The Individual Alternative Minimum Tax: Historical Data and Projections : Updated June 2008

The Individual Alternative Minimum Tax: Historical Data and ProjectionsGreg Leiserson, Jeff Rohaly

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

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Congress enacted a minimum tax in 1969 to guarantee that high-income individuals paid at least some tax. The AMT now threatens to grow from a footnote in the tax code to a major component affecting tens of millions of taxpayers. Although most lower- and middle-income taxpayers will remain unaffected by it, policymakers need to deal with the explosive growth of the AMT from an obscure tax affecting only 20,000 filers in 1970 to one affecting more than 33 million–a third of all taxpayers–by 2010. This document provides updated estimates of AMT participation, revenue, and distribution.

Congress originally enacted a minimum tax in 1969 to guarantee that high-income individuals paid at least a minimal amount of tax each year. Due to design flaws, however, the current alternative minimum tax (AMT) threatens to grow from a footnote in the tax code to a major component affecting tens of millions of taxpayers every year. One reason for the projected expansion of the AMT is that–unlike the regular income tax system–the AMT brackets and exemption are not indexed for inflation. In addition, since they reduce regular income taxes without a corresponding permanent fix to the AMT, the 2001-06 tax cuts exacerbate the AMT problem. Absent a change in law, more than 33 million taxpayers will be subject to the AMT by 2010. If Congress allows the tax cuts to expire at the end of 2010, the number of AMT taxpayers will fall dramatically in 2011, but will then trend back upward over time. By 2018, about 43 million taxpayers will be subject to the AMT under current law; that number will swell to almost 57 million if the tax cuts are extended. Although most lower- and middle-income taxpayers will remain unaffected by the tax, policymakers will need to deal with the explosive growth of the AMT from an obscure tax affecting only 20,000 filers in 1970 to one affecting more than a third of all taxpayers by 2010.

The Tax Policy Center (TPC) has written extensively about the AMT. This paper updates Rohaly and Leiserson (2006) with the TPC’s latest estimates of AMT participation, revenue, and the distribution of AMT liability. It starts with a brief overview of how the AMT works.

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Distribution of the 2001-2006 Tax Cuts : Updated Projections, July 2008

Distribution of the 2001-2006 Tax CutsGreg Leiserson, Jeff Rohaly

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

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Since 2001, Congress has passed a major tax bill almost every year. Most have reduced taxes significantly and, since they were not accompanied by spending cuts, the resulting deficits have increased the national debt. The tax cuts total almost $2.2 trillion over ten years, and that total may be vastly understated if some or all of the cuts are extended beyond their scheduled expiration date of 2010. In addition, the cuts exacerbated the growing problem of the alternative minimum tax (AMT). Barring legislative action, more than 33 million taxpayers will fall prey to the AMT in 2010.

Since 2001, Congress has passed a major tax bill almost every year. Most have reduced taxes significantly and, since they were not accompanied by spending cuts, the resulting deficits have increased the national debt. The largest revenue loss—$1.35 trillion over ten years—came from the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) reduced revenues by another $350 billion (again over the subsequent decade). Subsequent legislation cut taxes further: $146 billion in 2004 (WFTRA), $142 billion in 2006 (TIPRA and PPA), $51 billion in 2007 (TIPA), and $125 billion in 2008 (ESA). The tax cuts total almost $2.2 trillion over ten years, and that total may be vastly understated if some or all of the cuts are extended beyond their scheduled expiration date of 2010. In addition, the cuts exacerbated the growing problem of the alternative minimum tax (AMT). Barring legislative action, more than 33 million taxpayers will fall prey to the AMT in 2010. It is highly unlikely that Congress will allow this to happen but simply extending the AMT “patch” through the end of 2010 would add another $207 billion to the cost of the tax cuts.

As Congress and the new President consider whether to extend some or all of the tax cuts, they should take into account the distribution of the tax cuts and how that distribution would change if the cuts were combined with measures to finance the resulting budget deficits. Although the long-term distributional effects of the 2001-06 tax cuts will depend on how they are ultimately paid for, the immediate benefits are skewed in favor of high-income taxpayers. In 2010, when the cuts are fully phased in, households in the middle fifth of the income distribution will receive an average tax reduction equal to 2.6 percent of after-tax income. Households in the top quintile—the 20 percent of the population with the highest incomes—will receive an average tax cut that is more than twice as large: 5.4 percent of income. Those in the bottom quintile will get an average cut equal to just 0.7 percent of income. Taxpayers at the very top of the income scale benefit the most. Those in the top one percent will receive a 7.3 percent average increase in after-tax income in 2010; those in the top one-tenth of one percent—the richest 1 in 1,000 taxpayers—will see their after-tax incomes rise an average of 8.2 percent.

Over the long-term, Congress must finance tax cuts through spending reductions, other tax increases, or a combination of the two. The financing approach chosen will significantly affect the ultimate distributional impact of the cuts. For example, if the revenue loss from the 2001–06 tax cuts and an accompanying fix for the AMT were offset by an additional tax levied in proportion to income, the combination would transfer after-tax income from the poorest four-fifths of households to the richest fifth. Only taxpayers in the top quintile of the income distribution would, on average, receive an increase in after-tax income. Average after-tax incomes would fall for households in the bottom eighty percent of the income distribution. Households in the lowest quintile would face an average tax increase equal to 2.6 percent of after-tax income whereas taxpayers in the top quintile would see a tax cut equal to 1.0 percent of income on average. Taxpayers in the top one percent would see an average tax reduction equivalent to 2.6 percent of income.

This paper summarizes the Tax Policy Center’s (TPC) latest estimates of the distributional impact of the 2001–06 tax cuts. We include the impact of all major individual income and estate tax provisions in the seven tax acts. Our distribution tables include individual and corporate income taxes, payroll taxes for Social Security and Medicare, and the estate tax. More information and additional detailed distribution tables can be found on our web site at http://www.taxpolicycenter.org.

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An Updated Analysis of the 2008 Presidential Candidates' Tax Plans

An Updated Analysis of the 2008 Presidential Candidates' Tax PlansLeonard E. Burman, Surachai Khitatrakun, Greg Leiserson, Jeff Rohaly, Eric Toder, Roberton Williams

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

Updated tables analyzing the August 14, 2008 revision of the Obama tax plan are available here.

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Tax and fiscal policy will loom large in the next president's domestic policy agenda. Nearly all of the tax cuts enacted since 2001 expire at the end of 2010 and the individual alternative minimum tax (AMT) threatens to ensnare tens of millions of Americans. While a permanent fix palatable to both political parties has proven elusive, both candidates have proposed major tax changes. This report describes how we performed our modeling and analysis, outlines the major tax proposals, and discusses the implications of their policies for the revenue raised, taxpayer economic activity, and the distribution of the tax burden.

Tax and fiscal policy will loom large in the next president’s domestic policy agenda. Nearly all of the tax cuts enacted since 2001 expire at the end of 2010. The individual alternative minimum tax (AMT) threatens to ensnare tens of millions of Americans in a web of pointless complexity and higher taxes, but a permanent fix palatable to both political parties has proven elusive. In the past year, the federal budget deficit has ballooned, and, more worrisome, large projected increases in spending on Social Security, Medicare, and Medicaid will put unprecedented demands on federal government revenue sources in the coming decades.

Fundamental reform of our tax system is one way to resolve these problems, but, at least in part because reform creates both winners and losers, the leading presidential candidates have not addressed it seriously. Nonetheless, both candidates have proposed major changes to the nation’s tax laws. Senator McCain would permanently extend the 2001 and 2003 tax cuts, increase deductions for taxpayers supporting dependents, reduce the corporate income tax rate, and allow immediate deductions for investments in certain capital equipment. Senator Obama would permanently extend certain provisions of the 2001 and 2003 tax cuts primarily affecting taxpayers with incomes under $250,000 but repeal the cuts in the top two marginal income tax rates ahead of their scheduled expiration in 2010; increase the maximum rate on capital gains; raise the top tax rate on qualified dividends from its current level (but keep it below pre-2001 levels); and enact new and expanded targeted tax breaks for workers, retirees, homeowners, savers, students, and new farmers. Senator McCain proposes to extend permanently and increase the AMT “patch” that has prevented most individuals and families with incomes below $200,000 from being affected by the tax and lowered the tax for others, and in our interpretation of his proposal, Senator Obama would also extend the patch. Each candidate would also increase the estate tax exemption and reduce the estate tax rate compared with current law in 2011 and beyond, although Senator McCain would cut the tax much more than Senator Obama. Finally, each candidate promises to broaden the tax base and reduce corporate loopholes. McCain lists eight breaks for oil companies as targets but, other than that, is short on details for his pledge to eliminate “corporate welfare.” Obama identifies a variety of steps, including basis reporting for capital gains, taxing carried interest as ordinary income, and enacting sanctions on international tax havens that don’t cooperate with enforcement efforts, but he would also need additional as-yet-unspecified policies to achieve his revenue target for base broadening.

Although both candidates have at times stressed fiscal responsibility, their specific non-health tax proposals would reduce tax revenues by an estimated $4.2 trillion (McCain) and $2.8 trillion (Obama) over the next 10 years. Both candidates argue that their proposals should be scored against a “current policy” baseline instead of current law. Such a baseline assumes that the 2001 and 2003 tax cuts would be extended and the AMT patch made permanent. Against current policy, Senator Obama’s proposals would raise $800 billion and Senator McCain’s proposals lose $600 billion.

The two candidates’ tax plans would have sharply different distributional effects. Senator McCain’s tax cuts would primarily benefit those with very high incomes, almost all of whom would receive large tax cuts that would, on average, raise their after-tax incomes by more than twice the average for all households. Many fewer households at the bottom of the income distribution would get tax cuts and those tax cuts would be small as a share of after-tax income. In marked contrast, Senator Obama offers much larger tax breaks to low- and middle-income taxpayers and would increase taxes on high-income taxpayers. The largest tax cuts, as a share of income, would go to those at the bottom of the income distribution, while taxpayers with the highest income would see their taxes rise significantly.

The impact of the tax code on economic activity under each candidate’s policies would differ in several important ways. Under Senator McCain’s proposed policies, the top marginal rates (35 percent on individual income and 25 percent on corporate income) would be significantly lower than under Senator Obama’s plan (39.6 and 35 percent, respectively). McCain’s reduced individual and corporate rates could improve economic efficiency and increase domestic investment, but the larger future deficits would reduce and might completely negate any positive effect. In contrast, Senator Obama’s proposed new tax credits could encourage desirable behavior, particularly if the childless EITC and payroll tax rebate encourage additional labor supply among childless low-income individuals. However, he would also direct new subsidies at an already favored group—seniors —and an already favored activity—homeownership—which could probably be better directed elsewhere.

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The Individual Alternative Minimum Tax: Historical Data and Projections, Updated October 2009

The Individual Alternative Minimum Tax: Historical Data and Projections, Updated October 2009Katherine Lim, Jeff Rohaly

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The alternative minimum tax (AMT), which originally targeted high-income taxpayers, requires annual legislation to prevent it from affecting millions of middle-income individuals each year. There are two primary reasons for the AMT's broadening impact; its parameters are not indexed for inflation and the 2001-2006 tax cuts reduced regular tax liability without changing AMT liability. In 2009, four million taxpayers will pay $33.5 billion in AMT, but without congressional action that number will rise to 27 million owing $102 billion in 2010. This paper describes the AMT and provides TPC's latest estimates of AMT coverage, revenue, and distribution.

Congress originally enacted a minimum tax in 1969 to guarantee that high-income individuals paid at least a minimal amount of tax each year. Due to design flaws, however, the current alternative minimum tax (AMT) requires annual congressional action to prevent it from affecting tens of millions of taxpayers each year. One reason for the expansion of the AMT is that-unlike the regular income tax system-the AMT brackets and exemption are not indexed for inflation. In addition, the tax cuts passed during the Bush administration exacerbate the AMT problem because they reduce regular income taxes without a corresponding permanent reduction in the AMT. Absent another temporary fix or other change in law, the tax cuts and lack of indexation will combine to push more than 27 million taxpayers onto the AMT in 2010. If Congress extends the Bush tax cuts, that number would swell to almost 52 million by 2020. Alternatively, if Congress allows all of the tax cuts to expire-which is highly unlikely-the number of AMT taxpayers would fall dramatically in 2011, but then trend back upward over time to hit more than 37 million taxpayers by 2020. Regardless of how Congress deals with the coming expiration of the Bush tax cuts, policymakers will also need to address the explosive growth of the AMT from an obscure tax affecting only 20,000 filers in 1970 to one that could affect nearly a third of all taxpayers in 2010.

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