Should the AMT replace the regular income tax?
The notion that taxpayers should not have to calculate their tax liability twice—once for the regular tax and again for the alternative minimum tax (AMT)—has merit. It is less clear that making the AMT the only income tax in town would improve the tax system’s efficiency, simplicity, or fairness.
Two rates or four?
The regular income tax has seven statutory tax rates ranging from 10 percent to 39.6 percent. The AMT has only two: 26 percent and 28 percent. But the AMT is not as flat as it seems. It actually imposes four marginal tax rates, not two, because the AMT exemption phases out as income rises (figure 1).
The AMT exemption falls by 25 cents for each dollar by which alternative minimum taxable income exceeds a threshold ($158,900 for married couples and $119,200 for singles in 2015; those amounts are indexed annually for inflation). Thus, over the income range where the exemption phases out, taxpayers actually face a marginal rate 25 percent higher than the statutory rate. This increase applies not only to an additional dollar of ordinary income, but also to any increase in long-term capital gains or qualified dividends. So although the AMT is advertised as preserving the preferential rates on gains and dividends, over certain income ranges it actually taxes those income sources more heavily than the regular income tax.
Lower rates on a broader base?
The notion that the AMT taxes a broader income base at a lower rate than the regular income tax is not true for most AMT payers. In 2015, about 77 percent of households on the AMT actually face a higher effective marginal tax rate than they would if they were on the regular income tax (table 2).
In addition, the AMT provides a large exemption of $83,400 for married couples and $53,600 for singles in 2015; those amounts are indexed annually for inflation. This means that the amount of income taxed under the AMT is often less than under the regular income tax. In 2015, about 68 percent of taxpayers affected by the AMT would have had more income subject to tax under the rules of the regular system than under the AMT.
Simpler and fairer?
Making the AMT the only income tax would certainly reduce the hassle involved in calculating taxes twice. But the AMT as a stand-alone tax would still retain much of the complexity of the current regular tax system, particularly with respect to the definition and treatment of business and capital income.
In addition, the AMT imposes significant marriage penalties. Under the regular tax the standard deduction for married couples is twice that for singles, and the 10- and 15-percent tax brackets for married couples are twice as wide as those for singles. In contrast, AMT tax brackets are identical for married and single taxpayers, and the AMT exemption for married couples is only about one and a half times as large as the exemption for singles.
The regular income tax allows a personal exemption of $4,000 (in 2015, indexed for inflation) for each family member. The AMT exemption varies by filing status, but does not increase with family size. As a result, compared with the regular income tax, the AMT places a higher burden on large families.
Finally, because the tax rate on the highest incomes under the AMT is only 28 percent—significantly less than the regular tax’s top statutory rate of 39.6 percent—the AMT places a lighter burden on those with the greatest ability to pay.
Urban-Brookings Tax Policy Center. Table T15-0024. “Income Subject to Tax and Effective Marginal Tax Rates in the Regular Income Tax and the Alternative Minimum Tax (AMT), Current Law.”
Burman, Leonard E., and David Weiner. 2005. “Suppose They Took the AM Out of the AMT?” Washington, DC: Urban-Brookings Tax Policy Center.
Harris, Benjamin H., and Christopher Geissler. 2008. “Tax Rates on Capital Gains and Dividends under the AMT.” Washington, DC: Urban-Brookings Tax Policy Center.
Internal Revenue Service (IRS). 2015. “Internal Revenue Code.” Accessed February 6, 2015.