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Options to Fix the AMT

Leonard E. Burman, Greg Leiserson, William G. Gale, Jeff Rohaly

Published: January 19, 2007
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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.

Note: This report is available in its entirety in PDF Format.

The text below is a portion of the complete document.


Abstract

The individual alternative minimum tax (AMT) was originally designed to limit the amount of tax sheltering and to assure that high-income filers paid at least some tax. The current AMT, however, has strayed from those original goals and under current law the tax will affect over 23 million taxpayers in 2007. This brief examines a variety of implications of AMT repeal or reform and an array of options for offsetting the revenues lost under such options. The ideal solution would be to address the AMT in the context of a complete overhaul of the income tax, such as the proposal made by the President's Advisory Panel on Federal Income Tax Reform.


Introduction

The individual alternative minimum tax (AMT) was originally designed to limit the amount of tax sheltering that taxpayers could pursue and to assure that high-income filers paid at least some tax. The current AMT, however, has strayed far from those original goals. Under current law, the tax will affect over 23 million taxpayers in 2007-many of them solidly middle-class-and mainly for reasons that have little or nothing to do with what most people would consider tax sheltering.

One policy response would be to extend the temporary AMT provisions that expired at the end of 2006. This would keep the number of AMT taxpayers at about 4 million for another year, but it would cost more than $40 billion in 2007 alone and would grow more expensive in subsequent years. For these and other reasons, many policy makers, including House Ways and Means Committee Chairman Charles Rangel, Senate Finance Committee Chairman Max Baucus, and Finance Committee Ranking Member Charles Grassley have proposed permanent reform or repeal of the AMT.

This brief examines a variety of implications of AMT repeal or reform and an array of options for offsetting the revenues lost under such options. It begins with a description of the taxpayers affected by the AMT and an explanation of the dramatic growth projected for the tax as the context for evaluating reform options.

Note: Read the full report in PDF Format.