Tax Policy Center Urban Institute And Brookings Institution

Tax Policy Center Urban Institute And Brookings Institution The Individual Alternative Minimum Tax President’s Advisory Panel on Federal Tax Reform 3 March 2005 Leonard E. Burman Senior Fellow, The Urban Institute Codirector, The Tax Policy Center Visiting Professor, Georgetown Public Policy Institute www. taxpolicycenter. org

Background Tax Policy Center Urban Institute And Brookings Institution • 1966: 155 high-income taxpayers paid no income tax • 1969: creation of a minimum tax designed to ensure high income filers did not exploit tax laws to reduce or eliminate their federal income tax liability • 2010: AMT will affect 30 million taxpayers, including virtually all upper middle class families with two or more kids. www. taxpolicycenter. org

Determination of AMT Liability Tax Policy Center Urban Institute And Brookings Institution • Add preferences and adjustments to taxable income • Subtract AMT exemption • Calculate tax using AMT rate schedule and rules • If more than regular tax, pay the difference as AMT • (Many complexities left out of this simplified explanation. ) www. taxpolicycenter. org

AMT Exemptions and Schedule Tax Policy Center Urban Institute And Brookings Institution • AMT exemption currently $58, 000 for couples, $40, 250 for singles – In 2006, exemption drops to $45, 000/$33, 750 • Exemption phases out at higher incomes, creating high implicit tax rates • Statutory rates = 26% and 28%, but exemption phaseout creates phantom rates of 32. 5% and 35% • Not indexed for inflation www. taxpolicycenter. org

AMT Preference Items Tax Policy Center Urban Institute And Brookings Institution • State and local tax deductions (51% of total) • Personal Exemptions (22%) • Miscellaneous deductions above the 2% floor (20%) • Net Operating Losses (12%) • Incentive Stock Options (2%) • Passive Activity Loss (2%) • Post-1986 Depreciation (1%) • Standard Deduction (1%) • Private Activity Bonds Interest (1%) • Medical Deductions (1%) Note: Sum adds to more than 100 percent because some adjustments not shown, such as state tax refunds, are negative. Source: Burman and Weiner, “Suppose they Took the AM out of the AMT. ” www. taxpolicycenter. org

Causes of AMT Growth Tax Policy Center Urban Institute And Brookings Institution Current Law (extended) Effect of income tax cuts without permanent AMT fix Pre-2001 Law, with indexing Effect of failure to index for inflation Urban-Brookings Tax Policy Center Microsimulation Model, 2005 www. taxpolicycenter. org

AMT Projections Tax Policy Center Urban Institute And Brookings Institution • Baseline AMT revenue = $1. 2 trillion from 2005 -15 – $670 billion if the tax cuts are not extended in 2010 • About 4% of taxpayers on AMT in 2005 – 20% in ’ 06 and 30% in ’ 10 www. taxpolicycenter. org

AMT Demographics (2010) Tax Policy Center Urban Institute And Brookings Institution • AMT inflicts large marriage/child penalties – 48% of married couples vs. 3% of singles on AMT – 94% of marrieds with 2+ kids and AGI between $75&100 K • Residents of high-tax states are 5 percentage points more likely to be on AMT than those in low-tax states www. taxpolicycenter. org

Drifting Off Target Tax Policy Center Urban Institute And Brookings Institution • Though intended to make highincome people pay tax, AMT will increasingly hit middle class – Over 80% of AMT taxpayers will have income < $200 K in 2010 • More than 1/3 have income < $100 K – Families earning $75 -100 K 18% more likely to be on AMT than those earning over $1 million • Those earning $100 -200 K more than twice as likely as millionaires www. taxpolicycenter. org

Problems with the AMT Tax Policy Center Urban Institute And Brookings Institution • Good Tax Policy is… – Simple – Efficient – Fair • The AMT violates all of these principles. www. taxpolicycenter. org

Pointless Complexity Tax Policy Center Urban Institute And Brookings Institution • Many middle class taxpayers must file AMT Form 6251, but owe no AMT • AMT rules regarding credits, capital gains, dividends, deferral preferences very complex • Most deferral preferences don’t even generate much revenue, just change the timing of tax payments • Vastly complicates tax planning www. taxpolicycenter. org

Efficiency Tax Policy Center Urban Institute And Brookings Institution • The AMT raises marginal tax rates for most – 71% of AMT taxpayers face higher marginal tax rates under AMT in 2005 – 92% will be in that situation in 2010 – People creep into higher brackets over time because, unlike the regular income tax, AMT is not indexed • Might enhance efficiency to extent that it deterred tax shelters, but 90% of AMT preferences have nothing to do with shelters www. taxpolicycenter. org

Equity Tax Policy Center Urban Institute And Brookings Institution • Nasty marriage/child penalties • Some legitimate adjustments to ability to pay are disallowed under AMT (e. g. , contingent legal fees) • AMT makes the tax system more progressive, but less so over time • Relatively little tax collected from very rich www. taxpolicycenter. org

Conclusions Tax Policy Center Urban Institute And Brookings Institution • Pointless complexity and bizarre pattern of taxes • Increasingly a tax on the upper middle class • Better to build anti-tax shelter provisions into regular tax and adjust rates to hit revenue target www. taxpolicycenter. org

Appendix Tax Policy Center Urban Institute And Brookings Institution • Supplemental tables and charts • Further reading www. taxpolicycenter. org

AMT Exemptions and Schedule Tax Policy Center Urban Institute And Brookings Institution www. taxpolicycenter. org

Tax Policy Center Rate Schedule for Couples, AMT vs. Regular Tax: 2004 Urban Institute And Brookings Institution www. taxpolicycenter. org

Total AMT Revenue, 2005 -15 Tax Policy Center Urban Institute And Brookings Institution Current Law (extended) Pre-EGTRRA Law Urban-Brookings Tax Policy Center Microsimulation Model, 2005 www. taxpolicycenter. org

By 2008, it will cost more to repeal the AMT than the regular income tax. Tax Policy Center Urban Institute And Brookings Institution Cost of repealing the regular tax Cost of repealing the AMT Urban-Brookings Tax Policy Center Microsimulation Model, 2005 www. taxpolicycenter. org

AMT Projections by Individual Characteristics Tax Policy Center Percent on AMT Urban Institute And Brookings Institution Characteristic 2005 Current Law 2006 2010 Percent of Taxpayers 3. 8 20. 4 30. 4 Percent of Tax Filers 2. 7 14. 6 22. 6 0. 8 5. 2 0. 8 5. 9 1. 6 30. 7 4. 2 29. 0 2. 9 47. 9 45. 9 by Filing Status Single Married Filing Joint Head of Household Married Filing Separate Addendum: AMT Revenue in $billions, 2005 -2015 Current Law Extended Urban-Brookings Tax Policy Center Microsimulation Model, 2005 www. taxpolicycenter. org

AMT Projections by Individual Characteristics Tax Policy Center Urban Institute And Brookings Institution AMT Participation Rate (percent) Current Law Characteristic 2005 Filers By State Tax Level* Low Middle High 0. 8 1. 3 2. 7 10. 5 13. 9 15. 8 18. 3 22. 6 23. 8 Filers by Number of Children 0 1 2 3 or more 1. 8 2. 5 5. 0 8. 4 8. 3 17. 6 31. 4 37. 0 15. 6 27. 9 40. 6 47. 7 1. 6 77. 2 94. 4 Married Couple, 2+ kids, 75 k<AGI<100 k 2006 *Excludes effect of sales tax deduction, in effect for 2005. Urban-Brookings Tax Policy Center Microsimulation Model, 2005 www. taxpolicycenter. org 2010

AMT Projections by Income Tax Policy Center Urban Institute And Brookings Institution AMT Participation Rate (percent) Cash Income (thousands of 2003$) Less than 30 30 -50 50 -75 75 -100 100 -200 200 -500 500 -1, 000 and more Current Law 2005 2006 2010 0. 1 0. 5 0. 8 6. 8 53. 4 39. 3 26. 7 0. 0 1. 1 6. 0 31. 8 63. 0 87. 0 51. 8 33. 4 0. 0 2. 9 16. 9 53. 4 81. 0 93. 9 62. 6 35. 3 Urban-Brookings Tax Policy Center Microsimulation Model, 2005 www. taxpolicycenter. org

Percent of AMT Taxpayers who Face Higher Marginal Tax Rates Under the AMT Tax Policy Center Urban Institute And Brookings Institution Source: Urban-Brookings Tax Policy Center Microsimulation Model, 2005 www. taxpolicycenter. org

Distribution of AMT versus Regular Tax Liability: 2005 & 2010 Tax Policy Center Urban Institute And Brookings Institution www. taxpolicycenter. org

Further Reading Tax Policy Center Urban Institute And Brookings Institution Burman, Leonard E. and David Weiner. 2004. “Suppose They Took the AM out of the AMT? ” available at www. taxpolicycenter. org. (examines issues raised if the AMT were a standalone income tax) Burman, Leonard E. , William G. Gale, Jeffrey Rohaly, Matthew Hall, and Mohammed Adeel Saleem. 2004. “AMT: A Data Update” available at www. taxpolicycenter. org. (includes estimates of some reform options) Burman, Leonard E. , William G. Gale and Jeffrey Rohaly. 2003. “Policy Watch: The Expanding Reach of the Individual Alternative Minimum Tax, ” with Journal of Economic Perspectives 17(2): 173 -186. Burman, Leonard E. , William G. Gale, Jeffrey Rohaly, and Benjamin H. Harris. 2002. “The Individual AMT: Problems and Potential Solutions, ” National Tax Journal 55(3): 555 -596. Feenberg, Daniel R. , and James M. Poterba. 2004. “The Alternative Minimum Tax and Effective Marginal Tax Rates, ” National Tax Journal 57(2): 407 -427. General Accounting Office. 2000. “Alternative Minimum Tax: An Overview of its Rationale and Impact on Individual Taxpayers. ” Report to the Chairman, Committee on Finance, U. S. Senate (GAO/GGD-00180). August. Harvey, Robert P. and Jerry Tempalski. 1997. “The Individual AMT: Why it Matters. ” National Tax Journal 50(3): 453 -473. Rebelein, Robert and Jerry Tempalski. 2000. “Who Pays the Individual AMT? ” U. S. Department of the Treasury, OTA Paper 87. www. taxpolicycenter. org