By 2008, the AMT Will Cost More to Repeal Than the Regular Income Tax

By 2008, the AMT Will Cost More toRepeal Than the Regular Income TaxBy Leonard E. Burman, William G. Gale, and Jeffrey RohalyTaxpayers pay alternative minimum tax (AMT) iftheir AMT liability exceeds their regular income tax.Originally targeted at a few high-income householdswho paid no federal income tax, this class tax is aboutto become a mass tax. The projected expansion occursbecause the AMT is not indexed for inflation and be-cause last year ’s tax cut steadily pares regular incometax obligations without providing significant and sus-tained AMT relief. The increases are troubling becausethe AMT is notoriously complex and has dubious ef-fects on equity and efficiency.Barring a change in law, the number of AMT tax-payers will explode from 1.8 million in 2001 to almost36 million in 2010, according to projections from ourmicrosimulation model. More than two-thirds of mar-ried taxpayers with two or more children will facethe AMT by 2010 — including more than 97 percentof those with incomes between $75,000 and $100,000.Most remarkably, by 2008, it will cost more to repealthe AMT than to repeal the income tax — $100 billionversus $72 billion. Between 2001 and 2010, the an-nual cost of repealing the AMT will rise from $11billion to $141 billion. Meanwhile, repealing theregular tax (setting the tax rates to zero and repeal-ing all credits) would cost $222 billion in 2001, butonly $47 billion in 2010. After repeal, the number ofAMT taxpayers would rise to 71 million in 2010.Like all budget projections, this one is highly uncer-tain, but the trend is not. The AMT is on a path toswamp the income tax unless its underlying defects areaddressed soon.(Source: “The Individual AMT: Problems and Poten-tial Solutions,” Burman, Gale, Rohaly, and Harris, TaxPolicy Center Discussion Paper No. 5, September 2002.)tax factsfrom the Tax Policy CenterTAXANALYSTS®The Tax Policy Center, a joint venture of the Urban Instituteand the Brookings Institution, provides independent, timely, andaccessible analysis of current and emerging tax policy issues forthe public, journalists, policymakers, and academic researchers.For more tax facts, see http://www.taxpolicycenter.org/taxfacts.TAX NOTES, September 16, 20021641