Opinion Editorial | |
| Monday, June 20, 1997 | |
Alternative Minimum Tax Costs Much, Nets Little |
One of the more interesting elements of the tax bill winding through Congress is reform of the Alternative Minimum Tax (AMT). In his initial proposal, House Ways & Means Committee Chairman Bill Archer (R-TX) proposed abolishing the AMT altogether. Under political pressure, however, he settled for scaling it back. Nevertheless, the argument for repeal is strong. Even many liberals now acknowledge that the AMT has not fulfilled its purpose and may be doing more harm than good.
The AMT was enacted as part of the Tax Reform Act of 1986. Its purpose was to ensure that profitable corporations could not discharge their entire tax liability through the use of tax deductions. The AMT set up an alternative tax system in which many tax deductions are disallowed. Corporations calculate their tax liability under the regular corporate income tax and under the AMT. Under the former the tax rate is 35 percent, under the latter, 20 percent. Companies pay whichever system yields the higher tax. In 1994, the Treasury collected $4.5 billion from the AMT.
According to the U.S. General Accounting Office, only about 28,000 firms paid any AMT in 1992--about 1.3 percent of all corporations -- although 400,000 were required to file AMT returns. However, just 2,000 large corporations paid 85 percent of all AMT collected. Public utilities paid the greatest amount, followed by chemicals, paper, transportation, mining and autos.
One of the problems with the AMT is that liabilities can vary greatly from year to year. For example, in 1990 the auto industry paid almost $1 billion in AMT, but only $31 million the following year. The reason is that depreciation, the writeoff firms get for the wearing out of their plant and equipment, is the single biggest business deduction covered by the AMT. In a recession year like 1990, when profits fall, capital-intensive firms like auto companies still have a lot of depreciation. That is what triggers a large AMT payment. Then in future years, when a company may not be covered by the AMT, it gets a credit for the AMT it paid in previous years. In 1994, corporations received a credit of $3.3 billion for AMT they had paid earlier, reducing the net yield of the tax to just $1.1 billion.
What all this means is that the AMT increases corporate taxes during recessions and reduces them during expansions -- the opposite of what the tax system ought to do. It also is notoriously complex, makes corporate planning more difficult and discourages capital investment. Thus a study from DRI/McGraw-Hill predicts that repeal of the AMT would increase capital investment by 7.8 percent over the next 10 years. More investment translates into higher productivity, higher wages and more jobs.
These problems with the AMT are now leading even many liberals to question the wisdom of this tax. For example, a new book from the Brookings Institution makes a strong case for repeal. In "Cracking the Code," University of Maryland economics professor Andrew Lyon says that the AMT fails to achieve any notable equity objective. "There is little reason to believe that the distribution of taxes among corporations corresponds to a meaningful concept of equity among individuals," he writes.
Economist Martin Sullivan of Tax Analysts is even more critical. He says the AMT "makes an economically unjustified corporate income tax even more cumbersome and inefficient." Moreover, it is all done for the sake of appearance. "There is no policy justification for the AMT," Sullivan writes. "It exists so there will be no bad press about large corporations not paying any tax." Although Archer had to retreat from his plan to repeal the AMT, it is still a worthwhile goal.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, June 18, 1997.
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