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40 IRET Congressional Advisory 1 (1995)

handle is hein.taxfoundation/iretcgadv0038 and id is 1 raw text is: March 23, 1995 No. 40 TIME TO REPEAL THE AMT Representative Bill Archer, the new Chairman of the House Ways and Means Committee, has added an important tax reform provision to H.R. 1215, the Contract With America Tax Relief Act of 1995. The Archer proposal would immediately scale back the alternative minimum tax (AMT) imposed by current law on certain individuals and businesses, and repeal the AMT entirely for businesses in 2001. Scaling back and eliminating the AMT is a step in the correct direction because the AMT is complicated, The AMTs 14 inconsistent with regular tax out in the r policies, harmful to economic growth, and unfair. hich-tsm Under the ordinary government-wi income tax, individuals and corporations calculate their gross income and next subtract specified exemptions and deductions to determine net taxable income. They then compute their tax and deduct allowable tax credits. The AMT is an entirely separate tax calculation, under which taxpayers must omit many of the normal exemptions, deductions, and credits, and calculate a second tax liability on an expanded version of taxable income under a lower tax rate. They must then pay whichever tax bill is greater. olate egula ay lI lose, ills P( The exemptions, deductions, and credits related to business activity under the ordinary income tax consist overwhelmingly of legitimate adjustments to income, or to the tax on income. These adjustments are made to reflect (sometimes inadequately) the cost of producing goods and services for sale or other costs of earning income, because, until a taxpayer's revenues exceed his or her costs, no real income or profit can be said to exist, and no income tax should be due. The AMT's broader tax base almost always exceeds the real incomes of the affected individuals and businesses, and, even at lower AMT tax rates, may result in higher effective tax rates on the real earnings of the taxpayers involved than does the ordinary income tax. Consequently, the AMT discourages economic activity and retards economic growth. Rep. Archer's plan would remove from the corporate and individual AMT bases many items that are not included in the regular tax base, thereby reducing the tax liabilities of many firms and laid individuals now in the alternative tax system and I tax system, returning many others to the axpayers in a regular tax system. Further, tails-the- Rep. Archer's plan would )siton. repeal the corporate AMT in 2001. Congress's Joint Committee on Taxation estimates the 1995-2000 revenue cost at $16.6 billion. Of course, that is a static estimate. In the real world, the cost would probably be much lower because a reduced AMT would be less of a hindrance to economic growth. The individual AMT originated in the 1960s after it was publicized that some individuals with high incomes paid little or no tax. What was seldom reported is why these people paid little tax. Institute for Research on the Economics of Taxation IRET is a non-profit, tax exempt 501(c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote economic growth and efficient operation of the free market economy. 1730 K Street, N.W., Suite 910, Washington, D.C. 20006 Voice 202-463-1400 * Fax 202-463-6199 0 Internet www.iret.org

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