Eliminate the Individual Alternative Minimum Tax

The alternative minimum tax (AMT) entered the tax code in 1969 following testimony from the Secretary of the Treasury that 155 high-income individuals had no income tax liability in 1967. It requires some taxpayers to calculate their tax liability under a separate set of rules that capture more income than the ordinary system by providing a larger exemption amount but fewer tax preferences. When calculating their alternative minimum taxable income, taxpayers must add back many preferences, including the standard deduction, the itemized deduction for state and local taxes (SALT) paid, and many others. The AMT then applies a different rate schedule (26 percent and 28 percent) to the resulting measure of income. Taxpayers pay either their ordinary individual income tax liability or their AMT liability, whichever is greater.

This option eliminates the AMT. Some taxpayers who would be in higher tax brackets, such as the 35 or 37 percent brackets under the regular income tax, are currently taxed under the AMT’s 26 or 28 percent brackets. As a result, while eliminating the AMT would reduce average tax rates, leading to lower revenue, it would increase marginal tax rates for some taxpayers.

However, by removing the AMT’s limitation on certain itemized deductions, this option would reduce the tax burden on investment in owner-occupied housing. On net, these economic effects roughly offset. These estimates do not account for a reduction in compliance costs that would result from eliminating the AMT.

On a conventional basis, this option would increase the primary deficit by $271.1 billion over the budget window. Long-run GDP would rise slightly, while long-run GNP would fall slightly, reflecting the larger budget deficit. Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would be higher than baseline, reaching 178.1 percent by 2056.

On average, in 2036, taxpayers would see increases in their after-tax incomes of 0.1 percent, concentrated among high-income taxpayers.