Repeal the Corporate Alternative Minimum Tax

The Inflation Reduction Act of 2022 introduced a new 15 percent corporate alternative minimum tax (CAMT) for corporations earning over $1 billion in profits. The original motivation for CAMT was to address discrepancies between book income (calculated for financial statements) and taxable income (calculated for tax returns) by levying a minimum tax on book income.

Book income and taxable income are intended to measure different things and have different rules for legitimate reasons. Taxable income may be lower than book income in a given year because a company has made a lot of investments, which are often deducted faster for tax purposes than they are under book income rules. Placing a tax based on book income would put a disproportionate tax burden on investment. Due to several problems with basing a tax on financial statement income, such as investment incentives, CAMT features several modifications to arrive at adjusted financial statement income, requiring a complex set of calculations.

This option repeals CAMT. Repealing CAMT would raise marginal tax rates for some firms, as they faced a lower, 15 percent rate under the CAMT regime compared to the 21 percent statutory corporate tax rate. As a result, repealing the minimum tax would have a negative, but small, impact on long-run output. Notably, the economic effects of repealing CAMT do not include compliance cost savings, which would be significant.

On a conventional basis, this option would increase the primary deficit by $360.9 billion over the budget window. Long-run GDP would decline slightly, and long-run GNP would fall by 0.1 percent. On a dynamic basis, the primary deficit would increase by $394.5 billion from 2027 through 2036, $33.6 billion more than the conventional estimate. Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would be higher than baseline, reaching 179.6 percent by 2056.

On average, in 2036, taxpayers would see increases in their after-tax incomes of 0.2 percent. The top quintile of taxpayers would experience a 0.2 percent increase, while the bottom quintile would experience a 0.1 percent increase. On a long-run dynamic basis, taxpayers would see a 0.1 percent increase on average.