The Case for AMT Repeal

American Council for Capital Formation
August 1996

The American Council for Capital Formation submitted recommendations to the Platform Committees of both the Democratic and Republican national conventions for tax policy initiatives to promote saving, investment, and economic growth. What follows is the ACCF's analysis of the impact on the American economy of eliminating the corporate alternative minimum tax.

Summary of Findings

New research by the prominent economic analysis firm DRI/McGraw-Hill concludes that the repeal of the AMT would, over the 1996-2005 period:

• Increase fixed investment by a total of 7.9 percent;
• Raise GDP by a total of 1.6 percent;
• Expand the capital stock by 5.8 percent;
• Increase labor productivity by 1.6 percent; and
• Reduce the cost of capital by 10 percent.

Also, 100,000 additional jobs per year would be created during the years 1998-2002.

Background

The Tax Reform Act of 1986 (TRA) created a comprehensive corporate alternative minimum tax (AMT) system that exists separate from, but parallel to, the regular tax system. Under the AMT scheme, taxable income is modified by an intricate series of "adjustments" and by "preference items" to arrive at alternative minimum taxable income. Depreciation allowances for firms paying the alternative minimum tax are generally much less favorable than those for firms paying the regular corporate income tax. In fact, U.S. firms paying the AMT face the slowest capital cost recovery in the industrialized world for equipment used in manufacturing and pollution prevention and control (see Table 1). Although the corporate alternative minimum tax rate is 20 percent compared to 35 percent for the regular tax, it is applied to a broader base. Consequently, the AMT frequently results in a higher tax payment than required by the regular corporate income tax system.

Table 1 International Comparison of the Present Value of Equipment Used to Make Selected Manufacturing Products and Pollution Control Equipment (as a percent of cost)

• Stimulate Investment
  
  The DRI study shows that AMT repeal causes real fixed investment to increase by a total of 7.9 percent or about $8 to $10 billion per year over the 1996-2005 period compared to the baseline forecast (see Figure 1 and Table 2). Equipment spending rises by a total of 8.3 percent (see Table 2). In addition, the stock of equipment increase by 5.8 percent over the period so that by 2005, the amount of capital being combined with the labor force is $46 billion higher (in real terms) than it would have been under current law (see Table 2 and Figure 2).

• Enhance Productivity Growth
  
  The larger capital stock also increases labor productivity by an average of 0.2 percent per year over the 1996-2005 period for a total of 1.6 percent over 10 years (see Table 2). This is a significant amount because productivity growth has averaged less than 2 percent annually since 1980 and productivity increases permit living standards to rise without an increase in the amount of labor supplied.
  
  
• Increase GDP Growth
  
  AMT repeal causes inflation-adjusted Gross Domestic Product (GDP) to increase by a total of 1.6 percent over the ten-year period or about $15 billion per year by 2005 (see Table 2 and Figure 3).

• Promote Employment Growth
  
  The DRI study also shows that AMT repeal would increase employment by 100,000 jobs annually during the 1998-2002 period (see Figure 4).

• Reduction of uncertainty surrounding the user cost of capital. For corporations intermittently subject to the AMT, investment decisions must take into account the probability of becoming subject to the AMT. Corporations can be put into the AMT unexpectedly because of an economic downturn. To the extent this uncertainty deters investment by companies that never actually pay the AMT, the impacts on investment given above are understated.
• Elimination of the need to maintain an extra set of accounts. Even companies that never actually pay the AMT need to keep extra accounts simply to determine whether they are subject to it. The cost of these extra accounts is not trivial.
• Improved cash flow. This could be important both for small corporations with less ready access to the capital markets, and large companies that may have to pay the AMT even when they incur losses.

Conclusion Legislation addressing the AMT is an important step in putting U.S. firms on an equal footing with their international competitors. While the changes to the AMT in the Omnibus Budget Reconciliation Act of 1993 (OBRA) were a positive step (see Figure 5), AMT repeal is needed to increase U.S. living standards and allow U.S. firms to be competitive in today's global economy.