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47–005 2009

ALTERNATIVE MINIMUM TAX 

HEARING 

BEFORE THE

SUBCOMMITTEE ON SELECT REVENUE MEASURES 

OF THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TENTH CONGRESS 

FIRST SESSION 

MARCH 7, 2007 

Serial No. 110–19 

Printed for the use of the Committee on Ways and Means 

( 


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COMMITTEE ON WAYS AND MEANS 

CHARLES B. RANGEL, New York, Chairman 

FORTNEY PETE STARK, California 

SANDER M. LEVIN, Michigan 

JIM MCDERMOTT, Washington 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

MICHAEL R. MCNULTY, New York 

JOHN S. TANNER, Tennessee 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

EARL POMEROY, North Dakota 

STEPHANIE TUBBS JONES, Ohio 

MIKE THOMPSON, California 

JOHN B. LARSON, Connecticut 

RAHM EMANUEL, Illinois 

EARL BLUMENAUER, Oregon 

RON KIND, Wisconsin 

BILL PASCRELL JR., New Jersey 

SHELLEY BERKLEY, Nevada 

JOSEPH CROWLEY, New York 

CHRIS VAN HOLLEN, Maryland 

KENDRICK MEEK, Florida 

ALLYSON Y. SCHWARTZ, Pennsylvania 

ARTUR DAVIS, Alabama 

JIM MCCRERY, Louisiana 

WALLY HERGER, California 

DAVE CAMP, Michigan 

JIM RAMSTAD, Minnesota 

SAM JOHNSON, Texas 

PHIL ENGLISH, Pennsylvania 

JERRY WELLER, Illinois 

KENNY HULSHOF, Missouri 

RON LEWIS, Kentucky 

KEVIN BRADY, Texas 

THOMAS M. REYNOLDS, New York 

PAUL RYAN, Wisconsin 

ERIC CANTOR, Virginia 

JOHN LINDER, Georgia 

DEVIN NUNES, California 

PAT TIBERI, Ohio 

JON PORTER, Nevada 

Janice Mays, Chief Counsel and Staff Director 

Brett Loper, Minority Staff Director 

SUBCOMMITTEE ON SELECT REVENUE MEASURES

RICHARD E. NEAL, Massachusetts, Chairman 

LLOYD DOGGETT, Texas 

MIKE THOMPSON, California 

JOHN B. LARSON, Connecticut 

ALLYSON Y. SCHWARTZ, Pennsylvania 

JIM MCDERMOTT, Washington 

RAHM EMANUEL, Illinois 

EARL BLUMENAUER, Oregon 

PHIL ENGLISH, Pennsylvania 

THOMAS M. REYNOLDS, New York 

ERIC CANTOR, Virginia 

JOHN LINDER, Georgia 

PAUL RYAN, Wisconsin 

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records 

of the Committee on Ways and Means are also published in electronic form. The printed 

hearing record remains the official version. Because electronic submissions are used to 

prepare both printed and electronic versions of the hearing record, the process of converting 

between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process 

is further refined. 


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C O N T E N T S 

Page 

Advisory of February 28, 2007, announcing the hearing ..................................... 2 

WITNESSES 

Eric Solomon, Assistant Secretary for Tax Policy, U.S. Department of the 

Treasury ................................................................................................................ 6 

Nina E. Olson, National Taxpayer Advocate, Internal Revenue Service ............ 12 

Leonard E. Burman, Ph.D, Director, Tax Policy Center, a joint venture of 

the Urban Institute and Brookings Institution ................................................. 21 

Alan Viard, Ph.D, Resident Scholar, American Enterprise Institute .................. 36 

SUBMISSIONS FOR THE RECORD 

Norquist, Grover, statement ................................................................................... 65 

Rivero, Carmelo & Betty, statement ...................................................................... 68 


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HEARING ON ALTERNATIVE MINIMUM TAX 

WEDNESDAY, MARCH 7, 2007 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON WAYS AND MEANS, 

SUBCOMMITTEE ON SELECT REVENUE MEASURES, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 2:00 p.m., in room 

1100, Longworth House Office Building, Hon. Richard E. Neal 

(Chairman of the Subcommittee), presiding. 

[The advisory announcing the hearing follows:] 


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ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

SUBCOMMITTEE ON SELECT REVENUE MEASURES 

FOR IMMEDIATE RELEASE CONTACT: (202) 225–5522 

February 28, 2007 

SRM–1 

Neal Announces Hearing on the Alternative 

Minimum Tax 

House Ways and Means Select Revenue Measures Subcommittee Chairman Richard Neal (D–MA) announced today that the Subcommittee on Select Revenue Measures will hold a hearing on the Alternative Minimum Tax (AMT). The hearing will 

take place on Wednesday, March 7, 2007, in the main Committee hearing 

room, 1100 Longworth House Office Building, beginning at 2:00 p.m. 

The Subcommittee will examine the growing scope of the AMT and its interaction 

with individual-based tax provisions, including the tax cuts enacted since 2001. In 

view of the limited time available to hear witnesses, oral testimony at this hearing 

will be from invited witnesses only. However, any individual or organization not 

scheduled for an oral appearance may submit a written statement for consideration 

by the Committee and for inclusion in the printed record of the hearing. 

BACKGROUND: 

The Alternative Minimum Tax (AMT) is a parallel income tax originally designed 

to ensure that taxpayers with substantial economic income pay at least some minimum level of tax. However, the AMT was never intended to reach middle-income 

taxpayers nor to become the tax system applicable to most taxpayers. 

To calculate the AMT, taxpayers first determine tax liability under the regular 

income tax, and then add back certain ‘‘preference’’ items to taxable income. After 

deducting an exemption amount under AMT, taxpayers pay whichever is higher 

under the regular income tax or AMT. Personal exemptions, the itemized deduction 

for state and local taxes, and miscellaneous itemized deductions together account for 

90% of the preference items added back under the AMT, with state and local taxes 

almost half of that amount. 

There are two main reasons for the increase in the number of taxpayers affected 

by the AMT. First, the tax cuts under the regular income tax that were enacted as 

part of the Economic Growth and Tax Relief Reconciliation Act of 2001, the Jobs 

and Growth Tax Relief Reconciliation Act of 2003, and the Working Families Tax 

Relief Act of 2004 have narrowed significantly the differences between regular and 

AMT tax liabilities for middle and higher income individuals. Second, regular income tax brackets are indexed for inflation but the AMT thresholds are not. This 

has, over time, reduced further the differences between regular income tax liabilities 

and AMT liabilities at lower income levels. 

The combination of the two factors stated above means that, absent Congressional 

action on this issue, the number of taxpayers that will be affected by the AMT will 

grow significantly. The number of taxpayers subject to the AMT is expected to jump 

from 4.2 million in 2006 to 23 million in 2007. Taxpayers filing joint returns with 

no dependents could be subject to the AMT at income levels as low as 75,395 in 

2007, assuming that temporary protections for personal non-refundable credits and 

the higher exemption levels are not extended. By 2016, if the recently enacted tax 

cuts are extended, tax experts estimate that the number of taxpayers paying the 

AMT will increase to more than 48 million. High income states such as New Jersey, 

New York, Connecticut, the District of Columbia, and California have the highest 

percentage of taxpayers subject to the AMT. 

In announcing the hearing, Chairman Neal said, ‘‘The AMT was originally enacted to ensure that a small group of high-income individuals who manVerDate Mar 15 2010 09:26 Jun 07, 2011 Jkt 047005 PO 00000 Frm 00006 Fmt 6633 Sfmt 6621 I:\WAYS\IN\47005\PARAMS\47005.XXX 47005

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aged to avoid paying any income tax would pay at least a minimum amount 

of tax. The role of the AMT today has changed significantly. The AMT has 

become a stealth tax on far too many working families. We are committed 

to fully understanding the scope of this problem so that we can find a solution and prevent millions of working families from a massive and unexpected tax increase.’’ 

FOCUS OF THE HEARING: 

This hearing will explore the history of the AMT and how it has grown to affect 

many more taxpayers than at its inception. 

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

Please Note: Any person(s) and/or organization(s) wishing to submit for the hearing record must follow the appropriate link on the hearing page of the Committee 

website and complete the informational forms. From the Committee homepage, 

http://waysandmeans.house.gov, select ‘‘110th Congress’’ from the menu entitled, 

‘‘Committee Hearings’’ (http://waysandmeans.house.gov/Hearings.asp?congress=18). 

Select the hearing for which you would like to submit, and click on the link entitled, 

‘‘Click to provide a submission for the record.’’ Once you have followed the online 

instructions, completing all informational forms and clicking ‘‘submit’’ on the final 

page, an email will be sent to the address which you supply confirming your interest 

in providing a submission for the record. You MUST REPLY to the email and ATTACH your submission as a Word or WordPerfect document, in compliance with the 

formatting requirements listed below, by close of business Wednesday, March 21, 

2007. Finally, please note that due to the change in House mail policy, the U.S. 

Capitol Police will refuse sealed-package deliveries to all House Office Buildings. 

For questions, or if you encounter technical problems, please call (202) 225–1721. 

FORMATTING REQUIREMENTS: 

The Committee relies on electronic submissions for printing the official hearing record. As always, submissions will be included in the record according to the discretion of the Committee. 

The Committee will not alter the content of your submission, but we reserve the right to format 

it according to our guidelines. Any submission provided to the Committee by a witness, any supplementary materials submitted for the printed record, and any written comments in response 

to a request for written comments must conform to the guidelines listed below. Any submission 

or supplementary item not in compliance with these guidelines will not be printed, but will be 

maintained in the Committee files for review and use by the Committee. 

1. All submissions and supplementary materials must be provided in Word or WordPerfect 

format and MUST NOT exceed a total of 10 pages, including attachments. Witnesses and submitters are advised that the Committee relies on electronic submissions for printing the official 

hearing record. 

2. Copies of whole documents submitted as exhibit material will not be accepted for printing. 

Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material 

not meeting these specifications will be maintained in the Committee files for review and use 

by the Committee. 

3. All submissions must include a list of all clients, persons, and/or organizations on whose 

behalf the witness appears. A supplemental sheet must accompany each submission listing the 

name, company, address, telephone and fax numbers of each witness. 

Note: All Committee advisories and news releases are available on the World 

Wide Web at http://waysandmeans.house.gov. 

The Committee seeks to make its facilities accessible to persons with disabilities. 

If you are in need of special accommodations, please call 202–225–1721 or 202–226– 

3411 TTD/TTY in advance of the event (four business days notice is requested). 

Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above. 

f 

Chairman NEAL. I call this meeting of the Subcommittee on Select Revenue Measures to order, and would have everybody please 

take their seats. 


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This is the first hearing of the Select Revenue Measures Subcommittee, and I think it’s appropriate that the subject we will discuss today is the alternative minimum tax (AMT), or as some refer 

to it, the ATM machine for our Federal Government. 

The AMT is an issue that I have been battling for almost a decade. That’s right, almost ten years. I first filed legislation trying to 

protect middle income families from the reach of the AMT back in 

1998. I would note that the ranking Republican on this Subcommittee, my friend Mr. English, has also filed legislation to repeal AMT, reaching back to 1999. 

As Ambrose Bierce once wrote, ‘‘A patience is a minor form of despair, disguised as virtue.’’ I think, as it relates to AMT, Mr. 

English and I have both proved our virtue. 

The AMT is a bipartisan problem, and we are seeking bipartisan 

solutions. It is a parallel and stealth tax system, estimated to hit 

23 million taxpayers this year, if we do not extend a $50 billion 

patch to the system. Can you imagine a $50 billion patch? 

For those of you who appreciate classic, or older cars, like I do, 

you know how expensive it is to keep them up and running each 

year. At some point, though, you wonder if it’s worth the effort. 

Many car owners simply resort to cheaper fixes—from a different 

day and age, it was called Bondo—to patch up the car, but it’s 

never pretty, and eventually you have to commit to major overhaul. 

We are at that point with the AMT. 

The coat of Bondo that we put on year after year is just delaying 

the inevitable conclusion that this is a system that doesn’t run very 

well. The testimony we will hear today on that point is quite dramatic. This year, a family of four earning just $66,000 could be hit 

by AMT. By the end of the decade, virtually all families earning 

between $75,000 and $100,000 a year with 2 children will be paying higher taxes, due to the AMT. 

At my direction, the Committee staff prepared for each Member 

today specific estimates showing the growth of AMT, by Congressional district, for 2007. It’s important to see how this will be impacting our constituents. State and local taxes and personal exemptions—that is, children—are the top reasons taxpayers get pushed 

into a family—unfriendly AMT. 

This system, originally designed to catch millionaires who were 

avoiding taxes with excessive deductions, has gone seriously awry. 

It is my intention to offer a permanent solution to AMT, and not 

just another coat of Bondo. 

This series of hearings will assist the Subcommittee in finding 

and potentially recommending that solution. Today’s hearings will 

explore the history, the background, and policy reasons for AMT. 

At our next hearing, two weeks from now, we will hear more of a 

firsthand experience from those impacted by AMT. 

I am pleased to welcome our witnesses today. From the Treasury 

Department, we have Mr. Eric Solomon, the assistant secretary for 

tax policy, who will explain the position of the Administration, 

surely a partner in any ultimate solution. 

We are very fortunate, also, to have Ms. Nina Olson, the National Taxpayer Advocate, who is exactly what her title says: our 

advocate. She has recommended for years that AMT be repealed, 

because of the burden it places on individual taxpayers. 


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We are also pleased to welcome today Dr. Len Burman, the director of the Tax Policy Center. If you read pretty much any article 

or paper on the AMT, you will see Len Burman quoted, or his work 

cited, in the footnote. We are fortunate to have his expertise today, 

as well. 

I also want to welcome Dr. Alan Viard, resident scholar at the 

American Enterprise Institute (AEI). Dr. Viard has written on the 

problems in the AMT, both at AEI and at his former position as 

an economist with the Federal Reserve Bank in Dallas. 

St. Augustine said that, ‘‘Patience is the companion of wisdom,’’ 

and I know Mr. English, from previous get-togethers, we are both 

acolytes of St. Augustine. Today we await your wisdom, and we 

certainly expect to find common ground for a solution. At this time 

I would like to recognize my friend, Mr. English, for an opening 

statement. 

Mr. ENGLISH. I want to thank you, Mr. Chairman, and I particularly want to thank you for calling today’s hearing on the AMT, 

and assembling this panel, which I think offers a diversity of informed viewpoint on how to address this problem. 

This initial examination is enormously timely, and hopefully will 

yield a dialog that can point us in the direction for a possible solution in this Congress, or in the near future, to deal with this growing monster of an AMT. 

The most recent attempts with the AMT have been through the 

use of patches. Yes, that’s been a temporary expedient, which has 

yielded bigger and bigger problems each time. The AMT still remains a source of complexity for American taxpayers, and in my 

view, a drag on economic growth. I believe a comprehensive solution is the most desirable outcome. 

The AMT is a classic example of the rule of unintended consequences. Created in the 1960s, it was created by a majority that 

insisted it would only affect the rich. The tax was dramatically 

broadened again in the 1980s and 1990s. Tax increases, 

masquerading as reform, is what gives this legislative process a 

bad name. I hope that we can avoid similar mistakes in the weeks 

and the months to come. 

In my view, the policy challenge facing this Subcommittee and 

this Congress is the desperate need to reform the entire tax code. 

One of the strongest arguments for doing that is the continued existence of the AMT. 

I understand we may hear an argument being made today that 

the AMT is falling on more families because of the tax cuts enacted 

in 2001 and 2003. This logic would maintain that if income taxes 

are increased, less people would be subjected to the AMT. That’s 

not my approach to reform. I would argue that this line of thinking 

abandons the facts. The AMT is growing so significantly because 

the tax brackets were never indexed for inflation. No American is 

worse off under recent tax relief, and fewer taxpayers are subject 

to the AMT than otherwise would have been the case. 

After—and I approached this hearing today with an open mind— 

after today, I think we may be able to conclude that the real solution is tax reform and, above all, abolishing the AMT. I am sorry 

to see that we missed an opportunity to do that in 1999, as a result 

of a Presidential veto, but it is my hope that this Subcommittee 


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will play a central role in developing a creative policy response that 

will point us in the right direction. 

Again, I am grateful to you, Mr. Chairman, for initiating this 

process. Thank you. 

Chairman NEAL. Thanks, Phil. Without objection, any other 

Members wishing to insert statements as part of the record may 

do so. All written statements written by the witnesses will be inserted into the record as well. 

Mr. Solomon. Thank you. 

STATEMENT OF ERIC SOLOMON, ASSISTANT SECRETARY FOR 

TAX POLICY, U.S. DEPARTMENT OF THE TREASURY 

Mr. SOLOMON. Mr. Chairman, Ranking Member English, and 

distinguished Members of the Committee, thank you for the opportunity to discuss the issue of the individual AMT. 

The AMT was intended to deal with a relatively small but important issue. Unfortunately, the AMT illustrates how a good faith attempt to address an issue in the income tax system can have enormous, undesirable consequences. Today, the AMT is imposing burdens on millions of taxpayers who are not its intended targets. It 

is complex, and it frustrates millions of taxpayers who have to calculate their taxes twice, once under the regular tax system, and a 

second time under the AMT tax system. 

The predecessor of the AMT, the minimum tax, was first enacted 

in 1969 to ensure that a small group of high-income individuals 

who had managed to avoid paying Federal income tax would pay 

at least a minimum amount of tax. More than 37 years of changes 

to the tax code have transformed the original minimum tax into 

the current AMT. 

The AMT is a second income tax that operates parallel to the 

regular income tax. The AMT has its own tax base, exemption 

amounts, tax rates, and usable tax credits. The AMT tax base 

starts from taxable income, as defined under the regular income 

tax, but the base is broadened by adding back certain tax preferences, such as itemized deductions for State and local taxes, the 

standard deduction, and personal exemptions. The AMT tax base 

is reduced by an AMT exemption, which varies by filing status but 

not by family size. The AMT exemption is phased out above certain 

income levels. Beginning with the Economic Growth and Tax Relief 

Reconciliation Act of 2001 (P.L. 107–16), Congress has included 

provisions in its tax relief bills to extend and increase the AMT exemption temporarily, thus preventing a large increase in the number of AMT taxpayers. 

For 2006, the AMT exemption was $62,550 for married taxpayers 

filing jointly, and $42,500 for unmarried taxpayers. Since 1993, the 

first $175,000 of taxable income for AMT purposes is taxed at a 26 

percent rate, and amounts above $175,000 are taxed at a 28 percent rate. However, because the AMT exemption is phased out, 

some taxpayers face a marginal effective AMT tax rate of up to 35 

percent. 

The temporary extensions of the higher AMT exemptions and allowance of the full use of most personal tax credits—which have 

come to be known as the AMT patch—expired at the end of 2006. 

The President’s Fiscal Year 2008 budget includes a proposal to exVerDate Mar 15 2010 09:26 Jun 07, 2011 Jkt 047005 PO 00000 Frm 00010 Fmt 6633 Sfmt 6602 I:\WAYS\IN\47005\PARAMS\47005.XXX 47005

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tend the AMT patch through 2007, with the AMT exemptions increased for 2007 to hold the number of taxpayers affected by the 

AMT at approximately four million. 

The AMT exemption in effect through 2006 has kept the vast 

majority of taxpayers from being subject to the AMT. However, if 

the AMT patch is not extended, or the AMT is not otherwise addressed, the number of taxpayers projected to be affected by the 

AMT will rise sharply from 4 million in 2006 to 25 million in 2007. 

The AMT will increasingly affect middle-income taxpayers unless 

action is taken. 

The AMT also increasingly affects families with children, because 

it does not allow deductions for personal exemptions. Moreover, the 

AMT exemption includes a significant marriage penalty, which can 

worsen the effect of AMT on married couples. 

Unlike the regular tax, the AMT tax system is not indexed for 

inflation. The AMT exemption, the exemption phase-out, and the 

boundary between the two AMT tax rates are all fixed in nominal 

terms. Since these AMT parameters are not indexed, whereas the 

main parameters of the regular income tax are indexed annually 

for the effects of inflation, over time the AMT itself has become a 

significant issue. 

If the AMT exemption had been indexed to inflation beginning in 

1984, when the regular income tax brackets were indexed, the exemption in 2007 would be almost $81,000 for married taxpayers filing jointly, and $61,000 for unmarried individuals. With these indexed exemption amounts, only about two million taxpayers would 

be affected by the AMT in 2007. 

We share the concerns of taxpayers and Congress about the increasing scope of the AMT. We believe that a permanent solution 

is essential for the continued functioning of our individual income 

tax system. We look forward to working with this Committee and 

others in the Congress on a permanent solution to this difficult and 

important issue. However, until a long-term solution has been enacted, it is essential that we prevent an ever-larger share of taxpayers from being affected by the AMT. We are committed to helping ensure that middle-income taxpayers are not affected by the 

AMT this year or in the future. 

Thank you, again, Mr. Chairman, Ranking Member English, and 

Members of the Committee, for the opportunity to appear before 

you today. I would be pleased to answer any questions that you 

might have. 

[The prepared statement of Mr. Solomon follows:] 

Statement of Eric Solomon, Assistant Secretary for Tax Policy, U.S. 

Department of the Treasury 

WASHINGTON, D.C.—Mr. Chairman, Ranking Member English, and distinguished Members of the Committee, thank you for the opportunity to discuss the 

issue of the individual alternative minimum tax. 

The individual alternative minimum tax, or AMT, was intended to deal with a relatively small but important issue. Unfortunately, the AMT has created a far larger 

issue than the one it was intended to address. 

The Administration is very concerned about the adverse effects of the AMT. It is 

complex and frustrates the millions of taxpayers who have to calculate their taxes 

twice—once under the regular tax system and a second time under the AMT tax 

system. Taxpayers find that benefits otherwise provided under the regular tax system are taken away by the AMT, or they do the double calculations only to find 

that they are not subject to the AMT. 


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History of the AMT 

The predecessor of the AMT—the minimum tax—was first enacted in 1969 to ensure that a small group of high-income individuals who had managed to avoid paying federal income tax would pay at least a minimum amount of tax. In 1969, Treasury Secretary Barr noted in his testimony before the Joint Economic Committee of 

Congress that 155 taxpayers with incomes over $200,000 paid no tax in 1966. Even 

though the minimum tax reduced the number of high-income taxpayers who otherwise would have paid no income tax, it has never been completely successful in attaining the original goal of ensuring that all high-income taxpayers pay at least 

some tax. More than 37 years of legislative changes to the tax code have transformed the original minimum tax into the current AMT. 

Structure of the AMT 

The AMT is a second income tax that operates parallel to the regular income tax. 

The AMT has its own tax base, exemption amounts, tax rates, and usable tax credits. A taxpayer’s AMT liability is essentially the excess of the liability calculated 

under the AMT tax system over the liability calculated under the regular income 

tax. 

The AMT tax base starts from taxable income as defined under the regular income tax, but the base is broadened by adding back certain tax preferences. Preferences include, for example: 

• the itemized deduction for State and local taxes, 

• the itemized deduction for certain miscellaneous expenses exceeding two percent of adjusted gross income (AGI), 

• the itemized deduction for medical expenses to the extent it represents medical 

expenses of less than 10 percent of AGI, 

• the standard deduction, and 

• personal exemptions. 

A number of other items are treated as AMT preferences totally, or to the extent 

they are AMT preferences, must be calculated differently for AMT purposes. These 

include items such as incentive stock options, the net operating loss deduction, and 

investment interest expenses. The largest AMT preference items are the regular tax 

State and local tax deduction and personal exemptions. 

The AMT tax base is reduced by an AMT exemption which varies by filing status 

but not by family size. From 1984 through 1992, the AMT exemption was $40,000 

for married taxpayers and $30,000 for unmarried taxpayers. In 1993, it was increased to $45,000 for married taxpayers and $33,750 for unmarried taxpayers. Beginning with the Economic Growth and Tax Relief Reconciliation Act of 2001 

(EGTRRA), Congress has included provisions in each of the major tax relief bills to 

increase the AMT exemption temporarily, thus preventing a large increase in the 

number of AMT taxpayers. For 2006, the AMT exemption levels were $62,550 for 

married taxpayers filing joint returns and $42,500 for unmarried individuals. 

The AMT exemption begins to be phased out at $150,000 of AMT income for married taxpayers filing joint returns, at $112,500 for unmarried individuals, and at 

$75,000 for married filing separately returns. The exemption is reduced by 25 percent of AMT income above those thresholds until they are completely phased out. 

Since 1993, the first $175,000 of taxable income for AMT purposes is taxed at a 

26 percent rate, and amounts above $175,000 are taxed at a 28 percent rate. However, capital gains and qualified dividends are taxed under the AMT at the lower 

tax rates that apply under the regular income tax. Because the AMT exemption is 

phased out, it results in four effective AMT marginal tax rates of 26 percent, 32.5 

percent (for taxpayers phased out of the 26-percent AMT tax bracket), 28 percent, 

and 35 percent (for those phased out of the 28-percent AMT tax bracket). Consequently, because of the phase-out of the exemption, some taxpayers face a marginal effective AMT tax rate of 35 percent. 

Generally, the AMT can prevent some tax credits from being claimed against the 

regular tax because credits are disallowed if they reduce regular tax below the tentative amount of the AMT tax. Since 1998, Congress has repeatedly extended temporary legislation that has permitted most personal tax credits to reduce the otherwise applicable AMT. However, general business credits (most importantly the lowincome housing credit) can be limited by the AMT. 

The temporary extensions of the higher AMT exemptions and allowance of the full 

use of most personal tax credits (which have come to be known as the ‘‘AMT patch’’) 

expired at the end of 2006. The President’s fiscal year 2008 Budget includes a proposal to extend the AMT patch through 2007, with the AMT exemptions increased 

for 2007 to $65,350 for married taxpayers filing joint returns and $43,900 for unVerDate Mar 15 2010 09:26 Jun 07, 2011 Jkt 047005 PO 00000 Frm 00012 Fmt 6633 Sfmt 6621 I:\WAYS\IN\47005\PARAMS\47005.XXX 47005

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married individuals. The Budget proposal is designed to hold the number of taxpayers affected by the AMT constant at approximately 4 million. 

Does AMT Eliminate Nontaxable High Income Returns? 

In spite of the AMT, each year a very small percentage of high-income tax returns 

are filed reporting no income tax liability. The reasons for high-income returns reporting no income tax liability are varied. Certain itemized deductions and exclusions from income could cause this result. High-income returns with no income tax 

liability often result from a combination of factors, none of which, by itself, would 

completely eliminate income tax liability. Some items that singly or in combination 

may eliminate regular income tax liability cannot eliminate AMT liability because 

these items give rise to adjustments or preferences for AMT purposes. However, due 

to the AMT exemption and the fact that the starting point for alternative minimum 

taxable income is taxable income for regular tax purposes, which could be negative, 

a return could report no regular income tax and no AMT even though it included 

some items that produced AMT adjustments or preferences. 

Tax-exempt bond interest, itemized deductions for interest expense, miscellaneous 

itemized deductions not subject to the two-percent-of-AGI floor, casualty or theft 

losses, and medical expenses (exceeding 10 percent of AGI) could, by themselves, 

completely eliminate income tax liability because they do not generate AMT adjustments or preferences. More typically, combinations of these items together with deductions for charitable contributions completely eliminate tax liability without generating AMT liability. 

Complexity of the AMT 

The complexity and burden of the AMT result from the necessity that taxpayers 

understand and comply with two parallel tax systems. Moreover, because many taxpayers become subject to the AMT for reasons that are not the result of tax-motivated planning, many taxpayers are not aware that they will be affected by the 

AMT until they complete their tax returns. Even then, some taxpayers who complete their returns manually may not be aware that they are required to do the calculations for the AMT, creating a compliance problem. 

The Growing Ranks of AMT Payers 

Unlike the regular tax, the AMT tax system is not indexed for inflation. The AMT 

exemption, the exemption phase-out, and the boundary between the two AMT tax 

rates are all fixed in nominal terms. Consequently, with the passage of time, the 

effects of inflation will steadily increase the number of taxpayers subject to AMT 

and the amount of revenue from the AMT. When relatively few taxpayers were affected, the AMT arguably was achieving its policy objective. However, serious tax 

policy issues arise when the AMT affects millions of taxpayers who were never intended to be the target of this separate tax. 

The AMT exemption in effect through 2006 has generally kept the vast majority 

of taxpayers from being subject to the AMT. If the AMT exemption had been indexed to inflation beginning in 1984 when the regular income tax brackets were indexed, the exemption in 2007 would be about $81,000 for married taxpayers filing 

jointly and $61,000 for unmarried individuals. With these indexed exemption 

amounts, only about 2 million taxpayers would be affected by the AMT in 2007. 

Growth of the AMT 

If the AMT patch is not extended or the AMT is not otherwise addressed, the 

number of taxpayers projected to be affected by the AMT will rise sharply, from 4 

million in 2006 to 25 million in 2007 (Chart 1). If no further changes are made to 

the AMT, the number of taxpayers affected by the AMT is expected to grow to over 

56 million by 2017. By 2017, almost one-half of all taxpayers with income tax are 

projected to be affected by the AMT. 


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The AMT will increasingly affect middle-income taxpayers unless action is taken. 

If the Administration’s proposed extension and expansion of the AMT patch is enacted for 2007, about 7 percent of taxpayers with incomes between $100,000 and 

$200,000 will be subject to the AMT for 2007. However, if the AMT patch is not 

extended beyond its current expiration in 2006, when taxpayers file their tax returns in the spring of 2008 for tax year 2007, over 80 percent of taxpayers with income between $100,000 and $200,000 will be subject to the AMT. 

To put this into perspective, consider how the AMT would affect a hypothetical 

joint filer with two children in tax year 2007 if the Congress does not extend the 

AMT patch as proposed in the Administration’s 2008 Budget (see Chart 2). The taxpayer calculates tax liability under both the regular tax and the AMT and pays 

whichever is larger. The illustration shows that in 2007 the hypothetical taxpayer 

becomes subject to the AMT when his income exceeds $66,114. The AMT is no 

longer a tax that applies only or predominantly to high-income taxpayers. 


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1This estimate uses a baseline that includes the President’s fiscal year 2008 Budget proposal 

to extend permanently the 2001 and 2003 tax relief. 

The AMT also increasingly affects families with children because it does not allow 

deductions for personal exemptions. Moreover, the AMT exemption includes a marriage penalty, which can worsen the effect of the AMT on married couples. 

Assuming no AMT patch extension for 2007 or other action with respect to AMT, 

the increase in the number of AMT taxpayers over the next decade will be accompanied by a dramatic increase in tax revenues from the AMT. AMT revenue will 

increase from $22 billion in fiscal year 2006 to $67 billion in fiscal year 2007 and 

to $250 billion in 2017 (roughly 12 percent of total individual income tax revenue).1

AMT revenue will become so large that by 2013 the cost of repealing the AMT 

would exceed the cost of repealing the regular tax (Chart 3). 


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Addressing the AMT Issue 

In many respects, the AMT illustrates how a good-faith attempt to address an 

issue in the income tax system can have enormous unintended and undesirable consequences. Today the AMT is imposing burdens on millions of taxpayers who were 

not its intended targets. Because the AMT parameters are not indexed, whereas the 

main parameters of the regular income tax are indexed annually for the effects of 

inflation, over time the AMT itself has become a significant issue. 

The Administration shares the concerns of taxpayers and Congress about the increasing scope of the AMT. A permanent solution is essential for the continued functioning of our individual income tax system. 

We look forward to working with this Committee and others in the Congress on 

a permanent solution to this difficult and important issue. However, until a longterm solution has been enacted, it is essential to prevent an ever-larger share of taxpayers from being affected by the AMT. We are committed to helping ensure that 

middle-income taxpayers are not affected by the AMT this year or in the future. In 

the past, generally the AMT has been dealt with on a year-by-year basis, and the 

Administration’s proposal in the President’s fiscal year 2008 Budget for a one-year 

AMT patch reflects that experience. 

Thank you again, Mr. Chairman, Ranking Member English, and Members of the 

Committee for the opportunity to appear before you today. I would be pleased to 

answer any questions you might have. 

f 

Chairman NEAL. Thank you, Mr. Solomon. Now, Ms. Olson. 

STATEMENT OF NINA E. OLSON, NATIONAL TAXPAYER 

ADVOCATE, INTERNAL REVENUE SERVICE 

Ms. OLSON. Mr. Chairman, Ranking Member English, and distinguished Members of the Subcommittee, thank you for inviting 

me to testify today about the AMT for individual taxpayers. Since 

I became the national taxpayer advocate six years ago, I have repeatedly called attention to the deficiencies in the AMT. In my 

2006 annual report to Congress, I designated the AMT as the most 

serious problem facing taxpayers today. 

Indeed, if I were given the opportunity to make just one change 

to the Internal Revenue Code, I would use it to eliminate the individual AMT. With the concept of a—when the concept of a minimum tax first came into the Code in 1969, the intent was to prevent wealthy taxpayers from using tax preferences to avoid paying 

their fair share of taxes. 

Congress has changed the tax laws many times since the inception of the AMT, and it has long since shut down many of the tax 

avoidance opportunities that existed in the 1960s and 1970s. 

Today, the AMT affects millions of taxpayers with no tax avoidance 

motives at all, unless one considers choosing to live in a high-tax 

State, or choosing to have children to be a tax avoidance motive. 

For 2004, the Treasury Department found that fully 68 percent 

of aggregate AMT tax preference dollars are attributable to the disallowance of the State and local tax deduction, and 19 percent of 

these dollars are attributable to disallowance of personal exemptions. Thus, about 87 percent of the additional income subject to 

tax under the AMT results simply because of taxpayers’ place of 

residence, or family composition. 

Moreover, the AMT is now affecting increasing numbers of middle-income taxpayers, because the amount of income exempt from 

the AMT is not indexed for inflation. When Congress first enacted 

a minimum tax in 1969, the exemption amount was $30,000 for all 

taxpayers. If Congress had indexed that amount, it would be equal 


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to $165,000 today. Instead, the exemption amount, after temporary 

increases that expired in December, stands at $45,000 for married 

taxpayers, and $33,750 for most other taxpayers. 

At the same time, many of the so-called tax preferences claimed 

by middle-income taxpayers are indexed for inflation, and they are 

added back into the income under the AMT. As a result of these 

diverging trends, more income becomes subject to the AMT each 

year. In 2007, absent a change in law, it is projected that about 

23.4 million individual taxpayers, or 26 percent of individual filers 

who pay income tax, will be subject to the AMT. 

Among the categories of taxpayers hardest hit, 89 percent of 

married couples with adjusted gross incomes between $75,000 and 

$100,000, and 2 or more children, will owe AMT. The burden that 

the AMT imposes is substantial. In dollar terms, it is estimated 

that each AMT taxpayer will owe, on average, an additional $6,782 

in tax for 2006. 

Sometime very soon—by Mr. Burman’s estimate, as early as this 

year—we will reach a point where it will cost more for Congress 

to repeal the AMT, than to repeal the regular tax and leave the 

AMT intact. That’s astonishing. In a very real sense, then, the 

AMT has ceased to fulfill its intended mission of preventing tax 

avoidance by the wealthy, and is, instead, becoming the de facto 

tax system for millions of Americans. 

The obvious challenge in repealing the AMT is that its increasing 

revenue stream has been built into revenue estimates. So, if it is 

repealed, Congress will have to raise tax revenue in other ways, reduce spending, or allow the budget deficit to balloon. These alternatives, admittedly, are not appealing, but I have no doubt there 

are solutions that are far preferable to the status quo. Significantly, the longer Congress waits to act, the more dependent the 

Government will become on AMT revenue, and the harder, therefore, it will become to repeal it. 

To be viewed as fair, a tax system must be transparent. While 

the concept of a minimum tax is not unreasonable, the AMT, as 

currently structured, has morphed into something that was never 

intended. It is hitting taxpayers it was never intended to hit. It is 

taking large numbers of taxpayers by surprise, and subjecting 

them to estimated tax penalties. It is imposing onerous compliance 

burdens. It is altering the distribution of the tax burden that exists 

under the regular tax system. It is changing the tax incentives 

built into the regular tax system, and it is neutralizing the effects 

of changes to tax rates imposed under the regular tax system. 

Taxpayers subject to this treatment may wonder whether their 

Government is dealing fairly with them. My opinion is they have 

a right to ask that question. I strongly urge Congress to act before 

the AMT explosion occurs. Thank you, and good luck. 

[The prepared statement of Ms. Olson follows:] 

Statement of Nina E. Olson, National Taxpayer Advocate, Internal Revenue 

Service 

Mr. Chairman, Ranking Member English, and distinguished Members of the Subcommittee: 


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1The views expressed herein are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate is appointed by the Secretary of the Treasury and reports to the Commissioner of Internal Revenue. The statute establishing the position directs the National Taxpayer Advocate to present an independent taxpayer perspective that does not necessarily reflect 

the position of the IRS, the Treasury Department, or the Office of Management and Budget. 

Accordingly, Congressional testimony requested from the National Taxpayer Advocate is not 

submitted to the IRS, the Treasury Department, or the Office of Management and Budget for 

prior approval. However, we have provided courtesy copies of this statement to both the IRS 

and the Treasury Department in advance of this hearing. 2 I have highlighted problems with the AMT in prior reports as well. In my 2001 Annual Report to Congress, I recommended that the AMT be repealed or, at a minimum, substantially 

revamped to accomplish its original objective of preventing high-income taxpayers from escaping 

taxation through the use of tax-avoidance techniques. National Taxpayer Advocate 2001 Annual 

Report to Congress 166–177. In my 2003 Annual Report to Congress, I designated the AMT as 

the most serious problem facing taxpayers. National Taxpayer Advocate 2003 Annual Report to 

Congress 5–19. In my 2004 Annual Report to Congress, I reiterated my recommendation that 

the AMT be repealed. National Taxpayer Advocate 2004 Annual Report to Congress 383–385. 3 As a matter of fairness, the repeal of the AMT would require that Congress address the 

treatment of unused prior-year minimum tax credits, perhaps simply by retaining section 53 of 

the Code. 4The Taxpayer Advocate Service does not possess a revenue-estimating function. When we 

have written about the AMT in the past, we have generally used data developed by the Treasury 

Department’s Office of Tax Analysis, the Joint Committee on Taxation, or the Tax Policy Center, 

a joint venture of the Urban Institute and the Brookings Institution. Economists from each of 

these entities have told us that the modeling the others use is similar and generally produces 

similar results. Because the Tax Policy Center has published the most extensive data on the 

AMT, my testimony today generally cites to Tax Policy Center data. 5Office of Tax Analysis, Department of the Treasury (unpublished tabulation), cited at http:// 

www.taxpolicycenter.org/TaxFacts/TFDB/Content/PDF/amtlpreference.pdf. 

Thank you for inviting me to testify today about the Alternative Minimum Tax 

(AMT) for individuals taxpayers.1 In my 2006 Annual Report to Congress, I designated the AMT as the most serious problem facing taxpayers and recommended 

that it be repealed.2 Indeed, if I were given the opportunity to make just one change 

to the Internal Revenue Code, I would use it to eliminate the individual AMT.3

Why? Because the AMT is frustrating for taxpayers and bad for the tax system. 

It is frustrating for taxpayers for many reasons, including the difficulty in determining whether one is subject to the AMT, the difficulty in computing the AMT, 

the inaccurate and off-putting implication that the AMT applies because the taxpayer has escaped his or her rightful tax obligations by engaging in tax-avoidance 

techniques, and the fact that otherwise compliant taxpayers are often subject to 

penalties for failure to pay enough estimated tax during the year when they didn’t 

properly anticipate their AMT liabilities. 

The AMT is bad for the tax system because the disillusionment felt by taxpayers 

subject to the tax can erode their willingness to comply in the future. Moreover, the 

AMT negates the effect of tax rates and other tax provisions that apply under the 

regular tax rules and almost invisibly alters the distribution of the tax burden that 

exists under the regular tax system. 

In my testimony today, I will provide an overview of the AMT, describe its history, explain how it is computed, and detail its key deficiencies. I will also provide 

several examples to show how it operates.4

Overview 

The AMT was originally designed to prevent wealthy taxpayers from using tax 

shelters to avoid paying their fair share of taxes. However, Congress has changed 

the tax laws many times since the inception of the AMT and shut down many of 

the tax-avoidance opportunities that existed in the 1960s and 1970s. Today, the 

AMT affects millions of taxpayers with no tax-avoidance motives at all—unless one 

considers choosing to live in a high-tax state or choosing to have children to be a 

tax-avoidance motive. For 2004, the Treasury Department found that fully 68 percent of aggregate AMT tax preference dollars were attributable to the disallowance 

of the state and local tax deduction and 19 percent of aggregate AMT tax preference 

dollars were attributable to the disallowance of personal exemptions.5 Thus, about 

87 percent of the additional income subject to tax under the AMT results simply 

because of taxpayers’ place of residence or family composition. 

Moreover, the AMT is now affecting increasing numbers of middle-income taxpayers, because the amount of income exempt from the AMT (the AMT ‘‘exemption 

amount’’) is not indexed for inflation. When Congress first enacted a minimum tax 

in 1969, the exemption amount was $30,000 for all taxpayers. If Congress had 


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6Department of Labor, Bureau of Labor Statistics, Consumer Price Index—All Urban Consumers (CPI–U) (as of Oct. 31, 2006). Congress acted after hearing testimony that 155 taxpayers with adjusted gross incomes above $200,000 had paid no federal income tax for the 1966 tax 

year. See The 1969 Economic Report of the President: Hearings before the Joint Economic 

Comm., 91st Cong., pt. 1, p. 46 (1969) (statement of Joseph W. Barr, Secretary of the Treasury). 

The consumer price index has increased more than six fold since 1966, so the kinds of taxpayers 

who caught Congress’ attention back then would be making over 1.25 million today. See Department of Labor, Bureau of Labor Statistics, Consumer Price Index—All Urban Consumers (CPI– 

U) (as of Oct. 31, 2006). Yet the AMT today is not primarily affecting taxpayers with incomes over $1.25 million. By 2010, it has been estimated that 82 percent of all taxpayers affected by 

the AMT will have incomes under $200,000—and 36 percent will have incomes under $100,000. 

Greg Leiserson & Jeffrey Rohaly, The Individual Alternative Minimum Tax: Historical Data and 

Projections updated November 2006, table 5 (Nov. 10, 2006) (available at 

www.taxpolicycenter.org or on Lexis/Nexis at 2006 TNT 219–50). 7 IRC § 55(d). 

8Greg Leiserson & Jeffrey Rohaly, The Individual Alternative Minimum Tax: Historical Data 

and Projections updated November 2006, table 1 (Nov. 10, 2006) (available at 

www.taxpolicycenter.org or on Lexis/Nexis at 2006 TNT 219–50). 9Greg Leiserson & Jeffrey Rohaly, The Individual Alternative Minimum Tax: Historical Data 

and Projections updated November 2006, table 3 (Nov. 10, 2006) (available at 

www.taxpolicycenter.org or on Lexis/Nexis at 2006 TNT 219–50). 10Greg Leiserson & Jeffrey Rohaly, The Individual Alternative Minimum Tax: Historical Data 

and Projections updated November 2006, table 4 (Nov. 10, 2006) (available at 

www.taxpolicycenter.org or on Lexis/Nexis at 2006 TNT 219–50). 11 IRS Form 1040, Individual Income Tax Return, Instructions at 39 (2006). 12 IRS Form 6251, Alternative Minimum Tax—Individuals, Instructions (2006). 13 IRS Form 6251, Alternative Minimum Tax—Individuals (2006). 14 IRS Compliance Data Warehouse, Individual Returns Transaction File (IRTF), Tax Year 

2004. 15 Because of differing assumptions, estimates of when this crossover point will occur vary. 

The most recent modeling by the Tax Policy Center (TPC), a joint venture of the Urban Institute 

and the Brookings Institution, projects it will occur in 2007. Greg Leiserson & Jeffrey Rohaly, 

The Individual Alternative Minimum Tax: Historical Data and Projections updated November 

2006, at 4 (Nov. 10, 2006) (available at www.taxpolicycenter.org or on Lexis/Nexis at 2006 TNT 

219–50). The Treasury Department is projecting the crossover will occur in 2013. Office of Tax 

Analysis, Department of the Treasury (unpublished tabulation). Based on our conversations 

with Treasury and TPC economists, we understand that the TPC model assumes that tax credits that can be used against the AMT, including the child tax credit and the earned income tax 

credit, would be repealed along with the regular income tax. The Treasury Department did not 

assume these credits would be repealed along with the regular income tax. 

indexed that amount, it would be equal to about $165,000 today.6 Instead, the exemption amounts, after temporary increases that expired at the end of 2006, are 

$45,000 for married taxpayers and $33,750 for most other taxpayers.7 As a result, 

it is now projected that in 2007, absent a change in law, 23.4 million individual taxpayers—or about 26 percent of individual filers who pay income tax—will be subject 

to the AMT.8 Among the categories of taxpayers hardest hit, 89 percent of married 

couples with adjusted gross incomes between $75,000 and $100,000 and two or more 

children will owe AMT.9

The burden that the AMT imposes is substantial. In dollar terms, it is estimated 

that each AMT taxpayer will owe, on average, an additional 6,782 in tax in 2006.10

In terms of complexity and time, taxpayers often must complete a 16-line worksheet,11 read ten pages of instructions,12 and complete a 55-line form 13 simply to 

determine whether they are subject to the AMT. Thus, it is hardly surprising that 

77 percent of AMT taxpayers hire practitioners to prepare their returns.14

Perhaps most disturbingly, it is often very difficult for taxpayers to determine in 

advance whether they will be hit by the AMT. As a result, many taxpayers are unaware that the AMT applies to them until they receive a notice from the IRS, and 

some discover they have AMT liabilities that they did not anticipate and cannot pay. 

To make matters worse, the difficulty of projecting AMT tax liability in advance 

makes it challenging for taxpayers to compute and make required estimated tax 

payments, which often results in these taxpayers being subject to penalties. 

At some point very soon, by one estimate as early as in 2007, we will reach a 

point where it will cost more for Congress to repeal the AMT than to repeal the regular tax and leave the AMT intact.15 In a very real sense, then, the AMT is ceasing 

to fulfill its intended mission to prevent tax avoidance by the wealthy and is instead 

becoming the de facto tax system for millions of Americans. The obvious challenge 

in repealing the AMT is that its increasing revenue stream has been built into revenue estimates, so if it is repealed, either Congress will have to raise tax receipts 

in other ways or budget deficits will balloon. These alternatives admittedly are not 

appealing, but I have no doubt there are solutions that are far preferable to the staVerDate Mar 15 2010 09:26 Jun 07, 2011 Jkt 047005 PO 00000 Frm 00019 Fmt 6633 Sfmt 6621 I:\WAYS\IN\47005\PARAMS\47005.XXX 47005

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16The 1969 Economic Report of the President: Hearings before the Joint Economic Comm., 91st 

Cong., pt. 1, p. 46 (1969) (statement of Joseph W. Barr, Secretary of the Treasury); Committee 

on Ways and Means of the U.S. House of Representatives and Committee on Finance of the U.S. 

Senate, 91st Cong., Tax Reform Studies and Proposals, U.S. Treasury Department, pt. 1, p. 132 

(Comm. Print 1969). 17 H.R. 13270, § 301(a) (version passed by the House of Representatives on Aug. 8, 1969). 18See H.R. Conf. Rep. No. 91–782, p. 301 (1969). 19 H.R. 13270 (substituted version passed by the Senate on Dec. 11, 1969). 20Tax Reform Act, Pub. L. No. 91–172, § 301 (1969). The nine specified tax preference items 

were (1) excess investment interest income, (2) accelerated depreciation on personal property, 

(3) accelerated depreciation on real property, (4) amortization of certified pollution control facilities, (5) amortization of railroad rolling stock, (6) tax benefits from stock options, (7) bad debt 

deductions of financial institutions, (8) depletion, and (9) the deduction for capital gains. 21Tax Reform Act, Pub. L. No. 94–455, § 301 (1976). 22 Id. 23 Revenue Act, Pub. L. No. 95–600, § 421 (1978). 24Tax Equity and Fiscal Responsibility Act, Pub. L. No. 97–248, § 402(a) (1982). 

tus quo. Significantly, the longer Congress waits to act, the more dependent the government will become on AMT revenue and the harder it therefore will become to 

repeal it. 

While the concept of a minimum tax is not unreasonable, the AMT as currently 

structured has morphed into something that was never intended: It is penalizing 

taxpayers for such nontax-driven behavior as having children or selecting a state 

of residence; it is hitting taxpayers it was never intended to hit because its exemption amount has not been indexed for inflation; it is taking large numbers of taxpayers by surprise—and subjecting them to penalties to boot; it is imposing onerous 

compliance burdens; it is altering the distribution of the tax burden that exists 

under the regular tax system; it is changing the tax incentives built into the regular 

tax system; and it is neutralizing the effects of changes to tax rates imposed under 

the regular tax system. 

Background of the AMT 

The concept of a minimum tax was initially developed in response to reports that 

a small, wealthy group of taxpayers was avoiding taxes altogether through the use 

of tax avoidance techniques.16 In 1969, the House of Representatives adopted recommendations of the Treasury Department and passed a bill to impose a minimum 

tax by limiting certain tax preference items, in the aggregate, to 50 percent of gross 

income.17 This approach required the use of a complex formula designed to allocate 

itemized deductions between taxable income and non-taxable income and to disallow 

those deductions allocated to non-taxable income.18

The Senate changed the bill, adopting instead a tax on specified preference items in excess of a $30,000 exemption amount.19 The final bill followed the Senate’s approach and imposed an add-on tax of 10 percent on nine specific tax preference 

items when the sum of the preference items exceeded $30,000.20

The Tax Reform Act of 1976 and the Revenue Act of 1978 both made modifications to the add-on tax. The 1976 Act, among other things, increased the add-on tax 

rate to 15 percent and lowered the exemption amount from $30,000 to the greater 

of $10,000 or one-half of regular tax liability.21 The 1976 Act also added a new preference item for ‘‘excess itemized deductions’’ equal to the amount by which itemized 

deductions (other than medical and casualty deductions) exceeded 60 percent of adjusted gross income.22 The 1978 Act went a step further, restructuring the tax into 

two components. The add-on tax was retained for all tax preferences except the capital gains deduction and excess itemized deductions, and a new alternative minimum tax was established to adjust the taxpayer’s income for these two items of tax 

preference. This new alternative minimum tax (AMT) imposed a progressive threetiered rate structure on AMT: 10 percent on AMT income between $20,001 and 

$60,000; 20 percent on AMT income between $60,001 and $100,000; and 25 percent 

on AMT income over $100,000.23

In 1982, Congress repealed the add-on tax but left the AMT intact.24 Although 

Congress has enacted many technical changes over the past 25 years, the basic 

structure of the AMT rules has remained intact. 

How the AMT Is Computed 

The AMT’s method of calculation vividly demonstrates its complexity. The AMT 

requires a separate set of computations from the regular income tax, with unique 

rules governing the recognition of income and the timing of deductions and credits. 

Taxpayers are often required to maintain two sets of records—one for regular income tax purposes and one for AMT purposes. 

The determination of AMT liability, if any, involves an eight-step process: 


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25 IRS Form 1040, Individual Income Tax Return, Instructions at 39 (2006). 26 Required adjustments listed on Form 6251 include adjustments for medical and dental expenses, state and local taxes, certain non-allowable home mortgage interest, miscellaneous 

itemized deductions, tax refunds, investment interest, depletion, certain net operating losses, interest from specified private activity bonds, qualified small business stock, the exercise of incentive stock options, estates and trusts, electing large partnerships, property dispositions, depreciation on certain assets, passive activities, loss limitations, circulation costs, long-term contracts, mining costs, research and experimental costs, income from pre-1987 installment sales, 

intangible drilling costs, certain other adjustments and alternative tax net operating loss deductions. See IRC §§ 56 and 57; IRS Form 6251 (Alternative Minimum Tax—Individuals), Part I. 27 IRC § 55(d). 28 IRC § 55(d)(3). 29 IRC § 55(b)(1)(A). 30 In many cases, the taxpayer’s final tax liability is simply the greater of his regular tax liability or his tentative minimum tax liability. But because the Code requires adjustments for 

credits and other taxes, the Seventh and Eighth steps are required to ensure that taxpayers 

with these tax items obtain the correct result. 31 IRC § 53. 32 Beginning in 2007, an individual with a long-term unused AMT credit may be able to use 

a portion of his AMT credit in a taxable year in which he, as a result of the tentative minimum 

tax limitation, otherwise could not use it. For 2007, a long-term unused AMT credit is an AMT 

credit that was generated before 2004. IRC § 53(e). 

1. The taxpayer must calculate his regular tax liability. The regular income tax 

rules provide preferred treatment for certain types of income and allow taxpayers to claim certain exemptions, deductions, exclusions and credits. 

2. The taxpayer must determine whether he is subject to additional tax under the 

AMT regime. The IRS provides a 16-line worksheet (Worksheet To See if You 

Should Fill in Form 6251—Line 45) 25 to help taxpayers determine whether 

they may be subject to the AMT. If the worksheet indicates that a taxpayer 

is potentially subject to the AMT, the taxpayer must complete Form 6251 (Alternative Minimum Tax—Individuals), which contains 55 lines. Many taxpayers are required to complete Form 6251—only to find that they do not have 

an AMT liability. 

3. The taxpayer must compute his alternative minimum taxable income (AMTI) 

on Form 6251. This computation generally requires taxpayers to give up the 

benefit of tax preference items to which they are entitled under the regular tax 

system (e.g., dependency exemptions, a standard deduction, and itemized deductions for state and local taxes, employee business expenses and legal 

fees).26

4. The taxpayer must determine an ‘‘exemption amount’’ to which he is entitled 

based on filing status. After temporary increases in the AMT exemption 

amounts in recent years that have now expired, the AMT exemption amounts 

for 2007 stand at $45,000 for married taxpayers and 33,750 for most other taxpayers.27 The exemption amounts are phased out for married taxpayers with AMTI exceeding $150,000 and non-married taxpayers with AMTI exceeding 

$112,500.28

5. The taxpayer must compute his ‘‘taxable excess’’ by subtracting the exemption 

amount from his AMTI. 

6. A taxpayer with a positive ‘‘taxable excess’’ must compute his ‘‘tentative min- imum tax.’’ A ‘‘taxable excess’’ of $175,000 or less is taxed at a 26 percent rate 

and any additional ‘‘taxable excess’’ is taxed at a 28 percent rate. The sum of 

the two amounts, minus the alternative minimum tax foreign tax credit, is the 

‘‘tentative minimum tax.’’ 29

7. The taxpayer must compute his ‘‘alternative minimum tax’’ or ‘‘AMT.’’ The 

AMT is equal to the excess of the taxpayer’s tentative minimum tax, if any, 

over his regular tax liability (reduced by any tax from Form 4972 (Tax on 

Lump Sum Distributions) and any foreign tax credit from Form 1040). If the 

net result is a negative number or zero, the taxpayer does not owe AMT. 

8. If the taxpayer owes AMT, he computes his tax liability by adding his regular 

tax liability and his AMT liability.30

A taxpayer’s AMT liability may result in an AMT credit.31 In general, an AMT 

credit may be used in the future when the taxpayer’s regular tax liability, reduced 

by other nonrefundable credits, exceeds the taxpayer’s tentative minimum tax for 

the year.32 However, a taxpayer who owes AMT generates an AMT credit only to 

the extent the credit is caused by ‘‘deferral’’ items and not by ‘‘exclusion’’ items. Deferral items are those that are accounted for in different tax years in the regular 

tax and AMT systems. For example, the AMT in some instances requires taxpayers 

to depreciate property over a longer period of time. Exclusion items are adjustments 

and tax preference items that result in the permanent disallowance of certain tax 


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33Greg Leiserson & Jeffrey Rohaly, The Individual Alternative Minimum Tax: Historical Data 

and Projections updated November 2006, table 1 (Nov. 10, 2006) (available at www.taxpolicy 

center.org or on Lexis/Nexis at 2006 TNT 219–50). 34 Id. at table 3. 35 Id. at table 3. 36 IRS Wage & Investment Operating Division, Audit Information Management System (FY 

2005 data). 37 IRC § 59(a). 38 IRC § 56(b)(3). 39 IRC § 55(b)(3). 40 IRC § 59(j). 41The effect of the absence of AMT-exemption indexing is compounded by the fact that key 

tax preference items that are included in AMTI—e.g., the standard deduction and personal exemptions—are indexed annually. 42Greg Leiserson & Jeffrey Rohaly, The Individual Alternative Minimum Tax: Historical Data 

and Projections updated November 2006, table 3 (Nov. 10, 2006) (available at www.taxpolicy 

center.org or on Lexis/Nexis at 2006 TNT 219–50). 43Leonard E. Burman, William G. Gale & Jeffery Rohaly, The AMT: Projections and Problems, Tax Notes, July 7, 2003, pp. 105–106 (available at www.taxpolicycenter.org). 44 IRC § 56(b) & (e). Common itemized deductions that must be added back to income include, 

but are not limited to, state and local taxes, real estate and personal property taxes, mortgage 

interest not used for the purchase or improvement of a personal residence, medical expenses 

exceeding 7.5 percent but less than 10 percent of adjusted gross income, and certain miscellaneous itemized deductions such as employee business expenses and legal fees. 

benefits such as the standard deduction, personal exemptions and certain itemized 

deductions. Thus, many individual taxpayers who owe AMT will never be able to 

use an AMT credit. 

Problems with the AMT 

At the risk of some redundancy, the following is a concise list of some of the most 

significant problems relating to the AMT: 

• Impact on ‘‘Wrong’’ Taxpayers. The AMT no longer targets just wealthy taxpayers engaged in tax avoidance. The number of AMT filers is projected to grow 

to 32.4 million by 2010.33 Among taxpayers with incomes between $100,000 and $200,000, a staggering 80 percent will be subject to the AMT.34 Even more notable, the AMT will affect a higher percentage of taxpayers with incomes between $75,000 and $100,000 (50 percent) than taxpayers making more than $1 

million (39 percent).35

• Lack of AMT Knowledge. Taxpayers often file their returns not knowing about 

the AMT or expecting to be subject to it, but then receive bills relating to the 

AMT that they are not prepared to pay. In fiscal year 2005, the IRS closed more 

than 21,500 examinations that were initiated because of suspected AMT liabilities. These examinations resulted in additional tax assessments of nearly $39 

million—about $1,700 per return.36

• Complexity. The individual AMT computations are completely separate from the 

regular income tax computations. As described above, taxpayers may need to fill 

out a 16-line worksheet and then a 55-line form (IRS Form 6251, Alternative 

Minimum Tax—Individuals) just to determine whether they are subject to AMT. 

Other complexities of the AMT include the re-computation of the foreign tax 

credit,37 its effects on incentive stock options 38 and capital gains rates,39 and 

the treatment of income of minor children (the so-called ‘‘kiddie tax’’).40

• Failure to Index AMT Exemptions for Inflation. Regular income tax standard 

deductions, exemptions and filing thresholds are all adjusted for inflation. As 

discussed above, however, the AMT exemption amounts are not. The absence 

of an AMT indexing provision is largely responsible for the increasing numbers 

of middle-class taxpayers who are subject to the AMT regime.41

• Adverse Impact on Families. Married taxpayers will be almost 15 times as likely 

as single taxpayers to pay AMT in 2007.42 One study projected that approximately 5.7 million taxpayers will pay AMT in 2010 simply because they lose the 

benefit of personal exemptions under the AMT.43

• Loss of Itemized Deductions. An individual taxpayer must add back certain 

itemized deductions when computing the AMT.44 This adjustment causes particular difficulties for taxpayers with large expenditures such as medical bills, 

legal fees in court settlements, state and local taxes, or employee business expenses. 

• Unpredictability of Estimated Tax Payments. Because the law is so complicated, 

it is difficult, if not impossible, to predict whether an individual will be subject 

to the AMT. This uncertainty causes problems in paying the correct estimated 

tax for the year and can result in penalties for underpayment. In tax year 2004, 


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45 IRS Compliance Data Warehouse, Individual Returns Transaction File (IRTF), Tax Year 

2004. 46 IRC § 38(c)(1). 47Office of Tax Analysis, Department of the Treasury (unpublished tabulation); IRC § 55(c)(2). 48 IRC § 168(c). 49 IRC § 56(a)(1)(A)(i) (referencing IRC § 168(g)). 50 A credit may be carried to another taxable year only if the Code expressly provides for it. 

In the case of the credit for alternative motor vehicles, carryovers are authorized only if the vehicle is used in a trade or business and is subject to depreciation. See IRC § 30B(g). 51 IRC § 39(a). 52 IRC § 904(c). 

for example, 17.1 percent of AMT returns reported an estimated tax penalty on 

the return as compared with 3.7 percent of non-AMT returns.45

• Taxation of Incentive Stock Options. A taxpayer’s exercise of incentive stock options creates a paper (phantom) gain in the year the stock is purchased (i.e., 

the option exercise). This gain is not taxed under the regular tax rules but is 

taxed for AMT purposes. The gain is the difference between the option price and 

the market value of the stock on the date the option is exercised to purchase 

the shares. 

• Limitation on Availability of General Business Credits. Most general business 

tax credits are limited by the taxpayer’s tentative minimum tax.46 To illustrate, 

assume a taxpayer has a regular tax liability of $10,000 prior to credits, tentative minimum tax of $9,000, and a $2,000 credit under IRC § 44 for constructing an access ramp to his business for disabled individuals. Absent the 

credit, the AMT has no effect on this taxpayer because his regular tax liability 

exceeds his tentative minimum tax. However, the disabled access credit would 

reduce the taxpayer’s regular tax liability to $8,000, which is below his tentative minimum tax. Therefore, the taxpayer is only entitled to a credit amount 

of $1,000 and must carry back or carry forward the $1,000 credit balance. 

Under these circumstances, the taxpayer is required to complete Form 6251 and 

attach it to his return—even though the taxpayer does not have an AMT liability—to substantiate his entitlement to a portion of the credit. The Treasury Department estimates that taxpayers will lose nearly $13 billion in tax credits, 

mostly business credits, in 2010 because of the AMT.47

• Timing Issues Resulting from AMT Tax Credit Regime. The portion of AMT attributable to timing items reflects the difference between when certain deductions are allowable under the AMT and when the same deductions are allowable 

under the regular income tax. The taxpayer can claim an AMT credit only in 

subsequent years when the regular tax exceeds the AMT. 

• Requirement of Two Sets of Records. Taxpayers often must keep separate 

records for regular tax and AMT purposes. For example, assume a taxpayer 

placed an office building into service prior to 1999 and is claiming straight-line 

depreciation on the building. The taxpayer must depreciate the building over a 

39-year period for regular tax purposes,48 but for AMT purposes the depreciation period is 40 years.49

• Inconsistent Treatment of Carryover Items. When a taxpayer loses a tax benefit 

because of the AMT, the taxpayer may or may not be entitled to carry the benefit to another tax year, and the carryover periods vary from item to item. For 

example, an unused credit otherwise allowable for placing an alternative motor 

vehicle into service may not be carried over if the motor vehicle is not used in 

a trade or business.50 Thus, if the vehicle is for personal use, any credit that 

cannot be used in the year in which the vehicle is placed into service is permanently lost. Unused general business credits, on the other hand, generally may 

be carried back one year and carried forward 20 years.51 By contrast, unused 

foreign tax credits generally may be carried back one year and carried forward 

ten years.52

• Two Computations of Capital Gains Tax. Capital gains are taxed for regular tax 

purposes at lower rates than the AMT rates. Because Congress wanted to preserve tax-favored capital gains treatment under the AMT regime, a taxpayer 

with capital gains who owes AMT must complete 20 lines on Form 6251 after 

having already completed a Schedule D (Capital Gains and Losses) for regular 

tax purposes. 


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53 IRS Compliance Data Warehouse, Individual Returns Transaction File (IRTF), Tax Year 

2004. 54 IRS Compliance Data Warehouse, Individual Returns Transaction File (IRTF), Tax Year 

2004. 55 IRC § 55(d)(3). 56These examples illustrate common AMT issues we have seen in the Taxpayer Advocate 

Service, but they do not represent the facts of any particular case. 

• Increased Use of Paid Preparers. Approximately 60 percent of taxpayers without 

AMT liabilities pay to have their returns prepared.53 Where a taxpayer has an 

AMT liability, the use of paid preparers jumps to 77 percent.54

• High AMT Marginal Tax Rates Due to Phase-out of AMT Exemption. As described above, the AMT rules impose tax at a rate of 26 percent on a ‘‘taxable 

excess’’ (i.e., AMTI reduced by the applicable AMT exemption amount) up to 

$175,000 and 28 percent on higher amounts. However, the AMT exemptions 

phase out at a 25 percent rate for married taxpayers with AMTI exceeding 

$150,000 and non-married taxpayers with AMTI exceeding $112,500.55 Therefore, the AMT marginal tax rate can reach 35 percent. 

Examples of AMT Impact 

The following examples illustrate the impact of the AMT in four situations: 56

These examples illustrate common AMT issues we have seen in the Taxpayer Advocate Service, but they do not represent the facts of any particular case. 

AMT Penalty for Having Children: The (modified) Brady Bunch. Mr. and Mrs. 

Brady live in California in a rented home with their six children, ages 5–16. They 

claim the ‘‘married filing jointly’’ filing status and take the $10,300 standard deduction in 2006. Mr. Brady, an architect, made $73,160. Mrs. Brady worked part-time 

as a teacher and earned $25,000. The Bradys owe $2,424 in taxes under the regular 

tax system, but their tax bill rises to $3,199 with the AMT because the tax benefits 

of the personal exemptions for their children are phased out under the AMT. 

AMT Marriage Penalty. Assume the same facts as in the prior example except 

that Mr. and Mrs. Brady did not marry. If each used the ‘‘Head of Household’’ filing 

status and claimed their own three children, the AMT would not apply to either of 

them and their combined tax bill would be lower. Mrs. Brady would pay no tax and 

get $4,500 in refundable credits (a $2,385 EITC credit, a $2,055 child tax credit, and 

a $60 credit for federal telephone excise tax paid), and Mr. Brady would pay tax 

of $5,404. Their combined tax liability would be $904 (i.e., $5,404 minus $4,500)— 

or $2,295 less than their tax liability if they were married. Part of the difference 

in tax in these two examples is attributable to the general marriage penalty, but 

a significant portion is attributable solely to the AMT. 

AMT Penalty for High State and Local Taxes. A taxpayer filed a joint return 

claiming two dependent children for 2006. The taxpayer had an adjusted gross income of $190,000 and paid state income and property taxes totaling $28,000. The 

taxpayer had 90 percent of his regular tax liability withheld from his paycheck. 

When the taxpayer prepared his return, he discovered that he had an additional tax 

liability of $4,448 due to the AMT. Because of the additional AMT tax liability, he 

also owed a penalty for failure to pay estimated tax in the amount of $210. 

AMT Penalty Due to Combination of Having Children and Using ‘‘Married Filing 

Separately’’ Filing Status. A mother of five earned $57,500 in 2006. She is seeking 

a legal separation from her husband and lived apart from him during the final 

months of the year and thus claimed ‘‘married filing separately’’ filing status. Because she was entitled to claim the children as her dependents and to claim the 

child tax credit, she had no tax liability under the regular tax rules. She therefore 

did not have any tax withheld from her paychecks. When she prepared her tax return, however, she discovered that she had a tax liability of $1,909 due to the AMT. 

Because of the AMT tax liability, she also owed a penalty for failure to pay estimated tax in the amount of $93. 

Conclusion 

To be viewed as fair, a tax system must be transparent. Yet the complexity of the 

AMT is such that many if not most taxpayers who owe the AMT do not realize it 

until they prepare their returns. It adds insult to injury when many of these taxpayers discover that they also owe a penalty for failure to pay sufficient estimated 

tax because they did not factor in the AMT when they computed their withholding 

exemptions or estimated tax payments. Taxpayers subjected to this treatment may 

wonder whether their government is dealing fairly with them. To say the least, 

‘‘gotcha’’ taxation is not good for taxpayers or the tax system. 


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Clearly, there are many practical, policy, and political challenges to repealing the 

individual AMT. But these challenges will continue to grow over time as the government, absent congressional action, becomes increasingly dependent on AMT revenue. With all the problems inherent in the AMT, I don’t think taxpayers will stand 

for it when the AMT begins to hit tens of millions of taxpayers within the next few 

years. The AMT is a time bomb, and it is set to detonate very soon. I strongly urge 

Congress to act before the AMT explosion. 

f 

Chairman NEAL. Thank you very much, Ms. Olson. Dr. Burman. 

STATEMENT OF LEONARD E. BURMAN, PH.D., DIRECTOR, TAX 

POLICY CENTER, A JOINT VENTURE OF THE URBAN INSTITUTE AND BROOKINGS INSTITUTION 

Mr. BURMAN. Thank you, Mr. Chairman. Chairman Neal, 

Ranking Member English, Members of the Subcommittee, thank 

you for inviting me to share my views on the individual AMT, and 

thank you, Mr. Chairman and Mr. Ranking Member, for your leadership on this issue. 

In January 1969, Treasury Secretary Joseph Barr testified that 

155 high-income individual taxpayers had paid no Federal income 

tax in 1966. The news created a political firestorm. Members of 

Congress received more constituent letters about those 155 taxpayers than about the Vietnam War. 

Law makers could have responded in one of three ways. They 

could have explained that the non-taxpayers were taking advantage of tax incentives that advanced worthwhile social objectives, 

and thus, should not have to owe tax. That would have been a hard 

sell. 

They could have closed the loopholes that allowed rich people to 

avoid tax, but those loopholes had some pretty powerful constituencies, so that didn’t happen either. 

Instead, Congress decided to create an extra tax for high-income 

people who didn’t pay enough under the regular income tax system 

to avoid such embarrassing disclosures in the future. Thus was 

born the AMT. 

It was a bad choice. The AMT doesn’t do much to reign in tax 

shelters. Given the poor design, millionaires are actually less likely 

to owe AMT than middle income people with kids. It’s inefficient, 

and it undermines support for the tax system because it’s the poster child for pointless complexity. Taxpayers can’t understand it, but 

they think it’s unfair. 

Before getting into how to fix the AMT, I would like to address 

a couple of shibboleths. One, the AMT is virtually a flat tax with 

low rates of 26 and 28 percent. No. Those are the rates written into 

the law, but because the AMT exemption phases out with income, 

as Eric mentioned, the effective rates actually go as high as 35 percent, and they don’t even apply to the highest-income taxpayers. 

Since the highest rates don’t apply to the highest income people, 

the AMT hits almost everyone with incomes between $200,000 and 

$500,000, but not many millionaires. 

Another one. Since the AMT is becoming the de facto tax system, 

why not just eliminate the regular income tax? The AMT would be 

a terrible tax system. First, high tax rates apply at relatively modVerDate Mar 15 2010 09:26 Jun 07, 2011 Jkt 047005 PO 00000 Frm 00025 Fmt 6633 Sfmt 6602 I:\WAYS\IN\47005\PARAMS\47005.XXX 47005

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est incomes, and high-income people would get a big rate cut from 

35 percent to 28 percent. 

Second, there are horrendous marriage and child penalties. 

Third, it isn’t indexed for inflation, so it causes people’s average 

tax bills to increase every year, even if their real incomes weren’t 

changing. 

Another one is that software and paid preparers make AMT complexity no big deal. There are at least three problems with this argument. First, as the AMT consumes the middle class, it will hit 

more and more people who do their taxes by hand—or try. 

Second, even with software, it’s complex, as I explained in my 

written testimony. 

Third, you might want people to understand how the tax system 

affects them. With the AMT, the tax system becomes an inscrutable black box. 

It’s not the Bush tax cuts that have pushed people under the 

AMT, but the failure to index for inflation. Actually, it’s both. It’s 

certainly true that the AMT was on a path to cause problems even 

before the 2001 tax cuts were enacted, but EGTRRA doubled the 

problem. Without the tax cut, 16 million people would be on the 

AMT in 2010, which is way too many, but with the tax cut, the 

number balloons to 32 million. Cutting the regular income tax 

without fixing the AMT at the same time is the tax policy equivalent of throwing gasoline on a fire. 

The AMT is a blue state tax. Although in 2006, it’s true that taxpayers in relatively high-income high-tax coastal States are more 

likely to owe AMT than those in the interior, the AMT is going to 

hit people in all States hard if it isn’t fixed. It might be better to 

call it a soccer mom tax, or a swing voter tax. 

It’s in all of your interests to do something about it. So, what 

should we do? 

A serious fix to the AMT would, at a minimum, adjust it for inflation and retarget it at the higher income people who are intended to pay it. The ideal solution might be to repeal the tax, and 

include any valid anti-tax shelter provisions in the regular income 

tax. 

The problem, as you’re all painfully aware, is that any of these 

solutions would reduce Federal tax revenues dramatically, and repeal would be very regressive—96 percent of the benefits would go 

to the top fifth of the income distribution. 

We have looked at a number of options to pay for reform, including an increase in top income tax rates, elimination of the AMT tax 

preference for capital gains and dividends, or repeal of the deduction for State and local taxes under the regular income tax. 

Eliminating the tax break for capital gains and dividends has 

considerable merit. Prior to 1987, the tax break on capital gains 

was the single largest tax preference under the AMT. If the purpose of the AMT is to limit tax shelters, this makes sense, since 

virtually any individual income tax shelter you can imagine involves converting ordinary income into lightly taxed capital gains 

or dividends. Taxing gains and dividends under the AMT would 

also be highly progressive. 

The President’s tax reform panel proposed eliminating State and 

local tax deduction. I know that causes shudders of horror among 


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1My testimony draws heavily on joint work with my Tax Policy Center colleagues, Jeff 

Rohaly, Greg Leiserson, and Bill Gale. Views expressed are my own. 2The original minimum tax was an addition to regular income tax. The current AMT is a floor 

on total tax liability. For details, see Joint Committee on Taxation (2007) or Burman, Gale, and 

Rohaly (2005). 

people who live in high tax States, but your constituents are losing 

this break anyway because of the AMT, and it’s becoming increasingly just a tax deduction for very high-income people who aren’t 

subject to the AMT. 

Any of these changes would make the tax system more progressive, and they wouldn’t add to the deficit. I understand that fixing 

the AMT isn’t easy. If it were, it would have happened a long time 

ago, but I applaud the Subcommittee for taking the first steps toward what I hope will be a permanent solution. 

[The prepared statement of Mr. Burman follows:] 

Statement of Leonard E. Burman, Ph.D, Director, Tax Policy Center, a joint 

venture of the Urban Institute and Brookings Institution 

Chairman Neal, Ranking Member English, Members of the Subcommittee: Thank 

you for inviting me to share my views 1 on the individual alternative minimum tax. 

A precursor to the current individual alternative minimum tax (AMT) was originally enacted in 1969 to limit the amount of tax sheltering that taxpayers could pursue and to assure that high-income filers paid at least a minimal amount of tax.2

The current AMT, however, has strayed far from those original goals. Under current 

law, the tax will affect more than 23 million taxpayers in 2007, mainly for reasons 

that have little or nothing to do with what most people would consider tax sheltering. The AMT is expected to generate more than 800 billion in revenue over the 

next ten years under current law, a figure that rises to 1.5 trillion if the 2001–2006 

tax cuts are extended. In short, the AMT threatens to grow from a footnote in the 

tax code to a major component affecting tens of millions of taxpayers every year. 

My testimony will outline how the AMT works, whom it affects, and why it demands attention. I will also discuss possible ways of reforming the AMT and why 

financing AMT reform or repeal is important. I finish with some concluding observations. 

How does the AMT Work? 

The individual AMT operates parallel to the regular income tax with a different 

income definition, rate structure, and allowable deductions, exemptions, and credits. 

In short, after calculating regular tax liability, taxpayers must calculate their ‘‘tentative AMT’’ under the alternative rules and rates and pay whichever amount is 

larger. To calculate tentative AMT, taxpayers must first determine their alternative 

minimum taxable income (AMTI) and then subtract the applicable AMT exemption 

amount (which is subject to phase-out), calculate tax under the AMT rate schedule, 

and subtract any applicable credits. Technically, AMT liability is the excess, if any, 

of tentative AMT above the amount of taxes due under the regular income tax 

alone. 

Alternative minimum taxable income is the sum of three components: regular taxable income for AMT purposes, AMT preferences, and AMT adjustments. Regular 

taxable income for AMT purposes is basically the same as taxable income used for 

regular tax purposes, except it is allowed to be negative if deductions exceed gross 

income. 

An AMT preference is an item identified as a potential tax saving in the regular 

income tax that is not permitted in the AMT. An AMT adjustment is simply any 

other exclusion, exemption, deduction, credit, or other treatment (such as a method 

for computing depreciation) in the regular income tax that is either restricted or disallowed in the AMT. Because there is generally no interesting economic distinction 

between preferences and adjustments, I will refer to both as preferences. 

Interesting distinctions emerge among the various preferences themselves, however. Preferences are of two types: exemptions or deferrals. Exemption preferences 

broaden the AMT tax base and include the disallowance of personal exemptions, the 

standard deduction, and itemized deductions for miscellaneous expenses and state 

and local taxes. Deferral provisions change the timing of the recognition of income 

and deductions, typically to accelerate income and postpone deductions. Thus, they 


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3The exemption is reduced by 25 percent of the amount that AMTI exceeds the relevant 

threshold. As a result, married couples filing joint returns can claim no exemption if their AMTI 

exceeds $330,000; single filers and heads of household get no exemption if their AMTI is greater 

than $247,500. 4To be precise, the foreign tax credit is calculated before calculating the AMT and incorporated into the comparison between regular tax liability and AMT liability. Most credits, however, are calculated after both regular tax and AMT liability and do not affect the taxpayer’s 

direct AMT liability. 5Other personal credits, such as the Earned Income Tax Credit, were allowed against the 

AMT by tax law changes included in the Economic Growth and Tax Relief Reconciliation Act 

of 2001 and will remain in place through 2010. 

tend to raise the current-year tax base—and hence revenues—but only at the expense of future tax bases and tax collections. 

Middle-income AMT taxpayers are primarily affected by the exemption preferences, which are added to taxable income. The exemption measures might be interpreted as an effort to reduce tax incentives generally and move toward an alternative tax base that is broader than the regular income tax base. 

Deferral preferences outnumber exemption preferences, but they are used much 

less frequently, tend to be used by high-income taxpayers, and generate much less 

revenue. Deferral items tend to be complex; taxpayers generally need to recalculate 

income and costs using different schedules and keep separate books for regular tax 

and AMT purposes. Also, taxpayers may use AMT liability created by deferral provisions—but not by exemption provisions—as a credit against future years’ regular 

tax liability in excess of the tentative AMT. The deferral provisions, coupled with 

the credit they create, are consistent with a policy goal of having every high-income 

filer pay some positive tax in each year, even if his or her overall multiyear tax liability does not change. 

The Joint Committee on Taxation (2007) estimates that the three largest AMT 

preference items in 2006 were exemption preferences that few would consider to be 

aggressive tax shelters: deductions for state and local taxes (59 percent); personal 

exemptions, including exemptions for dependent children (22 percent); and miscellaneous itemized deductions for items such as unreimbursed business expenses (11 

percent). The share of these preference items—already more than 90 percent—will 

rise further over the next several years as the AMT encroaches on more and more 

middle-income taxpayers. 

After adding back their preference items and determining alternative minimum 

taxable income, taxpayers may then subtract an AMT exemption amount of $45,000 

for couples or $33,750 for singles and heads of household. That exemption is limited, 

however, for taxpayers filing joint returns with AMTI over $150,000 ($112,500 for 

singles and heads of household).3 AMTI less any applicable exemption is taxed at 

two rates—26 percent on the first $175,000 and 28 percent on any excess above that 

amount. As under the regular income tax, capital gains and dividends are subject 

to lower tax rates. If the resulting ‘‘tentative AMT’’ is greater than tax before credits 

calculated under the regular income tax, the difference is payable as AMT.4

That comparison means that anything that reduces the regular income tax relative to the AMT or that increases the tentative AMT relative to the regular income 

tax will move taxpayers onto the AMT. For example, a reduction in regular income 

tax rates that is not matched by a comparable change in the AMT would make more 

taxpayers subject to the AMT. The converse is also true: increasing regular income 

taxes or cutting AMT taxes would move some taxpayers off the AMT. If the 2001 

and 2003 tax cuts are allowed to sunset after 2010 as scheduled, for example, fewer 

taxpayers will owe AMT, albeit only because their regular tax bills will have increased. 

The Congress has limited the AMT’s reach in recent years by temporarily increasing the AMT exemption and allowing the use of personal nonrefundable credits 

against the AMT.5 For the 2006 tax year, for example, Congress raised the exemption from $45,000 to $62,550 for couples and from $33,750 to $42,500 for single filers and heads of household. Those changes kept 16.5 million taxpayers from falling 

into the AMT’s clutches. Because those adjustments were temporary, the Congress 

will need to pass additional legislation to prevent a sharp rise in the number of taxpayers subject to the AMT, from about 4 million in 2006 to more than 23 million 

in 2007. 


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Box 1 shows the calculation of AMT for a married couple having four children and 

earning $75,000 in 2007. It illustrates how the AMT will ensnare even middle-class 

families with very straightforward tax returns if Congress does not act. 


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6 Unless otherwise noted, estimates in this testimony are based on the Urban-Brookings Tax 

Policy Center’s microsimulation model of the federal tax system. Taxpayers affected by the AMT 

include those with direct AMT liability, those whose credits are limited by the AMT, and those 

who choose to take itemized deductions that are lower than their standard deduction in order 

to reduce or eliminate their AMT liability. Our estimates differ slightly from those reported by 

the Joint Committee on Taxation (2007) because of differences in underlying datasets, assumptions about growth of income over time and other factors, and definitions of what it means to 

be affected by the AMT. (I present our estimates rather than the JCT’s simply for purposes of 

internal consistency, since the JCT did not report all of the statistics I refer to in my testimony.) 

See Rohaly and Leiserson (2006) for further details on the Tax Policy Center’s methodology. 7Tax filers include all nondependent tax units filing an income tax return, regardless of 

whether they owe income tax. Taxpayers include all nondependent tax units with positive income tax liability after credits. The Joint Committee on Taxation (2007) reports estimates for 

‘‘taxpayers,’’ which they define as all tax-filing units, including those that do not file tax returns 

and dependent returns. 

Who is Affected by the AMT? 

Under current law, about 4 million taxpayers were affected by the AMT in 2006.6

With the expiration of the temporary AMT ‘‘patch’’ at the end of last year, the number of AMT taxpayers will increase dramatically in 2007 to 23 million, and continue 

to grow through 2010, eventually reaching 32 million, or more than one-third of all 

taxpayers. With the expiration of most of the 2001–2006 tax cuts in 2011, the number of AMT taxpayers will fall to 18.5 million, before again marching steadily upward to hit 39.1 million by 2017. If the 2001–2006 tax cuts are extended, 52.6 million taxpayers—almost half of all taxpayers—will pay the AMT by 2017. 

Although most AMT taxpayers are moderately well off, the tax is steadily encroaching on families that most would consider solidly middle-class. By 2010, half 

of all tax filers making between $75,000 and $100,000 will pay the AMT, up from 

36 percent this year and less than 1 percent in 2006, when the temporary AMT fix 

was still in place (table 1).7

Although the AMT may have originally been intended to prevent high-income individuals from sheltering all of their income and paying no tax, it now affects more 

tax filers in lower income classes than it does at the very top of the income scale. 

Since the 35 percent top rate of the regular income tax exceeds the 28 percent top 

statutory rate of the AMT, individuals with very high incomes who do not shelter 

a substantial portion of it will end up in the regular tax system. In 2006, only 31 

percent of filers with incomes above 1 million were affected by the AMT, compared 

to 51 percent of those with incomes between $200,000 and $500,000. By 2010, the 

difference is even starker: only 39 percent of millionaires will pay the AMT, but 94 

percent of those in the $200,000 to $500,000 income class will. 

What’s more, many tax shelters exploit the difference in tax rates between longterm capital gains, which face a maximum tax rate of 15 percent, and ordinary income, which can be taxed at rates as high as 35 percent under the regular income 

tax. However, the lower capital gains tax rate is not considered an AMT preference 

item, so high-income taxpayers who report a large amount of capital gains receive 

the same tax break under the AMT as under the regular income tax. In contrast, 

before 1987, the lower tax rate on capital gains was considered a preference item 

and was, in fact, the largest one. 


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In addition to being in certain income classes, taxpayers with any of several common situations are more likely than others to find themselves on the AMT: 

Large Families. Personal exemptions are allowed against the regular income tax, 

but not the AMT. Taxpayers with large families have many personal exemptions, 

which significantly reduce their regular income tax liability relative to tentative 

AMT. In 2006, taxpayers with three or more children were almost four times as 

likely to owe AMT as those with no children (table 1). By 2010, almost half of families with three or more children will find themselves on the AMT, compared to only 

17 percent of those without children. 

High State and Local Taxes. State and local taxes are deductible under the regular income tax, but not the AMT. Thus, high state and local taxes reduce regular 

tax liability relative to AMT, increasing the likelihood that a taxpayer will owe 

AMT. This helps explain why, in 2004, taxpayers in the New York area, the District 

of Columbia, and California were most likely to owe AMT (Burman and Rosenberg 

2006). They not only faced higher-than-average state and local tax burdens, but they 

also had higher than average incomes, making them substantially more likely than 

the average taxpayer to be subject to AMT. In 2006, households in high-tax states 

were almost three times more likely to be on the AMT than those in low-tax jurisdictions (table 1). With the dramatic growth of the AMT over the rest of this decade, 

however, this differential is slated to fall dramatically. By 2010, residents of hightax states will only be about 30 percent more likely to fall prey to the AMT than 

those in low-tax states (28 percent of households in high-tax states will face the 

AMT compared to 21 percent in low-tax states.) 


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8The Tax Relief and Health Care Act of 2006 allows certain taxpayers to claim a refundable 

credit for 20 percent of their unused long-term alternative minimum tax (AMT) credits (up to 

$5,000) per year. The refundable credit phases out for high-income taxpayers; the phase-out is 

based on the personal exemption phase-out. The refundable AMT credits can generally only be 

claimed for tax years 2007–2012 (JCT 2006 and personal communication from Jerry Tempalski). 

Marriage. Most married couples pay less tax under the regular income tax than 

they would if they were single. (That is, most ‘‘marriage penalties’’ have been eliminated and many couples receive ‘‘marriage bonuses.’’) This is not true under the 

AMT. AMT tax rate thresholds are identical for married and single taxpayers and 

the AMT exemption is only 33 percent larger for couples than for singles (except 

for those for whom the exemption has been phased out). In contrast, the standard 

deduction for couples under the regular income tax is twice that for singles. The 

combination of the AMT marriage penalties, the fact that married couples often 

have children, and the fact that married couples tend to have higher household incomes resulted in married couples being more than five times as likely to owe AMT 

as singles in 2006. In 2007, with expiration of the temporary AMT fix, married couples are 15 times more likely to owe AMT than singles (table 1). 

Taxpayer characteristics can combine to create very high probabilities of falling 

prey to the AMT. For example, absent a change in law, the AMT will become the 

de facto tax system for upper-middle-class families with children. In 2006, less than 

1 percent of married couples with two or more children and adjusted gross income 

between $75,000 and $100,000 were affected by the AMT, but by 2010 that share 

will rise to 89 percent (table 1). 

Other common situations that make a taxpayer more likely to incur the AMT include having high medical expenses or simply taking the standard deduction. Taxpayers may deduct medical expenses in excess of 7.5 percent of AGI under the regular income tax, but the threshold is 10 percent of AGI under the AMT. Thus, taxpayers with both high incomes and high medical expenses can be hit hard by the 

AMT. Even claiming the standard deduction can force an individual into AMT territory. Although most AMT taxpayers itemize deductions, the standard deduction 

under the AMT is worthless for the few who claim it: it reduces regular tax liability 

without affecting tentative AMT. 

Finally, current AMT rules allow for the possibility of some very perverse outcomes. Under the regular tax, filers may deduct legal fees incurred in cases that 

generate taxable damages (such as punitive damages or damages for nonphysical injuries) as miscellaneous itemized deductions to the extent that they exceed 2 percent 

of adjusted gross income. However, the AMT disallows miscellaneous deductions. As 

a result, a taxpayer with substantial legal fees will have much less taxable income 

under the regular tax than under the AMT. If the legal fees are high relative to 

the damage award, the taxpayer can actually owe more AMT than her net gain from 

a lawsuit (Johnston 2003). 

The exercise of incentive stock options generally creates income that is immediately taxable under the AMT, but that is not taxable under the regular income 

tax until the stock is actually sold. Individuals must include in AMTI the excess of 

the fair market value of the stock over the purchase price of the stock at the date 

of exercise (JCT 2006). This can cause taxpayers with very modest cash incomes to 

owe substantial AMT. If the stock is ultimately sold at a profit, the AMT paid earlier can be taken as a credit against the regular income tax owed. But if the stock 

price falls, the taxpayer can end up with a substantial AMT liability even though 

no income is ever realized.8

Why is the AMT Becoming a ‘‘Mass Tax’’? 

Although the factors described above help explain why individual taxpayers are 

affected by the AMT, they do not explain the dramatic growth in the AMT. Two factors reduce regular income tax liabilities relative to tentative AMT over time and 

largely explain the explosive growth in AMT projected through 2010 and beyond. 

Inflation. The AMT is not adjusted for inflation whereas the regular income tax 

is. This means that if an individual’s income just keeps pace with inflation each 

year, his or her regular income tax would remain constant (in real terms) while 

AMT liability would rise. The Joint Committee on Taxation (2007) estimates that 


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9 Real income growth also causes more taxpayers to become subject to the AMT over time because effective AMT tax rates are much higher than regular income tax rates for most taxpayers. 

(See Burman, Gale, and Rohaly 2005 for a discussion.) Thus, in most cases, the more income 

that is subject to AMT, the more likely it is that tentative AMT will exceed regular income tax. 

This is especially a problem for taxpayers in the phase-out range for the AMT exemption who 

are effectively taxed at rates 25 percent higher than the statutory AMT rate. The 26 percent 

rate becomes 32.5 percent; the 28 percent rate becomes 35 percent. This explains why almost 

all taxpayers with incomes between $200,000 and $500,000 are affected by the AMT (table 1). 

Real income growth is a minor factor in projected AMT growth compared to the lack of indexation and the impact of the tax cuts, however. Only 777,000 taxpayers would be subject to the 

AMT in 2011 if the AMT were indexed back to 1987 levels, according to the Joint Committee 

on Taxation. If the tax cuts are extended, about five times as many people would be affected, 

even with indexation. 10For more detailed discussion, see Burman and Weiner (2005). 11 Although the AMT generally preserves the lower statutory tax rates on capital gains and 

qualified dividends that exist under the regular tax system, the effect is diminished by the 

phase-out of the AMT exemption. Rather than the advertised 15 percent rate, taxpayers with 

incomes in the phase-out range can face effective marginal tax rates as high as 22 percent on 

gains and dividends. See Leiserson (forthcoming) for details. 

the number of AMT taxpayers in 2010 would be reduced by about 88 percent (26 

million) if the exemption had been indexed for inflation since 1987.9

The 2001–2006 Tax Cuts. The tax cuts reduced regular income tax liability, but 

made only temporary changes to the AMT. As a result, regular income tax declined 

relative to AMT liability, dramatically increasing the number of taxpayers subject 

to the AMT. In 2007, about 23 million taxpayers will be subject to the AMT under 

current law, more than double the 10.2 million that would have been affected had 

the tax cuts not been enacted. 

Should We Care About the Dramatic Growth of the AMT? 

While many people decry the expanding reach of the AMT, others assert that 

there is no cause for concern. Some argue that the complexity taxpayers face in calculating their taxes twice is not a reason to do away with the AMT, but rather cause 

to eliminate the regular tax. Others assert that the growing prevalence of tax preparation software negates any problems of complexity. In fact, both of those arguments 

have significant flaws. 

Some people, observing the complexity of having two parallel methods of calculating taxes, argue that the best solution is to repeal the regular income tax. This 

option would have several advantages according to its proponents. They claim that 

the AMT is nearly a flat-rate tax with only two statutory rates, 26 and 28 percent, 

both of which are significantly lower than the top statutory rate of 35 percent under 

the regular income tax. In addition, the AMT applies those lower rates to a broader 

income base, since it eliminates various special tax breaks that exist in the regular 

tax system. Since the AMT applies lower marginal rates to a broader tax base, it 

is a more efficient way of raising revenue than the regular tax system. 

This analysis is incorrect for several reasons.10 First, the AMT actually imposes 

four marginal tax rates, not two. The phase-out of the AMT exemption creates higher phantom tax rates of 32.5 and 35 percent, the latter equal to the top rate under 

the regular income tax.11 And in fact, significantly more taxpayers face higher effective marginal tax rates under the AMT than they would under the regular income 

tax. In 2006, 71 percent of AMT taxpayers faced a higher marginal rate under the 

AMT; that figure will rise to 89 percent by 2010 as the AMT ensnares more and 

more middle-income filers who would have faced statutory rates of 15 or 25 percent 

under the regular income tax (Leiserson and Rohaly 2006). 

Second, as described above, some of the base broadeners in the AMT have questionable validity as policy. In addition, the relatively high AMT exemption actually 

means that the AMT tax base is often smaller than the regular income tax base 

because the AMT exemption is larger than the total of all preference items for most 

taxpayers. In 2006, 63 percent of AMT taxpayers had more income subject to tax 

under the regular tax than they did under the AMT. That number will rise to 87 

percent by 2010 (Leiserson and Rohaly 2006). 

Thus the conventional wisdom that the AMT applies a lower marginal tax rate 

to a broader income base and is therefore more efficient than the regular tax system 

is incorrect. In fact, exactly the opposite is true. Most AMT taxpayers face a higher 

marginal rate applied to a more narrow tax base than they would if they were in 

the regular tax system. 

Other people assert that the complexity of calculating taxes under both the regular tax and the AMT does not pose a real problem. Relatively few taxpayers actually prepare their own tax returns, they argue, and instead rely on tax preparation 


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software, which calculates the AMT automatically, or paid tax preparers. It is true 

that the AMT is less complex for filers who use tax preparation software or a paid 

preparer, but at the cost of the income tax system’s transparency. The fact that the 

tax system is a black box for so many people is something to regret, not champion. 

In order to make informed decisions about work, saving, retirement, education, 

and other important matters, people should understand how the tax system affects 

those choices, but the AMT leads to endless confusion. Taxpayers will have a hard 

time predicting their marginal tax rate if they do not know whether they will be 

on the AMT. What’s more, many people may be confused about what constitutes an 

AMT preference item. For example, Consumer Reports magazine reported in the 

February 2007 issue that the AMT is ‘‘snagging middle-income taxpayers with big 

families, people who pay lots of state tax, and those with high mortgage interest.’’ 

Mortgage interest, of course, is not an AMT preference item (except on home equity 

lines and second mortgages used to pay for nonhousing expenses). And needless 

complexity contributes to public perceptions that the income tax system is unfair. 

In any case, computer software has its limitations. For example, individuals who 

were on the AMT in the previous year must figure out the state tax deduction that 

would have been allowed on their prior-year tax return before they were subject to 

the AMT. This is necessary in order to figure out how much of their state tax refund 

in the current year is taxable. This calculation is so complex that my tax software 

doesn’t do it. It recommends that I go back to my prior-year return, and keep refiguring my state tax deduction over and over until the AMT gets down to zero. This 

is complex even with software. Without it, the computation would be mind-numbing. 

A second example involves the choice between itemizing and taking the standard 

deduction. Under the regular income tax, taxpayers claim the standard deduction 

as long as it exceeds the amount of itemized deductions. But taxpayers on the AMT 

should itemize even if their standard deduction is greater, as long as their itemized 

deductions exceed the portion of the standard deduction that makes their regular 

tax less than the AMT. Even though the AMT disallows the standard deduction, 

some taxpayers who do not owe much AMT (i.e., whose tentative AMT is not that 

much more than their tax under the regular system) get a partial benefit from the 

standard deduction. That is, they would not be on the AMT if they did not take the 

standard deduction. Does that sound complicated? It is. The last time I checked, my 

tax software did not deal with that issue either. Taxpayers should not have to figure 

this out for themselves. 

Is there anything positive to say about the AMT? Over the long run, the AMT 

in its current form will become a more effective revenue generator than the regular 

income tax. The AMT will raise federal revenues by more than $800 billion over the 

next ten years under current law and by $1.5 trillion if the 2001–2006 tax cuts are 

extended. Indeed, our estimates show that in 2007, it would cost less to eliminate 

the regular income tax than to eliminate the AMT. Over a longer time horizon, the 

Congressional Budget Office (2003) estimates that, primarily because of the AMT, 

federal taxes will claim 25 percent of GDP by 2050, compared with just 17 percent 

today. That huge influx of revenue could help fund growing entitlement programs 

such as Social Security and Medicare as the baby boom generation retires. 

But the AMT’s power as a revenue generator stems entirely from the fact that 

its parameters are not indexed for inflation. In consequence, people whose incomes 

only just keep pace with inflation will face higher and higher average tax rates over 

time (a phenomenon sometimes referred to as bracket creep). And more and more 

people will find themselves in this situation as they become subject to the AMT over 

time. That is clearly not a sustainable path. 

Given this and all the other design flaws inherent in the AMT—marriage and 

family penalties, higher marginal tax rates that are likely to discourage working 

and saving and encourage inefficient tax avoidance behavior, and needless complexity—reforming or repealing the AMT in conjunction with reforming the regular 

income tax is far preferable to making the AMT the basis of our tax system. 

Financing AMT Reform or Repeal 

Reforming or repealing the AMT is costly and financing that cost is important. 

Outright repeal of the AMT, without any other offsetting changes, would reduce tax 

revenues by more than $800 billion through fiscal year 2017, assuming that the 

2001–2006 tax cuts expire after 2010. If the tax cuts are extended, the 1one-year revenue loss nearly doubles to almost $1.6 trillion. 

Some have argued that since everyone is aware that this AMT revenue should 

never have been collected in the first place, it is not necessary to offset the cost of 

repeal. The real baseline, they assert, should assume no AMT. That is a misleading 

argument. In fact, the AMT masked the true cost of the 2001 tax act. Congressional 

leaders understood that the AMT would ‘‘take back’’ a significant portion of the tax 


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12The JCT estimates that slightly less than half of the AMT is paid by taxpayers with ad- justed gross income (AGI) over $200,000 in 2007. The smaller share arises because AGI is often 

lower than the cash income measure used by the Tax Policy Center. Cash income, which is similar to the income measure used by the Department of the Treasury in its distributional analysis, 

includes items such as contributions to IRAs and 401(k) plans and tax-exempt bond interest that 

are excluded from AGI. 13For more information on these options, and others, see Burman et al. (2007). 14The AMT exemption was increased between 2005 and 2006 as an ad hoc inflation adjustment, but it has never been formally indexed for inflation. The allowance of personal non-refundable credits against both the regular tax and the AMT would also be extended under all 

reform options considered here. 

cuts and therefore keep their estimated cost down to the tax bill’s advertised $1.35 

trillion. By 2010, the AMT will reclaim almost 28 percent of the individual income 

tax cuts, including more than 70 percent of the cut that would have gone to taxpayers making between $200,000 and $500,000 (Leiserson and Rohaly 2006). 

Repeal of the AMT would be not only prohibitively expensive but also extremely 

regressive. Nearly 96 percent of the tax cut in 2007 would go to the top fifth of income earners and 80 percent would go to the top tenth. More than half would go 

to taxpayers with incomes greater than $200,000.12 After-tax incomes of taxpayers 

with incomes between $200,000 and $500,000 would rise by 2.7 percent, or an average of nearly 6,000. In contrast, taxpayers in the middle quintile of the income distribution would receive less than 1 percent of the benefits and would see their aftertax income rise by an average of only $5. 

Reforming the AMT to Spare the Middle Class 

Rather than outright repeal, the AMT could be reformed in order to shield middleand upper-middle-income taxpayers from its effects.13 The simplest reform would be 

to extend the exemption increase in place for 2006 and index the AMT for inflation. 

This would prevent inflation from increasing tentative AMT (in real terms) and conform the AMT treatment with that under the regular income tax.14 If indexation 

were applied to rate brackets and the phase-out as well as the exemption, only 3.6 

million taxpayers would be subject to the AMT in 2007, down from 23.4 million 

under current law (table 2). The number of AMT taxpayers with incomes less than 

$100,000 would fall by more than 98 percent. By 2010, real income growth would 

increase the number of AMT taxpayers to 4.6 million, still significantly lower than 

the projected 32.4 million under current law. 

A more comprehensive reform would also allow dependent exemptions, state and 

local tax deductions, the deductions for miscellaneous expenses and medical expenses, and the standard deduction for AMT purposes. This would reduce the number of AMT taxpayers to fewer than 500,000 in 2007 and would spare virtually all 

taxpayers with incomes below $200,000 from the AMT. 

These reforms would, however, substantially reduce federal tax revenues. We estimate that indexing the AMT for inflation from 2006 levels would reduce revenues 

by about $0.5 trillion over the ten-year period from 2007–2016 assuming the 2001– 

2006 tax cuts expire as scheduled. If the tax cuts are extended, the cost rises to $0.9 

trillion. The comprehensive reform package would reduce revenues by $0.7 trillion 

if the tax cuts expire and $1.2 trillion if they are extended. 


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15Tax Policy Center estimates are not revenue estimates because they do not account for the 

behavioral responses that would be considered by the JCT. JCT estimates, however, are not 

available for these options. 16See Burman (1997) for a discussion of the connection between capital gains tax preferences 

and tax shelters. 

Both options would also be regressive. Indexing the AMT for inflation would provide a tax cut of 1.4 percent of after-tax income to those in the top quintile in 2010 

(table 3). It would provide an increase of less than one-tenth of one percent to those 

in the middle fifth of the income distribution. The broad reform package would increase the after-tax incomes of those in the top quintile by 1.9 percent in 2010 while 

those in the top ten percent would see an increase of 2.1 percent. Again, those in 

the middle of the income spectrum would receive virtually nothing. 

Offsetting the Revenue Cost of the Middle-Class Reforms 

The revenue cost of the reforms outlined above could be offset in a variety of 

ways. All the offset options described below are intended to be roughly revenue neutral over the 2007–2016 budget window, and assume that the 2001–2006 tax cuts 

expire as scheduled.15 If the tax cuts are extended, each of the options would generally lose substantial amounts of revenue over the budget window, and many more 

people would be subject to the AMT after 2010. 

Although there are myriad ways in which the revenue cost of the reforms could 

be financed, I will discuss three illustrative options: (a) increasing the top three income tax rates under the regular tax; (b) increasing the AMT rates; or (c) combining 

(a) with disallowing the preferential rates on capital gains and dividends under the 

AMT. 

Financing the reforms by increasing AMT rates rather than by raising regular income tax rates leaves more individuals subject to the AMT, particularly those with 

incomes over $200,000. Since both of the reforms mentioned above involve substantial increases in the AMT exemption, they tend to shield those with incomes under 

$100,000 from the AMT. In addition, raising regular income tax rates and thus regular income tax liability reduces the number of people for whom tentative AMT is 

greater than regular tax and thus further reduces the number of AMT taxpayers. 

In contrast, raising AMT rates tends to increase the number of people for whom tentative AMT is greater than regular tax. 

Eliminating the preferential rates for capital gains and dividends under the AMT 

allows smaller increases in either regular or AMT tax rates. These options also tend 

to retarget the AMT toward those with very high incomes—since those taxpayers 

tend to have a higher share of their income in the form of capital gains—which is 

more consistent with the AMT’s original intent. Moreover, since many tax shelters 

exploit the lower tax rate on capital gains, eliminating preferential gains rates 

would likely do more to stem tax sheltering than any of the existing AMT preferences.16

Extending the exemption and indexing the AMT for inflation would require a 12 

percent increase in the top three regular income tax rates. (We raise only the top 

rates because it is primarily taxpayers in the upper brackets who are affected by 

the AMT.) Under this option, the top rate would increase from 35 to 39.1 percent 

through 2010 and from 39.6 to 44.3 percent for 2011 and thereafter. The number 

of AMT taxpayers would fall to 2.4 million in 2007; only 100,000 of them would have 

incomes below $100,000. The change in tax burdens by income quintiles would be 

small, never more than one percent of income. The highest-income taxpayers, however, would pay more tax. By 2011, the top one percent pays additional tax equal 

to about three percent of income. 


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If AMT rates were raised instead, to 31.1 and 33.5 percent, 9.7 million taxpayers 

would be affected by the AMT in 2007; the number of AMT taxpayers with incomes 

of $200,000 and over would actually rise relative to current law. AMT liabilities 

would also increase for higher-income households and so they would pay higher 

taxes on average. Households in the top ten percent would experience a tax increase 

of about 1 percent of income through 2010, and those in the top one percent would 

pay additional taxes equal to more than 2 percent of income. After 2010, the tax 

increases are much smaller because the higher AMT exemption in combination with 

the pre-EGTRRA regular income tax rates results in fewer upper-income households 

owing AMT. 

If the preferential rates on capital gains and dividends were disallowed for AMT 

purposes, the required increase in the top three regular income tax rates would be 

only 2 percent. The top rate, for example, would need to rise from 35 to 35.8 percent 

through 2010 and from 39.6 percent to 40.4 percent thereafter. This option would 

reduce the number of AMT taxpayers by about 80 percent in 2007, to 4.5 million. 

The AMT would be much more targeted at those with high incomes; taxpayers with 

incomes greater than $1 million would actually be more likely to owe AMT under 

this option than under current law. This option has very small effects on average 

tax burdens by quintiles—in all cases, tax changes are less than 1 percent of income. The tax change is much more significant for those at the very top, however. 

The top one percent would see an average tax increase of about 4 percent of aftertax income in 2007, although the size of that tax increase would decline over time. 

Since broad reform of the AMT costs substantially more, financing it would require larger increases in either regular or AMT rates. The required increase in the 

top three regular rates would be 14 percent, resulting in a top rate of 39.9 percent 

through 2010 and 45.2 percent thereafter. This option reduces the number of AMT 

taxpayers to only 300,000 in 2007, including only 100,000 with incomes less than 

$200,000. Since this option reduces tax revenues in the first five years and increases 

it thereafter, the largest tax increases occur after 2010. The average tax increase 

is about 3 percent of income for those in the top one percent after 2010. 

Financing the broad reform package would require a 38 percent increase in AMT 

rates, to 36 and 38.7 percent. As a result, 6.2 million taxpayers would face the AMT 

in 2007. Although only 100,000 taxpayers with incomes under $100,000 would be 

on the AMT, there is little reduction compared to current law for those making between $200,000 and $1 million. And virtually all taxpayers with incomes greater 

than $1 million would be on the AMT. 

Finally, broad reform could be financed by disallowing the preferential rates on 

capital gains and dividends under the AMT combined with an increase in the top 

three regular income tax rates. The required rate increase would be 7 percent resulting in a top rate of 37.4 percent through 2010 and 42.3 percent thereafter. This 

option would reduce the number of AMT taxpayers by about 95 percent in 2007, to 

just 1.2 million, with only 300,000 of them having incomes less than $200,000. This 

option would have very small effects on the distribution of tax burdens by quintile. 

But disallowing the lower capital gains rates under the AMT, combined with the 


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17 It would also be possible to raise rates in 2007 and keep them at that level permanently, 

rather than increasing them again in 2011 when the tax cuts expire. In that case, the revenueneutral rates would be 34.8, 41, and 43.5 percent. This option is roughly revenue neutral over 

both the first and second five-year periods of the budget window. 18 Alternatively, the bottom rates could remain the same and the top three rates could be reduced by 5 percent, resulting in a top statutory rate of 33.1 percent through 2010 and 37.5 percent thereafter. By 2011, this option is effectively distributionally neutral. 19 A number of other issues arise in considering whether to finance AMT repeal by eliminating 

the state and local tax deduction. See Rueben (2006) for a general discussion, or Burman and 

Gale (2005) in the context of the tax reform panel’s proposal. 

regular tax rate increases, results in significant tax increases for those at the very 

top of the income scale—over 3 percent of income for those in the top one percent 

before 2010. 

Offsetting the Revenue Cost of Repeal 

Full repeal of the AMT could also be financed in a variety of ways. Obvious candidates include: (a) increasing regular income tax rates; (b) repealing the state and 

local tax deduction; and (c) repealing the reduced tax rates for capital gains and 

dividends. 

The required increase in the top three rates required to offset the revenue loss 

from repeal would be 15 percent, resulting in top rates of 32.3, 38.1, and 40.4 percent through 2010 (from 28, 33, and 35 percent) and 35.8, 41.5, and 45.7 percent 

in 2011 and thereafter (from 31, 36, and 39.6 percent).17 This option cuts taxes in 

the first five years and increases them in the second five-years, after the 2001–2006 

tax cuts expire. Most of the net tax increases are experienced by taxpayers in the 

top five percent of the income distribution. The top one percent face the largest tax 

increases, averaging over 3 percent of income after 2010. This occurs because very 

high income earners are most affected by the rate increases and do not tend to benefit as much from repeal of the AMT since they tend not to be on the AMT in the 

first place. 

Another option to finance AMT repeal would be to broaden the tax base significantly by repealing the deduction for state and local taxes, as recommended by 

President Bush’s tax reform advisory panel. The deduction is not allowed for AMT 

purposes. And since most taxpayers in the bottom 60 percent of the income distribution take the standard deduction, the primary beneficiaries of the deduction are 

those at the very top of the income scale who escape the AMT. More than 70 percent 

of those in the top 1 percent of the income distribution will benefit from the deduction in 2007, with an average tax savings of almost $12,000 or 1.3 percent of income. Repealing the state and local tax deduction raises more than enough revenue 

to pay for repeal of the AMT, although it would not if the 2001–2006 tax cuts are 

extended. This allows for income tax rates to be reduced across-the-board by 2 percent.18

The option has very small effects on overall tax burdens by income group— 

amounting to less than 1 percent of income in any year. Middle-income taxpayers 

receive a very small benefit from the tax rate reduction and are not much affected 

by the elimination of the deduction since few taxpayers itemize in that income 

range. Itemizers in the fourth quintile lose more than they gain in 2007, because 

most itemize, but many have not become affected by the AMT in that year. By 2010, 

that group overall experiences a modest tax cut. Within the top quintile, elimination 

of the AMT is more significant than the loss of the state and local tax deduction 

until 2010. After that, this income group loses more than they gain, but the net 

losses are never large, even within the top 1 percent. Overall, this option makes the 

tax system modestly more progressive.19

Finally, AMT reform could be financed by rolling back the 2003 reductions in the 

tax rates on capital gains and qualified dividends combined with an 8 percent increase in the top three income tax rates above their pre-2001 levels, resulting in 

a top rate of 42.8 percent. This option would cut taxes by a modest amount for 

middle- and upper-middle-income taxpayers. It would increase taxes significantly for 

high-income taxpayers, especially before 2011 when current law allows for substantial reductions in the rates on capital gains and dividends. Taxpayers in the top one 

percent of the income distribution would, on average, pay additional taxes equal to 

more than 5 percent of after-tax income in 2007. These households lose out for three 

reasons—they are most affected by the income tax rate increases, they have a large 

amount of capital gains and dividends, and many taxpayers in this group do not 

owe AMT (and thus receive no benefit from repeal). 

This option would increase revenues by about $100 billion in the first five years 

of the budget period and reduce revenues by the same amount in the second five. 

Beyond the budget period, it would lose increasing amounts of revenue. 


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Conclusions 

Lack of inflation indexing in the alternative minimum tax expands the reach of 

the tax each year. The 2001–2006 tax cuts have further exacerbated the problem 

by reducing regular income tax liabilities without corresponding permanent changes 

to the AMT. Caught amid these trends, one in three American taxpayers will soon 

face a tax that almost none of them were ever meant to pay. Although the goals 

of the AMT—ensuring high-income taxpayers pay at least some amount of tax each 

year, and reducing inefficient tax sheltering—may command public support, the 

AMT is a highly imperfect way of achieving those goals. In particular, under current 

law, the AMT will come to plague the middle- and upper-middle-income classes with 

undue complexity, a narrower tax base, and higher marginal tax rates than under 

the regular income tax. 

As the AMT expands, the political benefits of achieving a solution increase as 

well. A number of sensible reform options are available. A significant barrier to 

AMT reform is the challenge of what to do about the lost revenues. Official budget 

estimates assume that the AMT will provide tax revenues of nearly one trillion dollars over the next ten years. Even modest reforms, such as extending the AMT 

‘‘patch’’ and indexing the AMT for inflation, would reduce tax revenues over that 

period by more than half a trillion dollars. Given our fiscal situation, making up 

that lost revenue would seem to be a necessary pre-condition for reform. 

I have illustrated a number of options for reforming or repealing the AMT without 

increasing the deficit over the ten-year budget period. The options show that it 

would be feasible to repeal or sharply scale back the AMT in a fiscally responsible 

manner with relatively minor dislocations. All of them produce winners and losers— 

it would be impossible to design a sensible revenue-neutral alternative to the AMT 

that didn’t—but many would cut taxes modestly on the middle class and have relatively small effects on those with higher incomes. 

There are untold numbers of other fiscally responsible options available, and some 

of them might be preferable to the ones displayed here. For example, Ways and 

Means Committee Chairman Rangel has proposed to improve tax compliance and 

collections as a way to raise revenue. To the extent that more of the tax that is due 

to the IRS could be collected, the revenue needs to finance AMT reform would be 

reduced. As a result, the options here could be implemented with smaller income 

tax rate increases or without the use of other offsets such as elimination of the deduction for state and local taxes. 

The ideal solution would be to address the AMT in the context of a complete overhaul of the income tax, such as the proposal made by the President’s Advisory Panel 

on Federal Income Tax Reform. Although the AMT is probably the best example of 

pointless complexity in the tax system, it is far from the only one. Addressing all 

of the sources of complexity, unfairness, and inefficiency in the tax system at the 

same time would strengthen the income tax—the major source of federal tax revenues—at a time when unprecedented demands are about to be placed on the federal 

government because of the impending retirement of the baby boomers. 

That said, the perfect should not be the enemy of the good. Many of the incremental options I have outlined would significantly improve our tax system. I applaud the subcommittee for taking the first steps toward advancing this goal. 

References 

Burman, Leonard E. 1997. The Labyrinth of Capital Gains Tax Policy: A Guide 

for the Perplexed. Washington, DC: Brookings Institution Press. 

Burman, Leonard E., and William G. Gale. 2005. ‘‘A Preliminary Evaluation of 

the Tax Reform Panel’s Report.’’ Tax Notes (December 5): 1349—68. http:// 

www.taxpolicycenter.org/publications/template.cfm?PubID=1000854. 

Burman, Leonard E., William G. Gale, Gregory Leiserson, and Jeffrey Rohaly. 

2007. ‘‘Options to Fix the AMT.’’ Washington DC: Tax Policy Center. (January). 

http://www.taxpolicycenter.org/UploadedPDF/411408lfixlAMT.pdf. 

Burman, Leonard E., William G. Gale, and Jeffrey Rohaly. 2005. ‘‘The Expanding 

Reach of the Individual Alternative Minimum Tax.’’ Washington, DC: Tax Policy 

Center. http://www.taxpolicycenter.org/publications/template.cfm?PubID=411194. 

Burman, Leonard E., and Carol Rosenberg. 2006. ‘‘AMT Projections by State, 

2004.’’ Tax Notes (December 11): 1021. http://www.taxpolicycenter.org/publications/ 

template.cfm?PubID=1001047. 

Burman, Leonard E., and David Weiner. 2005. ‘‘Suppose They Took the AM Out 

of the AMT?’’ Tax Policy Center Discussion Paper No. 25. Washington, DC: Tax Policy Center. http://taxpolicycenter.org/publications/template.cfm?PubID=9397. 

Congressional Budget Office. 2003. ‘‘The Long Term Budget Outlook.’’ Washington 

DC: The Congressional Budget Office. (December). 

Johnston, David Cay. 2003. Perfectly Legal: The Covert Campaign to Rig Our Tax 

System to Benefit the Super Rich—and Cheat Everybody Else. New York: Penguin. 


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Joint Committee on Taxation. 2006. ‘‘Technical Explanation of H.R. 6408, The Tax 

Relief and Health Care Act of 2006, as Introduced in the House on December 7, 

2006.’’ JCX–50–06. Washington, DC: Joint Committee on Taxation. 

Joint Committee on Taxation. 2007. ‘‘Present Law and Background Relating to 

the Individual Alternative Minimum Tax.’’ JCX–10–07. Washington, DC: Joint Committee on Taxation. 

Leiserson, Greg. (forthcoming). ‘‘The 15 Percent Rate on Capital Gains: A Casualty of the Alternative Minimum Tax.’’ Washington DC: Tax Policy Center. 

Leiserson, Greg, and Jeffrey Rohaly. 2006. ‘‘The Individual AMT: Historical Data 

and Updated Projections.’’ Tax Notes (December 25): 1167–76. http:// 

www.taxpolicycenter.org/publications/template.cfm?PubID=901012. 

Rueben, Kim. 2005. ‘‘The Impact of Repealing State and Local Tax Deductibility.’’ 

State Tax Notes (August 15): 497. http://www.taxpolicycenter.org/publications/ 

template.cfm?PubID=1000818. 

f 

Chairman NEAL. Thank you very much, Dr. Burman. Dr. Viard. 

STATEMENT OF ALAN VIARD, PH.D., RESIDENT SCHOLAR, 

AMERICAN ENTERPRISE INSTITUTE 

Mr. VIARD. Chairman Neal, Ranking Member English, distinguished Members of the Subcommittee, it is an honor to be invited 

to discuss the AMT today. 

I would like to make four main points. First, the fundamental 

reason for the spread of the AMT is that the exemption amount is 

not indexed for inflation. The AMT spread rapidly before the 2001 

and 2003 tax laws were adopted. It would have continued spreading without them, and it will spread further after 2010, even if 

those laws sunset. 

Second, recent tax legislation slowed the spread of the AMT in 

2001 through 2006, although it will accelerate that spread in 2007 

through 2010. 

Third, the taxpayers who move on to the AMT due to the 2001 

and 2003 tax laws still enjoy a net tax cut from those laws. 

Fourth, the spread of the AMT not only adds to complexity, but 

it also moves more taxpayers on to an ill-designed tax system. As 

the other witnesses have already stressed, the AMT exemption 

amount has never been indexed for inflation. As a result, inflation 

has always been a force that has pushed people onto the AMT. 

From 1987 to 2000, the AMT rolls doubled every three or four 

years. The number of people on the AMT surged from a mere 

140,000 to 1.6 million during that 13-year period. 

During 2001 to 2006, inflation caused the AMT rolls to increase 

further. During that period, the AMT rolls grew from 1.6 million 

in 2000 to 3.5 million in 2006. It is sometimes suggested that the 

2001 and 2003 tax cuts, and the other legislation adopted during 

those years, was responsible for this spread, but the opposite is 

true, for this time period. 

If pre-2001 law had remained in place, the AMT rolls would have 

surged to 8.1 million in 2006. They would have grown by a factor 

of five, rather than a factor of about two. The tax legislation adopted in 2001 to 2006 slowed the spread of the AMT. The AMT relief 

that was offered in those laws—part of it in EGTRRA and JGTRRA 

themselves; part of it in three other laws—that AMT relief was 

more than enough to offset the regular tax relief that was offered. 


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Therefore, that legislation reduced the spread of the AMT during 

that time period. 

Things are different in the 2007 to 2010 period. During these 

years, the 2001 and 2003 tax laws, and the other recent tax legislation, are expanding AMT rolls, because those laws offer regular tax 

relief without corresponding AMT relief. Nevertheless, inflation 

continues to be a significant factor behind the spread of the AMT. 

This year, more than 10 million taxpayers would be on the AMT, 

even if the 2001 and 2003 laws had not been adopted. 

Let me also note that those taxpayers who move on to the AMT 

because of the 2001 and 2003 tax laws do not experience a net tax 

increase from those laws. The AMT does take back part of the tax 

cut that those laws would otherwise have offered, but it still leaves 

them with some net tax reduction. 

If the tax laws do sunset after—in 2010, the AMT will continue 

to spread rapidly, growing to a staggering 39 million people on the 

AMT in 2017. Of course, the spread of the AMT would be even 

more rapid if EGTRRA and JGTRRA were extended without any 

long-term AMT relief or solution. It is important that an extension 

of those laws include AMT relief if no fundamental AMT reform 

has yet been adopted at the time of extension. 

Let me say a few words about the consequences of the spread of 

the AMT. As other witnesses have mentioned, this is a source of 

complexity for millions of ordinary taxpayers, some who merely 

have large families, live in high-tax States, or are in a particular 

income range. 

A bigger defect is that the spread of the AMT also puts a larger 

number of taxpayers on to an ill-designed tax system. I want to 

echo the criticisms that Len has just made of the AMT as an alternative tax system. 

The notion that it is a low-rate, flat-rate, broad-based income tax 

that might be better than a regular income tax is fundamentally 

mistaken. The base broadening provisions are limited, they are 

highly selective, and many of them are misdirected. 

Furthermore, effective marginal tax rates under the AMT are not 

systematically lower than those under the regular income tax. As 

Len has already mentioned to you, it is not the case that the AMT 

just has tax rates of 26 and 28 percent. Tax rates of 32.5 and 35 

percent also exist. 

In summary, Mr. Chairman, the fundamental reason for the 

spread of the AMT is the failure to index for inflation. Recent tax 

legislation slowed the AMT spread in 2001 through 2006, although 

it will accelerate it in 2007 through 2010. The AMT needs to be 

corrected, not only because of the complexity that it causes, but because it is exposing more taxpayers to an ill-designed tax system. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Viard follows:] 

Statement of Alan Viard, Ph.D, Resident Scholar, American Enterprise 

Institute 

Chairman Neal, Ranking Member English, Members of the Committee; it is an 

honor to appear before you today to discuss the alternative minimum tax (AMT). 

I would like to make four main points: 

• The fundamental reason for the spread of the AMT is that the exemption 

amount has never been indexed to inflation. As a result, the AMT spread rapVerDate Mar 15 2010 09:26 Jun 07, 2011 Jkt 047005 PO 00000 Frm 00041 Fmt 6633 Sfmt 6621 I:\WAYS\IN\47005\PARAMS\47005.XXX 47005

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idly before the 2001 and 2003 tax laws were adopted, it would have continued 

spreading without those laws, and it is projected to spread further after 2010 

even if those laws sunset. 

• The 2001 and 2003 tax laws, in combination with other tax legislation adopted 

in 2001 through 2006, slowed the AMT spread in those years, but will accelerate the spread in 2007 through 2010. 

• Taxpayers who move onto the AMT in 2007 through 2010 due to the 2001 and 

2003 tax laws still enjoy a net tax cut from those laws. 

• The spread of the AMT exposes more taxpayers to an ill-designed tax system. 

AMT Exemption Amount Has Never Been Indexed for Inflation 

The basic design of the AMT has remained largely unchanged since 1987, when 

the provisions of the Tax Reform Act of 1986 (enacted October 22, 1986) took effect. 

At that time, the exemption amount was $40,000 ($30,000 for unmarried taxpayers). 

No automatic inflation adjustment was provided for the AMT exemption, even 

though the regular tax brackets and exemption amounts were and are adjusted for 

inflation. 

Since that time, there has been only one permanent increase in the exemption 

amount. The Omnibus Budget Reconciliation Act of 1993 (OBRA93) (enacted August 

10, 1993) increased the exemption amount to $45,000 ($33,750 for unmarried taxpayers), effective in 1993. As can be seen in Figure 1, the increase fell far short 

of the amount needed to offset the cumulative effects of inflation since 1987. 

Moreover, OBRA93 also failed to provide for inflation indexation. By 2000, therefore, the exemption amount had fallen further behind what was needed to keep up 

with inflation. 

Inflation Caused AMT to Spread Before 2001 

When the regular tax system is indexed for inflation and the AMT is not, the effects of inflation are straightforward. Tax liability computed under AMT rules rises 

more rapidly than tax liability computed under regular tax rules. A larger number 

of people therefore find that their AMT-computed tax liability is the larger of the 

two and they then move onto the AMT. 

As one would expect, the AMT spread relentlessly during the 13 years after 1987, 

as shown by the Brookings-Urban Tax Policy Center data displayed in Figure 2. 

The AMT rolls surged from a mere 140,000 in 1987 to 1.6 million in 2000. Throughout this period, the number of AMT taxpayers typically doubled every three or four 

years. 


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1 EGTRRA also made the child credit and the earned income tax credit allowable under the 

AMT through 2010. 

Inflation Caused Further AMT Spread in 2001–2006; Tax Legislation Slowed 

the Spread 

The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) (enacted June 

7, 2001) provided sweeping reductions in regular income tax rates in 2001 through 

2010. The Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) (enacted May 

28, 2003) provided further reductions in regular tax liability. 

A common criticism asserts that these laws accelerated the spread of the AMT 

by lowering regular tax rates without providing AMT relief. As taxpayers’ regular 

tax liabilities declined with no change in their AMT liabilities, the story goes, taxpayers moved onto the AMT. 

That story does not accurately describe what happened in 2001 through 2006. 

EGTRRA and JGTRRA actually provided some AMT relief, and other laws signed 

by President Bush during this period provided additional relief. The net consequence of these laws was to slow the spread of the AMT in 2001 through 2006, 

relative to what would have happened under pre-2001 law. 

EGTRRA increased the AMT exemption amount to $49,000 ($35,750 for unmarried taxpayers) for 2001 through 2004.1 The higher exemption amounts duly took 

effect for 2001 and 2002. Subsequently, JGTRRA increased the exemption amount 

still further to $58,000 ($40,250 for unmarried taxpayers) for 2003 and 2004. 

Three other laws also provided AMT relief during this time period: 

• The Job Creation and Worker Assistance Act (enacted March 9, 2002) allowed 

personal nonrefundable credits to be claimed against the AMT in 2002 and 2003 

(prior law allowed such credits only through 2001). 

• The Working Families Tax Relief Act (enacted October 4, 2004) extended the 

58,000 exemption amount for 2005. It also allowed personal nonrefundable credits to be claimed against the AMT in 2004 and 2005. 

• The Tax Increase Prevention and Reconciliation Act (enacted May 17, 2006) 

raised the exemption amount to $62,550 ($42,500 for unmarried taxpayers) for 

2006 and also allowed personal nonrefundable credits to be claimed against the 

AMT in that year. 

According to Brookings-Urban Tax Policy Center data, the net effect of the legislation adopted in 2001 through 2006 was to reduce AMT coverage in those years. This 

reduction can be seen in the first part of Figure 3, the portion to the left of the 

first dashed horizontal line. 


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If the tax code had simply been left alone after 2000, the AMT rolls would have 

surged from 1.6 million in 2000 to 8.1 million in 2006. The surge would have occurred for the same reasons as the growth in the previous 13 years; inflation would 

have increased AMT liabilities relative to regular tax liabilities. The legislation 

adopted during this period slowed the spread of the AMT; the actual AMT rolls were 

smaller in each year than they would have been under prior law. Due to this legislation, there were 3.5 million taxpayers on the AMT in 2006, rather than 8.1 million. 

The AMT relief adopted during this period, some of it provided in EGTRRA and 

JGTRRA and some added by the other three laws, was sufficiently generous that 

it had the net effect of moving taxpayers off of the AMT. (Because the legislation 

increased AMT revenue per AMT taxpayer, AMT revenue was roughly unchanged 

from the level that would have resulted from prior law.) These laws slowed the AMT 

spread that would otherwise have resulted from inflation. 

Inflation Is Causing a Further Spread in 2007–2010, Reinforced by the Effects of the Tax Cuts 

The story in which EGTRRA and JGTRRA move taxpayers onto the AMT does 

have some validity for 2007 through 2010. This can be seen from the middle part 

of Figure 3, the portion between the two dashed horizontal lines. With the recent 

tax legislation in place, the AMT rolls number 23.4 million in 2007, rising to 32.4 

million in 2010. The spread would have been slower without the legislation; under 

pre-2001 law, the AMT rolls would have been 10.2 million in 2007, rising to 16.5 

million in 2010. 

The numbers also reveal, though, that a rapid inflation-driven spread was already 

programmed into the AMT, again due to its lack of indexation. Even if EGTRRA 

and JGTRRA had never been adopted, we would still be confronting an unacceptable 

spread of the AMT. We would be discussing a tax system that reached over 10 million people today, up from less than 1 million a decade earlier. The problem clearly 

involves more than the effects of those laws. 

Still, it is true that the AMT spread is more rapid with EGTRRA and JGTRRA 

than it otherwise would have been. These laws provide substantial regular tax relief 

for 2007 through 2010, without providing accompanying AMT relief. 

Taxpayers Who Move onto the AMT Still Have a Net Tax Cut 

As discussed above, some taxpayers who would otherwise be on the regular tax 

are on the AMT in 2007 through 2010 due to EGTRRA and JGTRRA. It is important to understand how these taxpayers’ tax liabilities are affected. Some observers 

claim that EGTRRA and JGTRRA constitute a ‘‘tax increase’’ for these taxpayers. 

In reality, however, these taxpayers still enjoy net tax cuts from those laws. 

Consider an example. Suppose that, without EGTRRA and JGTRRA, a hypothetical taxpayer would have a $100 tax liability under regular tax rules and a $90 


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2 Even those taxpayers may enjoy tax savings from other provisions of EGTRRA and JGTRRA. 

To begin, EGTRRA provides some AMT relief that applies in 2007–2010, as mentioned in footnote 1, above. Also, many of the tax-reduction provisions in EGTRRA and JGTRRA apply under 

both the AMT and the regular tax, including the rate reductions for dividends and long-term 

capital gains and the expansion of tax-free savings accounts. 3 All of the data on 2007 AMT coverage are Urban-Brookings Tax Policy Center data, taken 

from Greg Leiserson and Jeffrey Rohaly, ‘‘The Individual AMT: Historical Data and Updated 

Projections,’’ Tax Notes, December 25, 2006. 

tax liability under AMT rules. The taxpayer would then be on the regular income 

tax and would have a $100 tax liability. Suppose that those laws reduce the taxpayer’s liability under regular tax rules to $85 while leaving his or her liability 

under AMT rules unchanged at $90. Because liability under the AMT rules is now 

higher than the liability under the regular tax rules, the taxpayer moves onto the 

AMT and has a $90 tax liability. 

Although these laws cause the taxpayer to move onto the AMT, they do not raise 

his or her tax liability, relative to prior law. On the contrary, the laws reduce the 

taxpayer’s liability from $100 to $90. Moving onto the AMT merely reduces the size 

of the tax cut, which would have been $15 without the AMT, to $10. In colloquial 

terms, the AMT ‘‘takes back’’ one-third of this taxpayer’s tax cut. 

It is correct, therefore, to speak of the AMT taking back part of the tax cuts, but 

it is not correct to speak of the AMT turning the tax cuts into tax increases. The 

only taxpayers who do not receive any tax savings from the regular-tax-rate reductions in EGTRRA and JGTRRA are those who would already have been on the 

AMT, even without these laws.2

Inflation Will Cause AMT to Spread Still Further after 2010, Even if the Tax 

Cuts Sunset 

Due to inflation, the AMT is projected to continue spreading after 2010. The AMT 

rolls during this period are shown in the third part of Figure 3, the portion to the 

right of the second dashed horizontal line. The rolls grow from 32.4 million in 2010 

to 39.1 million in 2017. 

As noted above, EGTRRA and JGTRRA expand the AMT rolls to some extent in 

2007 through 2010 and their sunset therefore provides a respite from the spread 

of the AMT. But, the respite is short-lived, as inflation resumes its steady toll. The 

AMT spreads to absolutely unacceptable levels, even without EGTRRA and 

JGTRRA. Because those laws are scheduled to sunset, the AMT rolls under current 

law are essentially identical to those under pre-2001 law after 2010. 

Of course, the AMT spread would be even more rapid if EGTRRA and JGTRA 

were extended without any long-term AMT relief or solution. An extension of these 

laws would need to include AMT relief, if no fundamental AMT solution had yet 

been adopted. 

The Spread of the AMT Puts More Taxpayers on an Ill-Designed Tax 

System 

Without relief, the AMT will spread to a wide range of taxpayers. Those most likely to be hit by the AMT include the following: 

• Taxpayers with large families are more likely to owe AMT, because the AMT 

disallows the personal exemption ($3,400 per person in 2007) that the regular 

income tax allows for the taxpayer, spouse, and dependents. Under current law, 

in 2007, almost 40 percent of taxpayers with three or more children will owe 

AMT, compared to 11 percent of taxpayers without children.3

• Taxpayers who live in high-tax states are more likely to owe AMT, because the 

AMT disallows the regular tax system’s itemized deduction for state and local 

income (or sales) and property taxes. Under current law, in 2007, 22 percent 

of taxpayers in high-tax states are on the AMT, compared to 15 percent in lowtax states. 

• Taxpayers with incomes in the ranges in which the AMT rate schedule is closest to the regular tax schedule are most likely to be on the AMT. Under current 

law, in 2007, 90 percent of taxpayers with cash incomes between $200,000 and 

$500,000 (in 2006 prices) are on the AMT, compared to 34 percent of those with 

incomes above $1,000,000 and 36 percent of those with incomes of $75,000 to 

$100,000. 

As these taxpayers move onto the AMT, they will experience a significant increase 

in complexity. It should be recognized, however, that they will also be moving onto 

an ill-designed tax system. 


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4 Alan D. Viard, ‘‘The Alternative Minimum Tax: A Better System?’’ AEI Tax Policy Outlook, 

November 2006, www.aei.org/publication25110. 

Some have argued that the AMT is a low-rate flat-rate broad-based income tax 

that would actually be a good replacement for the income tax. As I argued in the 

November 2006 AEI Tax Policy Outlook, that view is unconvincing.4

The AMT’s base-broadening provisions are limited and highly selective, hampering any gains in economic efficiency. In some cases, the AMT is likely to induce 

taxpayers to shift from one tax-preferred activity to another tax-preferred activity 

(that the AMT does not address), with little or no gain in economic efficiency. Also, 

some of the base-broadening provisions are misdirected, because they deny people 

the ability to deduct costs of earning income. The AMT also features harsh treatment of some workers who exercise incentive stock options and some winners of taxable damage awards. 

The redeeming feature of the AMT is supposed to be its low marginal rates, but 

that, too, do not stand up under scrutiny. Effective marginal tax rates under the 

AMT are not systematically lower than those under the regular income tax. A common misconception holds that the AMT has two brackets, 26 percent and 28 percent. In reality, however, the AMT features two other, higher-rate, brackets. The 

marginal rates are 32.5 and 35 percent in the interval in which the exemption 

amount is being phased out. Also, the effective tax rate on an additional dollar of 

wages is enhanced under the AMT because a smaller portion of that dollar is deductible from taxable income, since the AMT allows a narrower range of itemized 

deductions. 

Figure 4 provides illustrative calculations of the difference in effective marginal 

tax rates between the two systems, for different types of returns and at different 

income levels, under a specific set of simplifying assumptions. It can be seen that 

the AMT rate is sometimes higher and sometimes lower than the regular tax rate. 

Although this calculation is only for a stylized example, it indicates that there is 

no inherent tendency for the AMT to have lower marginal tax rates. 


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Summary 

The fundamental reason for the spread of the AMT is that the exemption amount 

has never been indexed to inflation. As a result, the AMT spread rapidly before the 

2001 and 2003 tax laws were adopted, it would have continued spreading without 

those laws, and it is projected to spread further after 2010 even if those laws sunset. 

The 2001 and 2003 tax laws, in combination with other tax legislation, slowed the 

AMT spread in 2001 through 2006, but will accelerate the spread in 2007 through 

2010. It should be recognized that taxpayers who move onto the AMT due to the 

2001 and 2003 tax laws still enjoy a net tax cut from those laws. 

The spread of the AMT not only causes complexity, but also exposes more taxpayers to an ill-designed tax system. 

f 

Chairman NEAL. Thank you very much, Doctor. Mr. Solomon, 

prior Treasury testimony stated that, ‘‘Nearly all the AMT taxpayers will lose some part of the benefit of the 2001 through 2004 

tax cuts, including some who will lose all of the benefit.’’ 

CRS estimates this ‘‘take-back’’ effect of AMT peaks for those earning $100,000 to $150,000, who will lose two-thirds of the promised tax cut. Can you explain why the Administration continues to 

push for permanent 2001 and 2003 tax cuts without any permanent AMT solution? It seems that this income group will really be 

paying for everyone else’s tax cut. 

Mr. SOLOMON. Thank you, Mr. Chairman. In response to your 

question, there are two parts. First, the 2001 and 2003 tax relief 

provided benefits for virtually all Americans. 

Second, with respect to your question of why the Administration 

urges that the tax relief be made permanent, the reason for that 

is because the tax relief has been very important for the economy. 

It has helped make the economy strong. The economy is strong, 

and we need to keep it strong. 

For purposes of planning, it is important for taxpayers to know 

that, looking forward, they are going to have stable tax rates. For 

this reason, the Administration thinks it’s important that the tax 

relief be made permanent. 

With respect to the AMT, the Administration has proposed a oneyear patch. We recognize that the AMT is a very important problem, and we look forward to working with this Committee and the 

Congress in finding a long-term solution for the AMT. 

Chairman NEAL. Do you remember Bondo? 

Mr. SOLOMON. Excuse me? 

Chairman NEAL. Do you remember Bondo, how it was used for 

repairing automobile work? 

Mr. SOLOMON. No, I’m sorry, I do not, Mr. Chairman. 

Chairman NEAL. Well, I guess the question I would raise with 

you, would you agree at least with the premise that I offered, that 

there is a clawback provision that did, for people in the income 

groups that I described, they did lose a substantial part of the tax 

cuts of 2001 through 2003? 

Mr. SOLOMON. I would phrase it that virtually all Americans 

have enjoyed the tax cuts. 

Chairman NEAL. Okay. 

Mr. SOLOMON. There has been some clawback. 

Chairman NEAL. Okay. 

Mr. SOLOMON, but virtually all Americans have enjoyed the tax 

relief. 


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Chairman NEAL. Okay, thank you. Dr. Burman, we have heard 

some testimony today about inflation, as Dr. Viard said, being the 

fundamental reason for the spread of AMT. Do you agree? If not, 

what other reasons would you point to as contributing factors? 

Mr. BURMAN. It is certainly true that inflation is a factor in the 

spread of the AMT. It was never indexed for inflation. When the 

regular income tax was indexed in 1982, the AMT was left 

unadjusted. 

As I noted in my testimony, the number of people on the AMT 

would have grown to 16 million by 2010, even without the tax cuts. 

That is why I think you have been so engaged in the issue for such 

a long time, and why, frankly, it has agitated me, as well. 

The tax cuts doubled the size of the problem. Without the 2001 

to 2003 tax cuts, the number of people on the AMT would be about 

half of what it is in 2007. Now, we have patched it every year. Congress has kept the damage from being too great, but the cost of 

that patch grows every year. If the tax cuts are allowed to expire 

at the end of 2010, the number of people on the AMT actually 

drops by nearly half. 

The other thing is that real income growth pushes more people 

on to the AMT, but that is a relatively small factor. If it had been 

indexed for inflation and if there had been no tax cuts, the number 

of people on the AMT would be in the of hundreds of thousands, 

rather than millions, or tens of millions. 

Chairman NEAL. Ms. Olson, during your testimony you criticize 

the AMT, as you have faithfully done, incidentally, during your 

previous appearances. You suggested that ‘‘it alters the distribution 

of the tax burden, and it neutralized the effects of changes to tax 

rates in the regular system.’’ Could you briefly explain that? 

Ms. OLSON. Well, one point that I have tried to make is that 

the AMT has so infected our entire tax system, that not only is 

there some clawback effect, as others have talked about, but if Congress has made a determination that the standard deduction and 

the personal exemptions reflect the basic expenses that taxpayers 

need to have before they’re taxed, and yet the AMT is adding that 

back in, and people are being brought into the system solely because of dependency exemptions—as 19 percent of the income is attributable to that now—that’s a serious problem. 

I would make the point that whether you look at tax rates, or 

you just look at policy calls, if you were to decide to increase the 

standard deduction, or increase the personal exemptions, because 

you think it’s not keeping up with cost of living allowances, you 

would be bringing more people into the AMT. When you have that 

kind of situation, it has affected our entire tax system. 

Chairman NEAL. Thank you. Mr. English. 

Mr. ENGLISH. Thank you, Mr. Chairman. This is very stimulating testimony. I note that the claim is being made that the 2001 

and 2003 tax cuts, in effect, forced many Americans to pay the 

AMT. I am wondering if the panelists could give us a sense of how 

many taxpayers are paying more tax, both regular and AMT, as a 

result of the Bush tax relief, than they would if these measures 

had not been enacted. Mr. Solomon, could you give us some insight 

on that? 


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Mr. SOLOMON. Certainly, Congressman. In fact, there are no 

taxpayers who are paying more tax. 

Mr. ENGLISH. None at all? 

Mr. SOLOMON. No taxpayers paying more tax. Now, there may 

be perhaps an aberration in some situation, but as a result of the 

tax relief—and, the tax relief is, in fact, that, tax relief—it does not 

result in more taxpayers paying tax. 

There may be more taxpayers who are on the AMT, but that’s 

not the total consideration. The total consideration is the total tax 

liability measured under both the regular tax and the AMT. Taking 

both of those into account, and not just focusing on AMT, the tax 

relief was just that—tax relief. 

Mr. ENGLISH. Isn’t it also true that if the Bush tax cuts were 

allowed to expire, the number of people paying the AMT will, after 

a drop around 2011, continue to rise quickly and then soon surpass 

current levels? 

Mr. SOLOMON. That’s correct. It goes to the basic structure of 

the AMT. The real issue is the AMT itself, the structure of the 

AMT itself, the fact that it has amounts that are not indexed for 

inflation, the fact that it denies various deductions, the fact that 

it denies the personal exemption. The real issue lies in the structure of the AMT itself. 

So, even if the tax relief was to expire, nevertheless, the basic 

circumstances that caused the expansion of the AMT would continue to exist, and the number of AMT taxpayers would continue 

to increase. 

Mr. ENGLISH. Ms. Olson, I am struck by one element of your 

testimony, and that is the argument, ‘‘We recognize that the AMT 

was put in place as a solution to what were perceived as abusive 

tax shelters, but since the AMT was conceived, there has been a 

significant change in the character of the tax code.’’ 

Are you making the argument that the rationale for the AMT, 

those features of the tax code that could be so dramatically gained, 

have been rolled back or, if not, eliminated by past legislative action? In fact, if we repealed the AMT, would we be creating a return to the 1969 situation? Or, has most of that problem been addressed elsewhere? 

Ms. OLSON. I wouldn’t say that these problems have so much 

as been eliminated as they have been replaced by new tax avoidance techniques. Those tax avoidance techniques are not necessarily things that show up on the face of the return that you 

could easily add back as tax preferences—offshore havens, things 

like that—they don’t show up on the return. 

So, whereas you do have people sheltering income, they are not 

going to be affected by the AMT. I think both Treasury and the Tax 

Policy Institute have figures to show the number of taxpayers that 

make over $1 million that paid 0 tax. The AMT isn’t doing what 

it originally was intended to do, in terms of bringing people back 

into the system, and it is harming people that it never intended to 

touch. 

Mr. ENGLISH. So, it’s fair to say that there are tax avoidance 

problems now, but most of them are problems of a sort that the 

AMT doesn’t directly speak to, but instead, it creates its own problems, particularly in the area of complexity? 


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Ms. OLSON. I think that’s correct. 

Mr. ENGLISH. What impact has the AMT had on savings vehicles and the predictability of some of the policies that we have put 

in place in the code to increase economic growth? 

Ms. OLSON. I am not sure that I am qualified to—— 

Mr. ENGLISH. Would any of the panelists like to speak to that? 

Dr. Burman? 

Mr. BURMAN. I was actually thinking about that the other day, 

because we had something from our personnel office saying, ‘‘You 

should put your money in a Roth 403(b).’’ Actually, if you do that, 

and your income is at a certain level, it could put you into the 

phase-out range for the AMT. Effectively, you would be subject to 

a big tax penalty on the additional income you realize. 

A Roth is a good deal if you expect your tax rate when you retire 

to be about what it is now or higher. For people who are pushed 

onto the AMT by their additional contributions, it could be a bad 

deal. 

The big problem is that it makes it hard even for people to understand how the tax system is going to affect them. That’s a problem, not just for savings incentives, but for charitable contributions. There was an article in Consumer Reports this week that 

said, ‘‘Watch out. Your mortgage interest deduction is going to be 

taken back by the AMT.’’ It’s not true, but people are just really 

confused by this. 

Mr. ENGLISH. That changes the incentives. Thank you very 

much, Mr. Chairman. 

Chairman NEAL. Thank you, Mr. English. Mr. McDermott will 

inquire. 

Mr. MCDERMOTT. Thank you, Mr. Chairman. I appreciate your 

having us have an opportunity to finally discuss this issue. For the 

last six years it has been sort of off base to even bring it up, except 

to have a minor fix each year. 

If I understand it correctly from this first chart that we have— 

it’s called, ‘‘The Present Law and Background Related to Individual 

Alternate Minimum Tax’’; I don’t know whether you folks got 

that—but the first graph in there has a drop. If the Bush tax cuts 

are not extended, you have a drop from $120 billion down to something like $40 billion, and it goes down from 30 million taxpayers 

to 18 million. 

It seems to me that there were no changes in the AMT tax rates 

when they made the tax rate cuts in the other tax system. Is that 

a fair description, Mr. Burman, if what has gone on? 

Mr. BURMAN. Yes, that’s true. 

Mr. MCDERMOTT. It—the solution that’s being offered—I don’t 

know, I can’t tell what you really think is the solution to this—but 

isn’t the solution going back into those tax cuts of Mr. Bush of 2001 

and 2003 and making some adjustments, and making some adjustments in the AMT tax rates? 

Mr. BURMAN. There are actually a variety of solutions. You 

could roll back the Bush tax cuts, and that would make it easier 

to fix the AMT. It would raise some revenue that would offset some 

of the cost of repealing or reforming the AMT. You could just adjust income tax rates by themselves, as part of the current structure, or you could do other things to raise the revenue. 


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Mr. MCDERMOTT. But it sounds to me—and I have been here 

since 1989, and I heard there was a problem with Social Security, 

and I heard there was a problem with Social Security, and every 

year we hear there is a problem with Social Security. Congress has 

sat on its hands as we knew this bulge was coming of people to get 

on the Social Security system in 2010. It was almost as though 

they were trying to create a crisis to make it necessary to say, ‘‘Oh, 

we can’t fund it, let’s go to privatization.’’ 

I have the same feeling about this tax thing, that it was left 

alone to create a crisis that would get us in to do something to get 

rid of the income tax, or—I don’t know what they’re up to. Tell me. 

Am I misperceiving Congress sitting on its hands for the last 12 

years, knowing this was getting worse? 

Mr. BURMAN. I—— 

Mr. MCDERMOTT. For the last six years, making it worse by 

enacting tax cuts? 

Mr. BURMAN. I’m not sure I want to comment on the motives, 

but it’s certainly been true that the problem hasn’t been fixed. 

The biggest problem is that it’s hard coming up with the revenue 

that you were pretending was going to come in from the AMT, and 

repealing it would cost $70 billion, according to the JCT. 

Mr. MCDERMOTT. How about in 2001, how much would it have 

been? 

Mr. BURMAN. I don’t have that estimate right in front of me. 

The 2001 tax cuts about doubled the cost of fixing the AMT. 

Mr. MCDERMOTT. So—and now it’s three times? Four times? 

Mr. BURMAN. Well, the estimate that’s in my testimony is that 

if the tax cuts are extended, the cost of repealing the AMT would 

be about $1.6 trillion over ten years, rather than the $870 billion 

that was estimated, and that the cost would be growing over time. 

Mr. MCDERMOTT. So, is it—suppose we don’t do anything? 

What happens? 

Mr. BURMAN. Well—— 

Mr. MCDERMOTT. Is it just going to be screaming from the public that’s going to change this? 

Mr. BURMAN. Well, if you don’t do anything, 23 million people 

will be subject to the AMT, including more than a third of people 

with incomes between $75,000 and $100,000. 

Mr. MCDERMOTT. So, you would have to think that the Republicans were setting up 33 million to scream about changing the tax 

structure? 

Mr. BURMAN. I leave it to you to figure out the motives. 

Mr. MCDERMOTT. Well, if you can explain some economic motive why they did it, I would be willing to listen to that. Can you 

think of any economic reason? 

Mr. BURMAN. I think it’s more like eating food you know you 

shouldn’t be eating. You know it’s not good for you, but you can’t 

stop. We need the revenue, or we need to pretend the revenue is 

coming in. When the President says, ‘‘The budget is going to be balanced in 2012,’’ he is counting on a lot of AMT revenue. 

Mr. MCDERMOTT, but that line—they knew what that line was 

going to look like. They knew if they didn’t fix it there—if you go 

to a doctor, and he says, ‘‘If you don’t stop eating sugar, you’re 


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going to get diabetes,’’ and you keep eating sugar, and get diabetes, 

what would you say about such a patient? 

Mr. BURMAN. [No response.] 

Mr. MCDERMOTT. Irresponsible. Never mind. Thank you very 

much. 

Chairman NEAL. I thank the gentleman. The gentleman from 

Oregon, Mr. Blumenauer, will inquire. 

Mr. BLUMENAUER. Thank you very much, Mr. Chairman, and 

I do appreciate your single-minded focus on this issue. It has been 

my number one tax issue since I joined Congress and had an opportunity to try, in a small way, to reinforce your strong voice on this. 

That’s why I wanted to be on this Subcommittee. 

I want to pick up, if I could, on some of the line of inquiry from 

Mr. McDermott, because this is a millionaire’s tax that has 

morphed into a lawyers and accountants and lobbyist tax, which is 

now being a tax on working two-income families with children. 

Mr. Burman, I believe you mentioned that in 2001 the tax 

changes that were made doubled the cost of the fix, but in 2001, 

we had endless surpluses. We were concerned about paying off the 

Federal debt—those were the days, ‘‘What are we going to do when 

there are no taxable debt instruments in the United States?’’ 

A conscious decision was made to ignore this, and instead, incrementally tinker with the tax system, making some very substantial 

benefits, transferring very substantial benefits, to a very relatively 

small group of people, concentrated, scatter some other things, 

making a hash out of our tax policy, and kicking the can down the 

road on the AMT. 

It would have been a—and I would like, Mr. Chairman, for us 

to have provided to the Committee exactly what would have happened, in terms of the surplus that was projected in 2001, and instead of rounds of tax cuts for those who needed it the least, if we 

would have solved this problem that you have shown this searchlight on. I think that would be very interesting for the Committee 

to have. 

My question and my concern is serving on the Budget Committee, I see that although this continues not to be a priority for 

the Administration. They have assumed the $50 million patch, but 

then they spend all this AMT on their budget, and they want to 

extend other tax cuts over the 5-year and 10-year horizon, instead 

of fixing this problem. 

So, I would like to start, Mr. Solomon, to understand. It appears 

that this is not a priority of the Administration. They didn’t deal 

with it when they could have, relatively easily in 2001, and they 

were concerned about the Federal Government having too much 

money, and they have watched as this has morphed into a tax on 

the middle class with families. 

It doesn’t hit the hedge fund manager. It hits the lobbyists, the 

accountants, and now it’s hitting postal workers and fire fighters 

and teachers. I don’t understand why this isn’t a priority of the Administration, the same way of extending the tax cuts and spending 

all of this money in their budget plan. 

Mr. SOLOMON. This is a priority for the Administration. This 

is a very important issue. In the budget, the Administration proposed a one-year patch to deal with this very difficult and imporVerDate Mar 15 2010 09:26 Jun 07, 2011 Jkt 047005 PO 00000 Frm 00052 Fmt 6633 Sfmt 6602 I:\WAYS\IN\47005\PARAMS\47005.XXX 47005

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tant issue. We care, just like you do, about the effect that the AMT 

is having, and will have, on middle-income taxpayers. 

Just to note, with respect to 2001, the issue of the AMT was 

raised during the 2001 considerations, and a patch was included as 

part of the tax relief. In addition, a patch was included in 2003. 

Mr. BLUMENAUER. Yes. I understand the patch, the little— 

that’s the Get Out of Jail Free card, that’s the minimum that you 

can do to get away with it. If they didn’t do the patch, the whole 

house of cards would have collapsed. If it is a priority, why does 

the Bush budget that we’re dealing with in the Budget Committee 

right now—Mr. Doggett and I are sort of scratching our heads— 

why do you propose to spend all the money that the AMT is going 

to collect, if it is a priority to fix it? 

Mr. SOLOMON. It is a priority to fix it, and we look forward to 

working with you to find solutions for the AMT problem. 

Mr. BLUMENAUER. Let me try one last time. If it is a priority 

of the Bush Administration to fix it, having dodged the bullet and 

not done it earlier, why does the budget that you have given us assume that we are going to spend all the money it raises, except for 

a one-year patch? That doesn’t sound like it is a priority, does it? 

Mr. SOLOMON. It is a priority to deal with this very difficult 

and important issue. There are many facets of this, and many complexities to it, and we look forward to working with you to try to 

find a solution to it. 

Mr. BLUMENAUER. Mr. Chairman, I would like, with the help 

of the Committee Chair and Ranking Member, to—and maybe 

it’s—maybe this is all Mr. Solomon is authorized to say, that he 

wants to work with us, and it’s a priority—but I would like to sort 

of see if we can get a response from the Administration as to 

whether or not it’s a priority. If it is a priority, why are they proposing to spend all the money that it will raise, other than the oneyear patch? 

Mr. ENGLISH. Will the gentleman yield? 

Mr. BLUMENAUER. I would be happy to. 

Mr. ENGLISH. I am not sure I understand what the gentleman 

is now asking of the Administration. I think they have been very 

forthcoming and very direct. Certainly they have dealt with this as 

directly and as completely as any Administration recently has. 

I really have to wonder what it is exactly you want Mr. Solomon 

to give you that he hasn’t already given you. 

Mr. BLUMENAUER. Reclaiming my time, Mr. English, I—what 

I am trying to say is we have had an orgy of tax cuts that has been 

produced by this Administration and the previous six years in Congress. 

I guess I assume that the issue of a priority is what you spend 

money on. The only money that this Administration is willing to 

spend is the minimum, the one-year patch that they know has to 

happen, that will happen, whether they propose it or not, but they 

spend all the money that this tax would collect. 

So, I am trying to find out if it is, in fact, a priority, if they are 

willing to put something on the line to deal with some of the 

other—either their spending or their tax proposals. If not, that is 

fine. If we are kind of on our own, and it’s not a priority of theirs, 


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and they are not going to help us, budgetarily, or in tax policy, that 

is okay. They will cooperate, but they won’t put anything forward. 

I think it is a legitimate question to ask. That’s why I turn to 

you, Mr. English, and our Chair, to have some help in crafting the 

request, because I may not have artfully enough expressed it. 

Chairman NEAL. I think that the gentleman’s point is well 

taken, and I think there will be an opportunity, when the hearings 

are concluded in about 3 weeks, to have an opportunity to speak 

with the Secretary of the Treasury as well, at that moment, as we 

begin to proceed with what we believe to be a solution for this 

issue. 

The gentleman from Texas, Mr. Doggett, will inquire. 

Mr. DOGGETT. Well, I believe Mr. English is correct, at least in 

part, that the Administration has been very forthright and direct 

about this. You believe it’s a priority to solve this problem for the 

next year, and you have a proposal to do that, right? 

Mr. SOLOMON. That is correct. 

Mr. DOGGETT. As far as a long-term proposal, you have had six 

years to propose something, and neither then nor today have you 

viewed it as a high enough priority to propose anything, and today 

you have no proposal whatsoever, other than to say you will work 

with us and listen if we can come up with a proposal, right? 

Mr. SOLOMON. Our proposal is similar to what the Congress 

has done since 2001, with—— 

Mr. DOGGETT. Patch on top of patch, or Bondo on top of Bondo. 

You have no other proposal, right? Today? Other than your cooperation? 

Mr. SOLOMON. We look forward to working with you—— 

Mr. DOGGETT. Cooperating. I heard that from Mr. Partman, 

earlier. Mr. Partman, who, when he testified to our Committee and 

the Budget Committee, did at least concede that without counting 

the AMT dollars, to which Mr. Blumenauer just referred, this Administration, President Bush, has not submitted a balanced budget. 

Of course he has never submitted a balanced budget to us, so that 

doesn’t come as a great surprise, and there is no balance in the 

budget he has submitted, even in the future, because he includes 

this AMT revenue in order to achieve it. 

Ms. Olson, first, I really appreciate the work you do as our taxpayer advocate. I read your reports each year, and have offered legislation on a few of the provisions, but I think they are extremely 

helpful to us. 

You mentioned that there are a number of tax avoidance 

schemes that some of our wealthier neighbors utilize to avoid paying their fair share of taxes, but that these are not reached by the 

AMT. 

It just seems to me—and I guess I would direct this question to 

Dr. Burman, too—that we may have the very flawed implementation of this policy, but the notion that all Americans should contribute something toward our National defense, if they have prospered in this country, is not unlike my feeling that all corporations 

should, and that we should not permit the amount of tax avoidance, which this Committee has traditionally been the number one 

protector of, by corporations who go offshore and dodge their taxes, 

but even want to do work at taxpayer expense. 


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Isn’t there a way, as we look at the AMT, of preserving the concept that Americans all have a responsibility—once they reach a 

certain level of prosperity, at least—to share in the cost of our government? 

Ms. OLSON. I have tried to think about how you could leave a 

minimum tax, eliminate things like the State and local preferences 

and add-backs, or the dependents exemption, the standard deduction, or medical expenses that are itemized deductions, and replace 

them with items that are more targeted to the kind of abuse that 

we saw back in 1966 and 1969. 

My concern is that you just wouldn’t make—it still wouldn’t be 

enough to make up the revenue impact, because so much of the 

AMT revenue is coming from these other items. I even personally 

witnessed that in 2001, when we first recommended repeal. We had 

some other alternative suggestions: index the exemption amount 

for inflation, which was more modest at that time; or simply say 

anybody with gross income under $250,000 wouldn’t pay it. 

Today, because of the passage of time, those solutions will not do 

it. 

Mr. DOGGETT. Thank you. Dr. Burman? 

Mr. BURMAN. I think you could maintain an AMT that did a 

better job of reigning in tax shelters than the current one, and still 

spare virtually the entire middle class. What you would do is what 

Ms. Olson suggested, get rid of those middle class tax preferences, 

no longer punish people for having kids or State and local taxes. 

The other thing is to index it for inflation, so inflation doesn’t 

push people on to the AMT. I would also restore something that 

was in the AMT prior to 1987, which is to tax capital gains and 

dividends as other income. That was the biggest preference item in 

the AMT before 1987. 

Virtually any tax shelter you can imagine on the individual side 

eventually shows up as a capital gain. Basically, what tax shelters 

do is they convert ordinary income that is taxed at rates up to 35 

percent into income that is taxed at the low capital gains rates or 

dividend rates of 15 percent. 

Mr. DOGGETT. Thank you very much. I yield back. 

Chairman NEAL. The gentleman from New York, Mr. Reynolds, 

will inquire. 

Mr. REYNOLDS. I thank the Chairman for the opportunity to 

ask a few questions. I have learned a lot today about Bondo, a little 

bit about Bush tax cuts, and whether they’re oppression, or whether Americans got an opportunity to all take advantage of it. I heard 

we have had an orgy of tax cuts. 

What I haven’t heard in all of the history that has come from the 

majority in both observations and questions is a reminder that 

while there are some opinions, both by possibly panelists as well 

as Members of this Committee that 2001 and 2003 Bush tax cuts 

caused some of the problem, I haven’t heard anything come from 

the majority relative to reminding us that in 1969 it was a Democratic-controlled Congress that created AMT, or that in 1986, when 

one of my predecessors was in Congress, that we saw modification 

that didn’t include changing AMT. 

We have seen in 1993, the largest tax increase in the history of 

the country, and there have been some that have outlined that in 


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1993, that tax increase accelerated the amount of people that are 

in the AMT consideration. We can’t forget that in my freshman 

year—many people have been much longer than I—we passed a repeal the AMT and sent it to the President, and it was vetoed. So, 

we have had both parties intricately involved in creating and looking at and touching and hoping to fix AMT. 

There is a 1 trillion estimate to do a permanent fix. What I 

might ask the panelists is as you look at Senator Grassley, who is 

introducing a bill to repeal the AMT, he used in his words, ‘‘It’s 

simply unfair to expect taxpayers to pay a tax they were never intended to pay. It’s even more unfair to expect them to continue 

paying for that tax, once we get rid of it.’’ 

So, my question under pay-as-you-go rules, the House would 

have to find close to $1 trillion of offsetting tax increases to repeal 

the AMT. I wonder if anyone might say, ‘‘Are there folks who are 

not paying enough in taxes,’’ that they’re so low that you see a category where we should raise them, in order to fix the AMT? Or 

should Congress forgo and waive the Pay-go for the purpose of 

doing a permanent relief? My first question. 

The second is Chairman Rangel is quoted as outlining the fact 

in a report to Bloomberg that they may rearrange tax rates so 

wealthy Americans pay more to prevent the AMT from hitting the 

middle-class income households, rearranging the rates. I just wonder what your thought might be of whether this Congress—and 

particularly this body—should look at using that approach for your 

consideration. 

If the panels would, take the questions as they might. 

Mr. BURMAN. The question of whether you need to offset the 

revenue lost from eliminating the AMT has come up before. The 

fact is that Congress was counting on the AMT when it enacted the 

tax cuts in the first place, and actually, it was a way of sort of enabling the tax cuts by reducing the measured cost by about a third. 

If the country were swimming in tax revenues right now, if we 

were looking at surpluses, then of course it would make sense to 

look at tax cuts. The problem is that we are looking at some very 

serious budgetary problems in the long-term. In 2010, the Baby 

Boomers are going to start retiring. Even if you get the entitlements under control, it is going to put unprecedented demands on 

the government, and we are already running deficits. 

In my view, we ought to be, at a minimum, thinking about how 

to get the budget under control in anticipation of the huge demands that are going to be put on the country in the future. 

Saying that some people would have to pay higher taxes to offset 

the loss from the AMT, given that we were counting on that revenue all along, is not particularly unfair. I think it makes sense, 

as a matter of policy, to replace what is an irrational tax with a 

rational one. You can’t do that without having some people pay 

higher taxes. You can’t replace an irrational tax with a rational tax 

without changing things. 

Mr. SOLOMON. One aspect of this question that one has to take 

into account is the amount of revenues that is the appropriate target for the government to take in. That is, what percentage of the 

economy should be taken for government purposes? 


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That is an important question. What is the level of revenues that 

should be collected through the tax system? The historical average 

has been around 18 percent of gross domestic product (GDP). Now 

it’s about 18.4 percent. So, with respect to what you think the proper level of taxes is, and what you think the proper solution to AMT 

is, you need to take that into account. 

As of now, it is projected that the share of taxes to GDP in this 

country is expected to rise to perhaps 19 or 20 percent in the next 

5 to ten years. So, that needs to be considered in deciding how you 

want to deal with the AMT. 

Ms. OLSON. I would just like to suggest that we don’t have a 

lot of time to think about this. If we see that 26 percent of the taxpayers who are paying tax, who actually are the ones paying the 

revenue that are funding the government, are going to be pulled 

into this irrational tax, that you may actually see an erosion of participation in the tax system, that they will just become so disaffected, because they have to calculate their tax twice, or they 

have to pay someone to calculate their tax. 

So, it’s not just what’s the proper amount of revenues that should 

come in, but whether your taxpayers are going to pay them. 

Mr. VIARD. Mr. Congressman, I think that there are a number 

of ways that the cost of AMT relief, or AMT repeal, can be handled. 

I do think it would be preferable, in view of the fiscal imbalance 

we face, to try to address those costs today, rather than later. 

I think the increases in marginal tax rates that some have talked 

about would not be the ideal way to finance it, that base broadening under the regular income tax would be a far preferable strategy. 

Mr. REYNOLDS. Thank you, Chairman. 

Chairman NEAL. I thank the gentleman. The gentleman from 

California, Mr. Thompson, will inquire. 

Mr. THOMPSON. Thank you, Mr. Chairman. 

Mr. BLUMENAUER. Mr. Thompson, would you yield for 20 seconds? 

Mr. THOMPSON. For 20 seconds? Sure. 

Mr. BLUMENAUER. Thank you. I was listening to my friend 

from New York talk about the history, and wonder why these 

things hadn’t been raised. I would just note I didn’t want to get too 

partisan in my line of inquiry. I was risking something, but this 

1969 tax was birthed in the Nixon Administration. The 1986 

changes in the tax code were under the watch of my fellow Oregonian, Bob Packwood, Republican from Oregon, who was probably 

the major architect in the Reagan Administration. 

I do think that there are Republican fingerprints all over this. I 

didn’t want to bring this up, because we don’t want this to be partisan. 

Mr. ENGLISH. Will the gentleman yield? 

Chairman NEAL. It’s Mr. Thompson’s time. 

Mr. THOMPSON. I’m going to be out of time before we get going. 

Mr. Solomon, it has been brought up by a number of my colleagues on the dais today that the current budget proposes to make 

just about every tax cut known to mankind permanent, but only 

provides for a one-year fix in the AMT. 


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I just want to draw on one particular part of your testimony, 

where you say, ‘‘A permanent solution to the AMT is essential for 

the continued functioning of our individual income tax system.’’ If 

you believe that, don’t we need a permanent fix? 

Mr. SOLOMON. We do need a permanent fix to the AMT. 

Mr. THOMPSON. Then why is it part of the budget? 

Mr. SOLOMON. It’s not part of the budget. We have an immediate problem, which is for 2007, which has already begun. The immediate problem is to deal with 2007. 

So, to deal with the immediate problem, the budget includes a 

one-year patch. 

Mr. THOMPSON, but we have been doing the one-year patch. 

Mr. SOLOMON. I understand. The President’s budget proposal 

is consistent with that, but it also important that we take the time 

to examine permanent solutions to the AMT. 

There are a number of possibilities that we can consider: for example, dealing with the exemption on a long-term basis, dealing 

with the rates—— 

Mr. THOMPSON. It just seems to me—and other people have already said it—but the budget is the priority of our Administration, 

it’s a priority of our country. If it’s not in the budget, it is just— 

you can spin it any way you want, it’s just not a priority. 

I tend to agree with you that this does need to be fixed, and 

needs to be fixed on a permanent basis. Any one-year patches, 

we’re just obfuscating the potential problems, and the real need to 

do our work. 

Ms. Olson, if taxpayers—you have noted that this is a particularly difficult system to navigate, and a lot of people just don’t even 

know about it. If a taxpayer does his or her own tax work, and they 

fail to do it under the AMT, and they later found that they should 

have, what happens? 

Ms. OLSON. Well, the IRS has systems that will check whether 

you have—based on how we plug in the information from the return that we get—and it will just tell us that you should have calculated the AMT. 

Mr. THOMPSON. So, do you get a penalty? 

Ms. OLSON. You will get a letter from the IRS, and then you 

will get a penalty for—certainly you will have interest, and then 

you will get a penalty for failing to pay, unless you can show reasonable cause. Ignorance of the law is not an excuse. 

Mr. THOMPSON. So, if you just say, ‘‘This is really confusing, 

I didn’t know about it’’—— 

Ms. OLSON. That’s not good enough. 

Mr. THOMPSON. You still get your—so there is a bunch of taxpayers out there who are apt to get hit with this penalty? 

Ms. OLSON. Yes. One of the things that we point out is that because it is so hard to know until all of your information is at the 

end of the year, you can’t predict when you will be hit by the AMT. 

So, even if you calculate it correctly, you may have to get—you 

may be charged an estimated tax penalty, because you didn’t pay 

in enough money during the year to pay the alternative—— 

Mr. THOMPSON. Right. Does the IRS do an outreach to let people know that this is a problem they ought to be watching out for? 


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Ms. OLSON. The IRS has been working on a publication. It is 

one of the few issues that we don’t have a publication on, 

which—— 

Mr. THOMPSON. What do you think happens? You get your 

publication done first, or we fix this permanently first? 

Ms. OLSON. That would be a hard one to predict. 

Mr. THOMPSON. That’s what I was afraid of. Dr. Burman, you 

have given us several options as to how to deal with this. Do you 

have a favorite? If you were the benevolent tax czar, what would— 

how would you do it? 

Mr. BURMAN. I think there is actually a lot of merit to the tax 

reform panel’s proposal to eliminate State and local tax deduction. 

I know that’s not politically very popular, but it’s going away on 

its own, and it does make things more complicated. If you didn’t 

have a State and local tax deduction, fewer people would have to 

itemize, and it would raise more than enough revenue to eliminate 

the AMT. 

Mr. THOMPSON. It just goes to show you should not ask a question you do not already know the answer to. Thank you. 

Chairman NEAL. I thank the gentleman. The gentleman from 

Virginia, Mr. Cantor, will inquire. 

Mr. CANTOR. Thank you, Mr. Chairman. You know, I appreciate 

the panel being here. It has been a very interesting discussion, 

educating one for me. 

It seems to me, though, as we are looking to try and find not an 

easy, but a sensible way to address this growing problem, that perhaps we ought to look at the 1993 tax hike that essentially raised 

the AMT from a 24 percent flat rate to a dual tax rate of 26 percent on AMT income up to $175,000, and 28 percent on AMT income above that amount. 

You know, I know that joint tax has done an analysis which has 

shown that about 11 million more Americans will have to pay the 

AMT next year, thanks to the higher post-1993 AMT rates. 

So, if it is in our interest to really shield, or spare, the average 

American—and as my friend from Oregon—I think he’s no longer— 

wants to make sure the social worker, the fire fighter, and the 

teacher is protected from the AMT, then the cleanest solution 

would be to repeal the Clinton AMT tax rate hikes, and basically 

move back to a pre-Clinton 24 percent, and then index the exemption for inflation at the 2005 level of $40,250, which would now 

mean $58,000 for a joint return. 

What I have read, that—going back to this—would mean that 

only about 2.6 million taxpayers would be—filers—would be subject 

to an AMT penalty next year, instead of the 23 million that we are 

anticipating under current law. So, I would like to put that out to 

the panel for comment, number one. 

Number two, also, maybe Dr. Viard or Mr. Solomon could answer 

the question about when we are operating under the majority’s 

PAY–GO rules, and they are looking to try and ‘‘pay for the AMT 

fix,’’ and if the proposal is to do so by repealing the death tax, perhaps, or ending the repeal to death tax, or repealing the rate cuts 

on cap gains—dividends, especially—will not that have a global effect, in terms of economic activity generation, and in essence, we 

will then be suffering from a decline in economic activity, a decline 


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in revenues, that will then not serve the purpose that we were trying to do anyway, under the PAY–GO rules that they put in place, 

which is to, again, ‘‘pay for the AMT fix?’’ 

Mr. SOLOMON. You’ve asked at least two questions, and I will 

try to address each one of them. 

First, you mentioned the 1993 rate adjustments. The 1993 rate 

adjustments are just one change among many changes to the AMT 

that have caused it to become a large issue. One of the possibilities 

that one might consider is to change the rates, as I mentioned just 

a few minutes before. 

I think also, as perhaps you mentioned, it would be important to 

index the AMT and all the parameters of the AMT, as well. So, 

changing the rates and indexing various parameters would help reduce the impact of the AMT. 

With respect to other proposals, you would have to take into account the repercussions, the consequences of those proposed 

changes. 

For example, the lower rate on capital gains and dividends, 

which was part of the 2003 tax relief, we believe was very important for economic growth, and we have had sustained economic 

growth since that time. There has been a very positive economic recovery. Therefore, there would be, we believe, very important ramifications that you would have to take into account with respect to 

any of the changes that you have suggested. 

Mr. BURMAN. I would like to make a quick comment about the 

effect of the 1993 Act. All of the measured effect that you were 

talking about actually would have come from indexing the exemptions, starting from 1993. If you did that, it would reduce the number of people on the AMT. 

Basically, if we had indexed the AMT exemption at any point in 

history, the problem would be a lot smaller. The AMT Act did raise 

the rate on the AMT, but it also raised the exemption. If all you 

did was replace the current exemption and rates with the 1993 exemption and rates, you would actually have more people on the 

AMT, although they would be paying less tax. 

So, indexing is the story, but the change in 1993 was not. 

Mr. VIARD. I want to agree with you, Mr. Congressman, that reinstating the estate tax, or raising tax rates back up again on capital gains and dividends would be undesirable ways of trying to finance AMT relief, because that would increase the tax burden on 

savings and investment, which is the most harmful economic distortion that the tax system imposes. 

It would be far preferable, as I said earlier, to pursue base broadening within the regular income tax that does not involve increasing the tax burden on savings and investment. 

I think that Len actually mentioned one very interesting option 

just a few minutes ago, which is to repeal the State and local tax 

deduction. There are others that also could be pursued. 

Chairman NEAL. I thank the gentleman. Ms. Schwartz. 

Ms. SCHWARTZ. Thank you, Mr. Chairman, and first I want to 

say I think my colleagues did a really good job of presenting the 

concerns we have from the budget Committee point of view. I 

thought they made it very clear that if we don’t do something about 

it—and the Administration has not proposed anything but a oneVerDate Mar 15 2010 09:26 Jun 07, 2011 Jkt 047005 PO 00000 Frm 00060 Fmt 6633 Sfmt 6602 I:\WAYS\IN\47005\PARAMS\47005.XXX 47005

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year fix, and we’re even hearing from the other side of the aisle 

that a trillion dollars in additional—we don’t really worry about it. 

The Administration is not worried about it. The other side of the 

aisle is not worried about another trillion dollars of debt, though 

I guess we’re going to have to borrow from another foreign country 

to make ends meet. 

I think on the budget Committee we do care about it. So, what 

I wanted to do though is to take that to the—a little bit more to 

some of my constituents who are going to see the effect of the Administration’s proposal, which is a one-year fix and then no other 

change, the AMT stays in place. 

As I understand it that really means that people—families who 

are within $100,000, $150,0000 will be paying more. They’ll be paying the AMT. That’s what the budget looks like, that’s what the 

proposal is because we only fix it for one year, and that in fact that 

means that they will be paying for this benefit for someone else, 

that we’re really taking, really at this point at least in my district—really perceive themselves as middle class taxpayers who are 

going to be paying for the tax cuts that the Bush Administration 

has put in, since there’s no changes in that. 

In fact, in my district we’re looking about half of the taxpayers 

who are affected. On this panel actually more of my constituents 

are affected by the AMT than anyone else, which is kind of interesting. I didn’t realize that until we got some of these numbers, but 

the group, the adjusted gross income group are those people at 

$100,000 to $200,000 family income, not the people making over 

$500,000, a million, two million, three million dollars. 

Given the intention of the AMT, isn’t it true that those people 

who are making $100,000 will be paying, both for the Bush tax 

cuts and really helping out much wealthier Americans because 

they’re going to be paying it and other people won’t? I guess I 

would ask Mr. Solomon, since it’s the Administration’s proposal 

that’s suggesting this. 

Mr. SOLOMON. We very much share your concern about the effect of the AMT on the middle class and the effect it will have if 

it’s not fixed in the future, given that it will affect an increasing 

number of taxpayers. The Administration’s proposal for a one-year 

patch is a first step to deal with this issue. 

We agree with you that there should be a long-term solution. 

Ms. SCHWARTZ. You’ve said that several times, and I think the 

Administration has been suggesting a one-year patch for six years. 

Mr. SOLOMON. Which is consistent with what the Congress has 

done for the last six years. I would agree with you. I’m in agreement with you with respect to the importance of this issue and that 

we do not want the AMT to affect the middle class. 

Ms. SCHWARTZ. So, you agree that it is the middle class, the 

$100,000 family income that’s going to be hit the hardest if we 

don’t do anything about it? 

Mr. SOLOMON. I do not have the numbers before me, but it is 

true that the group between $100,000 and $200,000 will be affected 

significantly if the AMT is not fixed after 2007. 

Ms. SCHWARTZ. I can’t speak for all Americans but I can tell 

you the numbers we got on this panel, every member, the constituVerDate Mar 15 2010 09:26 Jun 07, 2011 Jkt 047005 PO 00000 Frm 00061 Fmt 6633 Sfmt 6602 I:\WAYS\IN\47005\PARAMS\47005.XXX 47005

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ents we represent, the group hit the hardest is $100,000 to 

$200,000. So, you’re confirming that that’s who is going to get hit. 

Mr. SOLOMON. If the AMT is not fixed they will be significantly 

impacted by the AMT, I do agree with that. 

Ms. SCHWARTZ. The Administration, the President’s proposal is 

to—really is hollow. It is to postpone it for one year, patch it for 

one year and then no suggestions about how to fix it for the future. 

Mr. SOLOMON. It is the first step in dealing—the President’s 

proposal, the Administration’s proposal is the first step toward 

finding a long-term solution to this issue. 

Ms. SCHWARTZ. So, how much—I’ve only been for one term, so 

how much progress had you made when you made the same proposal four years ago, five years ago? This has been six years of— 

we’re going to do it one year and then we’re going to make some 

progress, we’re going to have some discussion. 

So, since—from what—year, you’ve not made any progress. So, 

what makes you think you’ll make more progress this year? 

Mr. SOLOMON. There has been progress. That is, the number 

of AMT taxpayers has been kept at a minimum over the last six 

years. 

Ms. SCHWARTZ. By doing a one-year-at-a-time patch? 

Mr. SOLOMON. It has been through short-term, temporary 

patches. That’s correct. 

Ms. SCHWARTZ. So, is the intention to do a patch for next year 

and then the year after and then leave it to the next President? 

Mr. SOLOMON. We hope to work with you to find a long-term 

solution for this problem. We share your concerns. The question is 

how will we deal with it moving forward. 

Ms. SCHWARTZ. I think ‘share your pain’ is probably not going 

to be enough. I would think we need some—and I would say some 

really specific proposals. 

Again, our Chairman is really working hard on this, and I think 

is interested as we all are in creating that fix, but come on, you’re 

the Administration, you have lots of specific proposals. I’d like to 

see some very specific proposals for the changes to the President’s 

tax cut that you think have to be made in order to fix this or something new. 

I think it’s not good enough to just say, ‘‘we’re open for suggestions.’’ Thank you. 

Chairman NEAL. I thank the gentlelady. 

Mr. Solomon, let me do some followup based on what the 

gentlelady from Pennsylvania has said. I think it might highlight 

some of the frustration that we do feel. Let me just read some 

quotes to you. 

‘‘We estimate that the number of individuals affected by the 

AMT would almost double under the Bush proposals.’’ That comes 

from Joint Tax. That’s not a partisan organization. 

‘‘It is true that the AMT would eat away at some of the benefits 

flowing from the President’s tax proposals as compared to the absence of an AMT interaction with the rest of the tax code.’’ That’s 

the Secretary of the Treasury, Mr. O’Neill. ‘‘Otherwise, we are giving people a tax decrease on one side and a tax increase on the 

other side, and they aren’t really getting what we said they were 

going to get.’’ That’s Senator Charles Grassley. 


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The 2001 tax cut bill ‘‘will roughly double the number of AMT 

taxpayers in most of the last years of the budget window so that 

in 2010 an estimated one-third of all taxpayers will be subject to 

the AMT.’’ That’s the Treasury economist Jerry Tempalski. 

These are all quotes, as the gentlelady said, from 2001. As I’ve 

indicated, they’re not partisan positions. I accept your word that 

you’d like to work with Members of the Subcommittee and the full 

Committee and the Members of the house but there has to be 

something that moves beyond the level of testimony to really tackle 

this issue because I want to tell you—it’s the intention of the 

Chairman of the full Committee to tackle this issue in the next 

couple of months.—— 

So, I assure you that we appreciate your desire to work with us 

but this is not going to go away. We intend to do the followup 

based on what I proposed. 

If you’d like to comment, please. 

Mr. SOLOMON. Yes, just a few comments. First, there have 

been a couple of references that the President’s tax relief is the 

cause of the problem. I just want to reiterate that in my view the 

source of the problem is the AMT itself, and we need to recognize 

that. 

The AMT causes a penalty for being married. It causes negative 

effects on families because the personal exemptions are denied. It 

denies the standard deduction. It denies personal exemptions. It 

denies the itemized deduction for State and local taxes. All of these 

things are part of the AMT and they need to be—and they need 

to be addressed. 

In terms of particular kinds of proposals, some of the things that 

might be considered, for example, are increasing the exemption or 

reducing the rate. Those are some of the things that one might consider. 

Chairman NEAL. Dr. Burman, would you like to comment? 

Mr. BURMAN. Well, I disagree with Mr. Solomon that the 2001 

tax cuts are not a factor. I think we were counting on the AMT revenue when the 2001 tax cuts were enacted. It made them appear 

to be much less costly in terms of revenue than they actually 

turned out to be. 

I think we need a permanent solution. I’m glad that the Administration says they want to work toward a permanent solution. I 

think the response from Mr. Thomas to my response to what my 

favorite solution is suggests that it’s harder for politicians to fix 

this than for economists to do it, so it’s a difficult problem. 

We could have come up with 20 different solutions and none of 

them would be ones that you could just go back to your constituents and say, ‘‘hey, I’ve got the solution and everybody is better 

off.’’ The fact is that this tax is a capricious tax. It’s not hitting the 

people that you think it should be hitting. If you’re going to make 

up the revenue with something that makes sense, some other people are going to be paying more tax. 

My preference would be to shift the tax burden onto people who 

are most able to pay, the ones who benefited the most from the economic expansion of the last two decades, but that’s obviously not 

uncontroversial. 


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Chairman NEAL. I thank you. Mr. Blumenauer, would you like 

to further inquire? 

Mr. BLUMENAUER. I would like to just follow up with Dr. Burman. 

I must note, in your testimony you’ve got the couple in box one that is just $75,000 of income, a teacher and a firefighter, actually 

not a well paid teacher and a junior firefighter, frankly, with four 

children, who pay a $2,000 surcharge to the AMT in 2007. 

As you point out further in your testimony, by 2010 we’re going 

to be in a situation where less than 40 percent of the millionaires— 

not millionaires, people who make a million dollars a year or more 

will be subject to the AMT, but 94 percent of the $200,000 to 

$500,000—it just—I want to commend you for examples that show 

how starkly this is perverting what we are attempting to do with 

the tax code. 

I would like, if you would, to just elaborate where you were a moment ago. You were taking modest exception to the Secretary about 

whether or not the 2001 tax cuts figured into this. You’ve already 

pointed out that it doubled the number of people who were impacted when there was a chance, when there were trillions of dollars theoretically available, and they weren’t spent to ameliorate it. 

In fact, it made it worse. 

As you pointed out this money was used—in the AMT was used 

to justify larger tax cuts if they were ‘‘affordable’’ by assuming this 

revenue. Now, as I pointed out in the earlier round, this money is 

assumed in the next round of budgets that are being proposed 

other than the one year. 

I wonder if you could comment on this—on how much more difficult resolution is going to be if we were to take the approach recommended by the Administration, which is spend it all except the 

one-year patch as opposed to making some adjustments in the tax 

code, not making it worse, not extending it, not complicating it further, but redirecting to be able to have some of the simpler approaches that you’ve suggested. 

If you wanted to sort of elaborate on the difference between these 

two in terms of ultimately being able to solve the problem—spend 

it all versus making some adjustment and try and get on it sooner 

rather than later. 

Mr. BURMAN. Well, I certainly agree that the sooner you deal 

with the AMT—and Ms. Olsen made this point in her testimony. 

The sooner you deal with it, the easier it’s going to be. Every year 

the cost goes up by a lot because you’re adding another year with 

$200 billion of revenue costs. 

I don’t want to get into assigning blame, into a discussion of that. 

Mr. BLUMENAUER. If the tenor of my question suggests that 

I was suggesting you assign blame, please don’t. I just want you 

to assess the difficulty of the two approaches. 

Mr. BURMAN. I think it’s better to deal with it now than to put 

it off. I you do, this Congress will be remembered as the one that 

dealt with the really hard issue that had escaped the grasp of Congresses of both parties for the last 25 years. I think it would be 

great. 

Ms. OLSON. If I might make an observation, the AMT, just to 

remind folks, is not just about cost or at least the dollar cost. It’s 


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about the cost on taxpayers themselves. So, as more taxpayers are 

pulled into this system more taxpayers are having to go through 

the process of calculating their income tax returns twice, and that 

is an enormous compliance cost for taxpayers alone, and it does 

have an effect on the tax system overall. 

Mr. BLUMENAUER. Ms. Olsen, I really appreciate your elaboration. 

Mr. Chairman, one of the things that I hope we might be able 

to do if maybe some of our expert witnesses can help guide us in 

this point. Dealing with these lower income families that are being 

caught in the net—you know, the reference that Dr. Burman had 

to the $75,000—getting—if we can have some sense of what the 

costs of tax compliance will be as a percentage of what they’re paying—and I—maybe, Mr. Secretary, you’ve got something in Treasury, maybe our tax advocate has it, but it just seems to me that 

we’re going to be looking at a lot of people who are going to be paying maybe an extra $500, $1,000, $2,000, $2,500, but they’re going 

to be paying an accountant an extra thousand dollars for this 

$1,500 bill. 

Chairman NEAL. I think that the next panel that we’ve scheduled—we’re going to hear from the practitioners and then we’re 

going to hear from those who have born the burden of AMT, and 

we’ll have an opportunity to hear not just anecdotes, but attach 

them to real stories. 

I thank the gentleman from Oregon. 

Mr. English. 

Mr. ENGLISH. This has been an excellent panel, Mr. Chairman. 

I would say the one comment I would make is that there certainly 

has been, through this line of questioning, a focus on the way—on 

the AMT that I find surprising, one, blaming the Administration or 

the Administration’s tax policies for the problem when of course we 

go back to the last Administration and they threw away an opportunity to actually repeal flat out the AMT at a time when it would 

have been a much more affordable solution. 

I don’t want to join my colleagues in making partisan political 

statements but I do think that it is fair to say that pro-growth tax 

policies are not the reason why the AMT has been a growing problem, and the attempts to somehow link recent tax relief programs 

to the growth of the AMT instead of tying it to mere inflation and 

the growth of the economy reminds me of some of the Presocratic 

philosophers; concepts like Xeno’s paradox where somehow Achilles 

is never going to quite capture the tortoise because he’s moving 

along a straight line. 

The idea that somehow tax relief has exacerbated the AMT is a 

strange, abstract argument, but I am delighted that some of my 

colleagues have put on the Administration a challenge that reasonably can be moved back to them if in fact they feel this is something that needs to be addressed in the short term. They certainly 

have the opportunity to do it and I am certainly prepared to work 

with them. 

As co-Chairman of the zero AMT caucus, I have been looking for 

that kind of a partnership for years. I thank the Chairman for having provided this opportunity to explore some of the problems with 

the AMT, and I would simply want to ask the panel as a closing 


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question, is not the elimination or reform of the AMT something 

best done in the context of something that in the last Bush Administration was a—or I should say the first Bush Administration— 

was considered to be one of the priorities to drive their tax discussion, and that is fundamental tax reform. 

As you noted, Dr. Burman, the AMT was one of the things that 

the President’s tax panel did focus on and in fact explored one possible solution, you know, one that doesn’t necessarily appeal to me 

as a former city finance officer, but the eliminating the deductibility of State and local taxes, which at least would have some reasonable distributional effect and would also be an approach that 

would end the obvious inequity that Federal taxes are paid less by 

those from high tax jurisdictions. 

Is not this issue, very quickly, for each of you, best dealt in the 

context of a fundamental overhaul of the Code given the dimensions of the AMT problem? Dr. Viard. 

Mr. VIARD. Yes, Mr. Ranking Member. I agree that the fundament tax reform would be the best context in which to address 

this. It is such a big problem that a permanent solution to the 

AMT, particularly if there is offsetting financing through something like the repeal of the State and local tax deduction would 

itself almost qualify as a fundamental tax reform by itself. 

So, I think it would be best to address it in the context of something very broad based, whether that be a move to a consumption 

tax, as I would prefer, or whether it be a restructuring of the income tax. 

Mr. ENGLISH. Dr. Burman. 

Mr. BURMAN. I agree with you. I actually came to Washington 

to work on what became the Tax Reform Act 1986. It used to be 

that people perceived the income tax as the fairest tax. Now they 

perceive it as the least fair tax. 

The income tax actually is at its heart a very fair tax system. It’s 

progressive. It raises a much larger share of revenue from those 

who are most able to pay, but it’s too complicated. I think that before too long we need to fix the income tax so that people will support it as we’re demanding more from it to finance the growing demands of the government as the Baby Boomers retire. 

Mr. ENGLISH. Ms. Olson. 

Ms. OLSON. Well, I’ve often noted the need to repeal or deal 

with the AMT is going to drive fundamental tax reform because it 

will eventually cost more to repeal the AMT than it is to repeal the 

income tax, the regular tax and leave the AMT. 

I would also add that we don’t have time. I’ve characterized the 

AMT at times as a time bomb with a short fuse, which almost 

sounds impossible because you can’t have a time bomb with a fuse, 

but it is ticking away, and it is also exploding every single year as 

we either have to have a revenue hit to do the one-year patches 

in order to keep people off of it. We have to address both. 

Mr. ENGLISH. Mr. Solomon. 

Mr. SOLOMON. Yes, the long-term solution to the AMT could be 

considered as part of tax reform. The only comment I want to add 

is that we also have a short-term problem. We have to deal with 

AMT for 2007. 


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Tax reform is going to take longer than that, and so it is important that we deal with the issue for 2007, a year that has already 

begun, which is consistent with the Administration’s proposal. 

Mr. ENGLISH. Thank you. 

Chairman NEAL. The gentleman from Texas. 

Mr. DOGGETT. I will just agree particularly with what Ms. 

Olson just said. Fundamental tax reform is fine, but I’ve been 

through 12 years of Republican rule. In fact, I’ve never known anything else in the House until this year, and they never once 

brought fundamental tax reform proposals to a vote in this Committee or anywhere else. 

President Bush has had six years to propose fundamental tax reform. He has yet to offer a specific proposal to do that. 

I think you’re right. This is a time bomb. While we do need more 

comprehensive reform we ought not to wait for the perfect reform 

if one exists in order to try to provide some redress to middle class 

taxpayers. 

Mr. ENGLISH. Will the gentleman yield? 

Mr. DOGGETT. I’ll yield. 

Mr. ENGLISH. Will the gentleman then be in favor of perhaps 

considering in this Congress’ fundamental tax reform? 

Mr. DOGGETT. Well, the gentleman has had a majority for the 

last 12 years and was unable to—— 

Mr. ENGLISH. Now you do. Are you willing to do it? 

Mr. DOGGETT [continuing]. And controlled this Committee and 

never once did it. I’d be willing to—— 

Mr. ENGLISH. Are you willing to do it? 

Mr. DOGGETT. I’d be willing to consider any proposal you want 

to advance, but the only ones that we’ve talked about in the Committee rather than voted on have been ones that simply shift more 

of the burden to working people and less of the burden to the people that are already trying to dodge and avoid their taxes, and that 

kind of fundamental tax reform is fundamental tax deform, not reform. 

Mr. ENGLISH. Then I encourage the gentleman, look at my fundamental tax reform proposal, the simplified USA tax, and I don’t 

think that he can make the same claim about that. I yield back. 

Mr. DOGGETT. I will do so. 

Chairman NEAL. I would note today that for the panelists and 

the members of the audience that you could see what new leadership has brought. There are more esoteric arguments. 

We began with St. Augustine, we moved to Achilles, but I must 

tell you after all these years of being on this Committee and dealing with tax policy, the real test is Sisyphus, to continue to roll this 

boulder back up the hill. 

I thank the panelists. This was most informative, and I look forward to the next round of hearings, but most importantly a solution. This meeting stands adjourned. 

[Whereupon, at 3:42 p.m., the hearing was concluded.] 

[Questions submitted by the Members to the Witnesses follow:] 


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Question submitted by Mr. Johnson to Eric Solomon 

Question: Section 402 of Public Law 109–432 addresses the problem of 

stranded AMT tax credits. When I introduced the bill on this topic (H.R. 

3385) and when it was reviewed by Legislative Counsel and the Joint 

Committee on Taxation, the intent of the law was to make sure that individuals were able to use their stranded credits in no more than five 

years. We fully intended that individuals could get credits back in 20 

percent increments over five years. Is that your understanding of how 

the new law works? 

Unfortunately the law did not have any report language associated with it. 

However, it is clear to me that Congress was attempting to put this 

mess behind our constituents who voluntarily came forward to report 

this tax situation. Those taxpayers who never reported these Incentive 

Stock Option transactions are likely to have evaded this tax burden 

due to the fact that there was no reporting to the IRS of these transactions. For taxpayers who are known to the IRS, I would strongly encourage you to settle out these cases in a fair manner and to stop accruing additional interest and penalties. Mr. Assistant Secretary, I 

would encourage you and the IRS to simply settle out these cases as expeditiously as possible. 

Answer: Section 53(e) of the Code, as added by Pub. L. No. 109–432, § 402, provides 

special rules that make so-called stranded AMT tax credits refundable through 

2012. The provision allows an annual AMT credit equal to the greater of 20 percent of the taxpayer’s long-term unused minimum tax credits (stranded credits) 

or 5,000 (or the remaining amount of long-term unused minimum tax credits, 

if smaller than 5,000). Under the statute, it is clear that taxpayers with stranded credits over $25,000 will not fully recover the entire amount of these credits 

within five years. This is because for 2008 through 2012, the amount of the 

stranded credits will be reduced by the amount refunded in the prior year, and 

thus, the 20 percent will be multiplied by a smaller amount, not the original 

amount of stranded credits. For example, assuming that in each year a taxpayer 

could not otherwise use AMT credits to offset regular liability, if the total 

amount of the taxpayer’s stranded credits in 2007 is $100,000, the refundable 

credit is $100,000 × 20% = $20,000. In 2008, the total amount of stranded credits is now $80,000; therefore, the refundable credit is $80,000 × 20% = $16,000. 

In this example, the taxpayer would still have more than $26,000 of stranded 

credits left over in 2012. 

With respect to the issue of settling cases, although the Office of Tax Policy is 

not involved in the resolution of specific taxpayer cases, I can assure you that the 

IRS will ensure that section 53(e) is fairly applied as enacted. 

Question submitted by Mr. Johnson to Nina Olsen 

Question: Unfortunately the Public Law 109–432 did not have any report 

language associated with it. However, it is clear to me that Congress 

was attempting to put this mess behind our constituents who voluntarily came forward to report this tax situation regarding AMT and Incentive Stock Options. Those taxpayers who never reported these ISO 

transactions are likely to have evaded this tax burden due to the fact 

that there was no reporting to the IRS of these transactions. For taxpayers who are known to the IRS, I would strongly encourage you to 

settle out these cases in a fair manner and to stop accruing additional 

interest and penalties. 

Do you consider the taxpayers who have been caught in this nightmare of 

paying income taxes on phantom gains they never received to be in a 

more sympathetic position than those taxpayers who never reported 

these transactions at all and have never paid a penny toward similar 

tax bills? 

Isn’t it time to simply settle these cases? 

[Response pending.] 

[Submissions for the Record follow:] 


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1Godfrey, John. ‘‘Senate votes to keep tax breaks.’’ The Washington Times. October 30, 1999. 

Statement of Grover Norquist, Americans for Tax Reform 

Chairman Neal, Ranking Member English and other Members of this subcommittee, I thank you for the opportunity to submit testimony on the Alternative 

Minimum Tax. 

My name is Grover Norquist, and I am president of Americans for Tax Reform. 

I submit my comments to you today with serious concerns about the effectiveness 

of the Alternative Minimum Tax and the possible remedies being proposed by Congress. 

More specifically, the AMT is worst case example of everything wrong with tax 

policy in this country. As we all know this tax was established to prevent certain 

Americans and corporations from using otherwise available deductions to reduce 

(and in some cases eliminate) their income tax liability. The individual AMT was 

thus intended to act as a failsafe mechanism to ensure that a small number of 

upper income individuals had to pay income tax. 

But as with just about every other tax, the AMT has gone way beyond hitting 

only a wealthy few and now we are faced with the possibility of 30 million taxpayers 

facing this onerous burden. And as our members remind us every year around tax 

filing season, the burden is not just the additional taxes being paid but also the time 

to comply with the additional paperwork. The important point from the AMT lesson 

is that over time taxes do not hit just the wealthy as the middle-class always creep 

into these higher taxes. 

Just ask any household with a telephone which has been forced to pay an excise 

tax for over 100 years when Congress intended the tax to be a tax on the ‘‘rich’’ 

to pay for the Spanish-American War. The last time I checked America won that 

war but American taxpayers of all incomes continued to pay the tax. This is also 

the direction we are headed with the AMT and to a lesser extent the estate tax. 

Identifying the Problem 

For policymakers to identify the correct remedy of the AMT explosion it is important to understand the true reason this occurred. As we show below, the surge is 

not the result of the 2001 and 2003 tax cuts but the AMT tax increases of 1990 

and 1993 and the failure to index income exemptions to inflation. By our count, 97 

percent of AMT payers expected to be paying the AMT in 2016, 30 of the 31 million 

taxpayers, are paying because of the higher rates enacted in 1993 and the failure 

to index to inflation at the same time. 

In talking about the Alternative Minimum Tax (AMT) a lot of blame has recently 

been targeted at the tax cuts enacted in 2001 and 2003. The idea behind this is that 

reducing taxpayers’ regular income tax liability pushed their Alternative Minimum 

Tax liability higher, thus creating this rapid growth of AMT payers. As such, some 

Members of Congress are proposing to eliminate the tax cuts of 2001 and 2003 to 

fix the AMT problem. 

This is simply a race to the bottom whereby Congress is raising taxes on American middle class families to eliminate a different tax. A more common sense approach would be to just get rid of the AMT in the first place because the tax is not 

achieving its objectives. 

Moreover, the idea that the recent tax cuts have something to do with the recent 

surge is suspect. On October 29, 1999, the Senate hurriedly inserted a provision in 

an $8.5 billion tax package to allow families to use certain tax breaks so that they 

could avoid paying the dreaded—but surprisingly little-known at the time—AMT. 

Senate Finance Committee Chairman William Roth (R–DE) and ranking Member 

Sen. Daniel Patrick Moynihan (D–NY) issued a joint statement earlier in the week, 

declaring ‘‘If we fail to extend the AMT relief, millions of middle-income taxpayers 

will face an unintended and unexpected tax increase.’’ 1

So this surge of AMT payers was already occurring before the 2001 and 2003 tax 

cuts. In fact, the surge in the 1990’s was dramatic. According to data compiled by 

the Tax Foundation and analyzed by Americans for Tax Reform, 117,500 taxpayers 

paid the AMT in 1989 with an average tax burden of $11,500 per taxpayer (in 2006 

dollars). By the time the Sens. Roth and Moynihan issued their press release in 

1999 that number had increased more than ten-fold to over 1 million taxpayers. The 

average AMT liability was $7,700 (again in 2006 dollars) in 1999 which demonstrates the AMT was slowly creeping into the middle-class. More people were paying but as the incomes of the taxpayers affected were smaller these taxpayers were 

also paying smaller amounts. 


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AMT Bracket Creep Was Already Occurring Before 2001 & 2003 Tax Cuts 

Sensing this growing problem both the House of Representatives and the Senate 

voted on August 5, 1999 to repeal the Alternative Minimum Tax as part of the Taxpayer Relief Act of 1999. At the time the ‘‘cost’’ of repeal was just $105 billion. Most 

of the Members today complaining about the AMT problem voted against this legislation. Despite their opposition the legislation passed both Houses of Congress only 

to be vetoed by President Clinton with the common mantra that the legislation was 

a ‘‘tax cut for the rich.’’ We would not have this ‘‘problem’’ today if that legislation 

was signed into law by President Clinton. 

So what caused this dramatic surge? In 1990 and again in 1993 Congress raised 

the individual income tax. Knowing this would knock taxpayers off the higher revenue raising AMT and into the regular income tax, Congress also raised the Alternative Minimum Tax rates. This ensured all the people already paying the AMT 

stayed in the AMT system but also pushed more taxpayers into the AMT. 

Following the 1990 AMT tax increase the number of people paying the AMT nearly doubled from 132,000 to 244,000 taxpayers in just one year. In 1993 Congress 

created a two rate AMT tax system raising the rates from 24 to 26 percent for taxpayers with incomes under $175,000 and a 28 percent tax rate for taxpayers with 

incomes over $175,000. Following the 1993 tax rate the number of taxpayers paying 

the AMT increased an astonishing 354 percent by the end of 2000. 

At the same time Congress failed to index the AMT income exemption for inflation so as taxpayers incomes increased over time more and more taxpayers were hit 

with the AMT. Even with an inflation index, incomes grow faster than inflation so 

this would not have solved all the problems but indexing for inflation would have 

at least mitigated some of the problem. 

For example, in 1986 the median family income was just $29,458 while the AMT 

exemption was $40,000. The AMT exemption was lifted to $45,000 with the 1993 

tax increase but by 1997 the median family income was exactly at the AMT income 

amount. Following 1997, the median income was higher than AMT rate which was 

a key component to driving the rapid increases in AMT payers. 


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Failure to Index AMT to Inflation Led To Rapid Rise in AMT Payers 

97 Percent of AMT Payers Are Paying Because of the 1993 AMT Tax Increase 

According to estimates by the Joint Committee on Taxation (JCT), in 2016 the 

number of taxpayers paying the AMT will reach 30.8 million. Repealing the 1993 

tax increase will remove 12.2 million taxpayers from the AMT rolls. As such 40 percent of all AMT payers are paying because of the higher AMT tax rates enacted in 

1993. These higher AMT rates from 1993 will force American taxpayers to pay an 

additional $375 billion of taxes from 2006–2016. 

The next step in our analysis was to determine the second part of the AMT problem—the fact that rates and income are not subject to inflation protections as is the 

regular income tax. If the AMT was indexed for inflation in 1993 most of the people 

paying would be off the rolls. 

Recent inflation protections enacted in 2001, 2003, 2004, and 2006 has kept 17.6 

million people from paying the AMT. This runs contrary to the opinion that the recent tax cuts have increased the number of people paying the AMT. 

So when adding the two numbers from the higher rates coupled with the inflation 

protections, 29.8 million of the 30.8 million that will be forced to pay the AMT are 

only paying because of the Clinton tax increase and the failure to index to inflation. 

That would leave only 1 million people are actually paying because of high incomes 

and lots of deductions. 

The Impact of the Tax Cuts on AMT 

Recently a number of policymakers have suggested that the tax cuts enacted since 

2001 has increased the number of AMT payers. This could be the case but not for 

the reasons suggested. As I discussed above the AMT tax rates were increased correspondingly with increases in the income tax rates. Conversely, when income tax 

rates were cut in 2001, and again in 2003, AMT rates were not reduced correspondingly. This created an AMT tax liability higher than the regular income tax liability 

for some taxpayers. As such, the solution to this is not to raise the rates, either income or AMT, but to lower the AMT rates to match the lower income tax rates. 

A second reason for the rise in AMT is that the tax cuts created a number of new 

deductions for the regular income not available in the AMT. Most of these deductions enjoy bi-partisan support such as college tuition tax deduction. Therefore, to 

fix the AMT problem from the recent tax cuts is to get rid of the deductions that 

most members support. 

The combination of these two factors coupled with the policy failure of the 1993 

tax increase is not the reason currently being given as the rise of the AMT. Accordingly, the proposed policy solutions such as increasing higher income tax bracket 

rates or AMT rates will do nothing to fix the problem. Furthermore, as we have witnessed in the past, lifting income exemption amounts only delays the problem. As 


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incomes grow more and more people will be hit with the tax in the future. This is 

a situation of a dog chasing its own tail. 

Recommendations 

• AMT Repeal. We believe given these factors the Alternative Minimum 

Tax should be repealed with no offsets. It is unconscionable that Members 

of Congress who created this problem by raising tax rates and failing to index 

for inflation and then subsequently voting against repealing this tax six years 

later are now seeking to rearrange the chairs on the Titanic by forcing nearly 

1 trillion of tax increases to ‘‘pay’’ for AMT repeal/reform. Raising taxes on 

small businesses to pay for an income exemption that will only sock taxpayers 

at a later date is a ridiculous proposal. Taxpayers should not be paying this tax 

today and therefore should not be forced to pay higher taxes from one pocket 

to reduce their burden on the other pocket. 

• Repeal The Clinton AMT Tax Increase. Absent repeal without offsets, Congress should repeal the 1993 AMT tax increase to bring the AMT tax rates in 

line with the regular income tax. We know 40 percent of the AMT taxpayers 

are paying this tax solely because of the higher rates and these higher rates 

are generating nearly 50 percent of the revenue. This will not only remove 40 

percent of the taxpayers from AMT it will also substantially reduce the amount 

of AMT taxes for existing taxpayers. Sen. Arlen Specter of Pennsylvania just 

last week introduced this legislation and I would urge a similar bill in the 

House and encourage all members to reverse this damaging tax increase. 

• Do Not Raise Taxes Under The Guise of AMT Reform. Raising taxes to 

offset the ‘‘cost’’ will result in fewer jobs, a slower stock market, less growth, 

and ultimately a lower standard of living for all Americans. Any proposal to 

raise one set of taxes to offset the AMT is unnecessary and growth inhibiting. 

I urge all members to avoid this avenue. 

Thank you for the opportunity to submit my written testimony and I look forward 

to working with you on ending the Alternative Minimum Tax. 

f 

Statement of Betty & Carmelo Rivero 

We have, for some time now, been paying $1,750 per month to pay off our taxes 

for the year 2000. This is addition to the initial payments we made plus the bankruptcy filing we had to make in order to provide enough cash flow to make the 

$1,750 payments we are presently making. 

These issues began when I was working for i2 Technologies an up and coming 

supply chain management software company, as an Administrative Assistant. I was 

hired in 1995 at a starting salary of $27,000 per year. In 1998 i2 Technologies went 

public and I was given stock options along with other people in our company. This 

was the first time in our lives that either of us had ever been offered stock options 

and all we thought about was that this would give us the ability to do things for 

our daughters, Carmen and Amy and possibly buy a new home. 

In 1999 the stock started to rise pretty rapidly and in February 2000 I started 

to exercise my options. Later that year we put a down payment on a new home in 

Carrollton. It was over 15 miles closer to both our jobs. We thought we were at the 

perfect point in our lives. 

At the end of 2000, i2 Technologies along with many other technology companies’ 

stock started to drop drastically. Earlier that year I was told that I would be put 

on the black list, because of software on my computer that allowed me to support 

the company Controller, Nancy Brigham. Being put on the black list meant that I 

could not sell my stock during specific times of the year. Years later I was told that 

I was never added to this list but that I should not have sold my stock during that 

time because of the potential knowledge I had, given my position in the company. 

The black out period for that quarter began December 1st and it was lifted January 19th after we released our earnings for that quarter. Not selling my stock during this time caused me to acquire AMT taxes on stock I exercised early in 2001. 

But what I did not know at the time, was that the stock that was valued anywhere 

from $50 to $105 at the time I exercised it would only be worth $3 a share when 

I sold it. And I would be required to pay taxes not at the price it was sold for, but 

at the exercised amount. 

When I realized I owed these taxes I thought this was going to be an easy task 

to handle with the IRS. I could prove I never received the income at the exercise 


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value for which the AMT taxes were being accessed. Well, we found that this tax, 

no matter how unfair, is legally owed to the IRS and they were not willing to consider dismissing it. They said that we needed to pay our taxes in full. Their job was 

to collect taxes not to consider whether the taxes were fair or not. Added to this 

when we were able to sell the stock at the $3 a share in 2001 we were unable to 

take a loss against the exercised AMT taxed value but were required to use as basis 

the amount paid which reduced our taxable loss greatly and was further limited by 

the allowable capital loss deduction of $3,000 per year. We are required to pay tax 

on income we never received on stock purchased in 2000 not sold until 2001 and 

the losses actually sustained for the same stock when sold was limited to $3,000 

per year Capital Loss deduction (deduction against income not tax). 

As we have already stated, we have now settled with the IRS and are paying 

$1,750 per month. This payment will continue until we pay all of the taxes, penalties and interest that are owed. At the present time we have accrued about 

$40,000 in penalties and interest. We feel that this is the most bizarre portion of 

this affair: ‘‘We are being penalized on taxes we owe for income we never received.’’ 

We are not saying we do not owe the IRS money because we do. However, we 

would have been able to settle with them years before we finally reached an agreement, if we did not have the AMT taxes to pay. We could understand owing taxes 

if we would have received the level of income for which the taxes are owed, but to 

be taxed for what we consider to be phantom income is difficult to understand, even 

though it is legal. We do not see an end to our paying the IRS. With the mounting 

penalties and interest it looks like we will be paying indefinitely. 

My husband and I are requesting your help, in any way possible, in eliminating 

alternative minimum tax (AMT). 

Respectfully, 

BETTY RIVERO

CARMELO RIVERO

Æ 


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