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27–149—PDF 2005

S. HRG. 109–367

BLOWING THE COVER ON THE STEALTH TAX:

EXPOSING THE INDIVIDUAL AMT

HEARING

BEFORE THE

SUBCOMMITTEE ON TAXATION AND IRS OVERSIGHT

OF THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

MAY 23, 2005

(

Printed for the use of the Committee on Finance
COMMITTEE ON FINANCE

CHARLES E. GRASSLEY, Iowa, Chairman

ORRIN G. HATCH, Utah

TRENT LOTT, Mississippi

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

CRAIG THOMAS, Wyoming

RICK SANTORUM, Pennsylvania

BILL FRIST, Tennessee

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

MAX BAUCUS, Montana

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JAMES M. JEFFORDS (I), Vermont

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

KOLAN DAVIS, Staff Director and Chief Counsel

RUSSELL SULLIVAN, Democratic Staff Director

SUBCOMMITTEE ON TAXATION AND IRS OVERSIGHT

JON KYL, Arizona, Chairman

TRENT LOTT, Mississippi

ORRIN G. HATCH, Utah

OLYMPIA J. SNOWE, Maine

MIKE CRAPO, Idaho

CRAIG THOMAS, Wyoming

RICK SANTORUM, Pennsylvania

JAMES M. JEFFORDS (I), Vermont

MAX BAUCUS, Montana

KENT CONRAD, North Dakota

BLANCHE L. LINCOLN, Arkansas

CHARLES E. SCHUMER, New York

(II)
(III)

C O N T E N T S

OPENING STATEMENTS

Page

Kyl, Hon. Jon, a U.S. Senator from Arizona, chairman, Subcommittee on

Taxation and IRS Oversight, Committee on Finance ....................................... 1

Jeffords, Hon. James M., a U.S. Senator from Vermont ...................................... 3

Baucus, Hon. Max, a U.S. Senator from Montana ................................................ 14

WITNESSES

Carroll, Robert J., Deputy Assistant Secretary for Tax Analysis, U.S. Department of the Treasury, Washington, DC ............................................................. 3

Holtz-Eakin, Dr. Douglas, Director, Congressional Budget Office, Washington,

DC .......................................................................................................................... 5

Olson, Nina E., National Taxpayer Advocate, Taxpayer Advocate Service,

Washington, DC ................................................................................................... 7

Hassett, Dr. Kevin A., director of economic policy studies, American Enterprise Institute, Washington, DC ......................................................................... 15

Markman, Carol C., CPA, president, National Conference of CPA Practitioners; and partner at Feldman, Meinberg and Company, LLP, Jericho,

NY ......................................................................................................................... 17

Burman, Dr. Leonard E., senior fellow and co-director, Urban-Brookings Tax

Policy Center, The Urban Institute, Washington, DC ...................................... 18

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:

Opening statement ........................................................................................... 14

Burman, Dr. Leonard E.:

Testimony .......................................................................................................... 18

Prepared statement .......................................................................................... 21

Responses to questions from committee members ......................................... 45

Carroll, Robert J.:

Testimony .......................................................................................................... 3

Prepared statement .......................................................................................... 50

Responses to questions from committee members ......................................... 57

Grassley, Hon. Charles E.:

Prepared statement .......................................................................................... 59

Hassett, Dr. Kevin A.:

Testimony .......................................................................................................... 15

Prepared statement .......................................................................................... 60

Responses to questions from committee members ......................................... 73

Holtz-Eakin, Dr. Douglas:

Testimony .......................................................................................................... 5

Prepared statement .......................................................................................... 76

Responses to questions from committee members ......................................... 87

Jeffords, Hon. James M.:

Opening statement ........................................................................................... 3

Kyl, Hon. Jon:

Opening statement ........................................................................................... 1

Prepared statement .......................................................................................... 90

Markman, Carol C.:

Testimony .......................................................................................................... 17

Prepared statement .......................................................................................... 92

Responses to questions from committee members ......................................... 97
Page

IV

Olson, Nina E.:

Testimony .......................................................................................................... 7

Prepared statement .......................................................................................... 98

Responses to questions from committee members ......................................... 109

COMMUNICATIONS

Capitol Tax Partners ............................................................................................... 115
(1)

BLOWING THE COVER ON THE STEALTH TAX:

EXPOSING THE INDIVIDUAL AMT

MONDAY, MAY 23, 2005

U.S. SENATE,

SUBCOMMITTEE ON TAXATION AND IRS OVERSIGHT,

COMMITTEE ON FINANCE,

Washington, DC.

The hearing was convened, pursuant to notice, at 12:30 p.m., in

room SD–628, Dirksen Senate Office Building, Hon. Jon Kyl (chairman of the subcommittee) presiding.

Also present: Senators Thomas, Crapo, Baucus, Jeffords, and

Wyden.

OPENING STATEMENT OF HON. JON KYL, A U.S. SENATOR

FROM ARIZONA, CHAIRMAN, SUBCOMMITTEE ON TAXATION

AND IRS OVERSIGHT

Senator KYL. Good afternoon. This hearing of the Committee on

Finance, Subcommittee on Taxation and IRS Oversight, will begin.

I am expecting that Senator Jeffords will be here momentarily,

but we may be on a very tight time schedule today, and as a result

we want to move along as quickly as possible.

I will have an announcement to make in about 45 minutes or so,

but it is possible that there will be an effort to close this hearing

after 1 hour. So what I am going to do is to ask all of the witnesses

if they could try to stick with the 5-minute timeframe that we have

for oral testimony.

I know you have submitted testimony for the record, which we

will, of course, accept, and we will try to get through both of the

panels here, at least during the formal part of our discussion.

I will be exceedingly brief with some opening remarks. And Senator Jeffords, now that you are here, I will feel free to proceed with

that.

Let me just say, Senator Grassley is intending to be here as well

a little bit later.

I think we all know that one of the President’s top priorities is

tax reform, an effort that he began earlier this year when he reported a special panel, led by two former members of the Finance

Committee.

It is widely anticipated that, in its July 31st report to the Treasury Secretary, in addition to other proposals, this panel will make

recommendations on how to address the Alternative Minimum Tax,

or AMT.
2

* For more information on this subject, see also, ‘‘Present Law and Background Relating to

the Individual Alternative Minimum Tax,’’ Joint Committee on Taxation staff report, May 20,

2005 (JCX–37–05).

With that July 31st deadline fast approaching, our committee

now begins laying the groundwork for tax reform in the Senate by

holding today’s hearing on the Individual AMT.

Our goal for tax reform and simplification, in my view, must be

to create a tax system that supports continued economic growth

and prosperity by encouraging work, savings, and investment, and

that does not waste taxpayers’ time and effort with needless complexity.

To achieve these goals, Congress must make the individual rates,

the dividend and capital gains rates, and repeal of the estate tax

permanent, and we must repeal the AMT.

Now, the problem with the AMT is, in my view, that it was misguided from the beginning as an attempt to tax the rich, to make

sure that very wealthy taxpayers could not zero out their tax liability by claiming otherwise legitimate deductions and exemptions.

But, as frequently happens, what was originally aimed at the

rich quickly began to affect everyone else. As a result, according to

one report, by the end of the decade, the AMT will reach 35 million

taxpayers, the majority of whom will have incomes below

$100,000.* Clearly, this is something we have to deal with.

Now, the primary reason the AMT has begun invading the middle class is because its parameters—namely, the exemptions, rate

brackets, and phase-out levels—were not indexed for inflation.

But I do not think we should fool ourselves into thinking that we

can adjust the AMT in that way, and therefore solve the problem.

As I said, its real fundamental fallacy is that it attempts to impose

a special tax only on the wealthy, which inevitably ends up discouraging work and hurting economic growth.

So the hearing today is not intended to resolve the debate about

whether to reform AMT or repeal it, whether to offset the cost of

reform or repeal the tax increases or spending cuts, or whether the

costs need not be offset at all, but rather is to begin the process

of educating Senators and the public about the mind-boggling complexity of the AMT and about how the AMT amounts to a stealth

tax that traps many unsuspecting taxpayers.

Today we are going to learn the exact nature of the problem, including the numbers and types of taxpayers who most often fall

into the AMT.

We will learn what taxpayer situations most often trigger the

AMT, including the extent to which it imposes a marriage penalty

and hits families with children particularly hard.

We will hear how the AMT affects otherwise similarly situated

taxpayers who just happen to live in different States very differently, and how much it might cost the Treasury in static terms

to reform or repeal the AMT.

But, most important, we will learn how costly the AMT is currently to the economy in terms of taking productive resources out

of the private sector, in terms of reducing incentives to work and

save, and in terms of administrative complexity imposed on taxpayers as a result of the AMT.

Senator Jeffords?
3

OPENING STATEMENT OF HON. JAMES M. JEFFORDS,

A U.S. SENATOR FROM VERMONT

Senator JEFFORDS. Mr. Chairman, I want to commend you for

having this hearing today, and I want to thank today’s witnesses

for giving us their time and expertise.

It looks like our time will be limited, so I will keep my remarks

brief.

Almost 40 years ago, a handful of wealthy taxpayers escaped

paying taxes, and the minimum tax was born. It has grown like the

weeds since then, today snaring some 3 million taxpayers, with another 30 million filers trapped in the next few years if we do not

act. We need to confront the problems created by the AMT directly

rather than applying a succession of Band-Aids.

The problems are many. Millions and millions of Americans are

wasting time and money in calculating a second tax liability. These

people have not engaged in exotic schemes to lessen their tax burden.

No wonder, then, there is a tremendous frustration from ordinary taxpayers who find that they have additional liability simply

because they have several children or substantial State and local

tax bills. I look forward to the testimony of today’s witnesses. I am

very interested in their ideas on how we should reform this tax

once and for all.

While the AMT should certainly be examined by the President’s

Advisory Panel on Tax Reform, this is just the latest in 5 years’

worth of administrative justifications for doing little or nothing.

Again, I commend Senator Kyl, and I appreciate the witnesses

joining us today to share their expertise. Thank you, Mr. Chairman.

Senator KYL. Thank you very much, Senator Jeffords.

I am going to turn to the panel, next. Our three panelists are:

Mr. Robert Carroll, Deputy Assistant Secretary for Tax Analysis,

U.S. Department of the Treasury; Dr. Douglas Holtz-Eakin, Director, Congressional Budget Office, Washington, DC; and Ms. Nina E.

Olson, National Taxpayer Advocate, Taxpayer Advocate Service in

Washington.

Thank you, lady and gentlemen. We will start with you, Mr. Carroll.

STATEMENT OF ROBERT J. CARROLL, DEPUTY ASSISTANT

SECRETARY FOR TAX ANALYSIS, U.S. DEPARTMENT OF THE

TREASURY, WASHINGTON, DC

Mr. CARROLL. Thank you very much, Mr. Chairman, Senator Jeffords, and distinguished members of the committee. Thank you for

inviting me to appear before your subcommittee to discuss the Individual Alternative Minimum Tax.

When first enacted, the AMT was intended to address a relatively small, targeted problem. Unfortunately, it has had unintended consequences, grown far beyond its original purpose, and

created a far larger problem than it was ever intended to address.

The AMT is intertwined with the rest of the income tax in complex ways. Thus, a long-term solution to the AMT needs to be considered in the context of broader reform of the entire income tax.
4

Originally, in an attempt to address the concern that a small

group of high-income individuals had managed to avoid paying any

income tax, Congress enacted a minimum tax in 1969. At the time,

155 taxpayers with incomes over $200,000 paid no Federal income

tax. But by 2015, the AMT is projected to affect more than 50 million taxpayers under the President’s policy baseline.

Moreover, the AMT has been unsuccessful in ensuring that all

high-income taxpayers pay at least some tax. Several thousand

high-income taxpayers continue to avoid tax liability each year, in

spite of the AMT.

Simply put, the AMT is a second income tax system that runs

parallel to the regular income tax. It is complex, it is unfair, it discourages economic growth. It requires millions of taxpayers to understand and comply with both tax systems, even if they ultimately

have no AMT liability.

Yet, still many taxpayers become unsuspecting and unintended

victims of the AMT, unaware that they will be affected by the tax

until they complete their tax returns.

The major reason the AMT has become such a growing problem

is that, unlike the regular tax, this parallel tax system is not indexed for inflation. Over time, this steadily increases the size and

the scope of the AMT relative to the regular tax.

A higher AMT exemption and the provision to allow all personal

credits to be claimed against the AMT, the so-called AMT patch,

has generally kept the vast majority of taxpayers free from the

reach of the AMT over the past several years, and through the end

of 2005. Indeed, to prevent a large increase in the number of AMT

taxpayers in the near term, the AMT patch has been included in

the major tax cuts enacted in the last several years.

However, the AMT patch, as I mentioned, expires at the end of

this year. The number of taxpayers affected by the AMT will rise

sharply, from 3.8 million in 2005, to 20.5 million in 2006, increasingly affecting middle-income taxpayers when filing their tax returns in the spring of 2007.

By 2015, 51.3 million, or 45 percent of all taxpayers with income

tax, are projected to be subject to the AMT under the President’s

policy baseline. The AMT also increasingly affects families with

children because it does not allow deductions for personal exemptions.

Moreover, because of the phase-out of the AMT exemption, many

unsuspecting AMT taxpayers are subject to an effective marginal

tax rate of 35 percent, even though the maximum statutory AMT

rate is only 28 percent.

The AMT is, in many respects, a poster child for tax reform. It

fails to meet all three of the criteria the President laid out when

creating the advisory panel for reform of the Federal tax system.

It adds significant complexity to this tax system, it restrains economic growth, and it is unfair.

Because the AMT is intertwined with the regular tax, and because budgetary constraints preclude simple AMT repeal, a longterm solution to the AMT problem must be considered in the context of reform of the entire income tax system.
5

This provides us with an opportunity. The current tax system imposes large costs on our economy by distorting the economic decisions of households and businesses.

Reducing these distortions can encourage economic growth and

improve living standards. Complexity undermines our system of

voluntary compliance, leaving many taxpayers with the sense that

the system is unfair because others use special provisions to pay

less tax. This leads taxpayers to believe that they, too, should seek

out tax-minimizing strategies.

The U.S. tax system also imposes a compliance burden on our

economy, estimated at $130 billion annually, reflecting both direct

out-of-pocket costs and the opportunity costs of taxpayers’ time

spent to learn about the tax laws, to keep and assemble necessary

records, and prepare and submit tax returns. This translates into

6 billion hours per year, and is equivalent to 1.5 million workers

each working 2,000 hours per year. Certainly a simpler tax system

could decrease these burdens and put these resources to more productive uses. The President has made reforming our tax system a

key priority. The President’s Advisory Panel on Federal Tax Reform is developing options to reform our tax system to make it simpler, fairer, and more pro-growth. The panel brings a fresh perspective to tax reform, and the members are not wedded to particular

approaches to tax reform. We look forward to the panel’s final report to the Secretary of the Treasury, due by July 31st. The options

developed by the panel will provide critical input for the recommendations on reform, including recommendations to address

the AMT problem. The Secretary will then make recommendations

to the President, and the President to the Congress.

Thank you again, Mr. Chairman, for the opportunity to appear

before you today. We look forward to working together with this

committee on the AMT issue, and on tax reform in general. I would

be pleased to answer any questions.

Senator KYL. Thank you, Mr. Carroll. I should have noted that

this first panel has a very difficult job, especially with a time limit

of 5 minutes, to provide us all the information we need about the

history, the background, the scope, and expected impact of the

AMT problem.

So, I really appreciate all of you trying to tackle that within the

tight timeframes. Mr. Carroll, thank you for your testimony.

[The prepared statement of Mr. Carroll appears in the appendix.]

STATEMENT OF DR. DOUGLAS HOLTZ-EAKIN, DIRECTOR,

CONGRESSIONAL BUDGET OFFICE, WASHINGTON, DC

Dr. HOLTZ-EAKIN. Mr. Chairman, Senator Jeffords, members of

the committee, the CBO is pleased to be here today. Given the

tight timeframe, I will not even try to tackle that. Instead, I will

direct you to the written testimony, and I will make five points,

quickly.

The first, is that, as has been noted, the AMT is growing quite

rapidly, whether viewed as affecting a certain number of taxpayers

or its importance in the revenue scheme.

The chart on my left shows you the rising importance of the AMT

in the CBO baseline, where it rises from under 5 million taxpayers
6

now to 29 million taxpayers in 2010. It grows to raise $95 billion

in that year.

What is, I think, less appreciated, if we show the next chart, is

that if one allows this particular construct to evolve over a long,

long time—and I will show you a chart that goes out to 2050 that

was in a 2003 report we did—the AMT begins to affect 70 percent

of taxpayers by 2050 and raise 20 percent of all income taxes.

Now, the source of this growth has been commented upon. Over

the long term, it is the fact that the tax is not indexed for inflation.

Over the near term, it is intertwined with decisions that the Congress will make about the projected rise in the regular income tax

under current law with the sunset of the tax legislation of the past

3 years.

Now, who will pay this tax? Increasingly, it will be paid by the

middle-income taxpayer. The most striking rise over the 10-year

baseline is among those taxpayers who have between $50,000 and

$100,000 of income.

They are more likely to be married and they are more likely to

have children. Cut differently, it turns out that it is most likely to

affect those who deduct their State and local income taxes and use

personal exemptions.

Now, from a budgetary perspective, we outlined a couple of potential options that the Congress might consider in thinking about

reducing the impact of the AMT.

At the most extreme, one could repeal the AMT, eliminate its impact on 29 million taxpayers in 2010. That would come at a cost

of about $611 billion, in our estimates, which are done with the

help of the Joint Committee on Taxation.

Moving down in order of less extensive impacts, 22 million taxpayers would be removed simply by indexing the AMT for inflation.

That would cost, in revenue terms, $385 billion.

Allowing personal exemptions to be used under the AMT would

remove 18 million taxpayers in 2010, at a cost of $343 billion.

Twelve million taxpayers would no longer pay the AMT if they

were permitted to deduct their State and local income taxes and

sales taxes. That would cost $423 billion.

Finally, if one were to permit a standard deduction under the

AMT, it would remove from the rolls 6 million taxpayers at a cost

of $64 billion over the 10-year horizon.

Now, I want to emphasize that these are estimates that are done

relatively to the CBO current law baseline, so those assume that

the regular income tax provisions sunset in 2010 and go back to

their 2000 configuration in 2011. If you were to do the estimates

relative to, for example, the President’s policy baseline, the numbers would be considerably different.

Let me close with a few thoughts on the AMT as tax policy, not

as a budgetary phenomenon. The question often arises about

whether the AMT is a problem. I think there has been great testimony, both in its growing extent of use and the complexity it imposes on individual taxpayers, that it may be useful to address it

from a tax policy perspective. Sometimes it is promoted that perhaps the AMT by itself would be a better tax than would be the

regular individual income tax.
7

There, two claims are typically made. One, that it is a relatively

flat tax, and for that reason does not have a progressive structure

that would interfere with economic decisions for tax purposes.

That is usually an over-statement of the case. There are, in fact,

four marginal tax rates imbedded in the Alternative Minimum Tax,

from 26 to 32.5 percent, rising to 35 percent, and then dropping

back down to 28. So in practice, the AMT is far less flat than it

might appear on paper.

The second claim is typically that the AMT has a nice, broad

base, but it is useful for the committee to remember that that base

was designed in conjunction with the regular income tax.

As a stand-alone tax, it is neither as broad as would be one

under comprehensive tax reform, and in some cases it is broad in

a fashion that would probably be viewed by the Congress and most

tax policy experts as undesirable. For example, the absence of the

ability to use personal exemptions means that the tax is not adjusted for family size in any way.

I am happy for the chance to be here, and look forward to answering your questions.

Senator KYL. Thank you very much. You do have a lot to cover,

and I appreciate that very much.

[The prepared statement of Dr. Holtz-Eakin appears in the appendix.]

Senator KYL. Ms. Olson?

STATEMENT OF NINA E. OLSON, NATIONAL TAXPAYER

ADVOCATE, TAXPAYER ADVOCATE SERVICE, WASHINGTON, DC

Ms. OLSON. Mr. Chairman, Senator Jeffords, and distinguished

members of the subcommittee, thank you for inviting me today to

testify at this hearing, which is intriguingly titled, ‘‘Blowing the

Cover on the Stealth Tax: Exposing the Individual AMT.’’

Since I became the National Taxpayer Advocate 4 years ago, I

have tried to further this mission by repeatedly calling attention to

the deficiencies in the Individual AMT. 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.

When the concept of a minimum tax first came into the Internal

Revenue Code in 1969, after the Treasury Department reported

that 155 taxpayers with adjusted gross incomes above $200,000

had paid no tax in 1966, the intent was to prevent wealthy taxpayers from using tax preferences, generally available only to

them, to avoid paying their fair share of taxes.

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

For 2002, the Treasury Department found that fully 51 percent

of aggregate AMT tax preference dollars are attributable to the disallowance of State and local tax deductions under the AMT, and 22

percent of the aggregate AMT tax preference dollars are attributable to the disallowance of personal exemptions.
8

Thus, nearly three-quarters of the increase in income subject to

taxation under the AMT results simply because of the taxpayer’s

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, referred to as the AMT exemption amount, is not indexed

for inflation.

When Congress first enacted a minimum tax in 1969, the exemp- tion amount was $30,000 for all taxpayers. If Congress had indexed

that amount, it would be equal to $157,400 today. Instead, the exemption amount, after a temporary increase that will expire after

2005, is $45,000 for married taxpayers and $33,750 for most others.

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

by middle-income taxpayers, which are added back into income

under the AMT, are indexed for inflation.

As a result of these diverging trends, more income becomes subject to the AMT each year. It is now projected that in 2010, 34.8

million individual taxpayers, or 34 percent of individual filers who

pay income tax, will be subject to the AMT.

Among the categories of taxpayers hardest hit are 94 percent of married couples with adjusted gross income between $75,000 and

$100,000 and two or more children that will owe the AMT. That

is 94 percent. Heaven forbid you should be the Brady Bunch, with

six kids.

The burden that the AMT imposes is substantial. In dollar

terms, it is estimated that the average AMT taxpayer owed an additional $6,000 in tax in 2004. In terms of complexity and time,

taxpayers often must complete a 12-line worksheet, read 8 pages

of instructions, and complete a 55-line form simply to determine

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

that 75 percent of AMT taxpayers hire practitioners to prepare

their returns.

At some point in the next few years, we will reach a point where

it will cost more for Congress to repeal the AMT than to repeal the

regular income tax and leave the AMT intact. 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 that 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 it will be to repeal it.

Clearly, there are many practical policy and political challenges

to repealing the AMT, but these challenges will continue to grow

over time as the government, absent Congressional action, becomes

increasingly dependent on revenue.

With all of the problems inherent in the AMT, I do not think taxpayers will stand for it when the AMT begins to hit tens of millions
9

of taxpayers within the next few years. The AMT is a time bomb

with a short fuse. Although munitions experts may say that such

a device is an impossibility, I think it accurately depicts what will

happen in the next few years. In the short run, we will have a

blow-up at the end of next year when the lowered exemption

amount expires and the lower exemption amount pulls about 21

million taxpayers into the AMT. In the long run, the AMT is set

to detonate within the next 5 years. I strongly urge Congress to act

before the AMT explosion occurs.

Thank you, and good luck.

Senator KYL. Thank you very much.

[The prepared statement of Ms. Olson appears in the appendix.]

Senator KYL. As I indicated at the beginning, if the so-called 2-

hour rule is invoked, precluding this committee from meeting beyond the hour of 1:30, we really will not have an opportunity to finish our business with this hearing today.

But given the fact that that is a possibility, what I would like

to try to do is to at least leave enough time in the schedule to hear

from the next panel, which means that we have no more than

about 15 minutes.

By my calculation, if each of us take a couple of minutes instead

of our usual 10, we could at least each get an opportunity to question each of these witnesses. So, I am going to voluntarily take 2

minutes, myself, to begin, and see if everyone else will fall in line

with that so that we can then get to the next panel.

Ms. Olson, how can significant medical expenses trigger AMT liability?

Ms. OLSON. Well, if they fall within a certain range, they get

added back into the AMT taxable income. It is one of the tax preferences that are added back in. There is a member of a governing

body that I have personal knowledge of every year who says to me,

what are you doing about the AMT? He is paying AMT on his medical expenses.

Senator KYL. And these are, for the most part, unforeseen expenses, which can, therefore, substantially increase your tax liability under the AMT.

Ms. OLSON. As a result of catastrophic illness or disabilities.

Senator KYL. All right.

Let me ask you—and perhaps Mr. Carroll knows the answer to

this as well—how many taxpayers each year fall into the AMT

without knowing about it until they hear from the IRS? Do you

have any idea?

Mr. CARROLL. It is a little bit difficult to say. But certainly, in

the last several years, there probably have not been very many,

meaning fewer than several million. There are only 3.8 million taxpayers subject to the AMT that we project for 2005. So over the

last several years, it might be on the order of several hundred

thousand, maybe a bit more than that.

Senator KYL. All right.

Mr. CARROLL. The real issue is going from 2005 to 2006, when

we have this very large increase in the number of people.

Senator KYL. And my understanding is, it increases from 3.8 million to over 20 million next year who will be required to pay.

Mr. CARROLL. Exactly.
10

Senator KYL. Is that correct?

Mr. CARROLL. Exactly. So going from 2005 to 2006, it will number 16.7 million.

Senator KYL. It will catch a lot of people who have no idea they

are going to be caught by it.

Anybody have an estimate real quickly?

Ms. OLSON. We know that, in tax year 2001, 176,000 taxpayers who faced AMT also had to pay $103 million in estimated tax penalties, which means they did not know.

Senator KYL. Which means they did not anticipate it.

Ms. OLSON. Right.

Senator KYL. All right. Thanks very much.

Senator Jeffords?

Senator JEFFORDS. Mr. Carroll, you note that Congress has included, in each of the major tax cuts, protections against large increases in AMT filers. But surely it would have been possible in the

2001 Act to have done this for the entire decade. Can you explain

why Treasury did not urge greater and longer-term AMT protections in 2001, or any budget year since?

Mr. CARROLL. I should point out, as you also pointed out, what

has been done over the last several years. The President, working

with Congress, has ensured that in the near term the AMT problem has not touched millions and millions and millions of taxpayers.

It is the case that, in the longer term, the number of taxpayers

affected by the AMT will grow very, very rapidly. I had mentioned

the 50 million, over 50 million taxpayers under the President’s policy baseline. Doug Holtz-Eakin had mentioned what those numbers

were under the current-law baseline.

It is the President’s view that the AMT patch, as it is called, will

get us through 2005. It is very important that we develop a longterm solution to this problem, and it is something that the Tax

Panel is very much focused on.

It is something that, when the Secretary first met with the panel

back in January, he specifically asked them to include solutions to

the AMT problem in their options that they are working on.

I just should point out that when we have this large increase in

the number of taxpayers who will become subject to the AMT between tax year 2005 and tax year 2006, it is in the spring of

2007—I think Ms. Olson made a reference to this point—when

those additional 16.7 million individuals who become subject to the

AMT file their tax returns in 2007 when this is really a particular

problem.

So, it is certainly the President’s hope and the administration’s

hope that a long-term solution can be developed, together with tax

reform, before then.

Senator JEFFORDS. Ms. Olson, as you know, the administration’s

budget proposal this year did not recommend even an extension of

the current AMT. Deferring to the work of the Tax Reform Panel,

what do you think would happen to taxpayers if we did not extend

that by the end of the year, but maybe did so sometime next year?

Ms. OLSON. So that there was a gap or they would be filing 1

year and paying the tax and then seeking a refund? I am not sure

I understand the question. Or that there is a year where they
11

would be pulled in and then a year that they would be pulled out?

Either circumstance would be a disaster.

Senator JEFFORDS. Let us take them one at a time.

Ms. OLSON. Yes. Well, either circumstance would be a disaster.

Taxpayers do not do well when we are changing rules in midstream. The IRS does not do well. We would probably be flooded

with letters over and over again, and people would be confused,

and the IRS might have to waive penalties. It would just be a disaster.

Senator JEFFORDS. Thank you, Mr. Chairman.

Senator KYL. Thank you, Senator Jeffords.

Incidentally, I will simply announce, unless there is objection,

that members will have until close of business tomorrow to submit

additional questions to these witnesses, since we clearly will not

have time to get them all asked today.

Without objection, it is ordered.

Senator Thomas?

Senator THOMAS. Just very briefly, what is the impact on unincorporated small businesses, Ms. Olson?

Ms. OLSON. Well, one example that we give is that Congress has

enacted a very liberal Section 179 depreciation, where up to

$100,000 in equipment purchases can be written off.

In general, the difference between accelerated and straight-line

depreciation is considered a tax preference and gets added back in.

So, small business owners may go ahead and make an investment,

only to find out that they are owing more tax as a result of that

investment, even though they calculate it in another way.

Senator THOMAS. Thank you.

This will be very difficult for 15 seconds each, but what would

be your solution? Would you eliminate it? Would you alter it? What

do you think? In general terms, what would you do?

Mr. CARROLL. The administration is very much focused on tax reform, broad reform of the tax system. We are waiting to hear back

from the tax panel. We are of the view that really the only longterm solution to the AMT problem needs to be dealt with in the

context of broad reform of the tax system, because it is in such an

intimate way intertwined with the regular tax.

Senator THOMAS. I see.

Dr. HOLTZ-EAKIN. I think most tax policy experts would say that

you have to address the AMT and the regular tax simultaneously,

that the existence of the AMT is evidence to some extent that the

regular tax itself has problems.

Senator THOMAS. So you all both would see that it remains, but

in a different context, apparently.

Ms. Olson?

Ms. OLSON. Oh, I think you need to repeal it and deal with the

impact that it has on the tax system in a mature and reasonable

fashion. It is silly to have two systems.

Senator THOMAS. All right. Thank you.

Senator KYL. You are succinct. Thank you very much, Senator

Thomas.

Now, Senator Wyden?

Senator WYDEN. Thank you, Mr. Chairman. I am very pleased,

Mr. Chairman, to be with you and Chairman Grassley and Senator
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Baucus on the legislation we are introducing now to repeal this tax.

I would just say to the panel and to colleagues, this is the worst

of all worlds, the current situation.

What was supposed to be a targeted provision to make sure that

the most affluent would have to pay something has resulted in a

situation where now more affluent people pay no taxes at all than

when this whole debate began with respect to the AMT, and I

think we have also seen the kind of bureaucratic water torture that

middle-class people are pushed through, through the questions that

we have already established. So, I am very pleased to be part of

a bipartisan effort to turn this around.

Mr. Carroll, my question for you is, the administration wants to

lower tax rates right now for the most affluent in our country and

also give them more itemized deductions, while at the same time

saying that AMT reform has to wait. How is that fair?

Mr. CARROLL. What the administration has put a priority on is

permanence, repeal of the sunsets. That will help encourage economic growth, put the right incentives in place, give taxpayers

more certainty as households and businesses arrange their affairs.

Stability of the tax system is certainly one of the things that is important to allow taxpayers, individuals and businesses, to make decisions.

Another thing on the permanence provisions, the repeal of the

sunsets achieves——

Senator WYDEN. No. I just would like to get an answer to the

question. Tax rates under the administration’s proposal would get

acted on immediately. The deductions would get acted on immediately, but the whole debate about AMT would have to wait. How

is that fair?

Mr. CARROLL. If I just might finish the thought. Another thing

that the permanence provisions attain is, they lower the fraction.

They basically keep the fraction of Federal Government revenues

relative to GDP a little above 18 percent, which is about their historic norm over the last 20, 30, 40, 50 years. So, that is one of the

things that they achieve.

It is the administration’s view that reform of the income tax, as

directed to the Tax Panel, should be revenue-neutral and that

therefore the long-term solution to the AMT problem should be

dealt with in a revenue-neutral way, keeping in line with the 18

percent of GDP.

Senator WYDEN. I will not try a third time to get an answer to

my question, but it seems to me that the administration is raising

taxes on middle-class families now by not addressing the AMT.

Can you tell me why that analysis would be incorrect? Because

I am talking to middle-class families in Oregon who come to town

meetings, and they tell me that they would like to see tax relief

here, because they are getting clobbered now. They got clobbered

April 15th. It seems to me that the administration is raising taxes

on all those people by not addressing it now. Now, how would that

analysis be incorrect?

Mr. CARROLL. Well, one thing that the administration has done,

working with Congress, is it has passed the AMT patch, or provisions related to it, in pretty much each of the major tax bills that

have worked their way through Congress in the last 4 years. That
13

AMT patch has prevented a large number of individuals becoming

subject to the AMT.

So one thing I would observe is that, through 2005, we have not

had a large increase in the number of taxpayers subject to the

AMT because the President has worked with the Congress to

achieve that result. It is the hope of the administration that the

AMT problem can be solved, if you will, in the context of tax reform, through broad reform of the income tax.

That can occur prior to certainly the spring of 2007, when we

have this very large increase in the number of folks who will be

subject to the AMT, when those folks are filing their tax returns.

Senator WYDEN. My time is up, Mr. Chairman.

Senator KYL. Thank you, Senator Wyden.

I would now like to turn to Senator Baucus. With the committee’s concurrence, when Senator Baucus has concluded his questioning, then we will turn to the second panel.

Senator CRAPO. Mr. Chairman?

Senator KYL. Oh, I am sorry. I forgot Senator Crapo. My apologies. Senator Crapo, then Senator Baucus.

Senator CRAPO. I do not mind letting Senator Baucus go first.

Senator BAUCUS. No, no, no. You were here first. Go ahead.

Senator CRAPO. Thank you, Mr. Chairman.

I would just like to say, in comment to Senator Wyden, I do not

think it is accurate to portray the President’s position as one of

wanting the AMT to be left alone.

In fact, as was indicated, the AMT has been handled by the administration in each of the tax proposals that it has put before

Congress, and the administration is proposing to handle AMT

today in terms of overall tax reform.

The question that I have is, first of all, how many tax returns

are there? Do we have a broad, general number to that?

Mr. CARROLL. Roughly 130 million.

Senator CRAPO. One hundred and thirty million.

And in the 2006 tax year, 1 year from now, 16.7 million of the

130 million tax returns are going to be included in AMT coverage.

Is that correct?

Mr. CARROLL. It is actually higher. In tax year 2006, we project

20.5 million taxpayers will be subject to the AMT. The 16.7 is the

increase relative to 2005, sir.

Senator CRAPO. That is the additional amount. There is 3.8 million now.

Mr. CARROLL. Right.

Senator CRAPO. And then another 16.7 million. I believe it was

you, Ms. Olson, who said that the average tax increase for those

now covered was $6,000.

Ms. OLSON. In 2004. Additionally, yes.

Senator CRAPO. For 2004. The question I want to get to in my

remaining time—and maybe you know the answer to this, Ms.

Olson, but whoever could answer this—is for those 16.7 million,

who 12 months from today, or in the tax year starting next year,

are going to get covered, do we have an idea about the amount of

taxes that they are going to pay? If we do not have any specific

numbers, are we talking a couple of hundred dollars more in taxes

or are we talking thousands of more dollars of taxes per return?
14

Ms. OLSON. I do not know. I would have to go back and work on

that.

Dr. HOLTZ-EAKIN. The total that it would cost to extend the 2005

treatment to 2006, unless stopped, would be about $30 billion in

the aggregate.

Senator CRAPO. So if you divided 16.7 million into $30 billion,

you get an average for the cost.

Dr. HOLTZ-EAKIN. You get an average for the cost.

Senator CRAPO. All right. Thank you very much.

Senator KYL. Senator Baucus?

OPENING STATEMENT OF HON. MAX BAUCUS,

A U.S. SENATOR FROM MONTANA

Senator BAUCUS. Thank you, Mr. Chairman.

Mr. Chairman, I want to thank you and Senator Jeffords for calling this hearing today on the Alternative Minimum Tax. This

weekend, millions of Americans watched in suspense as Anakin

Skywalker was lured to the dark side and became Darth Vader.

What millions of those same Americans may not be aware of is another Darth Vader lurking in our tax code, and that is the Alternative Minimum Tax, otherwise known as the AMT.

The AMT has many of the same qualities as Anakin Skywalker.

The AMT was supposed to bring order and fairness to the tax

world, but it eventually got off on the wrong path and became a

threat to middle-income taxpayers. Both Skywalker and the AMT

started off with great intentions, but eventually went astray.

Now we have the Darth Vader of the tax code bearing down on

millions of unsuspecting families. If we do not act, the Congressional Research Service estimates that in 2006 the family-unfriendly AMT will hit middle-income families earning $63,000 with

three children.

What was once meant to ensure a handful of millionaires did not

eliminate all taxes through excessive deductions is now meaning

millions of working families, including thousands in my home State

of Montana, are subject to a higher stealth tax. It is truly bizarre.

Mr. Chairman, we designed a tax saying more children are excessive deductions and duly paying your State taxes a bad thing. Not

only is the AMT unfair and poorly targeted, it is an awful mess to

figure out.

We have heard testimony today from our National Taxpayer Advocate who has singled out this item as causing the most complexity for individual taxpayers, but also from a tax practitioner

who has seen first-hand how difficult it is for her clients.

I look forward to hearing from our other witnesses, Mr. Chairman. They have many good ideas for reform or repeal of the AMT.

I do look forward to working with my colleagues on the committee

to craft a bill that will put an end to the Darth Vader of the tax

code without any sequels.

Mr. Chairman, thank you very much. As you know, myself and

the Chairman of the committee are introducing a bill to repeal

AMT, along with yourself and Senator Wyden, and soon others, as

co-sponsors. I think it is about time we do something.

Senator KYL. We will let you write the opening paragraph on the

statement on it. That would be great. [Laughter.] Thank you very
15

much, Senator Baucus. I really do appreciate the indulgence of the

members of the committee here, and especially the panelists. We

will leave the record open for submission of questions, and appreciate your cooperation very, very much.

Now let me call to the dais the second panel, which is our private

sector panel. Dr. Kevin Hassett is director of economic policy studies at the American Enterprise Institute here in Washington, DC;

Ms. Carol Markman is a CPA and president of the National Conference of CPA Practitioners, and is a partner at Feldman, Meinberg and Company, LLP, from Jericho, NY; and Dr. Leonard Burman is a senior fellow and co-director of the Urban-Brookings Tax

Policy Center at The Urban Institute, Washington, DC.

We thank all three of you for being here. If you can keep to 5

minutes, we can get all of your testimony in before the bottom of

the hour. I appreciate all of you being here.

Dr. Hassett, let me begin with you, please.

STATEMENT OF DR. KEVIN A. HASSETT, DIRECTOR OF ECONOMIC POLICY STUDIES, AMERICAN ENTERPRISE INSTITUTE, WASHINGTON, DC

Dr. HASSETT. Thank you very much, Mr. Chairman, Senators

Baucus, Jeffords, and the rest. It is an honor and pleasure to be

here. I regret not having brought my light saber after hearing Mr.

Baucus’s introduction. [Laughter.]

I think that every professional agrees that the Alternative Minimum Tax is an abomination. My first recommendation to this

panel is that reliance on stop-gap measures, or patches, as Mr.

Carroll referred to them, be abandoned.

This is because current long-run forecasts include ever more significant amounts of revenues from the AMT that will not be realized if successive temporary stop-gaps are adopted. Elected officials

will base their decisions on highly misleading revenue forecasts if

they rely on these misleading baseline projections.

We are also very, very close, as you mentioned, to the precipice

on the AMT. I prepared in my testimony a simple example of exactly how close we are. Figures 1 and 2 in my testimony indicate

in which State a family with three children and two adults, with

an income of $150,000 and normal State deductions, will be on the

AMT.

The top panel, Figure 1, shows there are very few States where

that is the case. But next year, where the exemption goes back

down or the patch is removed, you can see that this very milquetoast family is on the AMT in virtually every State.

I also, in the second chart, used shading to indicate the big variation in AMT liability, depending on which State that you are in.

So, I think that action on the AMT is urgent, and I think giving

up stop-gap measures is important as well.

Now, why do we need to fix this AMT? Well, I think there are

two reasons. First, as has been mentioned, the AMT increases tax

complexity and compliance costs for the millions of taxpayers who

must calculate their taxes twice.

But, second, and I believe more important, the AMT raises marginal tax rates on individuals who are put on to the AMT more

often than not. In my testimony, I review a recent paper by Jim
16

Poterba and Dan Feenberg that calculates specifically how those

rates are changing.

I think that current forecasts assume that significant AMT revenue will be realized. Indeed, if you let the AMT run forward, then

tax revenues rise as a share of GDP to a level significantly above

the historical average over the next 10 years.

Beyond that, even more, by 2050, tax receipts will increase to

24.7 percent of GDP as the AMT gobbles up more and more taxpayers with a code that is not indexed to inflation.

Senator KYL. By what year is that?

Dr. HASSETT. 2050.

Senator KYL. Thanks.

Dr. HASSETT. These are CBO numbers referenced in my testimony.

Accordingly, I would have to disagree with some of the statements that I heard on the last panel, that it might be advisable to

have a revenue-neutral tax reform. Exactly where you stop with

the neutrality is certainly a judgment call, and in the near term

these pressures are significantly weaker, of course. But in the long

run, revenue neutrality would push revenue to GDP to an unprecedented height.

In the near term, if the committee wishes to consider offsets to

reduce the fiscal impact of the AMT, certainly they will refer to

both possible tax changes and spending changes. In the remainder

of my testimony, I just wanted to highlight the fact that I think

that the case for spending changes is pretty strong, as you can see

in the charts in my testimony.

Figures 4 and 5 help illustrate how much spending has skyrocketed. They compare current baseline spending and revenue to

what was projected to occur in the 2000 CBO budget outlook. Figure 4 documents that the difference in projected revenue is $180

billion in 2006, shrinking to only $65 billion by 2009.

This can be seen in Figure 5. The difference in spending is much

larger: a striking $425 billion in 2006, climbing to $535 billion in

2009.

From this comparison, it appears that spending increases that

were unanticipated in 2000, more than lower taxes, explain the

transition from projected budget surpluses to budget deficits.

If these pictures suggest that spending is an important additional source of the fiscal deterioration, then one might wish to explore what changes to spending would be required if one wanted

to repeal the AMT. I did that in my testimony as well.

Because spending is projected to increase over the next 10 years,

the cost of eliminating the AMT could plausibly be offset with relatively small reductions in spending growth, without actually reducing spending itself. The numbers, again, are in my testimony.

While these cuts may seem politically impossible, it is worth noting that spending would be extraordinarily higher than it was forecast to be a little more than 5 years ago, even after these reductions.

Now, I would seek to reduce spending while repealing the AMT.

I understand that others would prefer alternative approaches to

reaching fiscal balance in the near term.
17

The AMT is such a terrible tax, however, that I hope strategies

for achieving AMT reform in a responsible manner will receive the

careful scrutiny of this committee, and that disagreement concerning the merits of the different approaches does not become an

obstacle to the reform that is necessary and urgently needed.

Thank you.

Senator KYL. Thank you. Thank you, Dr. Hassett.

[The prepared statement of Dr. Hassett appears in the appendix.]

Senator KYL. Ms. Markman?

STATEMENT OF CAROL C. MARKMAN, CPA, PRESIDENT, NATIONAL CONFERENCE OF CPA PRACTITIONERS; AND PARTNER AT FELDMAN, MEINBERG AND COMPANY, LLP, JERICHO, NY

Ms. MARKMAN. Yes. Good afternoon.

I am a CPA, and I have been in practice for over 25 years. As

you mentioned, I am president of an organization that represents

CPAs in public practice. The members of NCCPAP own and operate local and regional practice units ranging in size from sole proprietors to organizations with many CPA owners. We estimate that

our members serve more than a half a million businesses and individual clients in every State.

I have been asked to provide anecdotal information about how

the AMT affects our members’ clients, the taxpayers of America.

The NCCPAP Tax Committee collected individual tax returns from

our members where the taxpayer was required to pay AMT. We

analyzed these returns to determine the reasons for the presence

of the AMT.

The most common reasons we saw were the large individual

itemized deductions, such as the State and local tax, and miscellaneous itemized deductions. However, a colleague told me about a

Federal income tax return of a single father with three children.

He earned a little over $70,000. He had no other income and he

claimed the standard deduction.

The taxpayer was required to pay $100 in AMT on his 2002 return. The trigger for the AMT was the exemption for his three children. A taxpayer who is otherwise eligible to file a 1040–EZ should

not have to be concerned about the AMT.

One of the other tax returns we reviewed concerned a retired single woman with no dependents. Her 2003 adjusted gross income

was about $76,000. It consisted mostly of Social Security, interest,

dividends, and net rental income.

She paid almost $2,700 in AMT, which was almost 30 percent of

her Federal tax liability, because of her relatively large real estate

taxes and her income from some tax-exempt private activity bonds.

She was quite annoyed and could not believe that she was in the

target group for this tax.

Another tax return concerned a married couple with four children. Both spouses worked outside the home. They earned a total

of about $152,000. They had less than $1,000 of interest and dividend income in 2004, but their State and local taxes were almost

$17,000. They had to pay almost $1,000 in AMT. They had one

child in college and one who will begin college next year. They are

not like the 155 taxpayers who paid no tax in 1969.
18

One of the most difficult AMT add-backs to explain to our clients

is the one for employee business expenses. One tax return we reviewed was for a single taxpayer with about $90,000 worth of income. He was an outside salesman and had about $20,000 of miscellaneous itemized deductions, travel, meals, et cetera. He was

subject to over $2,000 in AMT, 16 percent of his tax liability.

One of the issues that we dealt with was a taxpayer who loses

the tax benefit of the cost of producing income. If the taxpayer receives an award for damages from a lawsuit and the attorney is

paid legal fees from the settlement, those legal fees are not permitted for the AMT.

For the tax return that I want to bring to your attention, the taxpayer received a settlement because a stockbroker churned the taxpayers’ investment accounts. The taxpayers, who suffered capital

losses, were able to offset the settlement against capital gains for

regular tax purposes.

The taxpayers were retired and they had no taxable income for

the year of the settlement. However, they were subject to almost

$20,000 of Alternative Minimum Tax because the legal fees were

not an allowable deduction for AMT purposes.

The AMT has been called the ‘‘acutely messy tax,’’ and it is a

perfect example of the tax law giving with one hand and taking

away with the other. The regular tax rates have been lowered significantly, but the AMT rates have not changed in recent times and

the exemption amounts have not been indexed for inflation. If nothing is done to change the tax law, as you have heard, more than

a third of taxpayers will be subject to the AMT by 2010.

Although NCCPAP’s position is that the AMT should be repealed, there may, in fact, be a place for the AMT in the Tax Code.

However, the AMT certainly should not affect those taxpayers with

moderate income, a few children, and real estate taxes on their

principal residence, wherever they may live.

Thank you for the opportunity. NCCPAP stands ready to supply

you with additional anecdotal information if that would be helpful.

Thank you.

Senator KYL. It has been very helpful. Thank you, Ms. Markman.

[The prepared statement of Ms. Markman appears in the appendix.].

Senator KYL. Dr. Burman?

STATEMENT OF DR. LEONARD E. BURMAN, SENIOR FELLOW

AND CO-DIRECTOR, URBAN-BROOKINGS TAX POLICY CENTER, THE URBAN INSTITUTE, WASHINGTON, DC

Dr. BURMAN. Thank you, Mr. Chairman, Ranking Member Jeffords, and members of the subcommittee.

I hope you will indulge me, but I am going to try to skip over

things that people have already said.

I do have one point. Actually, I can answer the question from Mr.

Crapo. According to our estimates, AMT revenue, per taxpayer, in

2006, would be about $3,000. It is actually coming down over time

as more and more middle-income taxpayers get subject to the tax.

Though it sounds like it might be good news, it is actually an indication of how bad the tax is.
19

Now, this issue has been understood for years. The Treasury Department, CBO, and others have been doing great analysis on this.

The question is, why is it so hard to fix?

I have one prop, although not as big as CBO’s. It is kind of like

the old horror movie, ‘‘The Blob.’’ This poster says, ‘‘Indescribable,

indestructible, nothing can stop it.’’

Well, the AMT makes the tax system indescribable for many ordinary taxpayers, and even the Tax Reform Act of 1986 could not

destroy it, and the Tax Acts of 2001, 2003, and 2004 actually ended

up feeding the beast. So far, even though temporary patches have

slowed it down, nothing has stopped it.

The problem is that the AMT will bring in a lot of revenue over

the next 10 years, which would have to be made up somewhere else

if the AMT were eliminated or restrained. Kevin suggests spending

cuts. Given Congress’ recent history, I might suggest that you

might also need to raise taxes as well.

Politically, it would be hard to do those things. But extracting

from political concerns, one of the great luxuries of being in my job

is that it is actually not that hard to fix or eliminate the AMT, and

you do not need to wait for fundamental tax reform to do it. So,

I will discuss some options to accomplish that.

Just a couple of points before. One issue that Ms. Olson brought

up was AMT preference items. They are mostly middle-class tax

preferences. State and local tax deductions are half of the total.

Personal exemptions are a little bit more than a fifth, and so are

miscellaneous itemized deductions.

That is, 90 percent of the AMT tax preference items have nothing to do with tax sheltering. Well, why has the AMT grown so

much over time? There are really two major factors. One is the failure to index the AMT for inflation. Second is the 2001–2004 tax

cuts. Those lowered regular income tax rates, but except for a temporary fix, they did not do anything about the AMT.

If the 2001–2004 tax cuts had not been enacted, the number of

people on the AMT by 2010 would fall from 30.9 million to 14.4

million. If the AMT had been indexed for inflation all along, there

would be 400,000 people on the AMT.

A perverse effect of those tax cuts is that the AMT actually takes

back almost a third of the 2001–2004 tax cuts, so a lot of people

thought they were getting a big cut when their rates were reduced,

and will be surprised to find that the AMT rate is what prevails.

Another factor. This sort of relates to Mr. Carroll’s testimony.

Part of the administration’s revenue projections are counting on a

lot of AMT revenue. I think Kevin also made this point. By 2015,

AMT revenues are supposed to represent 1 percent of GDP. It is

not going to happen, but it means that we are sort of budgeting in

a kind of fantasy world here.

I am going to skip over the demographics and go to some solutions.

So what could you do about it? CBO options show a number of

ways to reduce the number of AMT taxpayers, but as Doug pointed

out, they would add to the deficit significantly.

There are ways to fix the AMT without adding to the deficit. One

way would be to repeal the tax and raise ordinary income tax rates.
20

This sounds like a bad option because the rate increases would be

fairly significant.

In 2010, you would need a 9 percent across-the-board tax increase. That is, the top rate would go from 35 percent to 38 percent. If you actually targeted those rate increases to the people who

are likely to pay the AMT, the top rate would go from 35 percent

to 44 percent. It sounds like a lot, but it is actually an indicator

of how much revenue the AMT is bringing in.

Senator KYL. Dr. Burman, excuse me. There are rules and I must

stop you right now. I am going to ask you to continue in just a second.

But first let me say, without objection, I am going to insert in

the record a statement of the chairman of the committee, Senator

Chuck Grassley.

[The prepared statement of Senator Grassley appears in the appendix.]

Senator KYL. Second, I have to advise the witnesses and members of the committee that, because Rule 5A of the Standing Rule

26 of the Senate has been invoked by Senator Reid, the Senate

having convened at 11:30 this morning, this committee cannot meet

past the hour of 1:30 p.m.

And even though it would be rare that such an objection would

be lodged against the Finance Committee meeting, especially on a

bipartisan matter like the AMT, it has been invoked and therefore

we have no option but to adjourn the meeting at this time.

It would be my intention that, after adjournment, the microphones are not cut off so we can continue to talk, but strictly in

an informal fashion. The hearing will have to adjourn. Unfortunately, we are about 10 seconds over.

So at this point, this hearing of the subcommittee of the Finance

Committee is adjourned.

[Whereupon, at 1:30 p.m., the hearing was concluded.]
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100
101
102
103
104
105
106
107
108
109
110
111
112
113

(115)

COMMUNICATIONS
116
117
118
119
120
121
122
123
124
125

Æ