The legislative history of AMT refers to three distinct measures of income: economic income, financial statement or “book” income, and income as defined for tax purposes. A calculation of economic income would include all types of income, recognize all income when it is earned rather than when it is received, subtract all the costs of earning the income, and make adjustments for inflation. Because such a comprehensive measurement would not be based solely on market transactions, it is not done in practice. Financial statements include a comprehensive measure of income based on historical records that can be verified. In contrast to economic income, financial statement or book income does not adjust values for inflation and does not recognize certain items of income until they are received. The definition of income implicit in the tax code combines a measure of taxpayers’ ability to pay taxes with the desire to encourage certain activities through the tax code and to minimize the difficulty of administering and complying with the tax law. Despite many similarities, the three measures are substantially different from each other. The purpose of AMT is to better coordinate the definition of income for tax purposes with that of economic income and financial statement income. Corporations are required to calculate their tax liability under two sets of rules—computing their regular tax liability and their tentative AMT liability, and paying whichever is greater. If the tentative AMT is more than the regular tax, the difference between them is AMT. AMT is described in sections 55 through 59 of the Internal Revenue Code. Corporations have to keep records to calculate AMT as well as the regular tax. For tax year 1994, a corporation had to file Form 4626—used to figure AMT—if its taxable income or loss before the net operating loss deduction, plus its adjustments and preferences, totaled more than the lesser of $40,000 or the corporation’s allowable exemption amount. The corporate AMT was cited by all 17 corporations we interviewed in preparing for testimony last year as among the provisions in the Internal Revenue Code with the largest recordkeeping and compliance cost burden. The AMT rate is 20 percent, lower than the regular corporate tax rate of 35 percent now or 34 percent through 1992. However, AMT is levied on a broader tax base than the regular tax because the AMT tax base includes certain regular tax preferences and adjustments that either delay the time when income is recognized or exclude income items altogether. Two important AMT adjustments are related to depreciation and financial statement income. Depreciation is the cost incurred by a business reflecting the reduction in value of certain of its assets over time. For both the regular tax and AMT, the amount of depreciation deductions taken in a year is a certain fraction of the original purchase price of the assets. Compared with the regular tax, deductions for depreciation under AMT are smaller in the early years after an asset is placed in service and are spread out over a longer time. The book income and the adjusted current earnings (ACE) adjustments were established to ensure that firms reporting large earnings on their financial statements in a given year paid some tax in that year. Book income reported on financial statements may not equal taxable income on tax returns because some items of revenue and expenses are never included in one or the other or are reported in different years. As a result, book income may not be equal to the taxable income figure on tax returns, as explained in appendix III. The book income adjustment was part of AMT from 1987 through 1989. It was replaced by the ACE adjustment in 1990. The ACE adjustment relies on income tax principles to define income in a way that Congress intended to be as broad as the definition of book income. AMT limits the amount of a corporation’s net operating losses from prior years that can be deducted in calculating current year’s income to 90 percent of tentative taxable income computed under AMT rules. In addition, it disallows the use of many credits available in the regular tax and specifically restricts the amount of foreign tax credit that can be taken for tax payments abroad. AMT is also linked to the regular tax through the AMT credit. Corporations that have paid AMT can credit these payments against their regular tax liability in future years when they pay the regular tax. However, the credit cannot be used to reduce regular tax liability below tentative AMT liability in future years. With this crediting mechanism, AMT operates partially as a prepayment of tax rather than as a permanent increase in tax liability. (App. I provides a more complete discussion of the history and mechanics of AMT.) The amount of corporate AMT paid rose from $2.2 billion in 1987 to $8.1 billion in 1990, before declining to $4.9 billion in 1992. These numbers must be combined with the fact that recovery of AMT liability via the AMT credit has been growing, albeit slowly, as shown in figure 1. Most corporations that paid AMT in 1987 had not fully recovered their payment by 1991, the last year we were able to examine, but the total dollar volume of credits used rose from year to year. The total number of corporations paying AMT was small. About 28,000, or about 1.3 percent of the 2.1 million corporations subject to AMT in 1992, paid AMT in 1992. The corresponding percentage ranged from 0.7 to 1.5 percent in the 1987 through 1992 period. Although only about 28,000 firms paid AMT in 1992, many more corporations were affected by it. For example, almost 400,000 corporations filed the AMT form with IRS in 1992 even though they owed no AMT. Of the approximately 2.1 million corporations that were subject to AMT in 1992, about 2,000 corporations with assets of $100 million or more paid 85 percent of the total corporate AMT liability. This was a pattern that generally held true for 1987 through 1991 also. As shown in figure 2, corporations with assets of $500 million or more paid 75 percent of all AMT in 1992, irrespective of the credit they may have received. However, most corporations that paid AMT from 1987 through 1992 were relatively small. In most years, more than 70 percent of corporations paying AMT had less than $10 million in assets. In 1992, 75 percent of AMT payers had less than $10 million in assets, as is also shown in figure 2. Nevertheless, relatively large corporations were more likely than smaller corporations to pay AMT. For instance, in all years except one, about 20 percent of corporations with assets of $500 million or more paid AMT; in contrast, no more than half of 1 percent of corporations with less than $1 million in assets paid AMT. The industries in which corporations paid the most AMT were manufacturing, transportation, and finance. At the industry level, AMT generally increased the amount of tax paid by about 1 or 2 percent of taxable income. Eight specific industry subclasses that we examined—auto, steel, chemicals, utilities, transportation, paper, oil and gas extraction, and mining other than oil—had generally higher percentages of AMT payers than existed in the nation as a whole during the 6 years we examined. Firms differed from each other in how often they paid AMT and the extent to which AMT increased their taxes. Of approximately 10,000 corporations with over $50 million in assets that we tracked over a 5-year period, about half paid AMT in at least one year. Of those that paid AMT at least once, most paid it for only one year. Only about 160 of the 10,000 corporations we studied paid AMT in all five years. In the larger universe of all AMT payers, about a third of the AMT payers that also paid regular tax had their taxes at least doubled by AMT. By far the most important elements that caused corporations to pay AMT were the depreciation adjustment for property placed in service after 1986 and the book income and adjusted current earnings adjustments. For instance, in 1992 the depreciation adjustment was included on about 87 percent of AMT returns and raised taxable income by about $23 billion. The ACE adjustment was included on about 67 percent of AMT returns and raised taxable income by about $19 billion. No other preference item or adjustment was present in more than 10 percent of AMT returns. AMT also caused corporations to pay tax by limiting their ability to take net operating loss deductions and the foreign tax credit (FTC). About 32 percent of AMT payers in 1992 included net operating losses in their AMT calculations, and about 19 percent reached the limitation on the use of the deduction. About 3 percent of AMT payers had FTC as part of their AMT computation, and about one-fourth of FTC claimants were constrained by the 90 percent FTC limit. FTC claims reduced overall AMT before credits by 32 percent. AMT has partially achieved the congressional objectives of ensuring that taxpayers with substantial economic income in a given year, and taxpayers with positive book income in a given year, pay some tax in that year. By including tax preferences in its tax base and by more closely approximating economic depreciation when inflation is low, AMT leads to a tax more closely based on economic income. In addition, in every year from 1987 through 1992, at least 6,000 corporations with positive book income that paid no regular tax paid some AMT, and at least 9,000 corporations with positive book income subject to regular tax paid an additional AMT amount, as shown in appendix III. A corporate tax based on economic income would deny many of the preferences and exclusions now in the regular tax code, index the value of assets and costs for inflation, and base depreciation deductions on economic depreciation. AMT moves the tax code closer to taxing economic income by including several preferences and exclusions in its tax base. With respect to inflation, neither the regular tax nor AMT rules adjust the measurement of income for inflation.