The latest version of the Biden administration’s Build Back Better reconciliation program reintroduces a policy that has already been tried and abandoned: an alternative minimum business tax (AMT). It would be a mistake to relaunch this complex and ill-conceived policy. Instead, lawmakers should consider directly reducing corporate tax expenditures.
The alternative minimum corporate tax was first introduced in the Tax Reform Act of 1986 (TRA86) in response to arguments taken up by some today: advertising around a phenomenon in which very large companies with large accounting revenues paid little or no tax. The AMT was therefore designed to prevent some companies from using enough tax breaks to face zero tax in any given year while still reporting accounting profit. It was repealed in 2017, and 30 years’ experience with an AMT company shows that this is not a good solution: if tax breaks are bad policy, they should be repealed directly; if it is a sound policy, all eligible taxpayers should be able to take full advantage of it.
Instead of taking this straightforward approach, the AMT required companies to calculate their income tax twice, once using the tax code and once using another calculation for the provisional AMT, and pay the higher amount. AMT has created economic inefficiencies, increased tax burdens and complexity, and saw tax revenues decline over time.
Companies that paid the AMT in one year received a credit that could be used to offset the future obligation under the ordinary tax code (but not below their provisional AMT obligation), meaning that for the For most businesses, the main effect of the alternative minimum tax was to shift tax liability over time rather than increasing it substantially.
As the accompanying chart illustrates, corporate AMT liabilities peaked in 1990 at just over $ 8 billion, falling to a low of $ 1.8 billion in 2001. companies accumulated and used the tax credits for the previous year’s AMT to offset their regular tax liability, the revenues from the AMT system decreased: from 1995 to 2001, the credits for the year’s AMT previous have exceeded the AMT liabilities of the current year, which means that the AMT system lost income on the net during these years.
As companies moved in and out of the old alternative tax regime, they could take advantage of the previous year’s AMT credits to offset part of their tax liability, which significantly reduced the net income generated. A similar, but perhaps weaker, effect could emerge under the new proposal, as it also includes credit for the previous year’s AMT. However, a company’s ability to use its credits may be limited if the new proposal is more likely to keep businesses in the AMT system. If companies continue to pay AMT liability year after year, they would be unable to use their credits, which would limit the offsetting effects of credits.
Another relevant issue with the AMT, especially the original TRA86 version which incorporated accounting income, is the way it handled depreciation deductions. For tax purposes, it makes sense for businesses to deduct the cost of physical investments when the investments are made. For accounting purposes, however, it often makes more sense to spread deductions over several years. The AMT partially rejected accelerated depreciation deductions that allow businesses to benefit more quickly from deductions for investments under the ordinary tax code.
As a result, it has disproportionately affected companies in sectors that rely heavily on investment in physical capital, such as manufacturing. As a 2005 Treasury Department report noted, mining, warehousing and transportation, and manufacturing companies faced the heaviest AMT burdens. Such disparate treatment of companies of different industries and sizes has created economic inefficiencies.
Throughout the 1990s and early 2000s, the depreciation rules under the AMT changed frequently, but eventually allowed a temporary bonus depreciation for the regular tax and the AMT, greatly reducing the business AMT effect by temporarily reducing depreciation differences between systems. The same Treasury report noted that “a more efficient tax system would treat all businesses equally, leaving investments and other business decisions to be made on the basis of their economic fundamentals rather than their tax consequences.”
In the end, the alternative minimum corporate tax has proven to be either a heavy burden on investment or an inefficient source of income. If politicians are to deal with the problem of targeted and non-neutral tax breaks as a means of generating income, they should repeal these policies directly, rather than using a complex policy like the alternative minimum tax which also punishes many legitimate deductions in the industry. the process .
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