Tax Analysts -- Paull Response to Rangel on AMT and Bush Tax Plan

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Tax Notes Today

SEPTEMBER 28, 2000

Paull Response to Rangel on AMT and Bush

Tax Plan

Joint Committee on Taxation Chief of Staff Lindy Paull in a letter responded to a request
from Ways and Means ranking Democrat Charles B. Rangel of New York, for information
about the alternative minimum tax implications in the tax cut plan of Gov. George W. Bush.

=============== FULL TEXT ===============

September 28, 2000
Honorable Charles B. Rangel
U.S. House of Representatives
Committee on Ways and Means
1106 Longworth HOB
Washington, DC 20515
Dear Mr. Rangel:
[1] This responds to your request of September 21, 2000, asking for information about the
alternative minimum tax ("AMT") implications of various proposals described as the "George
W. Bush Tax Reduction Proposal" (see Joint Committee on Taxation Table #00-1 075R).
PRESENT LAW
[2] Under present law, an individual's tax liability consists of two components -- a regular
income tax component and, to the extent tentative alternative minimum tax exceeds regular
income tax, an alternative minimum tax component.

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Tax Analysts -- Paull Response to Rangel on AMT and Bush Tax Plan

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[3] The regular income tax is computed using regular taxable income (generally gross income
minus allowable deductions) and the regular income tax rates (15%, 28%, 31%, 36%, and
39.6%), reduced by allowable tax credits.
[4] The alternative minimum tax is computed using alternative minimum taxable income
(regular taxable income adjusted for certain minimum tax preferences and deferral items and
the minimum tax exemption amount) and the alternative minimum tax rates (26% and 28%),
reduced by certain tax credits. Beginning in 2002, the alternative minimum tax may limit an
individual's ability to claim the full benefit of various tax credits generally allowable under the
regular income tax.
[5] Because the alternative minimum tax requires the calculation of a second income tax base
and a tax on that base, the alternative minimum tax is a source of complexity for individuals.
[6] Although relatively few individuals have been affected by the alternative minimum tax in the
past, the number of individuals affected by the alternative minimum tax is expected to increase
significantly in the future. This is expected to occur in part because the alternative minimum tax
exemption amounts and rate brackets are not indexed for inflation and in part because various
tax credits will be limited by the alternative minimum tax beginning in 2002. The table below
shows our projections of individuals (tax returns) affected by the alternative minimum tax under
present law broken down by (1) returns with alternative minimum tax liability, and (2) returns
affected by the alternative minimum tax but having no alternative minimum tax liability (i.e.,
returns with credits limited by the alternative minimum tax).
Calendar Years
[Millions of Returns]
____________________________________________________________________
Item
2002
2003
2004
2005
2006
____________________________________________________________________
Returns Affected
by the AMT under
Present Law,
(1) Returns with
AMT liability
(2) Returns affected by
the AMT but having
no AMT liability
(3) Total

1.6

1.9

2.4

3.1

3.9

1.4
1.7
2.1
2.7
3.0
___________________________________
3.0

3.6

4.5

5.8

6.9

Returns Affected by the

AMT as a Percentage of
Filed Returns
2.3%
2.7%
3.4%
4.2%
5.0%
____________________________________________________________________

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Tax Analysts -- Paull Response to Rangel on AMT and Bush Tax Plan

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[table continued]
____________________________________________________________________
Item
2007
2008
2009
2010
____________________________________________________________________
Returns Affected
by the AMT under
Present Law:
(1) Returns with
AMT liability
(2) Returns affected by
the AMT but having
no AMT liability
(3) Total

5.0

6.3

8.4

10.5

3.5
4.0
4.0
4.2
_________________________________
8.5

10.3

12.3

14.7

Returns Affected by the

AMT as a Percentage of
Filed Returns
6.0%
7.2%
8.5%
10.0%
____________________________________________________________________
NOTE. Details may not add to totals due to rounding.
GEORGE W. BUSH TAX REDUCTION PROPOSALS
[7] The various proposals described as the "George W. Bush Tax Reduction Proposal" (the
"Bush proposals") generally would have the effect of reducing the overall income tax liabilities
of individuals. One proposal relating to the tax credit for children would directly amend the
alternative minimum tax rules for individuals. In addition, some of the Bush proposals would
have an interactive effect with the alternative minimum tax -- that is, for certain individuals, the
alternative minimum tax would limit the overall income tax reduction provided by the proposals.
CHILD CREDIT PROPOSALS
[8] When fully phased in, the Bush child credit proposals would increase the present-law tax
credit for eligible children to $1,000 (from $500 under present law), increase the income limits
for claiming the credit, slow the phaseout of the credit, and permanently allow the credit
against the alternative minimum tax (under present law, credits are allowed against the
alternative minimum tax only until the end of 2001).
[9] The effect of the Bush child credit proposal would be to reduce the overall income tax
liability of families with eligible children. By itself, the proposal would be expected to reduce the
number of individuals affected by the alternative minimum tax because it would permanently
allow the child credit against the alternative minimum tax.
[10] You requested that we provide the revenue effects of the Bush alternative minimum tax
proposal separate from the other child credit proposals. The table below shows our estimates

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Tax Analysts -- Paull Response to Rangel on AMT and Bush Tax Plan

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of the revenue effects of (1) the Bush child credit proposals excluding the alternative minimum
tax proposal, (2) the alternative minimum tax proposal by itself, and (3) the total for all the
Bush child credit proposals including the alternative minimum tax proposal.
Fiscal Years
[Billions of Dollars]
____________________________________________________________________
Item
2002
2003
2004
2005
2006
____________________________________________________________________
Bush Proposals to
Increase and Expand
the Child Tax Credit:
(1) Excluding the
AMT proposal

-1.0

-5.7

-9.6

-12.9

-15.7

(2) AMT proposal

-0.2

-1.0

-1.7

-3.0

-5.1

(3) Total
-1.1
-6.7
-11.3
-15.9 -20.8
____________________________________________________________________
[table continued]
____________________________________________________________________
Item
2007
2008
2009
2010
2002-10
____________________________________________________________________
Bush Proposals to
Increase and Expand
the Child Tax Credit:
(1) Excluding the
AMT proposal
(2) AMT proposal

-17.6

-16.7

-16.0

-15.2

-110.4

-7.3

-9.2

-11.2

13.3

-51.8

(3) Total
-24.9
-25.9
-27.2
-28.5
-162.3
____________________________________________________________________
NOTE: Details may not add to totals due to rounding.
INTERACTIVE EFFECTS
[11] Although the Bush proposals include only one amendment to the alternative minimum tax,
other Bush proposals would have an interactive effect with the alternative minimum tax.
[12] The Bush proposal that would result in the most significant interactive effect is the
reduction in the regular income tax rates. When fully phased in, the Bush proposals would
reduce the regular income tax rates for individuals to 10%, 15%, 25%, and 33% (from the
present-law rates of 15%, 28%, 31%, 36%, and 39.6%), and make adjustments to income
levels for certain tax brackets. The Bush proposals do not change the present-law alternative
minimum tax rates (26% and 28%).

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Tax Analysts -- Paull Response to Rangel on AMT and Bush Tax Plan

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[13] The effect of the Bush income tax rate reduction proposals would be to reduce the regular
income tax component of an individual's income tax liability. This would result in an overall
income tax reduction for most individuals. However, some individuals would not receive any
tax reduction or may not receive the full benefit of the tax reduction because the individual's
overall income tax may not be reduced below the individual's tentative alternative minimum
tax. As a result, in the absence of a commensurate reduction in alternative minimum tax rates,
this proposal would be expected to increase the number of individuals affected by the
alternative minimum tax.
[14] To illustrate this interactive effect, assume an individual's regular income tax is $10,000
and tentative alternative minimum tax is $9,500, resulting in overall income tax liability of
$10,000. Now, assume all regular income tax rates are reduced by ten percent, but the
alternative minimum tax rates remain unchanged. Although the individual's regular income tax
would be reduced from $10,000 to $9,000, the individual's overall income tax could not be
reduced below the individual's tentative alternative minimum tax of $9,500. Thus, the
alternative minimum tax would limit the benefit of the regular income tax rate reduction for this
individual.
[15] In addition, other Bush proposals that reduce an individual's adjusted gross income (such
as the two-earner deduction) could make the individual eligible for increased deductions or
credits for the regular income tax. The individual may in turn be affected by the alternative
minimum tax if the increased deductions or credits are not allowed in computing alternative
minimum taxable income.
[16] It should be noted that there would be no increase in any individual's overall income tax
liability as a result of the Bush proposals and their interactive effect with the alternative
minimum tax.
[17] You requested a break down of the revenue effects of the Bush proposals between the
regular income tax and the interaction with the alternative minimum tax. The table below
shows our estimate of the revenue effects of the Bush proposals broken down as follows: (1)
the combined income tax effects for individuals (including the child care proposals shown
above) without the interaction with the alternative minimum tax, (2) the interaction with the
alternative minimum tax for individuals, (3) the overall reduction in income tax for individuals,
(4) the combined effects of other Bush proposals (i.e., proposals not affecting individual
income taxes), and (5) the total effects for all Bush proposals.
Fiscal Years
[Billions of Dollars]
____________________________________________________________________
Item
2002
2003
2004
2005
2006
____________________________________________________________________
Breakdown of the
Bush Proposals:
(1) Combined effects

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Tax Analysts -- Paull Response to Rangel on AMT and Bush Tax Plan

for individuals
without the
interaction with
the AMT

-22.2

(2) Interaction with

AMT for
individuals

-52.4

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-87.0

-118.5

-162.8

1.3
3.0
7.0
11.6
22.5
_____________________________________

(3) Overall reduction

in income tax for
individuals

-20.8

(4) Other proposals

-49.3

-80.0

-106.9

-140.4

-0.2
-8.0
-8.9
-18.6
-26.8
_____________________________________

(5) Total
-21.1
-57.4
-88.9 -125.5 -167.1
____________________________________________________________________
[table continued]
____________________________________________________________________
Item
2007
2008
2009
2010
2002-10
____________________________________________________________________
Breakdown of the
Bush Proposals:
(1) Combined effects
for individuals
without the
interaction with
the AMT
(2) Interaction with
AMT for
individuals
(3) Overall reduction
in income tax for
individuals
(4) Other proposals

-187.9

-196.8

-206.4

216.5

-1,250.4

29.5
34.0
38.9
44.0
191.8
___________________________________________

-158.5

-162.8

-167.5

-172-4

-1058.6

-34.7
-47.3
-56.9
-60.4
-261.7
___________________________________________

(5) Total
-193.2
-210.0
-224.5
-232.9 -1,320.5
____________________________________________________________________
NOTE: Details may not add to totals due to rounding.

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Tax Analysts -- Paull Response to Rangel on AMT and Bush Tax Plan

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NUMBERS OF RETURNS AFFECTED

[18] You also requested that we supply detailed information about the number of individuals
affected by the alternative minimum tax under the Bush proposals. As discussed above, the
Bush child credit proposals would be expected to reduce the number of individuals affected by
the alternative minimum tax, but the interactive effects of other Bush proposals would be
expected to increase the number of individuals affected by the alternative minimum tax. We
estimate that the number of individuals (tax returns) affected by the alternative minimum tax
would almost double under the Bush proposals.
[19] The table below shows our projections of the net change in individuals (tax returns)
affected by the alternative minimum tax under the Bush proposals broken down by (1) the net
change in returns with alternative minimum tax liability, and (2) the net change in returns
affected by the alternative minimum tax but having no alternative minimum tax liability (i.e.,
returns with credits limited by the alternative minimum tax).
Calendar Years
[Millions of Returns]
____________________________________________________________________
Item
2002
2003
2004
2005
2006
____________________________________________________________________
Total Returns Affected by
the AMT:
(1) Net Change in Returns
with AMT liability
(2) Net Change in Returns
affected by the AMT
but having no AMT
liability

1.5

2.1

4.0

5.2

8.7

0.3
0.5
0.5
0.3
____________________________________

(3) Total
1.5
2.4
4.5
5.7
9.0
____________________________________________________________________
[table continued]
____________________________________________________________________
Item
2007
2008
2009
2010
____________________________________________________________________
Total Returns Affected by
the AMT
(1) Net Chane in Returns
with AMT liability

9.9

11.2

12.2

13.6

(2) Net Change in Returns

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Tax Analysts -- Paull Response to Rangel on AMT and Bush Tax Plan

affected by the AMT

but having no AMT
liability

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-0.2
-0.8
-0.9
-1.4
____________________________________

(3) Total
9.7
10.4
11.2
12.2
____________________________________________________________________
FOOTNOTE TO TABLE
1 Less than 50,000.

END OF FOOTNOTE TO TABLE

[20] I hope this information is helpful to you. If we can be of further assistance in this matter,
please let me know.
Sincerely,
Lindy L. Paull
Congress of the United States
Joint Committee on Taxation
Washington, D.C.

Tax Analysts Information

Code Sections: Section 55 -- Alternative Minimum Tax
Section 59 -- Special Minimum Tax Rules
Jurisdiction: United States
Subject Areas: Legislation and lawmaking
Alternative minimum tax
Index Terms: legislation, tax
AMT
Author: Lindy L. Paull
Institutional Author: Joint Committee on Taxation
Tax Analysts Document Number: Doc 2000-25284 (7 original pages)
Tax Analysts Electronic Citation: 2000 TNT 192-14

Tax Analysts (2016)

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