Questions and Answers on the Corporate Alternative Minimum Tax


The phaseout of the corporate alternative minimum tax (AMT) is included in the Contract With America’s Tax Relief Act of 1995 (H.R. 1215) and was approved by the House of Representatives on April 5. The ACCF Center for Policy Research prepared this Special Report in order to encourage informed debate on the economic impact of the AMT. Earlier ACCF Center for Policy Research analyses and publications pertaining to the AMT include: “The Impact of the Alternative Minimum Tax on Investment and Economic Growth” (1995), “The Economic Impact of the Corporate Alternative Minimum Tax: Questions and Answers” (1991), and Economic Effects of the Corporate Alternative Minimum Tax (1991).

Q. Will AMT Reform Encourage U.S. Economic Growth?

A. Yes. Eliminating the corporate alternative minimum tax (AMT) will cut the cost of capital. By reducing the cost of capital for new investment and increasing cash flow, U.S. businesses will be able to make larger capital expenditures and thereby enhance productivity growth and job creation.

Many U.S. industries are highly capital intensive. For example, the average manufacturing employee works with $132,802 dollars worth of capital equipment (see Table 1). Increasing the capital stock will tend to boost both job growth and real incomes for U.S. workers.

Q. What Is the Corporate Alternative Minimum Tax?

A. The Tax Reform Act of 1986 (TRA) created a comprehensive corporate AMT system that exists separate from, but parallel to, the regular tax system. Under the AMT scheme, taxable income is modified by an intricate series of “adjustments” and by “preference items” to arrive at alternative minimum taxable income. Depreciation allowances for firms paying the alternative minimum tax are generally much less favorable than those for firms paying the regular corporate income tax. The corporate minimum tax rate is 20 percent.

There are three main reasons why corporations can become AMT payers: (1) a high level of investment in assets such as equipment and structures, and/or (2) low taxable income due to cyclical downturns, strong international competition, or other factors, and/or (3) low real interest rates, which encourage firms to invest, thus making their deductions more “depreciation intensive” relative to deductions for interest payments.

Q. How Do Economists View the AMT?

A. A study by Joel L. Prakken of Laurence H. Meyer and Associates states that the AMT can reduce investment spending in one of two ways.1 First, AMT filers pay a higher average tax rate and consequently generate less internal cash flow than they would under the regular tax. This, in turn, may curb investment by firms with impeded access to capital markets. Second, the AMT affects the marginal tax rate on capital and hence can discourage investment by raising the cost of capital or the “hurdle” rate which a new project must meet before it will be undertaken. Economists are in agreement that high capital costs discourage investment.

A 1995 study by the Government Accounting Office (GAO), “Experience with the Corporate Alternative Minimum Tax,” argues that the effect of the AMT is not clear. 2 However, numerous studies by highly regarded academics, including Alan Auerbach of the University of Pennsylvania and Kevin Hassett of Columbia University, and Lawrence Goulder of Stanford University and Philippe Thalmann of the University of Geneve, conclusively show that the increased capital costs resulting from the Tax Reform Act of 1986 have, in fact, decreased investment and worsened the overall efficiency of resource allocation. 3

Q. Who Pays the AMT?

A. It is commonly believed that the AMT extracts only token amounts of income tax from “rogue” companies that otherwise would be able to avoid paying their “fair share” of taxes. Actually, more than 64 percent of the $5.3 billion the Internal Revenue Service collected in corporate AMT taxes in 1991 was paid by the capital-intensive manufacturing, mining, construction, transportation, and utility sectors. According to GAO, more than 9,000 companies who paid the AMT between 1987 and 1992 also paid regular income tax. Depreciation for capital equipment is by far the major reason that corporations become AMT payers.

Q. Do Our International Competitors Tax New Investment as Heavily as Does the United States?

A. No. The United States is the only country with a corporate alternative minimum tax targeted at new investment. In addition, according to a study by the Progressive Foundation, the think tank affiliate of the Progressive Policy Institute, the marginal tax rate on domestic U.S. corporate investment is 37.5 percent, exceeding every country in their survey except Canada (see Figure 1). The calculations shown in Figure 1 exclude the AMT, but if the AMT were factored in, the U.S. effective tax rate would have been even higher.

Q. How Does the AMT Affect U.S. Cost Recovery Compared To Our Competitors?

A. Research by Arthur Andersen and Co. shows that U.S. firms paying the AMT recover their investment costs for new equipment much more slowly than do companies in other industrialized nations (see Table 2). For example, as the table shows, the present value of cost recovery allowances for U.S. steel firms using continuous casting equipment is only 59 percent compared to 82 percent in Germany and 88 percent in Brazil.

Q. How Does the AMT Affect Taxes for Firms That Purchase Pollution-Prevention and Control Equipment?

A. Capital cost recovery provisions for pollution-control equipment are much less favorable now than prior to the passage of the Tax Reform Act of 1986 (TRA). For example, the present value of cost recovery allowances for wastewater treatment facilities used in pulp and paper production was approximately 100 percent prior to TRA. Under regular TRA income tax, the present value for wastewater treatment facilities dropped to 81 percent; for AMT payers, the figure became 63 percent (see Table 2). Scrubbers used in the production of electricity fared even worse. Prior to TRA, the present value was only 55 percent; for AMT payers the figure dropped to 42 percent. As is true in the case of productive equipment, loss of the investment tax credit and lengthening of depreciable lives both raise effective tax rates.

Q. If the AMT Is Repealed, Won’t Many Corporations Escape Paying Any Income Tax?

A. No. In the early 1980s, business taxpayers could reduce their tax liability to a very small amount through safe harbor lease investments and investment tax credits. However, due to changes in the tax code in the mid-1980s, U.S. companies are much less likely to avoid income taxes. Table 3 shows the tax liability of a company in 1982 with $1 million in taxable income before the effects of its safe harbor lease investments and investment tax credits. In 1994, the same company would pay substantially more tax, even without the AMT.

In addition, a corporation’s income tax payments as a percent of book income may vary from year to year due to investment levels, profitability, or other factors. Some years a company may pay a very large share of its income in taxes and other years relatively little due to the differences between accounting principles for book and tax income.

Q. How Does the AMT Affect Capital Investment Decisions?

A. AMT status tends to discourage capital-intensive firms from making capital expenditures for several reasons:

  • Some companies may be forced to shut down U.S. plants because of the AMT’s negative effect on the profitability of investments in plant and equipment.
  • If a capital-intensive firm refrains from making capital outlays, including those for pollution-control equipment, it will eventually work its way out of the AMT because its depreciation “preferences” will disappear. Thus, the capital stock will be smaller than it otherwise would be.
  • Small start-up firms in particular are likely to be AMT payers and, unable to use the more generous depreciation allowances under the regular income tax, likely to find it harder to compete with established firms.
  • The tax liabilities of AMT firms are reduced less when they make capital expenditures than are those of firms paying the regular tax. Thus, AMT firms are at a competitive disadvantage.

Q. How Does the AMT Affect Tax Liability?

A. Firms paying the AMT always pay more than they would pay if they were regular tax payers because the law requires them to compute their taxes under both the regular tax and the AMT and to pay the larger amount of taxes. Although this larger amount of tax becomes a credit that is due to the taxpayer in the future, many taxpayers may never be able to use the credits or may not be able to use them in a meaningful time frame. For these taxpayers, the AMT becomes either a permanent tax increase (relative to a regular taxpayer) or an interest-free loan to the government.

Q. Does the AMT Result in Double Taxation?

A. Yes. Companies with earnings from foreign operations are taxed twice on a portion of their income by the 90 percent limitation on foreign tax credits under the AMT. The purpose of the foreign tax credit is to ensure that the income is taxed only once, yet the AMT violates that goal by disallowing a portion of foreign tax credits when calculating the AMT.

In addition, companies with net operating losses are allowed to reduce their AMT liability by only 90 percent. Thus, they end up paying tax even though they have not been able to deduct all of their losses from previous years.

Q. Didn’t the Changes to the AMT in the 1993 Budget Act “Fix” the Problems Faced by Capital-Intensive Firms?

A. No. While the repeal of the adjusted current earnings (ACE) adjustment to depreciation contained in OBRA 1993 was a positive step, the capital cost disadvantage faced by firms on the AMT remains (see Figure 2). AMT firms with assets appreciated over seven years face capital costs 10 percent higher than for firms on the regular corporate income tax. Had the reform proposed by the Clinton administration been enacted, AMT firms’ capital cost disadvantage would have fallen to less than 4 percent.

Q. Is AMT Reform a Partisan Issue?

A. No. President Clinton proposed substantial AMT reform in 1993 (see the preceding question and answer). In addition, House Ways and Means Committee Members Sander Levin (D-MI) and Benjamin Cardin (D-MD) introduced a bill to eliminate depreciation as an AMT preference in the 104th Congress. Former President George Bush also proposed reforms to the AMT in 1992.


1. Joel L. Prakken, “Investment, Economic Growth, and the Corporate Alternative Minimum Tax,” in Tax Policy for Economic Growth in the 1990s(Washington, D.C.: American Council for Capital Formation, March 1994) pp. 125-148.

2. GAO. Report to the Honorable William J. Coyne, House of Representatives. Tax Policy: Experience with the Corporate Alternative Minimum Tax (Washington, D.C.: General Accounting Office, April 1995).

3. Alan J. Auerbach and Kevin Hasset, Recent U.S. Behavior and the Tax Reform Act of 1986: A Disaggregate View. Working Paper No. 3626. (Cambridge, Mass.: National Bureau of Economic Research, Inc., February 1991); Lawrence H. Goulder and Philippe Thalmann, Approaches to Efficient Capital Taxation: Leveling the Playing Field vs. Living by the Golden Rule. Working Paper No. 3559. (Cambridge, Mass.: National Bureau of Economic Research, Inc., December 1990).