Repeal of the AMT, U.S. Investment, and Economic Growth

Report Summary

The phaseout of the corporate alternative minimum tax (AMT) is included in the Contract With America Tax Relief Act of 1995 (H.R. 1215) and was approved by the House of Representatives on April 5, 1995. Significant AMT reform has been introduced in the Senate (S.1000) by Senators Conrad Burns (R-MT) and Don Nickles (R-OK). The ACCF Center for Policy Research prepared this Special Report to present a new DRI/McGraw-Hill analysis of the AMT and to encourage informed debate on 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).

Summary of Findings
New research by the prominent economic analysis firm DRI/McGraw-Hill concludes that the repeal of the AMT would, over the 1996-2005 period:

  • Increase fixed investment by a total of 7.9 percent;
  • Raise GDP by a total of 1.6 percent;
  • Expand the capital stock by 5.8 percent;
  • Increase labor productivity by 1.6 percent; and
  • Reduce the cost of capital by 10 percent.

Also, 100,000 additional jobs per year would be created during the years 1998-2002.

Background on the AMT

The Tax Reform Act of 1986 (TRA) created a comprehensive corporate alternative minimum tax (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. In fact, U.S. firms paying the AMT face the slowest capital cost recovery in the industrialized world for equipment used in manufacturing and pollution prevention and control. Although the corporate minimum tax rate is 20 percent compared to 35 percent for the regular tax, it is applied to a broader base. Consequently, the AMT frequently results in a higher tax payment than required by the regular corporate income tax system.

Corporations can become AMT payers for three main reasons: (1) a high level of investment in assets such as equipment and structures; (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.

AMT’s Impact on Investment

The AMT discourages capital-intensive firms from making capital expenditures for several reasons:

  • The AMT raises the cost of capital for investments in plant and equipment.
  • The higher cost of capital requires a project to have a greater rate of return to overcome the AMT tax penalty.
  • The AMT creates uncertainty in business planning and forces firms to make investment decisions under a “worst case” scenario.
  • Since a capital-intensive firm can work its way out of the AMT by slowing its capital outlays, including those for pollution-control equipment, the capital stock will be smaller than it otherwise would be.
  • Small start-up firms in particular are likely to be AMT payers and, being unable to use the more generous depreciation allowances under the regular income tax, are 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.
  • 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.

Effect of AMT Repeal on the U.S. Economy

A new study by the prominent economic analysis firm DRI/McGraw-Hill (DRI) concludes that AMT repeal would have a beneficial impact on the U.S. economy. For example, repeal of the AMT depreciation adjustment would reduce the cost of capital (defined as the pre-tax return required by investors) by about 10 percent. Lower capital costs induce more investment, faster productivity growth, higher GDP, and increased employment.


The DRI study shows that AMT repeal causes real fixed investment to increase by a total of 7.9 percent or about $8 to $10 billion per year over the 1996-2005 period compared to the baseline forecast (see Figure 1 and Table 1). Equipment spending rises by a total of 8.3 percent (see Table 1). In addition, the stock of equipment increases by 5.8 percent over the period so that by 2005, the amount of capital being combined with the labor force is $46 billion higher (in real terms) than it would have been under current law (see Table 1 and Figure 2).


The larger capital stock also increases labor productivity by an average of 0.2 percent per year over the 1996-2005 period for a total of 1.6 percent over 10 years (see Table 1). This is a significant amount because productivity growth has averaged less than 2 percent annually since 1980 and productivity increases permit living standards to rise without an increase in the amount of labor supplied.

GDP Growth

AMT repeal causes inflation-adjusted Gross Domestic Product (GDP) to increase by a total of 1.6 percent over the ten year period or about $15 billion per year by 2005 (see Table 1 and Figure 3).

Employment Growth

The DRI study also shows that AMT repeal would increase employment by a total of 100,000 jobs during the 1998-2002 period (see Figure 4).

Other Benefits From AMT Repeal

In addition to the benefits of lower capital costs, the DRI study concludes that AMT repeal would also produce several other very real but difficult to quantify benefits:

  • Reduction of uncertainty surrounding the user cost of capital. For corporations intermittently subject to the AMT, investment decisions must take into account the probability of becoming subject to the AMT. Corporations can be put into the AMT unexpectedly because of an economic downturn. To the extent this uncertainty deters investment by companies that never actually pay the AMT, the impacts on investment given above are understated.
  • Elimination of the need to maintain an extra set of accounts. Even companies that never actually pay the AMT need to keep extra accounts simply to determine whether they are subject to it. The cost of these extra accounts is not trivial.
  • Improved cash flow. This could be important both for small corporations, with less ready access to the capital markets, and large companies that may have to pay the AMT even when they incur losses.


Legislation addressing the AMT is an important step in putting U.S. firms on an equal footing with their international competitors. While the changes to the AMT in the Omnibus Budget Reconciliation Act of 1993 (OBRA) were a positive step (see Figure 5), AMT repeal is needed to increase U. S. living standards and allow U.S. firms to be competitive in today’s global economy.