The Case for AMT Repeal

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.


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 (see Table 1). Although the corporate alternative 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.

[Table 1 International Comparison of the Present Value of Equipment Used to Make Selected Manufacturing Products and Pollution Control Equipment (as a percent of cost)]

Factory Robots Crank-
Continuous Casting for
Steel Production
Engine Blocks Wastewater Treatment
for Chemical Production
Wastewater Treatment
for Pulp
and Paper
Used in
United States
1985 Law 100.1 100.1 100.1 100.1 100.1 100.1 89.7
MACRS 1 80.8 80.8 80.8 80.8 85.2 80.8 54.5
AMT2 68.8 64.6 59.0 60.8 70.0 62.7 41.5
Brazil 74.7 74.7 88.3 74.7 74.7 74.7 79.4
Canada 74.0 73.8 74.2 73.6 85.3 85.3 85.3
Germany 82.7 83.9 74.2 83.9 71.8 69.7 68.9
Japan 83.4 83.9 81.4 83.7 84.6 83.7 82.4
Korea (w/ 3% ITC) 82.6 80.1 77.7 79.6 95.2 93.9 92.2
Singapore 91.7 91.7 91.7 91.7 91.7 91.7 91.7
Taiwan 79.0 64.3 63.5 63.7 147.0 147.0 147.0

Notes: 1) MACRS = Modified Accelerated Cost Recovery System (Current Law) for regular taxpayers. 2) AMT = Alternative Minimum Tax (Current Law)

Source: Stephen R. Corrick and Gerald M. Godshaw, “AMT Depreciation: How Bad is Bad?” in Economic Effects of the Corporate Alternative Minimum Tax (Washington, D.C.: American Council for Capital Formation Center for Policy Research, September 1991); and unpublished data incorporating the AMT provisions of OBRA 1993. Updated by Arthur Andersen LLP, Office of Federal Tax Services, Washington, D.C., January 1995.

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.

Positive Effects of AMT Repeal on the U.S. Economy

A study by the prominent economic analysis firm DRI/McGraw-Hill (DRI)1 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.

Stimulate Investment
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 2). Equipment spending rises by a total of 8.3 percent (see Table 2). In addition, the stock of equipment increase 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 2 and Figure 2).


[Figure 1 Annual Increase of Total Fixed Investment From AMT Repeal (billions of inflation-adjusted dollars)]

Source: DRI/McGraw-Hill, August 1995

Table 2 Cumulative Impact of AMT Repeal

Cumulative Total 1996-2005
Real GDP (% difference) 1.6
Real Capital Spending (% difference)
Total Equipment 8.3
Total Fixed Investment 7.9
Capital Stock (% difference) 5.8
Output per Hour (% difference) (productivity increase) 1.6

Source: DRI/McGraw-Hill, August 1995

[Figure 2 Cumulative Increase in Stock of Equipment From AMT Repeal (billions of inflation-adjusted dollars)]


Source: DRI/McGraw-Hill, August 1995

  • Enhance Productivity Growth 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 2). 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.
  • Increase 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 2 and Figure 3).


[Figure 3 Annual Increase in Real GDP From AMT Repeal (billions of inflation-adjusted dollars)]


Source: DRI/McGraw-Hill, August 1995

  • Promote Employment GrowthThe DRI study also shows that AMT repeal would increase employment by 100,000 jobs annually during the 1998-2002 period (see Figure 4).


[Figure 4 Total Annual Increase in Civilian Employment Caused by AMT Repeal)]



Source: DRI/McGraw-Hill, August 1995

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.

Conclusion 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.

[Figure 5 Comparison of the Increase in Cost of Capital for Equipment Incurred by AMT Firms Compared to Firms Paying the Regular Income Tax]


Note: Depreciation systems for an asset depreciated over 7 years under regular law. AMT prior to 1994: 120% declining balance recovered over 13-year period. OBRA 1993: 150% declining balance recovered over 13-year period. Clinton’s AMT: 120% declining balance recovered over 7-year period. Explanation: A firm on the current AMT faces a cost of capital 9.87 percent higher than a firm paying the regular income tax; the Clinton/House AMT proposal would have reduced the capital cost disadvantage to 3.6 percent for an AMT firm. The analysis assumes that firms are permanently on the AMT. The capital cost calculations use the pretax return required by an investor and are net of economic depreciation. Source: Capital cost calculations by Laurence H. Meyer & Associates. Chart prepared by ACCF Center for Policy Research, December 1993.


1. DRI/McGraw-Hill, “Report on the Macroeconomic Impacts of the House and Senate Proposals Regarding the Corporate Alternative Minimum Tax,” August 1995.