Paull Response to Rangel on AMT and Bush Tax Plan

September 28, 2000

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.

[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).

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[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 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.

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[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%).

[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.

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[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).

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Sincerely,