Cracking the Code: Making Sense of the Corporate Alternative Minimum Tax.

• Author: Lathrope, Daniel J.

By Andrew B. Lyon. Washington, DC: Brookings Institution Press, 1997. Pp. xi, 156. $16.95 paper, $38.95 cloth.

The Tax Reform Act of 1986 repealed the prior add-on minimum tax that applied to corporate taxpayers and created a new alternative minimum tax (AMT) for corporations. The corporate AMT was intended by Congress to address the perception and reality of fairness in the tax system by ensuring that corporations with substantial economic income cannot avoid paying significant amounts of tax by using deductions, exclusions, and credits. Since 1986, the corporate AMT has been the subject of a great deal of criticism and congressional attention. The legislative trend has been to narrow and limit the coverage of the tax. The debate over the corporate AMT has primarily been about the equity and efficiency effects of the tax. However, there has been little analysis or data on the effects of the corporate AMT on firms or the economy. In this book, Lyon makes a significant contribution toward filling that void and provides a useful guide to the deficiencies of the corporate AMT.

The book begins in the first two chapters with an introduction to the policy issues raised by the corporate AMT and a description of the structure of the tax. Data on corporate AMT revenues, AMT corporations, and corporate assets by tax status (AMT, loss, or regular tax) are presented. The legislative background of the AMT and a detailed description of the corporate AMT adjustments and preferences are also included in the second chapter. A special section of Chapter 2 is devoted to the AMT depreciation adjustment, which is the AMT adjustment that affects the most corporate taxpayers and produces the greatest increase in alternative minimum taxable income. Lyon also analyzes the differences between economic income and the base for the corporate AMT.

Chapters 3, 4, and 5 present the core of Lyon's analysis. Chapter 3 looks at the case for the corporate AMT based upon fairness and concludes that the justification for the tax is not strong. Lyon finds that the corporate AMT may promote horizontal equity in the short run and increase the overall progressivity of the income tax, but there are simpler and more effective ways to achieve those results.

Chapter 3 also addresses the argument that the corporate AMT is justified because it improves the perception that the income tax is fair. Lyon contests that argument by pointing out that (i) attitudes about fairness can be easily...