Economic Report of the President

depreciated as under an income tax. First-year bonus depreciation wasincreased to 50 percent in 2003 and 2004.These approaches have the potential to improve the allocation of capital andincrease incentives for investment. The cost of increased incentives would haveto be balanced against other objectives, such as keeping income tax rates low.The Alternative Minimum Tax (AMT)The AMT is a separate tax system requiring taxpayers to compute theirincome tax liability a second time under different rules and then pay theAMT if it is higher than the regular tax. As a result, the AMT adds considerablecomplexity, and dealing with it must be an important element of any taxreform. The predecessor to the current AMT was enacted in 1969 to ensurethat high-income taxpayers with substantial amounts of tax preferences wouldat least pay a moderate sum in taxes. Unlike many income tax provisions,Congress did not index the AMT for inflation. Later, Congress increasedAMT tax rates from 21 percent to 24 percent in 1991 and to 26 percent and28 percent in 1993. With higher rates and no indexing for inflation, it wasonly a matter of time before large numbers of taxpayers would be affected.During the last several years, Congress has passed several temporary measuresto keep the number of AMT taxpayers from growing too rapidly. However,under current law, the number of taxpayers paying the AMT is expected togrow rapidly from 3 million in 2004 to 38 million by 2010. Most of thenewly-affected taxpayers will not be those with the highest incomes. Onestudy projects that under current law, over half of all taxpayers with incomesof $75,000 to $100,000 (in $2003) and 94 percent of married taxpayers withtwo children in that income range will be subject to the AMT by 2010.Because taxpayers have to compute their taxes twice to see if they have topay the AMT, it is a major source of complexity. Further, the lowest rateunder the AMT is 26 percent, a higher rate than would otherwise be faced bymiddle-income families. Finally, while some tax preferences are added backinto the tax base, many features of the AMT are inconsistent with sensible taxprinciples. For example, some costs of earning income are not deductible andpersonal exemptions are treated as a tax preference under the AMT.Alternatives for AMT reform include repeal or limiting its effect to highincometaxpayers by increasing exemption levels and lowering AMT tax rates.Significant changes to the AMT would be costly, however, as various estimatessuggest that the 10-year cost of full repeal would be nearly $1 trillion.SimplificationMany provisions in the current tax system overlap, conflict, or are otherwiseoverly complex. The Congressional Joint Committee on Taxation and othershave produced lists of such provisions. Elimination or simplification of suchprovisions could substantially reduce compliance burdens and distortions of90 | Economic Report of the President