Corporate lobbyists, of course, routinely fight to lower corporate income taxes. This is generally a good thing because the corporate tax is a smoke screen that hides $200 billion in taxes from the workers, consumers, and shareholders who implicitly pay it. Corporations simply pass it through in the form of lower wages, higher prices, and lower shareholder returns. With good reason, Treasury Secretary Paul O’Neill says we should consider eliminating the corporate income tax altogether.
The stimulus package being considered in the House moves in that direction by reforming a few of the most inefficient parts of the corporate tax, including repeal of the alternative minimum tax (AMT). The former IRS National Taxpayer Advocate Val Oveson called the AMT “absolutely, asininely stupid.” In more diplomatic language, the congressional Joint Committee on Taxation called for its repeal earlier this year, noting that “the original purpose of the corporate AMT is no longer being served in any meaningful way.”
While most Americans have never heard of the corporate AMT, the accountants and executives at the companies they work for sure have. It’s a complicated parallel tax system clamped on top of the regular corporate income tax. Companies have to calculate their tax under each system and pay the higher tax liability amount each year. This wastes thousands of hours of skilled professionals’ time and confounds business planning because new investments face two different sets of tax rules and rates. And by pushing up effective tax rates, the AMT reduces capital investment and ultimately lowers worker wages since wages are tied to the quantity and quality of machinery they have to work with.
AMT repeal at this time makes particular economic sense because the tax perversely hits businesses hardest during slowdowns, as it did in the early 1990s recession. The AMT is an anti-stimulus on the economy. Not only does AMT repeal make economic sense right now, it also makes perfect budget sense. Both parties want a tax cut to stimulate business investment, but don’t want to bust the budget over the long term. AMT repeal perfectly fits these requirements.
This needs some explaining. When companies calculate their taxes and find they must pay AMT, they get a credit for these payments to be taken against future regular corporate taxes. In many years, aggregate credits utilized by the business sector are just as high as new AMT payments, with the result that the government often doesn’t raise a cent, on net, from the whole cumbersome AMT apparatus. Therefore, there would be very little federal revenue loss from AMT repeal in the long run, which fits the criteria laid down by many in Congress for the stimulus bill.
AMT repeal could also create the short-run stimulus effect that Congress desires. This is because companies have built up $23 billion in AMT credits that they could take immediately after repeal goes through. This would transfer much needed cash back into corporate coffers to make up for plummeting profits many firms are experiencing. In the past, this short-run budget loss had been a political hurdle to AMT reform. Now, that revenue loss makes this proposal a winner.
Congress is looking for a simple and effective way to get cash into the hands of those who can use it to get the economy moving again. AMT repeal would do exactly that since the AMT is a particularly heavy burden on large industrial companies that do much of the capital investment in this country. On this issue, Congress ought to listen to what the corporate lobbyists are saying and repeal this unneeded, and yes stupid, tax.