The Alternative Minimum Tax and Effective Marginal Tax Rates

This paper examines how the Alternative Minimum Tax (AMT) affects the weighted average marginal tax rates that apply to various components of taxable income and the subsidy rates on various income tax deductions. It also considers how several AMT reform proposals would affect the number of AMT taxpayers, total AMT liability, and weighted average marginal tax rates. On average, the AMT has only a modest impact on the weighted average marginal tax rates for most sources of income although some taxpayers face substantially higher tax rates, and others substantially lower rates, as a result of the AMT. Our projections show that modest increases in the AMT exclusion level have substantial effects on the number of AMT taxpayers, and that indexing the AMT parameters would reduce the number of AMT payers in 2010 by more than 60 percent.