I. INTRODUCTION
In January 1969, Treasury Secretary Joseph W. Barr reported to Congress that 155 individual taxpayers with incomes above $200,000 paid no federal income tax on their 1967 tax returns.1 The news created a political firestorm. Members of Congress received more constituent letters in 1969 regarding the 155 taxpayers than concerning the Vietnam War (Graetz 1999). Later that year, the Tax Reform Act of 1969 created a minimum tax designed to ensure that individuals with high incomes did not take what was deemed undue advantage of tax laws to reduce or eliminate their federal income tax liability.
Although the original minimum tax and its successor, the individual alternative minimum tax (AMT), have historically had limited scope and applied only to a small minority of highincome households, the AMT is now on the verge of switching from a “class tax” to a “mass tax.” In 2001, for example, fewer than 2 percent of taxpayers paid AMT. These taxpayers had substantial incomes, accounting for 7 percent of all adjusted gross income (AGI). Nevertheless, the tax accounted for just 1 percent of income tax revenue. Under current law, by 2010 the AMT will affect one-third of all taxpayers, who account for 55 percent of all AGI, and raise 10 percent of income tax revenues. The AMT will encroach significantly on the middle class, affecting a majority of taxpayers with AGI between $50,000 and $100,000. It will become the de facto tax system for taxpayers with AGI between $100,000 and $500,000, 95 percent of whom will pay AMT. Among married couples with two or more children and income between $75,000 and $500,000, the AMT participation rate will approach 100 percent. Indeed, by 2008, it would cost less in lost revenue to repeal the regular income tax than to repeal the AMT.
These projected increases raise a host of issues because the AMT is notoriously complex, its effects on efficiency and equity are questionable, and its underlying purpose is controversial. The purpose of this paper is to provide information on the AMT, its economic effects, and potential reform options.
