Tax Policy: Experience with the Corporate Alternative Minimum Tax (Letter
Report, 04/03/95, GAO/GGD-95-88).

Pursuant to a congressional request, GAO provided information on the
corporate alternative minimum tax (AMT), focusing on: (1) the
corporations that paid AMT between 1987 and 1992; (2) whether AMT
achieved its purpose; and (3) how AMT might affect corporate investment.

GAO found that: (1) AMT accelerated tax payments of $27.4 billion and
corporations used credits totalling $5.8 billion, from 1987 to 1992; (2)
at the end of 1992, corporations had accumulated $21.6 billion in
credits that would result in lower tax revenues in the future; (3) of
the 2.1 million corporations subject to AMT, 2,000 large corporations
paid 85 percent of all AMT in 1992; (4) the two AMT provisions that
produced the largest increases in taxable income were the depreciation
adjustment, used by 87 percent of all AMT payers, and the adjusted
current earnings adjustment, used by 67 percent of all AMT payers; (5)
the three industries that paid the most AMT were manufacturing,
transportation, and finance; (6) AMT has achieved its objectives of
making corporations with positive economic income pay tax and causing
corporations that reported positive amounts of book income in a
particular year to pay some tax in that year; (7) the effects of AMT on
corporate investment are unclear due to insufficient data; and (8) while
AMT might reduce present cash flows, future cash flows would be enhanced
as taxpayers recover AMT credits.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-95-88
     TITLE:  Tax Policy: Experience with the Corporate Alternative 
             Minimum Tax
      DATE:  04/03/95
   SUBJECT:  Corporations
             Tax credit
             Investments
             Taxpayers
             Depreciation
             Financial disclosure reporting
             Tax returns
             Income taxes
             Manufacturing industry
             Economic growth

             
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Cover
================================================================ COVER


Report to the Honorable
William J.  Coyne, House of Representatives

April 1995

TAX POLICY - EXPERIENCE WITH THE
CORPORATE ALTERNATIVE MINIMUM TAX

GAO/GGD-95-88

Experience With the Corporate Alternative Minimum Tax


Abbreviations
=============================================================== ABBREV

  ACE - adjusted current earnings
  AMT - alternative minimum tax
  AMTI - alternative minimum taxable income
  FTC - foreign tax credit
  IRS - Internal Revenue Service
  JCT - Joint Committee on Taxation
  NOL - net operating loss
  OBRA - Omnibus Budget Reconciliation Act
  TAMT - tentative alternative minimum tax
  TRA - Tax Reform Act of 1986

Letter
=============================================================== LETTER


B-260125

April 3, 1995

The Honorable William J.  Coyne
House of Representatives

Dear Mr.  Coyne: 

This report responds to your request for information on the corporate
alternative minimum tax (AMT).  In particular, the report discusses
the number, size, and industry class of corporations that paid AMT
over the period 1987 through 1992; why they were liable for it;
whether AMT achieved its purpose; and how AMT might affect corporate
investment.  AMT was substantially revised by Congress in 1986 to
ensure that no corporate taxpayer with substantial economic income
avoids significant tax liability by using exclusions, deductions, and
credits.  In addition, Congress made changes to AMT so that
corporations that reported significant income on their financial
statements for a particular year would pay some tax in that year. 
AMT raised almost $2.6 billion in net tax revenue in 1992. 


   BACKGROUND
------------------------------------------------------------ Letter :1

The legislative history of AMT refers to three distinct measures of
income:  economic income, financial statement or "book" income, and
income as defined for tax purposes.  A calculation of economic income
would include all types of income, recognize all income when it is
earned rather than when it is received, subtract all the costs of
earning the income, and make adjustments for inflation.  Because such
a comprehensive measurement would not be based solely on market
transactions, it is not done in practice.  Financial statements
include a comprehensive measure of income based on historical records
that can be verified.  In contrast to economic income, financial
statement or book income does not adjust values for inflation and
does not recognize certain items of income until they are received. 
The definition of income implicit in the tax code combines a measure
of taxpayers' ability to pay taxes with the desire to encourage
certain activities through the tax code and to minimize the
difficulty of administering and complying with the tax law.  Despite
many similarities, the three measures are substantially different
from each other.  The purpose of AMT is to better coordinate the
definition of income for tax purposes with that of economic income
and financial statement income. 

Corporations are required to calculate their tax liability under two
sets of rules--computing their regular tax liability and their
tentative AMT liability, and paying whichever is greater.  If the
tentative AMT is more than the regular tax, the difference between
them is AMT.  AMT is described in sections 55 through 59 of the
Internal Revenue Code. 

Corporations have to keep records to calculate AMT as well as the
regular tax.  For tax year 1994, a corporation had to file Form
4626--used to figure AMT--if its taxable income or loss before the
net operating loss deduction, plus its adjustments and preferences,
totaled more than the lesser of $40,000 or the corporation's
allowable exemption amount.  The corporate AMT was cited by all 17
corporations we interviewed in preparing for testimony last year as
among the provisions in the Internal Revenue Code with the largest
recordkeeping and compliance cost burden.\1

The AMT rate is 20 percent, lower than the regular corporate tax rate
of 35 percent now or 34 percent through 1992.  However, AMT is levied
on a broader tax base than the regular tax because the AMT tax base
includes certain regular tax preferences and adjustments that either
delay the time when income is recognized or exclude income items
altogether. 

Two important AMT adjustments are related to depreciation and
financial statement income.  Depreciation is the cost incurred by a
business reflecting the reduction in value of certain of its assets
over time.  For both the regular tax and AMT, the amount of
depreciation deductions taken in a year is a certain fraction of the
original purchase price of the assets.  Compared with the regular
tax, deductions for depreciation under AMT are smaller in the early
years after an asset is placed in service and are spread out over a
longer time. 

The book income and the adjusted current earnings (ACE) adjustments
were established to ensure that firms reporting large earnings on
their financial statements in a given year paid some tax in that
year.  Book income reported on financial statements may not equal
taxable income on tax returns because some items of revenue and
expenses are never included in one or the other or are reported in
different years.  As a result, book income may not be equal to the
taxable income figure on tax returns, as explained in appendix III. 
The book income adjustment was part of AMT from 1987 through 1989. 
It was replaced by the ACE adjustment in 1990.  The ACE adjustment
relies on income tax principles to define income in a way that
Congress intended to be as broad as the definition of book income. 

AMT limits the amount of a corporation's net operating losses from
prior years that can be deducted in calculating current year's income
to 90 percent of tentative taxable income computed under AMT rules. 
In addition, it disallows the use of many credits available in the
regular tax and specifically restricts the amount of foreign tax
credit that can be taken for tax payments abroad. 

AMT is also linked to the regular tax through the AMT credit. 
Corporations that have paid AMT can credit these payments against
their regular tax liability in future years when they pay the regular
tax.  However, the credit cannot be used to reduce regular tax
liability below tentative AMT liability in future years.  With this
crediting mechanism, AMT operates partially as a prepayment of tax
rather than as a permanent increase in tax liability.  (App.  I
provides a more complete discussion of the history and mechanics of
AMT.)


--------------------
\1 Tax System Burden:  Tax Compliance Burden Faced by Business
Taxpayers (GAO/T-GGD-95-42, Dec.  9, 1994). 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

AMT more closely resembles a prepayment of tax than a permanent
increase in tax liability.  As such, it has accelerated tax payments
of $27.4 billion over the 1987 through 1992 tax years.  But AMT also
provides for credits for these prepayments in later years.  Over the
years 1987 through 1992, corporations used credits totaling $5.8
billion.\2 At the end of 1992, corporations had accumulated $21.6
billion in credits that will result in lower tax revenues in the
future as corporations apply their AMT credits against their regular
tax liabilities. 

Most AMT revenues came from relatively few corporations, but many
more corporations bear some burden in complying with the AMT
provisions.  Of the universe of 2.1 million corporations subject to
AMT, just 2,000 large corporations (or 0.1 percent) paid 85 percent
of AMT payments in 1992, and only 28,000 (or 1.3 percent) paid any
AMT at all.  This was the pattern every year from 1987 through 1992. 
But few corporations that we studied in detail paid AMT every year. 
Thus, over a longer period of time, a higher percentage of
corporations would pay some AMT.  Even this percentage will still be
much lower than the percentage that have to file an AMT form or keep
AMT records.  In 1992, 400,000 corporations filed the AMT form.  And
even more would have had to produce one set of computations and
records for regular tax and another for AMT. 

Not surprisingly, AMT has most affected corporations and industries
that use the exclusions, deductions, and credits that AMT was
designed to offset.  The two AMT provisions that produced the largest
increases in taxable income were the depreciation adjustment and the
book and ACE adjustments.  In 1992, the depreciation adjustment
increased taxable income by about $23 billion and was an AMT item for
87 percent of all AMT payers.  The ACE adjustment increased income by
about $19 billion and was an AMT item for 67 percent of all AMT
payers.  AMT payments were also affected by limitations on the amount
of net operating losses and foreign tax credits corporations may use. 

The three industries that paid the most AMT were manufacturing,
transportation, and finance.  Generally, their average tax rate
increased 1 to 2 percentage points after accounting for AMT credits. 
The industry whose tax rate was most affected was the mining
industry, where the rate increased by 4 to 6 percentage points after
taking AMT credits into account. 

Congress had two objectives in enacting AMT.  AMT has partially
achieved the first objective of making corporations with positive
economic income pay tax.  The AMT tax base comes closer to taxing
economic income because it does not allow certain tax preferences and
exemptions that cause the regular tax base to deviate from a tax on
economic income.  AMT depreciation provisions appear to more closely
approximate economic depreciation when inflation is low, leading to a
more accurate measurement of economic income.\3 However, if inflation
is high, AMT depreciation provisions may lead to an overstatement of
economic income. 

AMT has achieved its second objective by causing corporations that
reported positive amounts of book income in a particular year to pay
some tax in that year.  In every year in the 1987 through 1992
period, at least 6,000 corporations with positive book income that
paid no regular tax paid some AMT; another 9,000 corporations with
positive book income subject to regular tax paid an additional AMT
amount.  While in all years in the same period at least 290,000
corporations with positive book income did not pay regular tax or
AMT, the vast majority of these were small corporations and had less
than $40,000 in net income, which most likely qualified them for the
AMT exemption. 

The effects of AMT on corporate investment are not clear.  First, AMT
increases the average tax rate for businesses that pay AMT,
decreasing their cash flow.  Some studies by economists have
indicated that reductions in cash flow can reduce investment by firms
that must pay relatively high costs for funds from external sources. 
These studies conclude that this effect is more likely for smaller
firms, firms that pay relatively small amounts of dividends, firms
that do not participate in the corporate bond market, and firms that
cannot use working capital to smooth investment spending over time. 
However, none of the studies directly tested the extent to which AMT
actually affected investments. 

Second, the literature indicates that the effects of AMT on marginal
incentives to invest depend on whether firms consistently pay AMT and
on the source of financing for investment.\4 For example, studies
show that, if corporations consistently pay AMT or receive AMT
credits over long periods, the lower AMT tax rate can more than
offset the less generous AMT depreciation allowance, thus enhancing
the incentive to invest through retained earnings or stock issuance. 
Conversely, if investment is financed through debt, AMT can reduce
the incentive to invest relative to the regular tax. 

For corporations that switch back and forth from regular tax to AMT
tax liabilities, research has shown that the effects on investment
incentive are more complicated.  To illustrate, investment incentives
are increased for those firms that deduct investment costs while
paying the higher regular tax rate and that report investment income
while paying the lower AMT rate; the opposite situations produce
effectively higher costs for investments, thereby reducing investment
incentives. 

Our review of the available studies indicated that determining the
effect of AMT on investment is further complicated by the lack of
consensus on how significantly actual investments are affected by
changes in investment incentives.  Some studies have concluded that
investment is very responsive to changes in tax incentives, while
others have found small effects. 

Our ability to pursue the issues raised in the literature by testing
the effects of AMT on corporate investment decisions was limited in
that we analyzed only tax return data.  However, that data showed
that most of the total revenue generated by AMT was paid by
relatively large corporations rather than small ones.  We also note
that, while AMT might reduce present cash flows, future cash flows
would be enhanced as taxpayers recover AMT credits.  Further, our
analysis of the return data for the 5-year period from 1987 through
1991 showed that, of 10,000 corporations with assets of $50 million
or more, 13 percent either paid AMT or had unrecovered AMT credits in
all 5 years; 36 percent switched back and forth between AMT and
regular tax liabilities during the period; and the remaining 51
percent did not pay AMT in any of the 5 years. 


--------------------
\2 The inflation-adjusted numbers for AMT and AMT credits in 1992
dollars are in table II.1. 

\3 The estimates of economic depreciation we used are the most
commonly cited and comprehensive estimates that we identified. 
However, since they are based on a 1981 study, they do not reflect
changes in depreciation rates since that time. 

\4 The term marginal incentive refers to the additional tax that a
business would pay if it invested an additional dollar. 


   HOW MUCH AMT WAS PAID? 
------------------------------------------------------------ Letter :3

The amount of corporate AMT paid rose from $2.2 billion in 1987 to
$8.1 billion in 1990, before declining to $4.9 billion in 1992. 
These numbers must be combined with the fact that recovery of AMT
liability via the AMT credit has been growing, albeit slowly, as
shown in figure 1.  Most corporations that paid AMT in 1987 had not
fully recovered their payment by 1991, the last year we were able to
examine, but the total dollar volume of credits used rose from year
to year. 

   Figure 1:  AMT Liabilities and
   AMT Credits Claimed

   (See figure in printed
   edition.)

Source:  GAO calculations based on Internal Revenue Service (IRS)
Statistics of Income data. 


   WHICH CORPORATIONS PAID AMT? 
------------------------------------------------------------ Letter :4

The total number of corporations paying AMT was small.  About 28,000,
or about 1.3 percent of the 2.1 million corporations subject to AMT
in 1992, paid AMT in 1992.  The corresponding percentage ranged from
0.7 to 1.5 percent in the 1987 through 1992 period. 

Although only about 28,000 firms paid AMT in 1992, many more
corporations were affected by it.  For example, almost 400,000
corporations filed the AMT form with IRS in 1992 even though they
owed no AMT. 

Of the approximately 2.1 million corporations that were subject to
AMT in 1992, about 2,000 corporations with assets of $100 million or
more paid 85 percent of the total corporate AMT liability.  This was
a pattern that generally held true for 1987 through 1991 also.  As
shown in figure 2, corporations with assets of $500 million or more
paid 75 percent of all AMT in 1992, irrespective of the credit they
may have received. 

   Figure 2:  Distribution of AMT
   Payers and Liability by Asset
   Size, 1992

   (See figure in printed
   edition.)

Note:  Numbers do not add to 100 percent due to rounding. 

Source:  GAO calculations based on IRS Statistics of Income data. 

However, most corporations that paid AMT from 1987 through 1992 were
relatively small.  In most years, more than 70 percent of
corporations paying AMT had less than $10 million in assets.  In
1992, 75 percent of AMT payers had less than $10 million in assets,
as is also shown in figure 2.  Nevertheless, relatively large
corporations were more likely than smaller corporations to pay AMT. 
For instance, in all years except one, about 20 percent of
corporations with assets of $500 million or more paid AMT; in
contrast, no more than half of 1 percent of corporations with less
than $1 million in assets paid AMT. 

The industries in which corporations paid the most AMT were
manufacturing, transportation, and finance.  At the industry level,
AMT generally increased the amount of tax paid by about 1 or 2
percent of taxable income.  Eight specific industry subclasses that
we examined--auto, steel, chemicals, utilities, transportation,
paper, oil and gas extraction, and mining other than oil--had
generally higher percentages of AMT payers than existed in the nation
as a whole during the 6 years we examined. 

Firms differed from each other in how often they paid AMT and the
extent to which AMT increased their taxes.  Of approximately 10,000
corporations with over $50 million in assets that we tracked over a
5-year period, about half paid AMT in at least one year.  Of those
that paid AMT at least once, most paid it for only one year.  Only
about 160 of the 10,000 corporations we studied paid AMT in all five
years.  In the larger universe of all AMT payers, about a third of
the AMT payers that also paid regular tax had their taxes at least
doubled by AMT. 


   WHY DID CORPORATIONS PAY AMT? 
------------------------------------------------------------ Letter :5

By far the most important elements that caused corporations to pay
AMT were the depreciation adjustment for property placed in service
after 1986 and the book income and adjusted current earnings
adjustments.  For instance, in 1992 the depreciation adjustment was
included on about 87 percent of AMT returns and raised taxable income
by about $23 billion.  The ACE adjustment was included on about 67
percent of AMT returns and raised taxable income by about $19
billion.  No other preference item or adjustment was present in more
than 10 percent of AMT returns. 

AMT also caused corporations to pay tax by limiting their ability to
take net operating loss deductions and the foreign tax credit (FTC). 
About 32 percent of AMT payers in 1992 included net operating losses
in their AMT calculations, and about 19 percent reached the
limitation on the use of the deduction.  About 3 percent of AMT
payers had FTC as part of their AMT computation, and about one-fourth
of FTC claimants were constrained by the 90 percent FTC limit.  FTC
claims reduced overall AMT before credits by 32 percent. 


   HAS AMT ACHIEVED ITS PURPOSES? 
------------------------------------------------------------ Letter :6

AMT has partially achieved the congressional objectives of ensuring
that taxpayers with substantial economic income in a given year, and
taxpayers with positive book income in a given year, pay some tax in
that year.  By including tax preferences in its tax base and by more
closely approximating economic depreciation when inflation is low,
AMT leads to a tax more closely based on economic income.  In
addition, in every year from 1987 through 1992, at least 6,000
corporations with positive book income that paid no regular tax paid
some AMT, and at least 9,000 corporations with positive book income
subject to regular tax paid an additional AMT amount, as shown in
appendix III. 


      AMT LEADS TO A CLOSER
      MEASUREMENT OF ECONOMIC
      INCOME WHEN INFLATION IS LOW
---------------------------------------------------------- Letter :6.1

A corporate tax based on economic income would deny many of the
preferences and exclusions now in the regular tax code, index the
value of assets and costs for inflation, and base depreciation
deductions on economic depreciation.  AMT moves the tax code closer
to taxing economic income by including several preferences and
exclusions in its tax base.  With respect to inflation, neither the
regular tax nor AMT rules adjust the measurement of income for
inflation.  Concerning depreciation, AMT depreciation rules lead to
deductions that more closely approximate economic depreciation when
inflation is low.  However, AMT depreciation deviates further from
economic income than does regular tax depreciation in the presence of
moderate or high rates of inflation.  AMT may also reduce the
generous deductions of nominal interest expense (rather than
inflation-adjusted interest expense) that corporations can claim at
high rates of inflation.  (App.  III provides additional information
on corporations' book income, economic income, and AMT depreciation
rules.)


      AMT HAS MADE MORE
      CORPORATIONS WITH POSITIVE
      BOOK INCOME PAY TAXES
---------------------------------------------------------- Letter :6.2

In 1992, AMT provisions were successful in making about 9,900
corporations with positive book income and no regular tax liability
pay some AMT, as shown in table 1.  Also, about 13,800 corporations
with positive book income subject to regular tax paid an additional
AMT amount.  About 4,300 corporations with negative book income also
paid AMT--1,800 of these corporations paid both regular tax and AMT,
and almost 2,500 of these corporations paid AMT but no regular tax. 
This payment of taxes by corporations with losses may have been due
to the fact that some revenues were recognized for financial
accounting purposes after they were included on tax returns and/or
expenses were recorded in accounting records before they were
deducted for tax purposes, as explained in appendix III. 

On the other hand, AMT did not reach all corporations with positive
book income.  Of 2.1 million corporate returns subject to AMT in
1992, about 306,000 corporate returns reported positive book income
but did not pay regular or alternative minimum tax.  The vast
majority of these corporations were small and had less than $40,000
in net income, so they probably qualified for the AMT exemption.  Of
the larger corporations with positive book income, most were
investment companies, which generally flow out all their income to
shareholders.  Because of this feature of their business, these
companies are exempt from the book income and ACE adjustments. 



                           Table 1
           
            Book Income and Taxes of Corporations
                    Subject to AMT in 1992

                    (Dollars in millions)

                                  Number     Total
                                      of   regular     Total
Book income and tax status       returns       tax       AMT
------------------------------  --------  --------  --------
Corporations with positive book income
------------------------------------------------------------
No regular tax, no AMT           306,371        $0        $0
No regular tax, some AMT           9,855        $0    $1,770
Some regular tax, no AMT         660,632   $82,905        $0
Some regular tax, some AMT        13,843    $6,495    $2,172
============================================================
Total                            990,701   $89,400    $3,942

Corporations with negative book income
------------------------------------------------------------
No regular tax, no AMT           983,603        $0        $0
No regular tax, some AMT           2,486        $0      $370
Some regular tax, no AMT         105,044    $5,539        $0
Some regular tax, some AMT         1,818    $1,023      $544
============================================================
Total                           1,092,95    $6,562      $914
                                       1
============================================================
Grand total                     2,083,65   $95,962    $4,856
                                       2
------------------------------------------------------------
Note:  Tax returns with AMT totaled 28,001. 

Source:  GAO calculations based on IRS Statistics of Income data. 


   HOW MIGHT AMT AFFECT CORPORATE
   INVESTMENT? 
------------------------------------------------------------ Letter :7

The effects of AMT on corporate investment are not clear.  Studies
and comments by economists have examined two ways in which AMT might
affect investment:  by (1) reducing cash flow and thus discouraging
investment, or (2) changing marginal incentives to invest, leading to
changes in investment. 


      CASH FLOW
---------------------------------------------------------- Letter :7.1

Corporations finance investment through internal funds--retained
earnings or profits--or external funds such as debt or new stock
issues.  For corporations that must use external sources and pay
significantly higher costs compared to their opportunity costs
(earnings from investing their own funds), investment could be
sensitive to the current profitability or cash-flow position of the
firm. 

A number of recent studies have found significant effects of cash
flow on investment, and some authors have concluded that some
corporations find external funds significantly more expensive than
internal funds.  These studies have concluded that this is more
likely to be the case for smaller firms, firms that pay relatively
small amounts of dividends, firms that do not participate in the
corporate bond market, and firms that cannot use working capital to
smooth investment spending over time.\5 Thus, for such firms, AMT
might reduce investment by reducing cash flow and forcing them to
finance investment with costly external funds. 

It is not clear how many AMT payers meet these conditions.  No study
has directly tested the extent to which such cash-flow constraints
affect corporations that paid AMT.  The tax return data we used were
limited in their ability to directly test many of these factors. 
However, the data did show that most AMT is paid by relatively large
corporations.  To the extent that investment by large corporations is
less dependent on current cash flow than is the case for small
corporations, the effect of the AMT on investment would be limited. 
In addition, as AMT credits are reclaimed in the future, cash flow
would increase at that time, possibly increasing investment. 


--------------------
\5 Recent studies include R.  Glenn Hubbard, Anil K.  Kashyap, and
Toni M.  Whited, Internal Finance and Firm Investment, National
Bureau of Economic Research Working Paper 4392, June 1993; Toni M. 
Whited, "Debt, Liquidity Constraints, and Corporate Investment: 
Evidence from Panel Data," The Journal of Finance, XLVII:4 (September
1992); Stephen D.  Oliner and Glenn D.  Rudebusch, "Sources of the
Financing Hierarchy for Business Investment," The Review of Economics
and Statistics, 1992; Steven M.  Fazzari and Bruce C.  Petersen,
"Working Capital and Fixed Investment:  New Evidence on Financing
Constraints," Rand Journal of Economics, 24:3 (Autumn 1993); and
Steven D.  Oliver and Glenn D.  Rudebusch, Is There a Broad Credit
Channel for Monetary Policy?, Board of Governors of the Federal
Reserve System Working Paper 146, January 1994. 


      MARGINAL INCENTIVES TO
      INVEST
---------------------------------------------------------- Letter :7.2

Many studies have been done on the effects of corporate income taxes
on marginal incentives to invest, and several have directly
investigated the effects of the AMT on marginal incentives to invest. 
These studies have investigated how the regular corporate income tax
and AMT might affect the incentive to invest through their tax rates,
depreciation provisions, the deductibility of interest payments and
the nondeductibility of dividends, loss provisions, and credits for
certain types of investment.  Relative to the regular tax, AMT has a
lower rate, a generally slower depreciation schedule, and additional
limitations on credits and losses.  Because the lower tax rate by
itself would lower the cost of investment but the other two features
would raise the cost of investment, investment incentives may be
increased or decreased relative to the regular tax. 

Several studies have investigated how AMT affects incentives to
invest for corporations that are consistently paying AMT or
recovering AMT credits over long periods.  Studies we reviewed
contained the following conclusions: 

Incentives to invest were greater under AMT than under the regular
tax for firms permanently paying AMT that financed investments with
equity.  In this case, the value of the lower tax rate more than
offset slower depreciation deductions, so the effective tax rate was
lower. 

Investment incentives were reduced under AMT relative to the regular
tax for debt-financed investments.  Because interest is deductible
under both AMT and the regular tax, a dollar of interest payments
will reduce taxes by a greater amount under the higher regular tax
rate.\6

For investments financed with a mixture of debt and equity,
investment incentives under AMT can be higher or lower than the
regular tax, depending on the amount of debt used.  For the mix of
debt and equity described as typical by two authors, investment
incentives are greater under AMT than under the regular tax.\7

Another study addressed the more general situation where firms could
switch from the regular tax to AMT or pay AMT and then return to the
regular tax and recover all their AMT credits.  In this circumstance,
the effect of AMT on investment incentives is more complicated.  In
this case, the effect of taxes on the cost of capital investment will
depend on the timing of investment relative to when and how long the
corporation pays AMT, as well as on the source of financing for the
investment.  If depreciation deductions are taken when the firm is
paying the regular tax, and income from the investment is received
when the firm is paying AMT, the cost of investment is relatively
low.  If depreciation deductions are taken when the firm is paying
AMT and income is taxed at the higher regular tax rate, the cost of
investment is higher.\8

Our analysis showed that the circumstance envisioned in this later
study was the more common for AMT corporations--such firms were more
likely to switch between the regular tax and AMT.  We tracked the
1987 through 1991 tax situations of 10,000 corporations with assets
of $50 million or more.  Fifty-one percent did not pay AMT in any
year.  About 13 percent either paid AMT or had unrecovered AMT
credits in all 5 years.  The remaining 36 percent switched back and
forth from the regular tax to AMT. 

Our review of the available studies indicated that determining the
effect of AMT on investment is further complicated by the lack of
consensus on how significantly actual investments are affected by
changes in investment incentives.  Analysts have widely differing
views on how responsive investment is to changes in tax rules.  Some
studies have concluded that investment is very responsive to changes
in tax incentives, while others have found small effects.  The
difficulty stems from a lack of consensus on the nontax determinants
of investment; without a clear model of how other factors affect
investment, it is difficult to isolate the effects of taxes, holding
other factors fixed. 


--------------------
\6 Since the regular tax code favors debt-financed investment,
because interest payments are deductible while dividends are not, AMT
may reduce this distortion. 

\7 See Jane G.  Gravelle, The Economic Effects of Taxing Capital
Income (Cambridge, MA:  The MIT Press, 1994), chapter 7; and B. 
Douglas Bernheim, "Incentive Effects of the Corporate Alternative
Minimum Tax," in Lawrence H.  Summers, ed., Tax Policy and the
Economy, National Bureau of Economic Research (Cambridge, MA:  The
MIT Press, 1989). 

\8 See Andrew Lyon, "Investment Incentives Under the Alternative
Minimum Tax," National Tax Journal, XLIII:4 (1990), pp.  451-65. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
------------------------------------------------------------ Letter :8

Our objectives for this report were to (1) determine which
corporations paid AMT and why they were liable for it, (2) examine
whether AMT has achieved its purpose, and (3) discuss how AMT might
affect corporate investment. 

To meet our first objective, we analyzed the IRS Statistics of Income
corporate databases for 1987 through 1992, the most recent data
available at the time of our review.  These data files of over 70,000
tax returns per year include all corporations with assets of over
$100 million and a stratified probability sample of all other
corporations organized for profit.  Results from firms with assets of
less than $100 million are thus subject to sampling errors.  With the
large sample sizes, the calculations of sampling errors for 1989 and
1990 showed that the 95-percent confidence intervals for statistics
based on all AMT-paying firms were within 5 percentage points of
percentage estimates and within 5 percent of the value of other
estimates.  Where larger confidence intervals were found, they are
noted in the report.  We also constructed a database consisting of
tax returns for corporations that filed returns in each year from
1987 through 1991.  This database included about 10,000 corporations
that had assets of over $50 million in each of these years. 
Corporations in this database paid 73 percent of the total regular
tax liability and 77 percent of all AMT paid in 1991.  We tracked
these corporations over time to assess their experience with AMT. 
The major limitations of this database are that it does not include
(1) all corporations and (2) larger corporations that either went out
of business between 1987 and 1991 or merged with another corporation
and therefore did not file their own tax returns. 

To address the second objective, we reviewed AMT's legislative
history.  Using the previously described tax return data, we also
analyzed the relationship between the income or losses corporations
showed on their books and the regular tax and/or AMT they paid.  To
assess whether AMT effectively taxes corporate economic income, we
compared the AMT tax base with the tax base proposed by the Treasury
Department in 1984.  Treasury's proposal was to change the tax system
so that real economic income would be taxed.  We also compared the
AMT tax base with the list of tax expenditures published by the Joint
Committee on Taxation to determine the extent to which AMT includes
items that are preferences or exclusions in the regular tax.  To
determine whether the AMT depreciation provisions are consistent with
economic depreciation, we obtained estimates of the present value of
economic depreciation deductions under the regular tax and AMT from
the Congressional Research Service.  These estimates, while
comprehensive and widely used by researchers, were based on work on
economic depreciation published in 1981.  Therefore, the estimates
are subject to error and would not reflect any changes in economic
depreciation rates that might have occurred since 1981. 

To meet the third objective, we reviewed various academic studies and
articles.  In addition, we reviewed the literature on the
determinants of business investment. 

We did not obtain IRS comments on this report because we did not
address tax administration issues. 

We did our work in Washington, D.C., between May 1993 and February
1995 in accordance with generally accepted government auditing
standards.  Appendixes II through IV provide more detail on our
findings as they relate to our objectives. 


---------------------------------------------------------- Letter :8.1

We are sending copies of this report to various congressional
committees and Members of Congress, the Secretary of the Treasury,
and other interested parties.  Copies will be made available to
others upon request. 

The major contributors to this report are listed in appendix V.  If
you have any questions, please contact me on (202) 512-5407. 

Sincerely yours,

Jennie S.  Stathis
Director, Tax Policy and
 Administration Issues


AMT'S PURPOSE:  TAXPAYERS WITH
SUBSTANTIAL INCOME SHOULD PAY SOME
TAX
=========================================================== Appendix I

In addition to the regular income tax, both corporations and
individuals are subject to an alternative minimum tax (AMT).  The tax
system has historically tried to achieve two potentially conflicting
goals.  One goal has been to raise revenue in relation to taxpayers'
ability to pay, which is generally measured by annual income.\1
Another has been to encourage certain types of economic activity
thought to be beneficial to society.  This goal has been pursued
through provisions (tax preferences) that exclude various types of
income from tax, delay the payment of tax on certain types of income,
or grant tax credits for certain activities. 

These two goals can conflict with each other.  At various times,
reports that individuals and corporations were able to pay no tax
through the direct use of tax preferences and through interactions of
preferences and other features of the tax code led to concerns that
the ability-to-pay goal was not being met.  These concerns led
Congress to set limits on preferences in the regular tax code and to
create AMT. 


--------------------
\1 Certain provisions of the tax code are consistent with lifetime
income or consumption being the preferred measure of a taxpayer's
ability to pay, and debate continues over which is the most
appropriate measure of ability to pay. 


   LEGISLATIVE HISTORY OF AMT
--------------------------------------------------------- Appendix I:1

The idea of AMT was originally developed by the Treasury Department
in 1969.  Treasury studies found that some high income individuals
paid little or no tax, and that many high income individuals paid tax
at a lower rate than individuals with lower income.  In response to
these findings, Treasury proposed establishing a minimum tax for
individuals. 

The Tax Reform Act of 1969 included an add-on minimum tax for both
noncorporate and corporate taxpayers on certain tax preferences.  A
10-percent tax was levied on the corporate minimum tax base, which
was the sum of corporate tax preferences\2 minus a $30,000 exemption
amount and a corporation's regular tax liability.  Levied in addition
to the taxpayer's regular tax liability, this was an add-on rather
than an alternative tax.  The Tax Reform Act of 1976 added
preferences and changed the exemption amount. 

In 1978, concerns about the effectiveness of the individual AMT led
to changes.  In contrast to an add-on minimum tax, the tax introduced
in 1978 developed the AMT concept of levying a tax on an alternative
income base when the liability under the alternative base is greater
than the regular tax liability.  From 1978 to 1982, individuals were
subject to both AMT and the add-on minimum tax.  In 1982, the add-on
tax for individuals was repealed and the AMT base broadened. 
Throughout this period, the corporate add-on tax was essentially
unchanged. 

In its 1984 tax reform proposal, the Treasury Department proposed
changing business taxes, including the corporate income tax, so that
the tax base more closely approximated the real economic income of
businesses.\3 In addition to several important structural changes,
Treasury recommended eliminating over 45 existing tax preferences and
limiting many others.  In particular, Treasury proposed eliminating
most of the preferences in the regular tax that were included in the
add-on tax.  Treasury concluded that a minimum tax or an add-on tax
would not be necessary if the preferences in the tax code were
eliminated directly. 

In contrast to the Treasury Department proposal, the administration's
1985 tax reform proposal recommended that the corporate add-on
minimum tax be replaced with an AMT.\4 Also in contrast to the
Treasury proposal, the President's proposal included additional
preferences in the regular tax, did not repeal others, and did not
index the corporate tax base for inflation.  The proposal called for
an AMT under which taxpayers would calculate their income under two
systems and pay AMT when it reflected greater tax liability.  The
President's proposal also called for an expanded list of preferences
to be covered by AMT. 

The changes actually made to the corporate AMT were substantial and
were included in the Tax Reform Act of 1986 (TRA).  The former add-on
tax was repealed and replaced with an AMT similar to the minimum tax
that had applied to individuals before 1986.  Using language that
mirrored both House and Senate reports, the Joint Committee on
Taxation (JCT) staff's explanation of the act discussed the rationale
for the changes in AMT: 

     "Congress concluded that the minimum tax should serve one
     overriding objective:  to ensure that no taxpayer with
     substantial economic income can avoid significant tax liability
     by using exclusions, deductions, and credits.  Although these
     provisions may provide incentives for worthy goals, they become
     counterproductive when taxpayers are allowed to use them to
     avoid virtually all tax liability.... 

     "In particular, Congress concluded that both the perception and
     the reality of fairness have been harmed by instances in which
     corporations paid little or no tax in years when they reported
     substantial earnings, and may even have paid substantial
     dividends, to shareholders.  Even to the extent that these
     instances may reflect deferral, rather than permanent avoidance,
     of corporate tax liability, Congress concluded that they
     demonstrated a need for change."\5

Since the passage of TRA, several other important changes have been
made to the corporate AMT.  However, the overall structure of AMT has
remained essentially the same.  AMT is governed by sections 55 to 59
of the Internal Revenue Code. 


--------------------
\2 The tax preferences included in the corporate add-on tax base were
excess accelerated depreciation on real property; amortization of
certain rehabilitation expenditures, certified pollution control
facilities, and railroad rolling stock; excess bad debt reserves for
financial institutions; excess depletion; certain capital gains; and
the excess of the fair market value over the option price of certain
stock options. 

\3 Tax Reform for Fairness, Simplicity, and Economic Growth
(Washington, D.C.:  U.S.  Department of the Treasury, November 1984). 

\4 The President's Tax Proposals to the Congress for Fairness,
Growth, and Simplicity (Washington, D.C.:  May 1985). 

\5 Staff of the Joint Committee on Taxation, General Explanation of
the Tax Reform Act of 1986 (Washington, D.C.:  U.S.  Government
Printing Office, 1987), pp.  432-33. 


   OVERVIEW:  HOW THE CORPORATE
   AMT WORKS
--------------------------------------------------------- Appendix I:2

Under current law, corporations are to calculate tax liability under
two separate systems--the regular tax and AMT.  To comply with the
AMT provisions, taxpayers go through the following process: 

First, they calculate Alternative Minimum Taxable Income (AMTI).  To
do this, taxpayers start with their taxable income, add the value of
a number of preference items and adjustments, and then deduct any
available AMT net operating losses.  Table I.1 shows this
calculation. 



                          Table I.1
           
                     Calculation of AMTI

Operation           Item
------------------  ----------------------------------------
                    Taxable income before net operating loss
                    (NOL) deduction

Plus                AMT preferences

Plus or minus       AMT adjustments

Equals              Tentative AMTI

Minus               AMT NOL deduction (limited to 90 percent
                    of
                    tentative AMTI)

Equals              AMTI
------------------------------------------------------------
Sources:  GAO; Stewart S.  Karlinsky, Alternative Minimum Tax (New
York:  Research Institute of America, 1993). 

Next, taxpayers calculate Tentative Alternative Minimum Tax (TAMT). 
To do this, they reduce AMTI by an exemption amount and multiply the
remainder by the AMT tax rate, which is 20 percent.  They then
subtract any allowable credits, primarily the AMT foreign tax credit. 

Finally, taxpayers compare TAMT liability with regular tax liability. 
If TAMT is more than the regular tax, the taxpayer is subject to AMT. 
The taxpayer will pay the government the amount of TAMT liability. 
The difference between TAMT and the regular tax is the amount of AMT
actually owed.  If regular tax is more than TAMT, the taxpayer is
subject to the regular tax.  The calculation of regular tax owed can
include a credit for AMT paid in earlier years.  Because of the AMT
credit, any AMT paid may be recouped in future years when the
taxpayer returns to the regular tax.  In this regard, AMT more
closely resembles a prepayment of tax than a permanent increase in
tax liability.  However, taxpayers cannot reduce their regular tax
liability below TAMT through the use of the AMT credit.  Table I.2
shows this calculation. 



                          Table I.2
           
                    Calculation of Net AMT

Operation      AMT item       Comments
-------------  -------------  ------------------------------
               AMTI

Minus          AMT exemption  Generally $40,000; phased out
               amount         for corporate taxpayers with
                              AMTI above $150,000.

Multiply by    AMT rate
               (20 percent)

Equals         AMT before
               allowable
               credits

Minus          AMT foreign    Limit rules require worldwide
               tax credit     AMTI to be calculated; AMT
                              foreign tax credit (in
                              conjunction with allowable
                              investment credits) cannot
                              reduce AMT liability by more
                              than 90 percent; the credit
                              can be carried back 2 years or
                              forward 5 years.

Minus          AMT            Credits cannot reduce AMT by
               investment     more than 25 percent.
               tax credit
               carryforwards

Equals         Tentative AMT
               (TAMT)

Compare        TAMT with      If tentative AMT /> regular
               regular tax    tax, tentative AMT is owed;
               liability      net AMT is the amount by which
                              TAMT exceeds regular tax
                              liability; net AMT can be
                              carried forward and credited
                              against regular tax in future
                              years.
------------------------------------------------------------
Sources:  GAO; West's Federal Taxation:  Corporations, Partnerships,
Estates, and Trusts (St.  Paul, MN:  West Publishing Company, 1990). 

An example will illustrate how AMT works.  If a corporation computed
its regular tax as $1 million and its tentative AMT as $1.5 million,
it would pay $1.5 million.  One million dollars of this payment would
be classified as regular tax, and $0.5 million would be classified as
AMT. 

If the same corporation found that in the next year it owed $2
million as its regular tax liability and $1 million of TAMT, the
corporation would then be subject to just the regular tax.  The
corporation could claim a credit against its regular tax for the $0.5
million in AMT it paid the year before and then send $1.5 million to
the government.  In this case, it would recoup its AMT payment
quickly.  However, the AMT credit cannot reduce current year regular
tax liability below current year AMT liability.  If the corporation's
TAMT in the second year had been $1.75 million instead of $1 million,
it could only have claimed a credit of $0.25 million and would have
had to carry the remaining $0.25 million in uncredited AMT payments
ahead to future years. 


   AMT PREFERENCES AND ADJUSTMENTS
--------------------------------------------------------- Appendix I:3

In general, AMT preferences and adjustments reflect aspects of the
regular tax that either (1) defer tax by rapidly recognizing expenses
or by delaying revenue recognition, or (2) always exclude certain
income from the definition of taxable income. 


      AMT PREFERENCES
------------------------------------------------------- Appendix I:3.1

AMT preferences under the post-TRA AMT generally maintain the
preferences that were in place under the add-on minimum tax.  Table
I.3 lists the AMT preference items and describes how their regular
tax treatment differs from their AMT treatment. 



                          Table I.3
           
            AMT Preference Items--Regular Tax and
                        AMT Treatment

                      Regular tax
AMT preference        treatment           AMT treatment
--------------------  ------------------  ------------------
Real estate           Depreciated over    Depreciated over
depreciation (pre-    15, 18, or 19       15, 18, or 19
1987 property)        years using 175-    years using
                      percent declining-  straight-line
                      balance method      method

Certified pollution   Taxpayers can       The excess of the
control facilities    elect 5-year        amortization
amortization (pre-    amortization        deduction over the
1987 property)                            amount that would
                                          have been allowed
                                          as depreciation
                                          under section 167
                                          or 168

Appreciated capital   Market value of     Capital gain on
gain property         contributed         the property is
contributed to        property may be     included in AMTI
charity (repealed in  deducted, subject
the Omnibus Budget    to a cap of 10
Reconciliation Act    percent of income
(OBRA) of 1993)

Percentage depletion  Certain percentage  Excess of the
                      of income can be    depletion
                      deducted for        deduction over the
                      depletion,          property's
                      regardless of the   adjusted basis is
                      amount of the       added to AMTI
                      investment

Intangible drilling   Seventy percent of  "Excess"
costs                 drilling costs for  intangible
                      domestic oil, gas,  drilling costs are
                      and geothermal      the amount that
                      wells can be        regular tax
                      deducted            deductions exceed
                      immediately         deductions over
                                          10-year
                                          amortization. The
                                          amount of excess
                                          drilling costs
                                          over 65 percent of
                                          income is included
                                          in AMTI

Financial             Thrifts and         Amount by which
institution reserve   certain banks may   regular tax
for bad debts         elect to deduct a   deduction exceeds
                      percentage of       deduction based on
                      income as an        actual experience
                      addition to their   of bad debts
                      bad debt reserve    included in AMTI

Certain tax-exempt    Interest from       Interest from
income                certain private     small issue,
                      activity bonds is   mortgage revenue,
                      exempt              student loan, and
                                          redevelopment
                                          bonds is included
                                          in AMTI
------------------------------------------------------------

      AMT ADJUSTMENTS
------------------------------------------------------- Appendix I:3.2

AMT adjustments differ from AMT preferences in that adjustments can
be positive or negative.  Thus, adjustments related to the deferral
of tax will generally be positive in the early years of an asset's
useful life, increasing AMTI, and negative in the later years,
decreasing AMTI.  Table I.4 describes their regular and AMT tax
treatments. 



                          Table I.4
           
             AMT Adjustments--Regular Tax and AMT
                          Treatment

                      Regular tax
AMT adjustment        treatment           AMT treatment
--------------------  ------------------  ------------------
Real estate           Depreciated using   Depreciated using
depreciation (post-   straight-line       straight-line
1986 structures)      method over 27.5-   method over 40-
                      or 31.5-year        year useful life
                      useful life; post-
                      OBRA 1993,
                      nonresidential
                      real property is
                      depreciated over
                      39 years

Personal property     Depreciated using   Depreciated using
depreciation (post-   200-percent         150-percent
1986 equipment)       declining-balance   declining-balance
                      method over         method over
                      asset's recovery    asset's (generally
                      period              longer) adjusted
                                          depreciation
                                          schedule life

Long-term contracts   Limited use of      Percentage-
                      completed-          completed method
                      contract method of  of accounting must
                      accounting is       be used (except
                      allowed (income is  for home
                      not recognized      construction
                      until contract is   contracts)
                      completed)

Installment sales     Pre-OBRA 1987,      Businesses must
                      installment method  recognize gain or
                      of accounting       loss at the time
                      available for some  of sale of assets
                      businesses

Amortization of       Eighty percent of   Must be amortized
pollution control     amortizable basis   over asset's class
facilities (post-     can be amortized    life using
1986)                 over 5 years        straight-line
                                          method

Mining exploration    Certain costs can   Costs must be
and development       be expensed         capitalized and
costs                 (deducted           amortized over 10
                      immediately)        years
------------------------------------------------------------
Source:  GAO. 


      BOOK INCOME AND ACE
      ADJUSTMENTS
------------------------------------------------------- Appendix I:3.3

One of the most important components of the corporate AMT has been
the book income adjustment and its successor, the adjusted current
earnings (ACE) adjustment.  During the debate over TRA, the Senate
added an adjustment to AMT based on a corporation's reported
financial statement income.  The final bill included an adjustment
based on book income for tax years 1987 through 1989, and specified
that, after 1989, the book profits adjustment would be replaced by
the ACE adjustment.  The ACE adjustment is patterned after the
calculations required in the tax code for calculating earnings and
profits.  The JCT also described the reasons for book income and ACE
adjustments: 

     "With respect to corporations, Congress concluded that the goal
     of applying the minimum tax to all companies with substantial
     economic incomes cannot be accomplished solely by compiling a
     list of specific items to be treated as preferences.  In order
     to achieve both real and apparent fairness, Congress concluded
     that there must be a reasonable certainty that, whenever a
     company publicly reports significant earnings, that company will
     pay some tax for the year. 

     "For the years from 1987 through 1989, Congress concluded that
     this goal should be accomplished by means of a preference based
     upon financial statement or book income reported by the taxpayer
     pursuant to public reporting requirements or in disclosures made
     for nontax reasons to regulators, shareholders, or creditors. 
     Congress concluded that it was particularly appropriate to base
     minimum tax liability in part upon book income during the first
     three years after enactment of the Act, in order to ensure that
     the Act will succeed in restoring public confidence in the
     fairness of the tax system. 

     "For taxable years beginning after 1989, Congress concluded that
     the book income preference should be replaced by the use of a
     broad-based system that is specifically defined by the Internal
     Revenue Code.  Congress intended that this system should
     generally be at least as broad as book income, as measured for
     financial reporting purposes, and should rely on income tax
     principles in order to facilitate its integration into the
     general minimum tax system."\6


--------------------
\6 General Explanation of the Tax Reform Act of 1986 (Washington,
D.C.:  U.S.  Government Printing Office, 1987), pp.  434-35. 


      BOOK INCOME ADJUSTMENT
------------------------------------------------------- Appendix I:3.4

The book income adjustment was in effect from 1987 through 1989. 
Under its rules, if a corporation's adjusted net book income exceeded
AMTI, 50 percent of the difference was added to AMTI.  Although the
book income adjustment was described as an adjustment, it was similar
to a preference because it could not be negative.  If net book income
was less than AMTI, no adjustment was made.  Because the AMT tax rate
was 20 percent, effectively book income (if greater than AMTI) was
taxed at a rate of 10 percent (20 percent of 50 percent). 

TRA specified the financial statements to be used to calculate the
book income adjustment.  For example, if a corporation had filed a
financial statement with the Securities and Exchange Commission, this
statement was to be used in the calculation.  If the corporation was
not required to file this statement, other audited financial
statements prepared for nontax purposes could be used. 


      ACE ADJUSTMENT
------------------------------------------------------- Appendix I:3.5

The ACE adjustment replaced the book income adjustment in 1990.  The
ACE adjustment is a modified version of the calculation of earnings
and profits.  Conceptually, earnings and profits are a measure of the
economic resources available to corporations to pay dividends without
drawing down their capital.  While not specifically defined in the
tax code, the earnings and profit concept is developed in several
code sections and regulations. 

Many of the adjustments required to calculate ACE involve items that
are also AMT adjustments and preferences.  Once ACE is calculated, it
is compared to AMTI, and 75 percent of the difference between the two
is added to AMTI.  Unlike the book income adjustment, ACE can be a
negative amount (to the extent to which positive ACE adjustments were
made in prior years) and can therefore reduce AMT liability.  Table
I.5 summarizes the ACE calculation. 



                          Table I.5
           
                  ACE Adjustment Calculation

Operation       Preadjustment AMTI     Comments
--------------  ---------------------  ---------------------
Plus or minus   ACE depreciation       Straight-line
                adjustment             depreciation used;
                                       this adjustment was
                                       repealed in OBRA 1993
                                       for personal property
                                       placed in service
                                       after 1993

Plus            Items included in      (1) Tax-exempt
                earnings and profits   interest; (2) certain
                                       distributions from
                                       life insurance
                                       contracts; (3) inside
                                       buildup on life
                                       insurance contracts

Plus            Disallowance of items  (1) Certain dividends
                not deductible in      received; (2) certain
                computing earnings     dividends paid; (3)
                and profits            other

Plus or minus   Other adjustments      (1) Intangible
                based on earnings and  drilling costs; (2)
                profit rules           circulation expenses;
                                       (3) organization
                                       expenses; (4) last-
                                       in-first-out
                                       inventory
                                       adjustments; (5)
                                       installment sales

Plus or minus   Other items            (1) Disallowance of
                                       loss on exchange of
                                       debt pools; (2)
                                       certain acquisition
                                       expenses; (3)
                                       depletion; (4) basis
                                       adjustment in
                                       determining loss or
                                       gain from sale or
                                       exchange of property

Equals          ACE
------------------------------------------------------------
Source:  ACE worksheet, IRS Form 4626 instructions. 


   AMT LIMITS ON NET OPERATING
   LOSS DEDUCTIONS AND TAX CREDITS
--------------------------------------------------------- Appendix I:4

AMT places limits on the availability of credits and deductions in
order to prevent taxpayers from eliminating all tax liability in a
given year.  As the JCT reported: 

     "In addition, Congress concluded that a change was necessary
     with regard to the use of net operating losses, foreign tax
     credits and investment tax credits to avoid all U.S.  tax
     liability.  Absent a special rule, a U.S.  taxpayer with
     substantial economic income for a taxable year potentially could
     avoid all U.S.  tax liability for such year so long as it had
     sufficient such credits and losses available.  While Congress
     viewed allowance of the foreign tax credit and net operating
     loss deduction, along with the transitional relief relating to
     the investment tax credit, as generally appropriate for minimum
     tax purposes, it was considered fair to mandate at least a
     nominal tax contribution from all U.S.  taxpayers with
     substantial economic income."\7


--------------------
\7 General Explanation of the Tax Reform Act of 1986 (Washington,
D.C.:  U.S.  Government Printing Office, 1987), p.  436. 


      NET OPERATING LOSS DEDUCTION
------------------------------------------------------- Appendix I:4.1

Losses are generally recognized when they occur for financial
accounting purposes, and corporations can report negative amounts of
income on their tax returns.  However, under current law, a
corporation that loses money in a given year does not get a tax
refund for that tax year.  This means that expenses that would reduce
taxable income and reduce taxes had the firm made money do not reduce
taxes if the firm loses money.  Without a carryforward or carryback
provision, corporations that made profits in each year would pay less
tax over time than corporations that earned the same profits over
time but had some years with profits and some years with losses. 
Under current law, corporations can carry losses forward to 15 future
years and deduct them when they have positive income.  Corporations
can also carry losses back 3 years. 

Although deductions for net operating losses are allowed in the
calculation of AMTI, the deduction cannot exceed 90 percent of AMTI. 
With an AMT tax rate of 20 percent, this guarantees that (aside from
the exemption amount and other credits) corporations subject to AMT
will pay tax equal to at least 2 percent of AMTI (20 percent times at
least 10 percent of AMTI). 


      FOREIGN TAX CREDIT (FTC)
------------------------------------------------------- Appendix I:4.2

In general, U.S.  corporations are subject to U.S.  income tax on
their worldwide income.  However, corporations that operate abroad
may also be subject to foreign income taxes.  Like most countries,
the United States allows taxpayers a tax credit for foreign income
taxes paid so that corporations that operate internationally are not
taxed twice on the same income.  At the same time, the amount of
foreign tax that can be credited is limited so that FTCs do not
offset U.S.-source income. 

Under AMT, taxpayers must recalculate their foreign-source income and
the FTC limitations according to AMT rules.  AMT also places an
additional limit on FTC.  The AMT FTC cannot reduce AMT (determined
without regard to the AMT net operating loss deduction) by more than
90 percent.  If the AMT FTC exceeds 90 percent, the excess amount can
be carried back 2 years or forward 5 years, as can the regular tax
FTC. 


      OTHER TAX CREDITS
------------------------------------------------------- Appendix I:4.3

Historically, taxpayers who have undertaken a variety of activities
have qualified for credits.  Before TRA, corporations could earn
investment tax credits for investing in qualified capital assets. 
Currently, corporations can earn tax credits for qualified research
and development spending, income earned in U.S.  possessions,
spending on rehabilitation of qualified structures, wages on
qualified jobs, and other tax-related activity.  The purpose of these
credits is to encourage certain types of activity that is thought to
lead to social benefits.  The regular tax places limits on the extent
that corporations can use credits to reduce their tax liability. 

Under AMT, these credits generally cannot be used to reduce AMT
liability.\8 Additionally, many tax credits cannot be used for the
regular tax if they reduce regular tax liability below AMT liability. 
An exception to this rule exists for the possessions credit; it
cannot reduce AMT, but it is included in the calculation of regular
tax. 

Table I.6 compares the tax rules for the deduction of net operating
losses with those for tax credits under the regular tax and AMT. 



                          Table I.6
           
           Net Operating Loss and Tax Credit Rules
                Under the Regular Tax and AMT

                      Regular tax
Provision             treatment           AMT treatment
--------------------  ------------------  ------------------
Net operating loss    Can be carried      Alternative tax
deduction             back 3 years or     net operating loss
                      forward 15 years;   can reduce AMTI by
                      can be used to      at most 90
                      eliminate all       percent; unused
                      current year tax    alternative losses
                      liability.          can similarly be
                                          carried forward or
                                          back.

Foreign tax credit    Can be carried      Calculated on AMTI
                      back 2 years and    base; limited to
                      forward 5 years;    90 percent of AMT.
                      can eliminate all
                      U.S. tax on
                      foreign-source
                      income.

General business      Can be carried      Generally cannot
credit includes (1)   back 3 years and    be used to reduce
investment credit,    forward 15 years;   AMT; before 1991,
(2) jobs credit, (3)  cannot exceed       corporations could
alcohol fuels         difference between  use the investment
credit, (4) research  regular tax and     credit to reduce
credit, and (5) low-  tentative AMT, or   AMT by up to 25
income housing        25 percent of       percent.
credit                regular tax
                      liability in
                      excess of $25,000.

Possessions tax       Credit for U.S.     Possessions income
credit                tax on income       not included in
                      earned in active    AMTI; credit
                      business in U.S.    cannot reduce AMT.
                      possession.

Nonconventional fuel  Cannot exceed       Cannot be used to
credit                difference between  reduce AMT.
                      regular tax and
                      tentative AMT; no
                      carryforwards or
                      carrybacks.

Orphan drug credit    Cannot exceed       Cannot be used to
                      difference between  reduce AMT.
                      regular tax and
                      tentative AMT; no
                      carryforwards or
                      carrybacks.
------------------------------------------------------------
Source:  GAO; West's Federal Taxation. 


--------------------
\8 Investment tax credits earned before the passage of TRA could be
used to reduce AMT; the use of these credits was phased out over
time. 


      AMT CREDIT
------------------------------------------------------- Appendix I:4.4

AMT and the regular tax are coordinated through the AMT credit
mechanism.  The JCT explained the reasons for the AMT credit: 

     "Finally, Congress concluded that it was desirable to change the
     underlying structure of the minimum tax in certain respects.  In
     particular, to the extent that tax preferences reflect deferral,
     rather than permanent avoidance, of tax liability, some
     adjustment was considered necessary with respect to years after
     the taxpayer has been required to treat an item as a minimum tax
     preference, and potentially to incur minimum tax liability with
     respect to the item.  Absent such an adjustment, taxpayers could
     lose altogether the benefit of certain deductions that reflect
     costs of earning income."\9

The rationale behind the AMT credit can be illustrated for the case
of depreciation.  As shown in table I.3, the depreciation rates for
AMT purposes are slower and useful lives are longer than under the
regular tax.  This means that depreciation deductions early in an
asset's useful life are smaller than under the regular tax.  Later in
the asset's useful life, depreciation deductions will be greater
under the AMT schedule than under the regular tax.  If a taxpayer is
under AMT when an asset is purchased and later returns to the regular
tax, the total amount of depreciation deductions the taxpayer claimed
for the asset could be significantly less than the original cost.  In
this case, the taxpayer's larger regular tax depreciation deductions
are effectively disallowed by AMT in favor of smaller deductions. 
The AMT credit allows the taxpayer to eventually deduct the cost of
the asset, either through depreciation deductions directly or through
AMT credits that restore the previously disallowed depreciation
deductions. 

Before 1989, the AMT credit carryforward was limited to those items
involving deferral of tax only.  In OBRA 1989, this rule was changed
so that all items that generate AMT, whether timing or permanent
differences, lead to a creditable carryforward for tax years after
1989.  Unlike the net operating loss deduction carryforward or
foreign tax credit carryforward for the regular tax, the AMT credit
has no time limit.  Like these other deductions and credits, the
carryforward does not earn interest.  Therefore, taxpayers who use
AMT credit carryforwards lose the time value of money (potential
interest) on the amount of AMT paid from the time AMT liability is
incurred until they can use the credit. 


--------------------
\9 General Explanation of the Tax Reform Act of 1986 (Washington,
D.C.:  U.S.  Government Printing Office, 1987), p.  436. 


WHICH CORPORATIONS PAID AMT AND
WHY? 
========================================================== Appendix II

This appendix contains information on the amount of corporate AMT
payments, the size of the firms paying AMT, the industry breakdown of
these firms, the frequency of AMT payments and AMT credits claimed,
the significant elements of AMT, and the relationship of AMT to net
operating losses (NOL) and to the foreign tax credit (FTC). 


   AMT ACCOUNTS FOR SIGNIFICANT
   REVENUES FROM CORPORATIONS
-------------------------------------------------------- Appendix II:1

Table II.1 shows regular tax and AMT revenues for the years since the
major revision of AMT in 1986.  AMT revenues were between $2.7 and
$8.6 billion, or between 3 and 9 percent of the regular tax revenues
collected during the period.  The table also shows that the use of
the AMT credit has grown as more firms that paid AMT use the credit
against regular tax liability. 



                          Table II.1
           
              Size of Regular Tax Revenues, AMT
                  Revenues, and AMT Credits

                    (Dollars in billions)

Category        1987    1988    1989    1990    1991    1992
------------  ------  ------  ------  ------  ------  ------
1992 dollars
------------------------------------------------------------
Regular tax   $101.0  $106.2  $102.0   $93.4   $90.1   $96.0
 revenue
AMT              2.7     4.0     3.9     8.6     5.4     4.9
AMT credits       NA     0.6     0.9     0.7     1.5     2.3

Current year dollars
------------------------------------------------------------
Regular tax    $83.5   $91.3   $91.5   $87.5   $87.6   $96.0
 revenue
AMT              2.2     3.4     3.5     8.1     5.3     4.9
AMT credits       NA     0.5     0.8     0.7     1.5     2.3
------------------------------------------------------------
Note:  NA means not applicable. 

Source:  GAO calculations based on Internal Revenue Service (IRS)
Statistics of Income data.  Regular tax does not include tax from
Subchapter S corporations. 

AMT revenue is likely to decline in the future for several reasons. 
First, the Omnibus Budget and Reconciliation Act (OBRA) of 1993 made
two changes that should reduce the number of taxpayers using AMT. 
OBRA eliminated the ACE depreciation adjustment for property placed
in service after 1993.  The Joint Committee on Taxation estimated
that this change would reduce revenue by about $4.3 billion from 1994
through 1998.  OBRA also increased the useful life for nonresidential
real estate under the regular tax from 31.5 to 39 years.  Because the
39 years is only slightly different from the 40 years for AMT
purposes, less in AMT revenues related to this real estate can be
expected than otherwise. 

A second reason for the likely decline in AMT revenue is related to
the relatively short-lived equipment placed in service since the 1986
TRA that has added to the depreciation adjustment.  Much of this
equipment should reach the point in its useful life where
depreciation under the AMT system will be less than that under the
regular tax, generating a negative adjustment. 

A third reason is that more taxpayers may be subject to the regular
tax as the economy moves out of the recession.  With fewer taxpayers
paying AMT, AMT revenue should fall and recovery of past AMT credits
should speed up. 


   WHILE FEW CORPORATIONS HAVE
   PAID AMT, LARGE FIRMS ARE MORE
   LIKELY TO PAY AMT
-------------------------------------------------------- Appendix II:2

As table II.2 shows, only 0.7 to 1.5 percent of corporations paid AMT
in any given year.  For example, about 32,000 of 2.1 million 1990
corporate returns included AMT.\1



                          Table II.2
           
            Percentage of All Corporations Paying
                             AMT

AMT status      1987    1988    1989    1990    1991    1992
------------  ------  ------  ------  ------  ------  ------
Paying AMT       0.7     1.1     1.1     1.5     1.5     1.3
Not paying      99.3    98.9    98.9    98.5    98.5    98.7
 AMT
------------------------------------------------------------
Source:  GAO calculations based on IRS Statistics of Income data. 

Table II.3 shows that a high percentage of corporate AMT payers were
relatively small corporations.  The relationship between firm size
and AMT payment stems from the fact that there are many more small
corporations than large corporations.  For most of the years between
1987 and 1992, more than 70 percent of AMT payers had less than $10
million in assets.  Large corporations represented a small percentage
of AMT payers. 



                          Table II.3
           
             Percentage of AMT Payers by Size of
                         Corporation

                    (Dollars in millions)

Asset size class     1987   1988   1989   1990   1991   1992
------------------  -----  -----  -----  -----  -----  -----
$0 -less than $1     20.8   29.0   25.0   29.6   27.6   29.1
$1 -less than        42.7   42.0   46.5   44.6   47.3   46.3
 $10
$10 -less than       19.6   16.5   16.4   14.1   14.5   14.0
 $50
$50 -less than        6.2    4.7    4.4    4.2    3.8    3.8
 $100
$100 -less than       5.1    3.7    3.6    3.5    3.2    3.0
 $250
$250 -less than       2.0    1.5    1.6    1.5    1.3    1.3
 $500
$500 -less than       1.1    0.8    1.0    0.8    0.8    0.8
 $1,000
$1,000 and above      2.4    1.7    1.6    1.8    1.5    1.6
------------------------------------------------------------
Note:  Numbers may not add to 100 percent due to rounding. 

Source:  GAO calculations based on IRS Statistics of Income data. 

Table II.4 shows the percentage of corporations in each size class
that paid AMT.\2 While table II.3 showed that most AMT payers were
relatively small, small corporations were much less likely to be
paying AMT than large corporations.  While less than half of 1
percent of corporations with less than $1 million in assets were
paying AMT, more than 20 percent of the corporations with more than
$1 billion in assets were.  However, since there were so many more
small corporations than large ones, most AMT payers were relatively
small. 



                          Table II.4
           
           Percentage of Corporate Returns With AMT
                    by Size of Corporation

                    (Dollars in millions)

Asset size class     1987   1988   1989   1990   1991   1992
------------------  -----  -----  -----  -----  -----  -----
$0 -less than         0.2    0.4    0.3    0.5    0.5    0.4
 $1
$1 -less than         3.7    5.3    6.1    7.7    7.8    7.0
 $10
$10 -less than       12.1   15.2   15.1   16.7   16.6   14.8
 $50
$50 -less than       17.3   17.9   16.4   20.0   16.7   15.0
 $100
$100 -less than      18.5   18.2   16.9   20.0   17.0   13.7
 $250
$250 -less than      17.8   18.4   18.1   20.8   16.7   14.0
 $500
$500 -less than      17.4   17.4   18.1   19.4   16.5   14.6
 $1,000
$1,000 and above     23.7   23.7   21.0   30.0   23.2   20.1
------------------------------------------------------------
Source:  GAO calculations based on IRS Statistics of Income data. 

To further understand the relative importance of AMT, we calculated
the percentage of corporate assets that were in firms that paid AMT
and in those that did not.  Because large corporations paid AMT more
frequently, the percentage of assets that were in firms paying AMT
was much larger than the percentage of taxpayers paying AMT.  Thus,
even though less than 2 percent of taxpayers paid AMT, table II.5
shows that about a quarter of corporate assets were in firms that
paid AMT. 



                          Table II.5
           
                Percentage of Total Assets in
                  Corporations by AMT Status

AMT status      1987    1988    1989    1990    1991    1992
------------  ------  ------  ------  ------  ------  ------
AMT               23      24      24      37      25      24
No AMT            77      76      76      63      75      76
------------------------------------------------------------
Source:  GAO calculations based on IRS Statistics of Income data. 

Table II.6 shows the percentage of AMT liability paid by corporations
by asset size class.  Despite the fact that most AMT payers were
relatively small, most AMT liability came from the largest firms. 
Referring to table II.3, large corporations, generally comprising
about 2 to 3 percent of AMT payers, usually paid about 75 percent of
AMT liability.  In contrast, the smallest two size classes contained
75 percent of AMT payers, but they paid less than 10 percent of the
AMT liability. 



                          Table II.6
           
            Percentage of AMT Liability by Size of
                         Corporation

                    (Dollars in millions)

Asset size class     1987   1988   1989   1990   1991   1992
------------------  -----  -----  -----  -----  -----  -----
$0 -less than           3      2      3      1      2      1
 $1
$1 -less than           5      5      5      3      4      4
 $10
$10 -less than          6      6      6      3      5      6
 $50
$50 -less than          3      3      3      2      3      3
 $100
$100 -less than         5      5      5      3      5      5
 $250
$250 -less than         5      4      6      4      4      5
 $500
$500 -less than         4      5      8      6      6      8
 $1,000
$1,000 and above       68     70     64     78     71     67
------------------------------------------------------------
Note:  Numbers may not add to 100 percent due to rounding. 

Source:  GAO calculations based on IRS Statistics of Income data. 


--------------------
\1 These figures do not include about 1.6 million Subchapter S
corporation returns.  S corporations are taxed like partnerships and
are not subject to the corporate AMT. 

\2 For a similar analysis of AMT liability by firm size and other
calculations similar to those in this appendix, see Geraldine
Gerardi, Hudson Milner, and Gerald Silverstein, "Temporal Aspects of
the Corporate Alternative Minimum Tax:  Results From Corporate Panel
Data for 1987-1990," Proceedings of the Eighty-Fifth Annual
Conference on Taxation, National Tax Association - Tax Institute of
America, 1992; and "The Effects of Corporate Alternative Minimum Tax: 
Additional Results From Panel Data for 1987-1991," Proceedings of the
Eighty-Sixth Annual Conference on Taxation, National Tax Association,
1993. 


   AMT LIABILITY BY INDUSTRY
-------------------------------------------------------- Appendix II:3

Table II.7 shows the percentage of firms paying AMT by industry.  The
industry classifications are the major industry groups as defined by
IRS.  The table shows that corporations in the mining, manufacturing,
and transportation industries were more likely to have paid AMT. 
Corporations in wholesale and retail trade and services were less
likely to have paid AMT. 



                          Table II.7
           
           Percentage of Corporations Paying AMT by
                           Industry

Industry             1987   1988   1989   1990   1991   1992
------------------  -----  -----  -----  -----  -----  -----
Agriculture           0.4    1.2    0.8    1.4    1.4    1.2
Mining                3.2    3.3    4.0    5.7    4.4    4.9
Construction          1.1    1.8    1.9    1.9    1.6    1.2
Manufacturing         1.2    2.2    2.3    3.5    3.7    3.5
Transportation        1.2    1.9    2.6    2.9    3.0    2.9
 and public
 utilities
Wholesale             0.6    0.8    0.9    1.2    1.0    1.0
 trade
Retail trade          0.3    0.4    0.4    0.6    0.7    0.6
Finance,              1.3    1.4    1.4    1.7    1.7    1.4
 insurance,
 and real
 estate
Services              0.3    0.6    0.6    0.9    0.8    0.9
Other                 0.1    0.1    0.1    0.0    0.0    0.1
Overall               0.7    1.1    1.1    1.5    1.5    1.3
 average
------------------------------------------------------------
Source:  GAO calculations based on IRS Statistics of Income data. 

Table II.8 shows AMT liability by industry.  The data show that the
manufacturing, transportation, and finance industries paid the most
AMT. 



                          Table II.8
           
                  AMT Liability by Industry

                  (1992 dollars in millions)

Industry             1987   1988   1989   1990   1991   1992
------------------  -----  -----  -----  -----  -----  -----
Agriculture          $8.6  $14.7  $19.3  $20.1  $20.4  $19.3
Mining              110.5  244.9  298.7  351.8  306.9  222.2
Construction        110.1  121.4   99.7  109.7   85.6   79.8
Manufacturing       861.4  1,709  1,320  3,647  1,946  1,822
                              .5     .7     .2     .9     .2
Transportation      584.4  533.1  835.2  1,931  1,186  970.5
 and public                                 .8     .6
 utilities
Wholesale            69.9   74.4  115.6  179.1  156.7  261.2
 trade
Retail trade         99.6  100.9  149.9  312.7  227.9  167.4
Finance,            718.5  933.3  903.4  1,772  1,333  1,107
 insurance,                                 .4     .4     .2
 and real estate
Services            131.3  169.1  202.7  322.6  203.7  206.3
Other                 0.6    0.2    0.6    0.0    0.0    0.0
------------------------------------------------------------
Source:  GAO calculations based on IRS Statistics of Income data. 

In order to see the importance of AMT relative to the regular tax for
different industries, we calculated industry average tax rates for
the regular tax and for AMT.  The regular tax rate is regular tax
(not including the AMT credit) divided by taxable income (as defined
under the regular tax).  The AMT average tax rate is the regular tax
and AMT less the AMT credit, also divided by taxable income.  The
difference between the two figures shows the extent to which AMT
(both tax and credit) changes the aggregate tax payment of the
industry.  Table II.9 shows that AMT generally resulted in relatively
small changes at the industry level. 



                          Table II.9
           
              Average Tax Rates (Percentages of
           Taxable Income) Without and With AMT by
                           Industry

Industry             1987   1988   1989   1990   1991   1992
------------------  -----  -----  -----  -----  -----  -----
Agriculture           27/    24/    25/    26/    24/    24/
                       27     25     26     26     25     25
Mining                29/    18/    19/    19/    17/    18/
                       33     22     24     24     23     23
Construction          29/    26/    26/    27/    25/    25/
                       31     27     27     28     26     26
Manufacturing         25/    20/    21/    20/    20/    21/
                       25     21     21     22     21     21
Transportation        36/    29/    31/    31/    31/    32/
 and public            37     30     32     35     33     33
 utilities
Wholesale trade       34/    27/    29/    29/    28/    27/
                       34     28     30     30     28     28
Retail trade          34/    29/    30/    28/    30/    30/
                       34     29     30     30     30     30
Finance,              37/    28/    30/    28/    32/    30/
 insurance, and        38     29     31     31     33     30
 real estate
Services              27/    24/    26/    26/    27/    28/
                       27     25     27     28     28     28
Other                 27/    20/    25/    23/    24/    13/
                       27     20     26     23     24     13
------------------------------------------------------------
Source:  GAO calculations based on IRS Statistics of Income data. 

As requested, we computed the same information for eight industry
subclasses.  Table II.10 shows the percentage of firms paying AMT in
these industry subclasses.  The percentage of corporations that paid
AMT in these subclasses was above the average for all corporations,
with the possible exception of utilities due to the statistical
imprecision in the percentage of that subclass. 



                         Table II.10
           
           Percentage of Corporations Paying AMT in
                  Eight Industry Subclasses

Industry             1987   1988   1989   1990   1991   1992
------------------  -----  -----  -----  -----  -----  -----
Auto                  2.0    2.3    3.4    6.6    7.6    5.5
Steel                 1.5    3.4    5.4    6.2    5.5    4.8
Chemicals             2.3    2.2    2.7    4.7    4.8    5.9
Utilities             1.5    2.5    2.9    2.5    2.9    3.4
Transportation        1.2    1.9    2.5    2.9    2.9    2.8
Paper                 6.9    3.2    7.0    8.2    8.9    9.7
Oil and gas           2.4    2.8    3.3    5.1    4.0    4.1
 extraction
Mining (other         6.3    5.1    6.7    8.0    5.7    7.9
 than oil)
Overall average       0.7    1.1    1.1    1.5    1.5    1.3
------------------------------------------------------------
Note:  The estimate for utilities for 1990, the only year for which
we examined the statistical significance of the utilities estimate,
was not significantly different from the overall average at a
95-percent level of confidence. 

Source:  GAO calculations based on IRS Statistics of Income data. 

Table II.11 shows AMT liability for these industries. 



                         Table II.11
           
               AMT Liability for Eight Industry
                          Subclasses

                  (1992 dollars in millions)

Industry             1987   1988   1989   1990   1991   1992
------------------  -----  -----  -----  -----  -----  -----
Auto                $50.9  $174.  $45.5  $999.  $31.3  $136.
                               7             5             7
Steel                25.6   44.7   54.4   49.0   23.0   29.8
Chemicals            86.2   81.6  173.4  500.8  244.2  306.6
Utilities           418.8  343.2  523.0  841.5  642.4  629.3
Transportation      147.3  121.7  177.8  467.1  259.9  213.6
Paper                81.0   60.7   58.4  172.3  252.1  223.5
Oil and gas          39.3   67.1  104.7  174.4  232.5   80.8
 extraction
Mining (other        71.2  177.8  194.0  177.5   74.4  141.3
 than oil)
------------------------------------------------------------
Source:  GAO calculations based on IRS Statistics of Income data. 

Table 11.12 shows the average tax rate without and with AMT for these
eight industry subclasses. 



                         Table II.12
           
              Average Tax Rates (Percentages of
           Taxable Income) Without and With AMT by
                      Industry Subclass

Industry             1987   1988   1989   1990   1991   1992
------------------  -----  -----  -----  -----  -----  -----
Auto                  30/    17/    13/   6/20    24/    24/
                       31     18     14            28     28
Steel                 34/    27/    30/    30/    31/    30/
                       36     28     32     34     33     32
Chemicals             23/    19/    18/    17/    16/    17/
                       24     19     18     19     17     17
Utilities             35/    29/    31/    31/    32/    32/
                       37     30     33     35     34     35
Transportation        35/    29/    28/    29/    29/    26/
                       37     30     30     36     33     33
Paper                 35/    27/    28/    26/    25/    28/
                       36     28     28     28     30     29
Oil and gas           18/    11/    16/    15/    14/    15/
 extraction            21     13     18     19     20     16
Mining (other         41/    27/    24/    27/    25/    24/
 than oil)             46     34     34     35     30     32
------------------------------------------------------------
Source:  GAO calculations based on IRS Statistics of Income data. 


   AMT SIGNIFICANTLY INCREASED TAX
   LIABILITY FOR SOME TAXPAYERS
-------------------------------------------------------- Appendix II:4

For many AMT payers, AMT led to a large percentage increase in taxes
owed.  To determine whether AMT led to only very small tax changes or
to large tax changes for AMT payers, we calculated the percentage
increase in tax from AMT.  For AMT taxpayers who had no regular tax
liability, AMT was 100 percent of the taxes paid.  As shown in
appendix III (table III.8), about 40 percent of AMT payers owed no
regular tax in the year they paid AMT.  Table II.13 shows the
percentage increase in tax resulting from AMT for AMT taxpayers who
also had positive regular tax liability.  In 1990, for example, 8.5
percent of AMT payers had their total tax increased by less than 5
percent by AMT.  On the other hand, a third of AMT payers had their
taxes at least doubled by AMT. 



                         Table II.13
           
            Percentage of AMT Payers by Percentage
                  Increase in Tax Due to AMT

Percent         1987    1988    1989    1990    1991    1992
------------  ------  ------  ------  ------  ------  ------
0 -5            13.5     9.8    10.4     8.5     8.1    11.8
More than 5      6.7     9.3     7.1     6.2     6.0     6.4
 ï¿½ 10
More than       16.1    15.7    14.3    14.2    15.9    14.9
 10 ï¿½ 25
More than       14.3    17.1    15.0    19.3    15.3    20.4
 25 ï¿½ 50
More than       15.6    16.3    17.9    18.7    19.0    15.7
 50 ï¿½ 100
Above 100       33.8    31.8    35.3    33.2    35.6    30.8
------------------------------------------------------------
Note:  Numbers may not add to 100 percent due to rounding. 

Source:  GAO calculations based on IRS Statistics of Income data. 


   ABOUT HALF OF LARGE
   CORPORATIONS PAID AMT AT SOME
   TIME
-------------------------------------------------------- Appendix II:5

In order to see whether corporations paid AMT consistently between
1987 and 1991 or fluctuated between the regular tax and AMT, it is
necessary to track individual corporations over time.  To do this, we
developed a database containing 5 years of tax returns for
corporations that had total assets of more than $50 million in each
year from 1987 through 1991.\3 This database also allows us to
determine how quickly AMT payers were able to use the AMT credit.\4
Of the approximately 10,000 corporations in the database, about 50
percent did not pay AMT at any time over the 5-year period, as shown
in table II.14.  Very few (about 3.2 percent of AMT payers, or about
1.6 percent of the 10,000 corporations in the database) paid AMT in
all 5 years.  The greatest percentage of AMT payers paid once in the
5 years.  Table II.14 also shows the percentage of assets in
different categories as a percentage of the sum of all corporate
assets over the 5 years. 



                         Table II.14
           
           Percentage of $50+ Million Corporations
           Paying AMT by the Number of Years Paying
            AMT and Percentage of Corporate Assets
                    in Those Corporations

                    Never      1      2      3      4      5
                 paid AMT   year  years  years  years  years
---------------  --------  -----  -----  -----  -----  -----
Corporations         51.0   20.2   14.2    8.6    4.4    1.6
 (percent)
Assets               33.8   24.0   19.1   14.3    7.3    1.5
 (percent)
------------------------------------------------------------
Source:  GAO database developed from IRS Statistics of Income data. 

To understand whether corporations tended to pay AMT in consecutive
years or moved back and forth between AMT and the regular tax, we
tracked the years that taxpayers paid and did not pay AMT.  Table
II.15 shows the percentage of taxpayers that paid AMT in consecutive
years by the number of years that they paid AMT.  About two-thirds of
the corporations that paid AMT twice in the 5 years did so in
consecutive years.  About half of 3-year payers paid in 3 consecutive
years. 



                         Table II.15
           
                Percentage of AMT Payers With
            Consecutive Years Paying AMT by Number
                     of Years Paying AMT

              Percentage  Percentage  Percentage  Percentage
              paying for  paying for  paying for  paying for
Number of             no           2           3           4
years paying  consecutiv  consecutiv  consecutiv  consecutiv
AMT              e years     e years     e years     e years
------------  ----------  ----------  ----------  ----------
2                     33          67          NA          NA
3                      8          38          53          NA
4                     NA          11          23          66
------------------------------------------------------------
Note:  Percentages may not add to 100 percent across the table due to
rounding.  NA means not applicable. 

Source:  GAO database developed from IRS Statistics of Income data. 

To determine how long it took AMT payers to recover their payments
via the AMT credit, we calculated the percentage of firms that had
fully recovered their payment by year of AMT liability.  In making
this calculation, we assumed that receipt of an AMT credit recovered
the first possible year of AMT payments.  Table II.16 shows that the
majority of AMT payers for tax year 1987 had not fully recovered
their 1987 AMT payment via the AMT credit by the 1991 tax year. 



                         Table II.16
           
           Percentage of AMT Payers That Recovered
              AMT Liability, by Tax Year of AMT
                          Liability


Tax year of                                        Not fully
AMT liability     1988    1989    1990    1991     recovered
--------------  ------  ------  ------  ------  ------------
1987              13.7    11.9     7.4     8.1          58.8
1988                NA    11.3     7.8     9.0          71.9
1989                NA      NA     8.3    10.9          80.8
1990                NA      NA      NA     3.0          97.0
------------------------------------------------------------
Note:  NA means not applicable. 

Source:  GAO database developed from IRS Statistics of Income data. 

Table II.17 shows the percentage of AMT payments recovered via the
AMT credit.  In contrast to the preceding table, table II.17 shows
the amount of credit recovered by firms that fully recovered their
AMT payment and by those that only partially recovered their credits. 
These calculations also assume that credits claimed are allocated to
the first year of AMT liability for which AMT has not been fully
recovered.  The table shows that less than half of 1987 AMT liability
had been recovered via the AMT credit by 1991.\5



                         Table II.17
           
            Percentage of AMT Payment Recovered by
           All AMT Credit Claimants, by Year of AMT
                          Liability


Year of AMT                                            Total
liability         1988    1989    1990    1991     recovered
--------------  ------  ------  ------  ------  ------------
1987              20.6    14.1     3.1     5.8          43.6
1988                NA    16.0     3.3     4.7          24.0
1989                NA      NA    11.5     9.3          20.8
1990                NA      NA      NA     7.0           7.0
------------------------------------------------------------
Note:  NA means not applicable. 

Source:  GAO database developed from IRS Statistics of Income data. 

Table II.18 shows the percentage of corporations and the percentage
of assets of firms in the database that either paid AMT or paid
regular tax and had not been able to reclaim all outstanding AMT
credits in a particular year.  The data indicate that about 40
percent of the large corporations in the database were in this
position after tax year 1991.  This percentage may have fallen in tax
year 1992 as the amount of AMT credits claimed rose significantly, as
shown in table II.1. 



                         Table II.18
           
             Percentage of Firms in GAO Database
            Either Paying AMT or Having Unused AMT
             Credits and Percentage of Assets in
                         Those Firms

                    1987     1988     1989     1990     1991
---------------  -------  -------  -------  -------  -------
Corporations          19       27       31       38       40
 (percent)
Assets                24       32       36       54       52
 (percent)
------------------------------------------------------------
Source:  GAO database developed from IRS Statistics of Income data. 

We also calculated the length of time that corporations spent either
paying AMT or recovering credits.  Table II.19 shows the percentage
of corporations that either paid AMT or had unusable AMT credits by
the number of years that they were in this position.  For example,
the table shows that 9.2 percent of companies paid AMT or had
unusable credits in only 1 year, which means that they paid AMT in 1
year and fully recovered the payment with the AMT credit in the
following year.  About 10 percent of firms either paid AMT in 2 years
and recovered their credits in the next year or they paid AMT in 1
year and were unable to recover credits for an additional year. 
Thirteen percent of the companies either paid AMT or had outstanding
credits in all 5 years.  These firms could have been AMT payers in
all 5 years, paid AMT once but never recovered their credits, or paid
AMT in several years and never recovered credits.  Thus, while table
II.14 showed that only 1.6 percent of the companies in the database
paid AMT in all 5 years, 13 percent of the companies were either
paying AMT or had excess AMT credits in all 5 years. 



                         Table II.19
           
           Percentage of $50+ Million Corporations
            Either Paying AMT or Having Excess AMT
            Credits by the Number of Years in This
             Position and Percentage of Corporate
                 Assets in Those Corporations

                                         2     3     4     5
                         Never     1  year  year  year  year
                      paid AMT  year     s     s     s     s
--------------------  --------  ----  ----  ----  ----  ----
Corporations              51.0   9.2   9.7   7.9   9.0  13.2
 (percent)
Assets                    33.8  10.3  18.3  10.4  14.6  12.6
 (percent)
------------------------------------------------------------
Source:  GAO database developed from IRS Statistics of Income data. 


--------------------
\3 Due to time constraints, we were not able to incorporate 1992 data
into this database. 

\4 Gerardi, Milner, and Silverstein analyzed AMT using a similar
database.  The database we used contained about 800 more companies
because we were able to use the final rather than the preliminary SOI
data to develop our database.  However, in those cases where we
performed similar calculations, our results were generally very close
to theirs. 

\5 Gerardi, Milner, and Silverstein performed this calculation for
their database and found faster recovery of credits.  For example,
they found that 65.8 percent of 1987 AMT payments had been recovered
through tax year 1991. 


   THE BOOK/ACE ADJUSTMENT AND
   DEPRECIATION WERE THE MOST
   SIGNIFICANT AMT COMPONENTS
-------------------------------------------------------- Appendix II:6

Table II.20 shows the relative size of the AMT preferences and
adjustments.  As can be seen, the book income and ACE adjustments
were relatively large.  The replacement of the book income adjustment
with the ACE adjustment coincided with a large increase in the amount
of the adjustment.  Before 1990, the book income adjustment had been
declining in importance. 

The depreciation adjustment for post-1986 property grew as more
depreciable assets were placed into service after the introduction of
the adjustment.  As time passes from the imposition of the tax, more
new assets are put into service, increasing the adjustment.  At the
same time, more assets reach the point where depreciation is greater
under the AMT rules than under the regular tax, leading to a negative
adjustment.  A similar pattern is apparent for the depreciation
preferences related to pre-1986 assets; as time passes, fewer assets
generate positive adjustment amounts. 

Compared to the book/ACE adjustment and post-1986 property
depreciation, the other components of AMTI were small overall,
although they could be important for particular firms or industries. 



                         Table II.20
           
               AMT Preferences and Adjustments

                  (1992 dollars in millions)

Item                 1987   1988   1989   1990   1991   1992
------------------  -----  -----  -----  -----  -----  -----
Adjustments
------------------------------------------------------------
Book income or ACE  $26,1  $23,2  $15,7  $52,1  $25,8  $18,8
                       07     40     79     36     76     93
Depreciation        3,976  10,63  16,16  30,04  23,02  22,84
 (post-                        8      4      0      8      3
 1986 property)
Pollution             -15     47     21     NA     NA     21
 facilities
Mining development    179    319    324    295    195    108
Basis                 -47   -422   -904     NA     NA      -
                                                       3,368
Long-term           1,504  1,125  1,471     NA     NA     95
 contracts
Installment sales     304   -535   -178     NA     NA    -14
Merchant marine        40      5      1     NA     NA     31
 construction
Section 833            17      9    664     NA     NA  1,478
 deduction
Farm losses            27      0     13     NA     NA      0
Passive losses        168    125     38     NA     NA     34

Preferences
------------------------------------------------------------
Depletion           1,351  1,870  2,224  1,489    925  1,620
Tax-exempt bonds       19     41     77    544    167    128
Appreciated            48     33     64     73     81     82
 property
 charitable
 deduction
Intangible            247    171    145    376    232    176
 drilling costs
Reserves for bad       91     41     30     NA     NA     86
 debts
Accelerated            19    499    353    397    186    108
 depreciation of
 real property
Accelerated            10     16     16      6     NA      4
 depreciation of
 personal property
Amortized              22     12      9     NA     NA     NA
 pollution
 control
 facilities
------------------------------------------------------------
Note:  NA means not available.  For tax years 1990 and 1991,
Statistics of Income entered fewer items from many corporate tax
returns into its database, including items from the AMT form.  Also,
the estimates for several of the smaller adjustments and preferences
are based on small samples and are thus imprecise.  The amounts
reported are from AMT payers only, and the adjustment amounts are net
of negative adjustments. 

Source:  GAO calculations based on IRS Statistics of Income data. 

The importance of the depreciation and the book income and adjusted
current earnings adjustments is also apparent from data on the
frequency of occurrence of different AMT components, as table II.21
shows.  These items increased AMTI for most AMT payers.  In contrast,
the other preferences and adjustments increased AMTI for only a small
percentage of AMT payers. 



                         Table II.21
           
                Percentage of AMT Payers With
                 Adjustments and Preferences

Item                 1987   1988   1989   1990   1991   1992
------------------  -----  -----  -----  -----  -----  -----
Depreciation           65     79     84     86     86     87
 adjustment
Mining                  1      1      1      0      0      1
 development
 adjustment
Depletion               5      4      5      5      4      4
 preference
Intangible              2      1      1      1      1      1
 drilling
 preference
Tax-exempt income       1      1      1      1      1      1
 preference
Accelerated            21     15     13     12     10      9
 depreciation
 preferences
ACE/book income        48     45     41     65     86     67
 adjustment
------------------------------------------------------------
Source:  GAO calculations based on IRS Statistics of Income data. 


   AMT LIMITS TAX CREDITS AND
   DEDUCTIONS FOR PRIOR LOSSES
-------------------------------------------------------- Appendix II:7

In order to ensure at least a small tax liability from corporations
with prior year losses and foreign tax credits, the AMT rules include
limits on the amounts these deductions and credits can reduce AMTI
and AMT.  The rules also include an overall limit on the amount by
which both the AMT net operating loss deduction and the AMT FTC
together can reduce AMT liability. 

To determine how these rules affected AMT payers, we calculated the
percentage of AMT payers that included NOLs and FTCs in their AMT
computations.  We also calculated the percentage by which AMT payers
were able to reduce AMTI and AMT before credits, respectively, to
determine whether the limitations had prevented firms from fully
claiming deductions and credits. 

Table II.22 shows the percentage of AMT payers that claimed a
deduction for prior year net operating losses.  The table shows that
about a third of AMT payers claimed the deduction, and in recent
years the deduction reduced tentative AMTI by about 15 percent. 



                         Table II.22
           
           Percentage of AMT Payers With Deduction
                         for AMT NOL

                     1987   1988   1989   1990   1991   1992
------------------  -----  -----  -----  -----  -----  -----
Percentage of AMT      36     37     33     33     30     32
 payers with AMT
 NOL deduction
Percentage of AMT      64     63     67     67     70     68
 payers with no
 AMT NOL deduction
Overall reduction      36     34     31     13     16     17
 in AMTI from AMT
 NOL deduction
------------------------------------------------------------
Source:  GAO calculations based on IRS Statistics of Income data. 

To determine whether corporations were constrained by the 90-percent
net operating loss limit, we calculated the percentage reduction in
AMTI for AMT payers who had a deduction for AMT net operating losses. 
Table II.23 shows that a significant percentage of AMT payers with
NOL deductions may have been constrained by the limitation. 



                         Table II.23
           
            Percentage of AMT Payers With AMT NOL
           Deductions by Size of AMT NOL Deduction
                Relative to AMTI Before Losses

Percentage
reduction in AMTI
from AMT NOL         1987   1988   1989   1990   1991   1992
------------------  -----  -----  -----  -----  -----  -----
90 percent (at         65     60     62     56     55     59
 limit)
Above 75 through        4      6      5      5      3      5
 89 percent
Above 50 through        9      7      8     10     12      7
 75 percent
Above 25 through       10     15     10     11     14     13
 50 percent
0 through 25           12     13     15     20     17     15
 percent
------------------------------------------------------------
Note:  Numbers may not add to 100 percent because of rounding. 

Source:  GAO calculations based on IRS Statistics of Income data. 

AMT payers can also claim AMT foreign tax credits for foreign taxes
paid.  Table II.24 shows that despite the fact that very few AMT
payers claimed an AMT FTC, the credit reduced AMT before credits to a
large extent on an aggregate level. 



                         Table II.24
           
            Percentage of AMT Payers Claiming AMT
           FTC and Resulting Reduction in Aggregate
                             AMT

                     1987   1988   1989   1990   1991   1992
------------------  -----  -----  -----  -----  -----  -----
Percent of AMT          2      2      3      3      3      3
 payers with AMT
 FTC
Percent of AMT         98     98     97     97     97     97
 payers
 without AMT FTC
Overall                33     43     31     30     33     32
 percentage
 reduction in AMT
 before credits
 from
 AMT FTC
------------------------------------------------------------
Source:  GAO calculations based on IRS Statistics of Income data. 

Table II.25 shows the distribution of the percentage reduction of AMT
before credits for corporations that claimed AMT FTC.  The credit
cannot be used to reduce AMT before credits by more than 90 percent. 
The table indicates that between 25 and 37 percent of AMT FTC
claimants may have been constrained by the limitation. 



                         Table II.25
           
           Percentage of AMT Payers With AMT FTC by
            Size of AMT FTC Relative to AMT Before
                           Credits

Percentage
reduction in TAMT
from AMT FTC         1987   1988   1989   1990   1991   1992
------------------  -----  -----  -----  -----  -----  -----
90 percent (at         27     37     30     25     28     27
 limit)
Above 75 through        5     11      6      5      6      7
 89 percent
Above 50 through        9      9     12     10     10     10
 75 percent
Above 25 through        9     11     10      9     10      9
 50 percent
0 through 25           50     32     43     52     45     47
 percent
------------------------------------------------------------
Note:  Numbers may not add to 100 percent due to rounding. 

Source:  GAO calculations based on IRS Statistics of Income data. 

Taxpayers who claim the AMT NOL deduction and/or AMT FTC are also
subject to an overall limit.  The AMT NOL deduction and AMT FTC
combined cannot reduce AMT liability by more than 90 percent.  Few
taxpayers claimed both NOL and FTC.  Table II.26 shows the extent to
which AMT payers reduced AMTI through the use of the credit and the
deduction.  It shows that the percent of firms that may have been
constrained by the overall limitation varied, ranging from 29 percent
in 1989 to 49 percent in 1992. 



                         Table II.26
           
            Percentage of AMT Payers With AMT NOL
              and FTC by Size of AMT NOL and FTC
                       Relative to AMTI

Percentage
reduction in AMTI
from AMT FTC and
AMT NOL              1987   1988   1989   1990   1991   1992
------------------  -----  -----  -----  -----  -----  -----
90 percent (at         33     42     29     31     41     49
 limit)
Above 75 through       10     15     10     14      9      7
 89
 percent
Above 50 through       23     18     32     16     13     12
 75
 percent
Above 25 through       19     13      8     13     10     10
 50
 percent
0 through 25           15     12     21     26     28     23
 percent
------------------------------------------------------------
Note:  Numbers may not add to 100 percent due to rounding. 

Source:  GAO calculations based on IRS Statistics of Income data. 


HAS AMT ACHIEVED ITS GOALS? 
========================================================= Appendix III

According to the legislative history, the goals of AMT are to ensure
that taxpayers with substantial economic income pay some tax, and to
ensure that taxpayers with positive book income pay tax in the year
of positive income. 


   IS AMT DESIGNED TO TAX ECONOMIC
   INCOME? 
------------------------------------------------------- Appendix III:1

Because we are not aware of the existence of an agreed-upon, detailed
definition of economic income for corporations, we compared AMT to
the proposals made by the Department of the Treasury in November
1984.\1 The Treasury proposals were designed to tax the real economic
income of individuals and businesses, both corporate and
noncorporate.  We also compared the AMT provisions to the Joint
Committee on Taxation's list of corporate tax expenditures, which are
generally preferences and exclusions in the regular tax that deviate
from a tax on economic income.  The Treasury proposals provide a
broad outline of a corporate tax based on economic income; the tax
expenditure list goes into greater detail on particular tax code
provisions. 

Our comparisons showed that AMT moves the tax system closer to taxing
economic income by including several tax preferences.  In addition,
firms paying AMT will have depreciation deductions that more closely
match economic depreciation than do depreciation deductions under the
regular tax if inflation rates are low.  However, if inflation is
moderate or high, depreciation deductions under AMT can be less
generous than estimates of economic depreciation would dictate,
leading to an overstatement of economic income.  In times of moderate
or high inflation, the overstatement of income due to the
depreciation provisions may indirectly reduce the understatement of
income that occurs when corporations deduct nominal, rather than
inflation-adjusted, interest costs on debt incurred to finance
investments.  However, such indirect effects would not apply to
investments financed by equity. 


--------------------
\1 Tax Reform for Fairness, Simplicity, and Economic Growth
(Washington, D.C.:  U.S.  Department of the Treasury, November 1984). 


      TREASURY PROPOSAL
----------------------------------------------------- Appendix III:1.1

Treasury proposed three major structural changes to the corporate tax
in order to tax economic income. 

First, it proposed that the double taxation of dividends be reduced. 
Under the regular corporate tax, dividends are taxed when received by
shareholders but are not deducted by the corporation when paid.  In
contrast, interest paid is taxed when received by bondholders and is
deducted by the corporation. 

Second, Treasury proposed that capital assets, inventories, and
interest paid be indexed to inflation. 

Third, Treasury recommended that depreciation schedules be adjusted
to more closely match estimates of economic depreciation.  Economic
depreciation is the reduction in the market value of a particular
asset over a year.  If the tax provisions for depreciation deductions
matched economic depreciation, businesses would deduct the actual
reduction in the value of their assets as a business cost each year. 

Treasury maintained that these provisions and a reduction in the
preferences and exclusions in the tax code would result in a tax more
closely based on economic income.  Using this proposal as a basis for
comparison, we analyzed the tax base of AMT to judge whether AMT has
moved the tax base closer to economic income. 

First, AMT does not relieve the double taxation of dividends.  The
ACE adjustment further restricts the deductibility of dividends
received by corporations and therefore moves the tax base further
from a definition of economic income and closer to book income,
reflecting another goal of AMT. 

Second, AMT does nothing explicitly to adjust for inflation.  Many
items in the Treasury proposal related to the mismeasurement of
income due to inflation.  Inflation reduces the value of depreciation
deductions because the amount of depreciation deducted reflects the
historical cost of the asset when purchased, not its current
replacement value.  On the other hand, inflation increases the real
value of the deduction for interest paid because interest costs
unadjusted for inflation are deducted rather than the
inflation-adjusted interest costs.  However, the Tax Reform Act of
1986 did not include comprehensive indexing provisions.\2

Third, AMT depreciation schedules are closer to economic income at 0
percent inflation, but not when the inflation rate is 3 percent or
higher.  The data in appendix II showed that the depreciation
adjustment is a key component of AMT, responsible for $23 billion of
AMTI and included on 87 percent of AMT returns in 1992.  The question
then is whether the AMT depreciation provisions are closer to
economic depreciation than the provisions under the regular tax. 
Under the current tax system, depreciation deductions are calculated
using the historical cost of acquiring the asset.  Because neither
the regular tax nor the AMT depreciation schedules include
adjustments for inflation, the value of these deductions erodes as
the inflation rate increases.  One justification for accelerating
depreciation relative to economic depreciation is to offset the
effects of inflation. 

Table III.1 shows one set of estimates of the present value of
depreciation deductions under the regular tax and AMT per dollar
invested in 22 types of equipment and 6 types of structures, for
different inflation rates.  The table also shows estimates for the
present value of economic depreciation for these asset classes.  If
the value for the regular tax or AMT for a particular asset is
greater than that for economic depreciation, the tax schedules allow
a more generous deduction than economic depreciation.  If the values
are smaller, the tax schedules allow for slower, less generous
depreciation deductions. 

For example, if a corporation purchases an automobile, it is entitled
to depreciation deductions over the useful life that will eventually
total the purchase price of the auto.  However, since the deductions
occur over time, they are worth less than the purchase price today. 
Table III.1 indicates that with no inflation, depreciation deductions
under the regular tax today are worth 91 percent of the original
investment, 89 percent under AMT depreciation, and 87 percent under
economic depreciation.  The table also shows the effects of inflation
on depreciation deductions for regular tax and AMT; as inflation
increases from 0 to 3 to 6 percent, the present value of depreciation
deductions falls.\3



                         Table III.1
           
             Present Value of Depreciation Under
                Regular Tax, AMT, and Economic
                         Depreciation


                  0%    3%    6%    0%    3%    6%  Economic
--------------  ----  ----  ----  ----  ----  ----  --------
Equipment
------------------------------------------------------------
Autos           0.90  0.85  0.80  0.89  0.83  0.78    0.8695
                  54    53    94    28    63    49
Office          0.90  0.85  0.80  0.89  0.83  0.78    0.8451
                  54    53    94    28    63    49
Trucks          0.90  0.85  0.80  0.88  0.82  0.76    0.8353
                  54    53    94    31    23    76
Aircraft        0.87  0.81  0.75  0.77  0.67  0.59    0.7842
                  48    12    47    68    68    54
Construction    0.90  0.85  0.80  0.87  0.80  0.75    0.7749
 machinery        54    53    94    34    83    02
Mining and oil  0.87  0.80  0.74  0.77  0.67  0.59    0.7674
 field            15    65     9    68    68    54
Service         0.87  0.80  0.74  0.81  0.73  0.65    0.7674
                  15    65     9    86    22    89
Tractors        0.88  0.82  0.76  0.82  0.73  0.66    0.7655
                  15    06    63    04    45    16
Instruments     0.86  0.79  0.73  0.75  0.64  0.56    0.7465
                  05     3    46    48    85     4
Other           0.87  0.80  0.74  0.78  0.68  0.60    0.7465
                  15    65     9    49    73    73
General         0.85  0.79  0.73  0.76  0.66  0.57    0.7101
 industrial       97    26    48    57    24    93
Metal working   0.87  0.81  0.75  0.80  0.71  0.64    0.7101
                  65    35    76    83    38    27
Electric        0.78  0.69  0.62  0.69  0.57  0.48    0.7022
 transmission     29     3    23    13    09    12
Communication   0.90  0.85  0.80  0.80  0.70  0.63    0.7022
                  54    53    94    15    92    23
Other electric  0.87  0.80  0.74  0.78  0.68  0.60    0.7022
                  15    65     9           1    01
Furniture and   0.87  0.80  0.74  0.80  0.70  0.63    0.6875
 fixtures         15    65     9    15    92    23
Special         0.87  0.81  0.76  0.77  0.67  0.59    0.6734
 industrial       98    83    34    68    68    54
Agricultural    0.87  0.80  0.74  0.80  0.70  0.63      0.66
                  15    65     9    15    92    23
Fabricated      0.78  0.69  0.63  0.69  0.57  0.48    0.6771
 metals           73    93    01     4    41    45
Engines and     0.67  0.55  0.46  0.62  0.49  0.40    0.6111
 turbines         32    02    05    53    58    59
Ships and       0.82  0.74  0.67  0.68  0.55  0.46       0.6
 boats            42    13    14     2    99    99
Railroad        0.87  0.80  0.74  0.77  0.66  0.58    0.5689
                  15    65     9     4    85    91

Structures
------------------------------------------------------------
Mining, oil,    0.89  0.88  0.88  0.87  0.82  0.79      0.57
 and gas          61    89    23    82    92    03
Other           0.43  0.30  0.22  0.43  0.29  0.22    0.4758
                  98    63    99    23    97    44
Industrial      0.43  0.30  0.22  0.43  0.29  0.22    0.3975
                  98    63    99    23    97    44
Public utility  0.67  0.55  0.46  0.57  0.44  0.35    0.3872
                  32    02    05    27    01    32
Commercial      0.43  0.30  0.22  0.43  0.29  0.22     0.315
                  98    63    99    23    97    44
Farm            0.65  0.53  0.44  0.59  0.46  0.37    0.3215
                  64    04    01    86    71    84
------------------------------------------------------------
Source:  Jane Gravelle, Congressional Research Service. 

Table III.2 shows the percentage difference between economic
depreciation and regular and AMT depreciation.  The table shows that
the current regular tax depreciation schedule is generous relative to
economic depreciation when there is no inflation and in most cases
when inflation is 3 percent.  AMT depreciation is closer to economic
depreciation than regular depreciation at 0-percent inflation, but
for 3- or 6-percent inflation it is less generous than economic
depreciation for many assets.  As the inflation rate rises to 6
percent, both regular tax and AMT would be less generous than
economic depreciation would dictate for many assets. 



                         Table III.2
           
            Percentage Difference in Present Value
           of Regular Tax and AMT Depreciation From
                    Economic Depreciation


                       0%     3%     6%     0%     3%     6%
------------------  -----  -----  -----  -----  -----  -----
Equipment
------------------------------------------------------------
Autos                4.1%      -      -   2.7%      -      -
                            1.6%   6.9%          3.8%   9.7%
Office/computers      7.1    1.2   -4.2    4.9   -1.7   -7.8
Trucks                8.4    2.4   -3.1    5.7   -1.6   -8.1
Aircraft             11.6    3.4   -3.8   -0.9      -      -
                                                 13.7   24.1
Construction         16.8   10.4    4.5   12.7    4.3   -3.2
 machinery
Mining/oil field     13.6    5.1   -2.4    1.2      -      -
                                                 11.8   22.4
Service              13.6    5.1   -2.4    6.7   -4.6      -
                                                        14.1
Tractors             15.2    7.2    0.1    7.2   -4.0      -
                                                        13.6
Instruments          15.3    6.2   -1.6    1.1      -      -
                                                 13.1   24.4
Other                16.7    8.0    0.3    5.1   -7.9      -
                                                        18.6
General industrial   21.1   11.6    3.5    7.8   -6.7      -
                                                        18.4
Metal working        23.4   14.6    6.7   13.8    0.5   -9.5
Electric             11.5   -1.3      -   -1.6      -      -
 transmission                      11.4          18.7   31.5
Communication        28.9   21.8   15.3   14.1    1.0      -
                                                        10.0
Other electric       24.1   14.9    6.7   11.1   -3.0      -
                                                        14.5
Furniture and        26.8   17.3    8.9   16.6    3.2   -8.0
 fixtures
Special industrial   30.7   21.5   13.4   15.4    0.5      -
                                                        11.6
Agricultural         32.0   22.2   13.5   21.4    7.5   -4.2
Fabricated metals    16.3    3.3   -6.9    2.5      -      -
                                                 15.2   28.4
Engines and          10.2      -      -    2.3      -      -
 turbines                   10.0   24.6          18.9   33.6
Ships and boats      37.4   23.6   11.9   13.7   -6.7      -
                                                        21.7
Railroad             53.2   41.8   31.7   36.1   17.5    3.6

Structures
------------------------------------------------------------
Mining, oil, and     57.2   55.9   54.8   54.1   45.5   38.6
 gas
Other                -7.6      -      -   -9.1      -      -
                            35.6   51.7          37.0   52.8
Industrial           10.6      -      -    8.8      -      -
                            22.9   42.2          24.6   43.5
Public utility       73.9   42.1   18.9   47.9   13.7   -8.8
Commercial           39.6   -2.8      -   37.2   -4.9      -
                                   27.0                 28.8
Farm                104.2   65.0   36.9   86.2   45.3   17.7
------------------------------------------------------------
Source:  GAO calculations based on data in table III.1. 

To the extent that the AMT depreciation provisions are less generous
than economic depreciation at moderate or high inflation rates, they
tend to overstate economic income.  However, as mentioned above,
interest expenses are overstated in real terms when inflation exists. 
In this context, AMT may indirectly offset this inflation advantage
for corporations with sizeable debt-financed capital investment and
function as an implicit limit on interest deductions. 

Whether such a limit is consistent with a tax on economic income
depends largely on whether the personal tax is considered as well as
the corporate tax.  While corporations deduct interest unadjusted for
inflation, this interest is in turn taxed when received at the
individual level.  Thus, income earned by the corporation is in fact
taxed, but the revenue is received through the individual income tax
rather than the corporate tax.  However, many individuals are taxed
at a rate lower than the corporate rate, so the deduction at the
corporate level reduces taxes by an amount more than taxes are raised
at the individual level.  In addition, if the recipient of the
interest is a pension fund, no tax is levied until the income is
ultimately received by the pension recipient.\4

For shareholders, corporate income can be received as dividends or as
capital gains when stock shares are sold.  Dividends are not
deductible under the corporate tax, so there is no inflation- driven
advantage at the corporation level for dividends.  Capital gains are
taxed on their amount unadjusted for inflation, overstating their
real value, but have commonly been taxed under preferential rates and
are taxed only when shares are sold (realized), allowing potentially
substantial tax deferral.  While AMT depreciation provisions may
indirectly counteract inflation biases for debt at the corporate
level, they do not do so for income received by shareholders. 


--------------------
\2 For a discussion of plans for explicit indexing and the implicit
indexing in the tax code, see Daniel Halperin and Eugene Steuerle,
"Indexing the Tax System for Inflation," in Henry J.  Aaron, Harvey
Galper, and Joseph Pechman, eds., Uneasy Compromise:  Problems of a
Hybrid Income-Consumption Tax (Washington, D.C.:  The Brookings
Institution, 1988). 

\3 These estimates were provided by Jane Gravelle of the
Congressional Research Service.  Ms.  Gravelle's estimates assumed a
5-percent real discount rate.  The estimates of economic depreciation
are based on Charles R.  Hulten and Frank Wykoff, "The Measurement of
Economic Depreciation," in Charles R.  Hulten, editor, Depreciation,
Inflation, and the Taxation of Income from Capital (Washington, D.C.: 
Urban Institute Press, 1981). 

\4 For an analysis of limits on interest deductibility, see Alan J. 
Auerbach, "Should Interest Deductions Be Limited?" in Uneasy
Compromise cited above. 


      AMT INCLUDES SEVERAL TAX
      EXPENDITURES IN ITS BASE
----------------------------------------------------- Appendix III:1.2

AMT adjustments and preferences include some, but not all, tax
expenditures to broaden the tax base and move the tax base closer to
economic income.  Table III.3 shows corporate tax expenditures, as
defined by the Joint Committee on Taxation, that have an estimated
revenue loss of over $100 million in 1995.  The table shows which tax
expenditures are included directly in AMT as preferences or
adjustments and which are included indirectly through the ACE
adjustment.\5



                         Table III.3
           
                AMT Tax Base and Corporate Tax
                         Expenditures

                                AMT            Included in
                                preference or  ACE
Tax expenditure                 adjustment     adjustment
------------------------------  -------------  -------------
Accelerated depreciation of     yes            yes until
equipment                                      1993

Accelerated depreciation of     yes            yes until
buildings other than rental                    1993
housing

Accelerated depreciation on     yes            yes until
rental housing                                 1993

Exclusion of interest on        yes            yes
private purpose tax-exempt
bonds

Exclusion of interest on        no             yes
governmental tax-exempt bonds

Exclusion of income of foreign  no             yes
sales corporations

Inventory property sales        no             no
source rules exemption

Deferral of income from         no             no
controlled foreign
corporations

Interest allocation rules       no             no
exception for certain
nonfinancial corporations

Expensing of research and       no             no
development expenditures

Expensing of exploration and    yes            yes
development costs (fuels and
nonfuel minerals)

Excess of percentage over cost  yes            yes
depletion (fuels and nonfuel
minerals)

Nonconventional fuel            yes            no
production credit

Expensing of multiperiod        no             no
timber growing
costs

Investment tax credit for       yes            no
rehabilitation of historic
structures

Cash accounting for             no             no
agriculture

Excess bad debt reserves of     yes            no
financial institutions

Exclusion of interest on life   no             yes
insurance savings

Small life insurance company    no             yes
taxable income adjustment

Special treatment of life       no             no
insurance company reserves

Deduction of unpaid property    no             no
loss reserves for property and
casualty insurance companies

Special Blue Cross/Blue Shield  yes            yes
deduction

Low-income housing credit       yes            no

Expensing of up to $17,500 of   no             yes
depreciable business property

Reduced rates for first $10     no             no
million of corporate taxable
income

Deferral of gain on nondealer   yes            yes
installment sales

Completed contract rules        yes            yes

Deferral of gain on like-kind   no             no
exchange

Exception from net operating    no             no
loss limitations for
corporations in bankruptcy
proceedings

Deferral of gains from sale of  no             no
broadcasting facilities to
minority-owned businesses

Deferral of tax on capital      no             no
construction funds of shipping
companies

Regional economic development   certain        certain
tax incentives: empowerment     credits may    expensing
zones, enterprise communities,  be limited     provisions
and Indian investment                          may be
incentives                                     limited

Deductibility of charitable     certain        no
contributions                   contributions
                                until 1993

Employee stock option plan      no             no
rules

Targeted jobs credit            yes            no

Possessions tax credit          no             no
------------------------------------------------------------
Note:  This list of corporate tax expenditures follows Joint
Committee on Taxation definitions for tax expenditures with more than
$100 million in estimated revenue loss for 1995. 

Source:  GAO. 


--------------------
\5 In addition to other specific adjustments, if an amount is
permanently excluded from gross income for purposes of determining
AMTI, that amount must be included in ACE.  This list was compiled
using the specific adjustments for ACE in Internal Revenue Code
section 56(g)(4) and by applying general earnings and profit
principles.  We consulted appropriate IRS officials in developing
this table. 


   HAS AMT ENSURED THAT
   CORPORATIONS WITH POSITIVE BOOK
   INCOME IN A GIVEN YEAR PAID
   SOME TAX IN THAT YEAR? 
------------------------------------------------------- Appendix III:2

AMT has generated tax from some firms with positive book income that
otherwise would not have paid regular tax, but the percentage of
firms with book income that paid tax in a given year was not changed
very much by AMT.  The data indicate that AMT has been successful in
ensuring that large firms with book income paid some tax in that
year.  The corporations with book income that did not pay AMT or
regular tax were generally small, and most had net income under
$40,000, the AMT exemption amount.  The large corporations that had
book income but paid no tax were predominately mutual funds and
investment companies, which generally pass all income to
shareholders.  Because of this feature of their business, these
companies are exempt from the book income and ACE adjustments.\6


--------------------
\6 Internal Revenue Code sections 56(g)(6) and 56(f)(4). 


      DIFFERENCES BETWEEN TAXABLE
      INCOME AND FINANCIAL
      STATEMENT INCOME
----------------------------------------------------- Appendix III:2.1

The measurement of income for financial statement purposes and
measurement for tax purposes differ in important ways.  These
differences make it possible for the same corporation to report
positive income for financial statement purposes (book income) and a
loss for tax purposes, or the opposite. 

Some items of revenue and expense enter into the calculation of
either taxable income or book income without ever affecting the other
under current provisions of the tax laws.  One example of a permanent
difference between the two income measures is the treatment of income
from tax-exempt securities.  Corporations will include income from
tax-exempt securities on their financial statements, but this income
will never be included in taxable income.  Another permanent
difference is the treatment of dividends received by a corporation. 
For financial statements, dividends received are included in income. 
For tax purposes, only a fraction of dividends received are taxed. 
The purpose of the deduction for dividends received is to compensate
in part for the lack of a deduction for dividends paid.  Without a
deduction for dividends received, income flowing through several
corporations and ultimately to shareholders would be taxed at all
levels. 

Some items of revenue and expense are eventually recognized by both
tax and financial accounting but are recognized at different times. 
Book income before tax can exceed taxable income if (1) revenue is
recognized for accounting purposes prior to its recognition on the
tax return, or (2) expenses are recognized for accounting purposes
after their deduction on the tax return.  On the other hand, book
income before tax can be less than taxable income if (1) revenue is
recognized for accounting purposes after its inclusion on the tax
return, or (2) expenses are recognized for accounting purposes prior
to their deduction for tax purposes.  In contrast to permanent
differences, timing differences affect the timing of the recognition
of income or expense; over time, the same amount of income and
expense will be recognized for both book and tax purposes. 


      HOW DIFFERENT ARE TAX AND
      BOOK INCOME? 
----------------------------------------------------- Appendix III:2.2

To show how book income and taxable income are related, we calculated
the percentage of corporations in each of the classes in table III.4. 
The first row shows the percentage of corporations that reported a
positive amount of book income and a positive amount of net income on
their tax returns in a particular year.  The middle two rows of the
table show the percentage of corporations that differ in the sign of
the two income measures in the year.  The last row shows the
percentage of corporations that reported losses on both their
financial statements and for tax purposes in the year. 



                         Table III.4
           
           Percentage of Corporations in Net Income
           (Taxable Income Before Loss and Dividend
            Deduction) and Book Income Categories

                     1987   1988   1989   1990   1991   1992
------------------  -----  -----  -----  -----  -----  -----
Positive net         50.8   48.4   47.6   46.2   45.4   46.1
 income,
 positive book
 income
Positive net          6.4    7.0    6.9    6.9    6.6    7.8
 income,
 zero or negative
 book income
No net income,        1.3    1.5    1.4    1.4    1.6    1.4
 positive book
 income
No net income,       41.5   43.1   44.1   45.5   46.4   44.7
 zero or negative
 book income
------------------------------------------------------------
Source:  GAO calculations based on IRS Statistics of Income data. 

Table III.5 repeats this calculation after allowing for the deduction
of dividends received and net operating losses from net income.  The
table shows that these two provisions have significant effects.  In
1992, 13 percent of taxpayers with positive book income and positive
current year net income reduced their current year taxable income to
zero by using deductions for dividends received and prior year
losses. 



                         Table III.5
           
            Percentage of Corporations in Regular
            Taxable Income and Book Income Classes

                     1987   1988   1989   1990   1991   1992
------------------  -----  -----  -----  -----  -----  -----
Positive regular     40.4   37.5   36.5   34.6   33.4   33.1
 taxable
 income, positive
 book income
Positive regular      4.9    4.9    4.9    4.9    4.7    5.4
 taxable
 income, no book
 income
No regular           11.7   12.4   12.5   13.1   13.6   14.4
 taxable
 income, positive
 book
 income
No regular           43.0   45.2   46.1   47.5   48.4   47.1
 taxable
 income, no book
 income
------------------------------------------------------------
Source:  GAO calculations based on IRS Statistics of Income data. 

Regular tax owed on taxable income is further reduced by any
allowable credits.  Table III.6 shows the percentage of corporations
that have positive and zero regular tax liability while reporting
positive or negative book income.\7



                         Table III.6
           
           Percentage of Corporations With Regular
              Tax Payment, by Book Income Status

                     1987   1988   1989   1990   1991   1992
------------------  -----  -----  -----  -----  -----  -----
Positive regular     37.1   35.7   35.2   33.6   32.6   32.4
 tax,
 positive book
 income
Positive regular      4.5    4.7    4.8    4.7    4.5    5.1
 tax,
 negative book
 income
Zero regular tax,    15.0   14.2   13.8   14.0   14.4   15.2
 positive book
 income
Zero regular tax,    43.4   45.4   46.3   47.7   48.5   47.3
 negative book
 income
------------------------------------------------------------
Source:  GAO calculations based on IRS Statistics of Income data. 

As one goal of AMT is to get taxpayers with positive book income in a
given year to pay tax in that year, its design must "undo" many of
the differences between regular tax income and book income.  Many of
the preference items and the adjustments serve this purpose, as do
the book income and ACE adjustments. 



                         Table III.7
           
            Number of Corporations Paying Some and
            No Regular Tax and AMT, by Book Income
                       Status, by Year

                    (Numbers in thousands)

                          1987  1988  1989  1990  1991  1992
------------------------  ----  ----  ----  ----  ----  ----
Corporations with positive book income
------------------------------------------------------------
No regular tax, no AMT     367   318   295   291   293   306
No regular tax, some AMT     6     9    10    10     9    10
Some regular tax, no AMT   912   811   763   702   670   661
Some regular tax, some       9    13    12    17    16    14
 AMT
============================================================
Total                     1,29  1,15  1,08  1,02   989   991
                             4     1     0     0

Corporations with negative book income
------------------------------------------------------------
No regular tax, no AMT    1,07  1,04  1,01  1,01  1,01   984
                             7     6     8     7     8
No regular tax, some AMT     1     2     2     4     3     2
Some regular tax, no AMT   111   106   104    99    93   105
Some regular tax, some       1     2     1     2     2     2
 AMT
============================================================
Total                     1,19  1,15  1,12  1,12  1,11  1,09
                             0     6     5     2     6     3
============================================================
Grand total               2,48  2,30  2,20  2,14  2,10  2,08
                             4     6     5     2     5     4
------------------------------------------------------------
Note:  Totals may not be the sum of the detailed numbers due to
rounding. 

Source:  GAO calculations based on IRS Statistics of Income data. 


--------------------
\7 These figures will understate potential credit use in the absence
of AMT.  AMT limits the use of credits both by AMT payers and by
non-AMT payers whose potential credit use would reduce regular tax
below tentative AMT. 


      MANY AMT PAYERS DID NOT OWE
      ANY REGULAR TAX
----------------------------------------------------- Appendix III:2.3

Table III.8 shows the percentage of AMT payers that also paid regular
tax and the percentage that reported no regular tax liability.  The
percentages, which were consistent across time, show that about half
of AMT payers owed regular tax as well as AMT.  However, a
significant percentage of AMT payers had no regular tax liability at
the time they paid AMT. 



                         Table III.8
           
           Percentage of Corporations Paying AMT by
                      Regular Tax Status

Regular tax status   1987   1988   1989   1990   1991   1992
------------------  -----  -----  -----  -----  -----  -----
Paid positive          56     57     52     58     59     56
 regular tax
Paid no regular        44     43     48     42     41     44
 tax
------------------------------------------------------------
Source:  GAO calculations based on IRS Statistics of Income data. 

Table III.9 examines the relationship between regular tax status and
AMT payment in more detail.  The table groups AMT taxpayers into four
categories.  The first category includes those taxpayers that had
positive taxable income and paid some regular tax.  The second
category covers those taxpayers with positive net income but no
regular tax; these taxpayers had credits that could have eliminated
all regular tax or sufficient NOL deductions to eliminate all taxable
income.  The third category is for those taxpayers with a current
year regular tax loss.  A small number of AMT payers paid regular tax
but did not fall into one of the other categories. 

The table shows that the majority of AMT payers had positive taxable
income and also owed regular tax.  Fewer AMT payers had positive
taxable income and owed no regular tax.  A large percentage of AMT
payers owed no regular tax due to net operating loss deduction
carryforwards.  A smaller but significant percentage of AMT payers
had a current year regular tax loss but had positive AMTI leading to
an AMT liability. 



                         Table III.9
           
           Percentage of AMT Payers by Regular Tax
                 Status and Net Income Status

                     1987   1988   1989   1990   1991   1992
------------------  -----  -----  -----  -----  -----  -----
Positive regular       56     57     52     58     59     56
 tax,
 positive net
 income
Zero regular tax,      30     29     31     27     27     33
 positive net
 income
Zero regular tax,      14     14     17     15     14     11
 negative net
 income
Positive regular        0      0      1      1      1      1
 tax,
 negative net
 income
------------------------------------------------------------
Source:  GAO calculations based on IRS Statistics of Income data. 

Table III.10 shows the share of AMT liability that is raised from
each of the groups shown in table III.9. 



                         Table III.10
           
            Percentage of AMT Liability by Regular
               Tax Status and Net Income Status

                     1987   1988   1989   1990   1991   1992
------------------  -----  -----  -----  -----  -----  -----
Positive regular       54     46     55     68     60     56
 tax,
 positive net
 income
Zero regular tax,      28     35     31     18     25     34
 positive net
 income
Zero regular tax,      16     18     14     13     15     10
 negative net
 income
Positive regular        1      0      0      0      0      0
 tax,
 negative net
 income
------------------------------------------------------------
Source:  GAO calculations based on IRS Statistics of Income data. 


      MOST AMT PAYERS HAD POSITIVE
      BOOK INCOME
----------------------------------------------------- Appendix III:2.4

The legislative history of AMT indicates that Congress was concerned
that confidence in the tax system could be undermined if corporations
that reported significant income on their books paid no tax.  Table
III.11 shows that most AMT payers had positive book income, as might
be expected because of the large percentage of AMT returns that
included the book income and ACE adjustments.  However, a significant
percentage of AMT payers had negative book income. 



                         Table III.11
           
           Percentage of AMT-Paying Corporations by
                      Book Income Status

Book income status   1987   1988   1989   1990   1991   1992
------------------  -----  -----  -----  -----  -----  -----
Positive book          88     86     87     82     83     85
 income
Zero or negative       12     14     13     18     17     15
 book income
------------------------------------------------------------
Source:  GAO calculations based on IRS Statistics of Income data. 

To determine whether AMT significantly reduced the number of
taxpayers that reported positive income and paid no tax, we
calculated the percentage of taxpayers with positive book income that
paid AMT and had no regular tax liability.  Table II.12 shows the tax
status of those corporations that reported positive book income. 
Most taxpayers with positive amounts of book income paid regular tax. 
AMT had a very small effect on the overall percentage. 



                         Table III.12
           
            Percentage of Taxpayers With Positive
                  Book Income by Tax Status

                     1987   1988   1989   1990   1991   1992
------------------  -----  -----  -----  -----  -----  -----
Paid regular tax       70     70     71     69     68     67
 only
Paid regular tax        1      1      1      2      2      1
 and AMT
Paid AMT only           0      1      1      1      1      1
Paid no tax            28     28     27     29     30     31
------------------------------------------------------------
Source:  GAO calculations based on IRS Statistics of Income data. 

However, AMT raised a significant amount of revenue from firms that
reported book income and did not pay regular tax.  Table III.13 shows
the percentage of total AMT liability paid by corporations according
to their regular tax and book income situation.  Corporations with
positive book income and no regular tax liability paid a significant
portion of AMT. 



                         Table III.13
           
            Percentage of AMT Liability by Regular
                  Tax and Book Income Status

AMT payers:
regular tax and
book income status   1987   1988   1989   1990   1991   1992
------------------  -----  -----  -----  -----  -----  -----
Also paid regular      54     45     52     56     52     45
 tax,
 positive book
 income
Also paid regular       2      2      3     13      8     11
 tax,
 negative book
 income
Paid AMT only,         41     47     39     23     28     36
 positive book
 income
Paid AMT only,          4      6      6      8     12      8
 negative book
 income
------------------------------------------------------------
Source:  GAO calculations based on IRS Statistics of Income data. 


      WHY DID COMPANIES WITH
      POSITIVE BOOK INCOME NOT PAY
      AMT? 
----------------------------------------------------- Appendix III:2.5

To determine why AMT had not forced all corporations with positive
book income to pay some tax, we analyzed the information that was
available for these corporations from their regular tax returns.  The
IRS database that we used had little AMT information for non-AMT
payers.  In particular, small taxpayers who qualify for the exemption
are not required to file a Form 4626, so IRS does not have AMT
information for these taxpayers.  Without a 4626, we could not
completely identify the reasons why firms would not be paying AMT. 
However, we were able to characterize these firms by their regular
tax returns. 

About 98 percent of the corporations with positive book income and no
tax payment were relatively small, having less than $10 million in
assets. 

About 85 percent had less than $40,000 in net income.  Thus, it is
likely that they would qualify for the AMT exemption. 

Most firms with $1 billion or more in assets were regulated
investment companies (RIC) and real estate investment trusts (REIT),
which are technically subject to AMT but are exempt from the book
income and ACE adjustments.  (See table III.14.)



                         Table III.14
           
             Characteristics of Corporations With
            Positive Book Income Paying No Regular
                          Tax or AMT

                     1987   1988   1989   1990   1991   1992
------------------  -----  -----  -----  -----  -----  -----
Percentage of        85.9   84.9   85.3   86.3   86.5   86.7
 corporations with
 less
 than $40,000 in
 net
 income
Percentage of        98.3   98.1   97.9   98.0   97.7   97.5
 corporations with
 less
 than $10 million
 in
 assets
Percentage of        85.6   96.6   96.7   97.2   96.3   97.8
 corporations with
 $1 billion or
 more in assets
 that are RICs or
 REITs
------------------------------------------------------------
Source:  GAO calculations based on IRS Statistics of Income data. 


HAS AMT AFFECTED CORPORATE
INVESTMENT? 
========================================================== Appendix IV

Studies and comments by economists on the potential effect of AMT on
investment have considered two ways in which AMT might affect
investment.  First, by increasing the average tax rate, AMT could
reduce cash flow, discouraging investment.  Second, AMT could change
the marginal tax rate, which is the additional tax owed from an
additional dollar of income.  If AMT changed the incentives to
invest, this in turn could lead to changes in investment.  The
material that follows summarizes the results and ideas of the various
studies and comments. 


   EFFECTS OF AMT ON CASH FLOW AND
   INVESTMENT
-------------------------------------------------------- Appendix IV:1

Corporations can finance investment through internal funds (retained
earnings or profits) or external funds, such as debt or new stock
issues.  If a corporation must pay significantly higher costs for
borrowed funds or newly issued stock than the opportunity cost of
retained earnings, investment could be sensitive to the current
profitability or cash-flow position of the firm.\1 In circumstances
where securities markets do not have the same information as managers
in evaluating the potential investments of the firm, firms that must
borrow from the markets may have to pay a premium for funds.  If such
premiums had to be paid, potential investments that could be
profitable if the firm had sufficient cash flow might not be
profitable, and investment could be curtailed or delayed until
sufficient cash flow was available. 

A number of recent studies have found significant effects of cash
flow on investment, and some authors have concluded that some
corporations find external funds significantly more expensive than
internal funds.  These studies have concluded that this is more
likely to be the case for smaller firms, firms that pay relatively
small amounts of dividends, firms without access to the corporate
bond market, and firms that cannot use working capital to smooth
investment spending over time.\2

It is not clear how many AMT payers meet these conditions.  No study
has directly tested the extent to which such cash-flow constraints
affect corporations that paid AMT.\3 The tax return data we used were
limited in their ability to directly test many of these factors. 
However, the data did show that most AMT is paid by relatively large
corporations.  To the extent that investment by large corporations is
less dependent on current cash flow than is the case for small
corporations, the effect of the AMT on investment would be limited. 
In addition, as AMT credits are reclaimed in the future, cash flow
would increase at that time, possibly increasing investment. 


--------------------
\1 Opportunity cost in this circumstance is the amount that could be
earned in the most profitable alternative investment.  For example,
the corporation could invest its retained earnings in government
bonds and earn a relatively safe return. 

\2 Recent studies include R.  Glenn Hubbard, Anil K.  Kashyap, and
Toni M.  Whited, Internal Finance and Firm Investment, National
Bureau of Economic Research Working Paper 4392, June 1993; Toni M. 
Whited, "Debt, Liquidity Constraints, and Corporate Investment: 
Evidence from Panel Data," The Journal of Finance, XLVII:4 (1992);
Stephen D.  Oliner and Glenn D.  Rudebusch, "Sources of the Financing
Hierarchy for Business Investment," The Review of Economics and
Statistics, 1992; Steven M.  Fazzari and Bruce C.  Petersen, "Working
Capital and Fixed Investment:  New Evidence on Financing
Constraints," Rand Journal of Economics, 24:3 (Autumn 1993); and
Steven D.  Oliver and Glenn D.  Rudebusch, Is There a Broad Credit
Channel for Monetary Policy?, Board of Governors of the Federal
Reserve System Working Paper 146, January 1994. 

\3 Prakken discussed the potential effects of AMT on investment via
cash flow.  He concluded that AMT is more likely to have a
significant effect on investment through its effect on the cost of
capital.  See Joel L.  Prakken, "Investment, Economic Growth and the
Corporate Alternative Minimum Tax," in Tax Policy for Economic Growth
in the 1990s, American Council for Capital Formation Center for
Policy Research. 


   TAXES AFFECT INVESTMENT
   INCENTIVES
-------------------------------------------------------- Appendix IV:2

Several studies have analyzed the effects of AMT on incentives to
invest.  These studies have attempted to measure the extent to which
AMT changes incentives to invest.  While AMT increases the average
tax rate paid by corporations, it may increase or decrease the
marginal tax rate on new investment. 

A common approach to analyzing the effects of taxes on investment has
been to calculate the extent that taxes increase the before-tax
profit rate or pretax rate of return needed to generate a given
after-tax profit or return on investment.  Under these analyses,
business income taxes have been found to effectively raise the price
of investments.  If investments cost more than they otherwise would,
only those that earn relatively high profits over time will be
worthwhile.  One advantage to this type of analysis is that it can
include all the features of the tax code that may affect the
after-tax return to an investment. 

Researchers have studied how several business income tax provisions
may affect incentives to invest.  In particular, the incentives to
invest can be affected through the tax rate, depreciation provisions,
the deductibility or nondeductibility of interest payments and
dividends, whether inflation is accounted for, loss provisions, and
credits for certain types of investment.  First, the lower the
statutory business tax rate is, the lower is the cost of capital
investments, and the greater is the incentive to invest.  Second, the
more accelerated the depreciation method and shorter the useful lives
of business assets are, the lower is the cost of investment.  For
example, an immediate deduction of all investment spending
(expensing) reduces the tax cost on investment to zero.  Third,
inflation can reduce the value of deductions that are based on
historical cost.  Indexing provisions would lower the cost of capital
in times of inflation.  Fourth, the deductibility or nondeductibility
of sources of finance and the tax rates that apply to those sources
in the individual income tax can affect the cost of investment. 
Fifth, the deductibility of prior-year losses from taxable income and
whether such loss carryforwards earn interest to preserve their
present value can affect the cost of capital.  Finally, if tax
credits are allowed for certain types of investment, the cost of
those investments falls. 

As shown in table IV.1, relative to the regular tax, AMT has a lower
rate, a generally slower depreciation schedule, and additional
limitations on credits and losses.  Since the lower tax rate by
itself would lower the cost of investment but the other two features
would raise the cost of investment, it is not immediately clear
whether the cost of investment would rise or fall.  An evaluation of
the effects of AMT must include all these features. 



                          Table IV.1
           
              Major Tax Code Features Affecting
              Investment in Regular Tax and AMT

Item                  Regular tax         AMT
--------------------  ------------------  ------------------
Tax rate              35 percent          20 percent

Depreciation          Accelerated         Slower method than
schedule              relative to         regular tax
                      economic            depreciation,
                      depreciation (with  longer useful
                      low to moderate     lives
                      inflation)

Use of credits        Several credits     Most credits
                      can be              cannot be used
                      used to reduce
                      tax, subject to
                      limits

Treatment of losses   Carryforward can    Can reduce AMTI by
                      reduce taxable      at most 90 percent
                      income to zero
------------------------------------------------------------
Source:  Internal Revenue Code. 


      STUDIES OF AMT AND
      INCENTIVES TO INVEST
------------------------------------------------------ Appendix IV:2.1

The studies we reviewed found that relative to the regular tax,
investment incentives can be increased or reduced by AMT, depending
on several factors.  In general, these studies focused on investment
incentives for small projects that would not by themselves affect
whether the corporation would be subject to the regular tax or AMT. 

For firms permanently paying AMT, the incentives to invest were found
to be greater under AMT than the regular tax for investments financed
by equity.  In this case, the value of the lower tax rate more than
offset slower depreciation deductions, so the effective tax rate was
lower. 

On the other hand, investment incentives can be lower under AMT
relative to the regular tax for debt-financed investments.\4 Since
interest is deductible under both AMT and the regular tax, the higher
rate under the regular tax is a relative advantage because a dollar
of interest payments will reduce taxes by a greater amount if the tax
rate is higher.  Since the regular tax code favors debt-financed over
equity- financed investment at the corporate level because interest
payments are deductible and dividends are not, AMT may reduce this
distortion. 

For investments financed with a mixture of debt and equity, the
effective rate under AMT can be higher or lower depending on the
amount of debt used.  For an investment with the average mix of
approximately one-third debt, effective rates are higher under the
regular tax than under AMT.\5

The results cited above hold for firms that are either permanently
paying only the regular tax or paying AMT.  However, the effect of
AMT on investment incentives is further complicated if firms switch
back and forth from AMT status to regular tax status.  In this case,
the cost of capital will depend on the timing of investment relative
to the time during which AMT is paid and the length of time the firm
pays AMT and recovers its credits, as well as the source of financing
for the investment.  Investment incentives will depend on the timing
of investment because of the differences in the depreciation rules
and the tax rates between the two systems.  If depreciation
deductions are taken when the firm is paying the regular tax, and
income from the investment is received when the firm is paying AMT,
the cost of investment is relatively low.  If depreciation deductions
are taken when the firm is paying AMT and income is taxed at the
higher regular tax rate, the cost of investment is higher.\6

A recent study also showed that AMT may change the incentives to
invest in the United States or abroad.  Since the AMT tax rate is
lower than the regular tax rate, firms operating abroad may find that
AMT status presents an opportunity to bring profits back to the
United States and pay tax at a temporarily lower tax rate.  If these
additional profits are reinvested here, domestic investment may rise. 
On the other hand, the depreciation schedule under AMT is closer to
that for foreign investment under the regular tax, narrowing the
differential that exists under the regular tax.  AMT may thus reduce
the relative disincentive to invest abroad, encouraging more
investment abroad than otherwise.\7

The literature does not cover the effect of AMT on investment when an
investment is large enough to potentially change the tax status of
the firm from the regular tax to AMT or from a current net operating
loss position to AMT.  Some studies have examined investment
incentives when corporations can be either in a net operating loss
carryforward position or paying the regular tax.  In this case, the
size of net operating loss outstanding has an effect on incentives; a
firm with a relatively small NOL carryforward is penalized for
investment because of the loss of the time value of money on the
loss.  However, a large NOL carryforward could indicate that the firm
will effectively be tax-exempt for the foreseeable future and
investment may be encouraged.  It is not clear at this time how AMT
might change these incentives.\8


--------------------
\4 Prakken computed changes in the cost of capital from AMT using a
leverage ratio of 62 percent as a base case.  He also showed how
changes in the cost of capital are dependent on the amount of debt
used in financing investment.  See Joel Prakken, "Investment,
Economic Growth and the Corporate Alternative Minimum Tax."

\5 A mix of one-third debt was described as typical by Gravelle and
by Bernheim.  See Jane G.  Gravelle, The Economic Effects of Taxing
Capital Income (Cambridge, MA:  The MIT Press, 1994), chapter 7; and
B.  Douglas Bernheim, "Incentive Effects of the Corporate Alternative
Minimum Tax," in Lawrence H.  Summers, ed., Tax Policy and the
Economy, National Bureau of Economic Research (Cambridge, MA:  The
MIT Press, 1989). 

\6 Andrew Lyon, "Investment Incentives Under the Alternative Minimum
Tax," National Tax Journal, XLIII:4 (1990), pp.  451 -65.  The
article is also summarized in Gravelle (1994), pp.  170- 71. 

\7 Andrew Lyon and Gerald Silverstein, The Alternative Minimum Tax
and the Behavior of Multinational Corporations, National Bureau of
Economic Research Working Paper 4783, June 1994. 

\8 See Rosanne Altshuler, "Asymmetric Taxation and Investment
Incentives," Proceedings of the Annual Conference of the National Tax
Association, 1988, and Alan J.  Auerbach, "The Dynamic Effects of Tax
Law Asymmetries," Review of Economic Studies, LIII (1986). 


      HOW SENSITIVE IS INVESTMENT
      TO THE PRICE OR COST OF
      CAPITAL? 
------------------------------------------------------ Appendix IV:2.2

The effect of AMT on investment is further complicated by the lack of
consensus on the size of the effect on investment of changes in the
incentive to invest.  Analysts have widely differing views on how
responsive investment is to changes in tax rules.  Some studies have
concluded that investment is very responsive to changes in tax
incentives, while others have found small effects.  The difficulty
stems from a lack of consensus on the nontax determinants of
investment; without a clear model of the other determinants of
investment, it is difficult to isolate the effects of taxes, holding
other factors fixed. 

In particular, it has been difficult for investment models to isolate
the effects of output and price.  If output is the major determinant
of investment as firms add capacity when output is growing, then
investment may be relatively insensitive to the price of capital
goods.  If investment is sensitive to the price of capital goods,
then taxes, including AMT, may have an important effect on investment
by changing the effective price.\9


--------------------
\9 For a survey of recent literature on investment, see Robert S. 
Chirinko, "Business Fixed Investment Spending:  Modeling Strategies,
Empirical Results, and Policy Implications," Journal of Economic
Literature, XXXI (1993), pp.  1875-1911.  Chirinko concluded that the
effect of prices on investment is small.  For an opposite view, see
Martin Feldstein and Joosung Jun, "The Effects of Tax Rules on
Nonresidential Fixed Investment:  Some Preliminary Evidence from the
1980s," in Martin Feldstein, ed., The Effects of Taxation on Capital
Accumulation (University of Chicago Press, 1987). 


MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix V

GENERAL GOVERNMENT DIVISION, WASHINGTON, D.C. 

Jose R.  Oyola, Assistant Director, Tax Policy
 and Administration Issues
Lawrence M.  Korb, Assignment Manager
Edward J.  Nannenhorn, Economist-in-Charge
Patricia H.  McGuire, Senior Computer Specialist
