Jane G. Gravelle
Senior Specialist in Economic Policy
Government and Finance Division
Modifying the Alternative Minimum Tax (AMT):
Revenue Costs and Potential Revenue Offsets
Summary
Congress enacted the precursor to the current
individual alternative minimum tax (AMT) in the Tax
Reform Act of 1969 to ensure that all taxpayers,
especially high-income taxpayers, paid a minimum of
federal taxes. Initially, the minimum tax applied to
fewer than 20,000 taxpayers; in 2007 it applied to
4.2 million. Moreover, absent legislative action,
the AMT will affect significantly more middle- to
upper-middle-income taxpayers: by 2008, up to 26
million taxpayers are projected to be subject to the
AMT.
The AMT's expanded coverage will occur because
temporary increases in the basic AMT exemptions and
provisions allowing taxpayers to apply certain tax
credits against the AMT have expired. To keep the
AMT from affecting more taxpayers in the future
would, at a minimum, require (1) that the higher AMT
exemption levels be maintained and that they be
indexed for inflation, and (2) that all personal tax
credits be allowed against the AMT. This "patch" is
estimated to cost about $75 billion in its first
full year.
If the recent reductions in the regular income tax
expire at the end of 2010, then the patch would cost
$313 billion over the FY2009 through FY2013 period
and $724 billion over FY2009 through FY2018. If the
reductions in the regular income tax are extended
past 2010, then the cost of the AMT patch would have
increased to $1.3 trillion dollars over the same
10-year period. Repealing the AMT would be even more
expensive.
While offsetting the costs of AMT relief may prove
difficult, several approaches are being discussed.
One approach would shift AMT taxes from
middle-income to high-income taxpayers by some
combination of higher AMT rates and taxing capital
gains and dividends at the AMT rates. Proponents
argue that including capital gains preferences in
the AMT would be consistent with the original
purpose of the minimum tax.
In other proposals, AMT relief would be financed by
raising regular income tax rates; for example,
raising the top three rates by 24%. Another approach
might be to repeal or restrict some of the
preference items under the regular income tax.
However, income tax base broadening may be difficult
because many of these provisions are both
longstanding and popular.
Another approach to financing AMT relief might be to
focus on reducing the tax gap. Although the tax gap
is estimated to be in the neighborhood of $300
billion, the revenue yield from proposals to reduce
the gap appears to fall far short of the amount
needed to address the AMT.
This report will be updated to reflect legislative
developments.
Contents
Structure of the AMT
Revenue Effects of Modifying the AMT
AMT Coverage
Potential Cost Offsets for AMT Modification
Offsetting AMT Revisions with Changes to the
Structure of the
AMT
Offsetting AMT Revisions with Individual
Income Tax Rate
Increases
Offsetting AMT Revisions with Income Tax Base
Broadening
Offsetting AMT Revisions by Reducing the Tax
Gap and Greater Tax
Compliance
Increased Withholding or Third Party
Reporting
Economic Substance Doctrine
Earnings Stripping
International Tax Shelters
Summing Up: Tax Gap Issues
Conclusion
Appendix. Capital Gains
Realization Response
List of Tables
Table 1. Revenue
Costs of Modifying the AMT
Table 2. Percentage of Tax-filers
with AMT Liability by Cash Income in
2006 Dollars, Selected Calendar Years
2006-2017
Table 3. Interest, Dividends, and Capital Gains by
Adjusted Gross
Income Class, as a Percentage of Total Income,
2003
Table 4. Largest Tax Expenditures for Individuals,
FY2006
Modifying the Alternative Minimum Tax (AMT): Revenue
Costs and
Potential Revenue Offsets
Congress enacted the precursor to the current
alternative minimum tax (AMT) for individuals in the
Tax Reform Act of 1969 to ensure that all taxpayers,
especially high-income taxpayers, paid at least a
minimum amount of federal taxes.1
Initially, the minimum tax applied to fewer than
20,000 taxpayers. However, absent legislative
action, the AMT will affect significantly more
middle- to upper-middle-income taxpayers in the near
future. In 2007, about 4.2 million taxpayers were
subject to the AMT, but by 2008, up to 26 million
taxpayers would be subject to the AMT without
legislative action commonly referred to as the AMT
"patch." (In December, 2007 the latest one year
extension of the patch was adopted without revenue
offsets.)
Two main factors have caused the increase in the
number of taxpayers affected by the AMT. First, the
regular income tax is indexed for inflation, but the
AMT is not. Over time, this failure to index has
reduced the differences between regular income tax
liabilities and AMT liabilities at any given nominal
income level, differences that will continue to
shrink in the absence of AMT indexation. Second, the
2001 and 2003 reductions in the regular income tax
have further narrowed the differences between
regular and AMT tax liabilities.2 Because
of these two factors, many taxpayers will find that
their regular income tax liability has been so
reduced relative to their AMT liability that, even
though they have few (if any) tax preferences, they
may still be subject to the AMT.
An increase in the basic exemption for the AMT and
provisions allowing certain personal tax credits to
offset AMT liability have temporarily mitigated the
increase in the coverage of the AMT. For 2007, the
AMT exemption was $66,250 for joint returns and
$44,250 for unmarried taxpayers. Under current law
the basic AMT exemption is scheduled to revert to
$45,000 for joint returns and $35,750 for unmarried
taxpayers in 2008. In addition, starting in 2008,
several personal tax credits will not be allowed
against the AMT.3
This report first reviews the cost of modifying the
AMT to reduce its coverage. It then discusses a
range of potential revenue offsets for these
modifications, including alterations to the AMT and
to the regular income tax. These measures include
higher rates under both the AMT and the regular
income tax, a reduction of preferentially treated
items under the regular income tax, and measures to
reduce the tax gap. Many of the revenue offsets
examined are designed so that the burden of paying
for AMT modifications is borne by those taxpayers
for whom the AMT was originally intended (i.e.,
taxpayers at the highest income levels).
Structure of the AMT
The AMT operates as a parallel tax system to the
regular income tax. Under current law, calculating
AMT tax liability requires taxpayers to first add
back various tax items (called adjustments and
preferences) to their regular taxable income. The
three major preference items added back to the AMT
tax base are personal exemptions, state and local
tax deductions, and miscellaneous itemized
deductions. These three items account for over 90%
of the total AMT preference items and adjustments
added back to regular taxable income for AMT
purposes. Other items subject to tax under the AMT
include net operating losses, passive activity
losses, incentive stock options, and private
activity bond interest.
This grossed-up income becomes the tax base for the
AMT. For tax year 2007, a basic exemption of $66,250
for joint returns, or $44,350 for single and head of
household returns, is subtracted to obtain AMT
taxable income. These exemption levels are temporary
and are scheduled to revert, in 2008, to their prior
law levels of $45,000 for joint returns and $35,750
for unmarried taxpayers. The basic AMT exemption is
phased out for taxpayers with high levels of AMT
income. A two-tiered rate structure of 26% and 28%
is assessed against AMT taxable income. The tax is
26% of AMT taxable income up to $175,000 and 28% of
AMT taxable income in excess of $175,000. The
taxpayer compares his AMT tax liability to his
regular tax liability and pays the greater of the
two.
It is important to note that even though a taxpayer
may not be subject to the AMT, it can still affect
his regular income tax liability. The reason is
that, after 2007, some personal tax credits under
the regular income tax are limited to the amount by
which regular income tax liability exceeds AMT
liability.4 Thus, a taxpayer who has a
regular income tax liability of $5,000 and $1,000 of
these affected personal tax credits will effectively
see these regular income tax credits reduced in
value by $300 if his AMT liability is $4,300.
Revenue Effects of Modifying the AMT
The fact that the AMT is poised to affect so many
taxpayers in the near future has prompted calls for
change. Absent legislative action, the AMT will
"take back" much of the recently enacted reductions
in the regular income tax for millions of taxpayers.
Because personal exemptions are not allowed against
the AMT, large families will be particularly
susceptible to the AMT. In addition, because
deductions for state/local taxes are not allowed
against the AMT, taxpayers who itemize and deduct
these taxes on their regular income tax returns are
also more likely to be adversely affected by the
AMT. However, modifications to reduce AMT coverage
would prove costly in terms of forgone revenue.
When discussing the long-run (beyond 2010) revenue
implications of modifying the AMT, it is critical to
specify whether it is assumed that the 2001/2003 tax
cuts are allowed to expire after 2010 as scheduled,
or whether it is assumed that the tax cuts will be
extended beyond 2010. Allowing the 2001 tax cuts to
expire as scheduled will reduce the costs of
modifying the AMT. Extending the tax cuts beyond
2010 substantially increases the costs of modifying
the AMT. If the 2001/2003 tax cuts are extended
then, as a rough estimate, the cost of most options
for modifying the AMT would almost double. The
revenue effects of several modifications to the AMT
are shown in Table 1.
To keep the AMT from affecting more taxpayers in the
out years than it did in 2007 would, at the least,
require maintaining higher exemption levels and
indexing the AMT for inflation. According to the
Congressional Budget Office (CBO), this option
(which is often referred to as a "patch" and assumes
allowing personal tax credits against the AMT, and
indexing the basic exemption levels of
$66,250/$44,350 along with the AMT tax brackets for
inflation after 2007) would reduce revenues by $75
billion in its first full year.
If the recent reductions in the regular income tax
expire as scheduled at the end of 2010, then the
patch will cost $313 billion over the period FY2009
through FY2013 (five-year cost) and $724 billion
over the FY2009 through FY2018 period (10-year
cost). However, if the reductions in the regular
income tax are extended past 2010, then the cost of
the AMT patch as outlined by CBO rises to $1.3
trillion dollars over the same 10-year period.
If these changes are debt
financed (not paid for by either raising other taxes
or reducing expenditures), then the cost of the
patch rises significantly because of the higher net
interest outlays.
Repealing the AMT is even more expensive (although
the data here are not for exactly the same years).
The five-year cost of repeal could be around $408
billion. The 10-year cost of repeal could range from
around $851 billion to $1.7 trillion, depending on
whether the reductions in the regular income tax are
extended past their 2010 expiration. Again, if the
repeal was debt financed, the cost of debt servicing
would engender considerably more cost.
The additional policy options outlined in Table 1
would be less expensive than the patch or outright
repeal of the AMT, but these options would mean more
taxpayers would fall under the AMT in the future
than in 2007. These estimates predated the enactment
of the patch for 2007, but the magnitudes are
roughly appropriate to capture the relative size of
the cost.
Table 1.
Revenue Costs of Modifying the AMT
(billions of dollars)
First
FY09-18 FY09-18
full
(2001 tax (2001 tax
year
cuts cuts
Policy Option cost
FY08-12 expire) extended)
______________________________________________________________________________
Basic AMT exemption levels of
$62,550/$42,500, index exemption
and bracket amounts for inflation
after 2006, allow personal tax
credits against the AMTa
$75 $313 $724 $1,322
Additional debt service $2 $39
$189 $294
Total cost $77 $358
$913 $1,616
______________________________________________________________________________
Calendar Calender
First
Years Years
full Calender
08-17 08-17b
year Years
(tax cuts (tax cuts
Policy Option cost 08-12
expire) extended)
________________________________________________________________________
Repeal the AMTc
$86 $408 $851 $1,659
________________________________________________________________________
First
FY08-17 FY08-17
full
(2001 tax (2001 tax
Additional Policy Options (Prior year
cuts cuts
to 2007 Patch) cost
FY08-12 expire) extended)
________________________________________________________________________
Allow AMT taxpayers to take
personal exemptions, the standard
deduction, misc. itemized
deductions and deductions for
state/local taxes.c
$73 $390 $757 N/A
Allow personal exemptions under
AMTc
$43 $236 $494 N/A
Allow state/local tax deductions
under AMTc
$55 $281 $556 N/A
________________________________________________________________________
Note
a Congressional
Budget Office, The Budget and
Economic Outlook: Fiscal Years 2009 to 2018,
Jan. 2008.
b Urban-Brookings
Tax Policy Center, Aggregate AMT
Projections and Recent History: 1970-2017,
Jan. 2006.
c Joint
Committee on Taxation, Present Law and
Background Relating to the Individual
Alternative Minimum Tax,
March 5, 2007.
AMT Coverage
Although the AMT originally targeted the wealthy,
the highest income taxpayers are currently not as
affected by the AMT as the income classes below
them, and this dichotomy will grow over time. As
shown in Table 2, only 31% of taxpayers in
the highest income class were subject to the AMT in
2006 or 2007.
Table 2.
Percentage of Tax-filers with AMT Liability by Cash
Income
in 2006 Dollars, Selected Calendar Years
2006-2017
2017
Cash
(With Tax
Income
Cuts
(000s) 2006 2007 2010 2017
Extended)
Less than $30 0.0% 0.0% 0.0% 0.1%
0.1%
$30-$50 0.0% 0.0% 3.0% 12.2%
13.0%
$50-$75 0.2% 0.2% 17.1% 30.1%
38.8%
$75 -- $100 0.7% 0.5% 49.9% 53.7%
67.2%
$100 -- $200 4.8% 4.1% 80.4% 61.7%
92.3%
$200 -- $500 50.9% 50.2% 94.3% 77.7%
96.8%
$500 -- $1,000 49.5% 50.5% 72.2% 27.0%
73.8%
Over $1,000 31.4% 31.4% 38.8% 20.3%
40.1%
All tax-filers 2.8% 2.8% 24.5% 27.8%
37.4%
Source: Urban-Brookings Tax Policy Center,
AMT
Participation Rate by Individual Characteristics,
Jan. 29, 2008.
Even if the basic AMT exemption reverts to its lower
prior-law levels and certain credits are no longer
allowed against the AMT, coverage in the highest
income class will only be 39% 2010.
On the other hand, there will be a significant
expansion of AMT coverage for taxpayers with cash
income in the $50,000 to $1,000,000 range if the
basic AMT exemption reverts to its lower prior-law
levels and certain credits are not allowed against
the AMT. For example, in 2006 4.8% of taxpayers with
income in the $100,000 to $200,000 range were
subject to the AMT. By 2010, over 80% of taxpayers
in that income range will be subject to the AMT.
There are several reasons why a
high-income taxpayers will be less affected
by the AMT in the future than their lower-income
counterparts.
First, the marginal tax rates high-income taxpayers
face under the regular income tax tend to be higher
than the marginal tax rates they face under the AMT.
Under the regular income tax, the top two marginal
income tax rates are 33% and 35%. The top rate under
the AMT is 28%.
Second, under the regular income tax, personal
exemptions are phased out for high-income taxpayers.
So the fact that personal exemptions are not allowed
under the AMT does not have a significant effect on
high-income taxpayers who do not get personal
exemptions under the regular income tax.
Third, under current law, the basic AMT exemption is
phased out for taxpayers filing joint returns when
AMT taxable income exceeds $150,000. For joint
returns in 2008, the basic AMT exemption is fully
phased out at AMT taxable income levels in excess of
$330,000. Hence, many high-income taxpayers do not
get a basic exemption under the AMT. Therefore, the
scheduled reduction in the basic AMT exemption will
have little or no effect on their AMT liabilities.
Finally, high-income taxpayers, unlike their
lower-income counterparts, generally derive a
significant percentage of their total income from
capital gains and dividend income. These items
receive preferential tax treatment under the AMT as
well as the regular income tax. Under both, the tax
rate on long-term capital gains and dividend income
is limited to a maximum rate of 15%.
Income from dividends and capital gains is an
important source of income at high income levels.
Table 3 below shows the share of income in
interest, dividends, and capital gains by income
class. For example, in the highest adjusted gross
income class (over $1 million), on average 30.3% of
income is from capital gains and 4% is from
dividends currently taxed at 15%. In contrast,
taxpayers in the $75,000 to $100,000 AGI range
derive 1.1% and 0.8% of their income from capital
gains and dividends, respectively.
Table 3.
Interest, Dividends, and Capital Gains by Adjusted
Gross
Income Class, as a Percentage of Total
Income, 2003
Adjusted Gross
Total
Income Class
Financial
($ thousands) Interest Dividends
Capital Gains Income
Under $15 4.7% 0.9%
-0.5% 5.2%
$15-$30 2.6 0.6
0.2 3.4
$30-$50 1.8 0.5
0.3 2.6
$50-$75 1.8 0.6
0.6 3.0
$75-$100 1.7 0.8
1.1 3.5
$100-$200 2.0 1.2
2.7 5.9
$200-$500 2.9 2.1
8.2 13.2
$500-$1,000 3.5 3.0
13.4 19.9
Above $1,000 5.0 4.0
30.3 39.4
Overall 2.5 1.3
4.7 8.6
Source: CRS calculations based on the
Internal Revenue Service
2003 Individual Statistics of Income. Excludes
returns with negative
adjusted gross income.
Reproduced from CRS Report RL33285, Tax
Reform and Redistributional Issues,
by Jane G. Gravelle.
Potential Cost Offsets for AMT Modification
There are many ways that the AMT could be changed to
mitigate its impact in future years. This report
concentrates on the two most widely discussed
alternatives: a short-term patch to the AMT or
outright repeal of the AMT. This section discusses
what revenue offsets would be needed to pay for
these two solutions to the AMT problem.
The revenue offsets are grouped into four main
categories: offsets derived from (1) changes to the
structure of the AMT, (2) changes to the individual
income tax rate structure, (3) income tax base
broadening, and (4) reducing the tax gap.
Offsetting AMT Revisions with Changes to the
Structure of the AMT
One approach to dealing with the expanding scope of
the AMT would shift the AMT tax burden away from
taxpayers with AGIs in the $50,000 to $500,000 range
and towards higher-income taxpayers. This approach
appeals to some because it helps restore the AMT to
its original purpose -- ensuring that high-income
taxpayers pay what many argue is their fair share of
the federal tax burden.
Revisions within the AMT could take many forms but
three revisions are of special interest. AMT tax
rates could be increased or dividends and capital
gains income could be included in the AMT tax base
at regular AMT tax rates, or both. Either increases
in the AMT tax rates or a combination of increases
in AMT tax rates and subjecting capital gains and
dividend income to full AMT tax rates could raise
enough revenue to offset the costs of an AMT patch.
Increasing the top rate of the AMT is one option for
shifting the burden of the AMT to higher-income
taxpayers. For example, in a paper written in 2002,
researchers at the Urban/Brookings Tax Policy Center
(TPC) proposed a revenue-neutral AMT revision that
included increasing the basic AMT exemption,
lowering the income level at which the AMT rate
increases, eliminating the phaseout of the AMT
exemption, and raising the top AMT tax rate to 35%.5
The Citizens for Tax Justice (CTJ) recently
presented a proposal to tax capital gains and
dividend income at ordinary AMT tax rates rather
than the lower dividend and capital gains rates
applicable under the regular income tax.6
According to the CTJ analysis, such a change would
pay for 87% of the cost of the AMT exemption
increase (making the higher exemption levels
permanent and indexing them) for the next four
years. They also calculate that including capital
gains and dividends in the AMT combined with an
increase in the top AMT tax rate to 29% would make
the proposal revenue neutral.
CTJ argues that this change would restore the AMT to
its original purpose. The principal target and most
critical preference in the initial minimum tax was
the capital gains preference.
A more recent study by researchers at the TPC
discusses a variety of revenue neutral revisions
over the ten-year budget horizon (FY2007-FY2016)
that would shift the burden of the AMT to
higher-income taxpayers.7
These revisions were made
prior to the enactment of the AMT patch and were for
earlier years. The cost of patching the AMT tends to
rise as we move through time because each year is
closer to the expiration of the 2001 tax rates.
These options are still relevant as ways of
addressing the AMT problem. One proposal for an AMT
patch, which is very similar to the CTJ approach,
would be paid for by including capital gains and
dividend income under the AMT and subjecting them to
AMT tax rates. Combined with a 3% increase in the
AMT tax rates (to 26.8% and 28.9%) this option would
more than pay for itself over the next four years,
according to TPC projections.
However, the CTJ and TPC estimates assume capital
gains realizations are fixed. If realizations
decline in response to these tax increases, then
other measures would be needed to make up the
revenue loss. Both studies acknowledge this issue,
although CTJ argues that capital gains realization
responses are small. With a realization response,
including capital gains as a preference item in the
AMT will not raise as much revenue as these two
estimates indicate. The Joint Committee on Taxation
(JCT) takes an expected decline in realizations into
account in its estimates of the revenue effects of
changing tax rates on capital income. Based on the
JCT estimate of the effect of the tax rate changes
on realizations in the late 1980s, only about 43% of
the static gain from increasing the tax rate on
capital gains and dividend income would actually be
realized. Recent evidence suggests the realization
response would be such that up to 80% of the static
change in revenue would be realized. (This issue is
discussed in more detail in the appendix.)
It is worth reiterating that, in large part,
Congress enacted the first minimum tax largely to
recapture the capital gains income that was excluded
under the regular income tax. In 1969, 50% of a
long-term capital gain was exempt from tax under the
regular income tax. The long-term capital gain
income that escaped tax under the regular income tax
was included as a preference item under the original
minimum tax and subjected to minimum tax rates.
Prior to 1969, many high-income taxpayers used the
preferential tax rates on capital gains income to
reduce their federal income tax liabilities to
levels that Congress deemed inappropriate for their
levels of economic income.8
Offsetting AMT Revisions with Individual Income Tax
Rate Increases
Another option to pay for AMT revisions is raising
the individual income tax rates. In a tax reform
proposal introduced by Ways and Means Committee
Chairman Rangel , H.R.
3970, prior to enactment of the 2007 patch, the AMT
was repealed and the revenue offset by a 4% surtax
on adjusted gross income over $200,000 (and a 4.6%
surtax on adjusted gross income over $500,000.9
This additional tax would be applied not to taxable
income, but to adjusted gross income, a larger base.
The TPC study discussed above contains a variety of
scenarios where rates are increased to pay for the
AMT revisions. For instance, increasing the top
three individual income tax rates by 24% over the
next four years would offset the cost of repealing
the AMT. This would require raising the top three
rates from 28%, 33% and 35% to 34.8%, 41%, and 43.5%
respectively.
To pay for the AMT patch, the TPC estimates that the
top income tax rates would have to be increased by
2% from 28%, 33%, and 35% to 28.6%, 33.7%, and
35.8%. In addition, this option would require taxing
dividends and capital gains income at regular AMT
tax rates. Over the first few years, this option
actually increases total revenues by about $28
billion, according to TPC projections. (Note that
these options do not account for any capital gains
realization responses and these projections were
made prior to the enactment of the AMT patch for
2007 and relate to earlier years.)
Offsetting AMT Revisions with Income Tax Base
Broadening
It is possible to pay for repeal or a patch to the
AMT through income tax base broadening. There are
many provisions in the income tax law that narrow
the tax base compared to a tax base that
approximates economic income, but many of these tax
benefits are both popular and long established.
The AMT patch for 2007 was not paid for by revenue
offsets. However, there were bills (passed in the
House) that would have paid for the patch.
H.R. 3996, which also included
provisions that might be considered base broadening
to pay for the one-year 2007 AMT patch and extending
some other expiring provisions. The revenue
raising provisions included two individual tax
provisions relating to individuals managing hedge
funds: one would tax income deferred in overseas
entities on a current basis and one that would treat
earnings now taxed as capital gains as ordinary
income (this income is referred to as carried
interest).10 Another revision would delay
application of a provision adopted in 2004 to
include interest on debt acquired abroad in the
total to be allocated between foreign and domestic
income for purposes of the foreign tax credit. Each
of these three provisions raised around $25 billion
over ten years. Since these provisions' revenue gain
over ten years would only offset the AMT patch for
about a year, they would not be adequate to finance
permanent changes.
There are several legislative proposals that would
use more general base broadening to offset AMT
reforms. Senator Ron Wyden and Representative Rahm
Emmanuel introduced legislation (S. 1927 and H.R.
5176) in the 109th Congress that would have repealed
the AMT and provided for overall tax reform, and
Senator Wyden introduced a similar bill (S. 1111) in
the 110th Congress. The cost of this legislation
would have been offset through income tax base
broadening and increases in the individual income
tax rates.
In the 110th Congress, Senator John Kerry has
introduced legislation (S. 102) that would partially
offset the cost of a one-year AMT patch by rolling
back the lower rates for dividends and capital gains
for 2009 and 2010. Under this legislation, the
maximum tax rate on capital gains income would
increase from 15% to 20% and dividend income would
be taxed at regular income tax rates. The lower
rates on capital gains and dividends are set to
expire after 2010, and so increasing these rates for
2009 and 2010 would only have a short-run revenue
effect for scoring purposes.
Based on revenue estimates done by the JCT in 2003,
changing the tax rates on capital gains and
dividends appears to increase revenues in the
neighborhood of $20 billion per year for dividends
and $4 billion for capital gains. These capital
gains estimates involve some timing effects, and
were estimated at a time when gains were smaller.
(Capital gains realizations are very volatile.)
Based on the most recent estimate of capital gains
liabilities, $75 billion for 2005,11 a
static gain from increasing the rate by a third
(from 15% to 20%) would be $25 billion. The actual
revenue gain would be about 40% of the static cost,
or $10 billion if the realization response is around
0.7 (a 10% reduction in tax leads to a 7% increase
in realizations); 60% or about $15 billion for a
realization response of 0.46 range, 78% or about $20
billion if the realization response of 0.25 range,
and 90% or about $23 billion for responses of 0.11.
These effects would not cover the full cost of the
patch, but could provide some revenue.
There are several sources of information on possible
tax base broadeners. Discussions of base-broadening
provisions, along with their revenue effects, are
found in various tax expenditure documents.12
Table 4 reports the largest tax expenditures
for individuals in the tax expenditure list, and
while many of them would provide sufficient revenue
to pay for the AMT patch, most of them are
longstanding provisions that are quite popular.
There are many other smaller tax expenditures as
well as significant tax expenditures in the
corporate income tax which could also be considered.
Because there are more than 160 separate tax
expenditures, a discussion of them is beyond the
scope of this report.
Table 4.
Largest Tax Expenditures for Individuals, FY2006
Dollars Percentage
(billions) of GDP
Net Exclusion of pension contributions and earnings
124.7 0.95
Reduced tax rates on dividends and long-term
capital
gains
92.2 0.70
Exclusion of employer contributions for health care
90.6 0.69
Deduction for mortgage interest
69.4 0.53
Exclusion of capital gains at death
50.9 0.39
Tax credit for children under age 17
46.0 0.35
Earned income credit (EIC)
42.7 0.33
Charitable contributions
41.3 0.32
Deduction of state and local taxes
36.8 0.28
Exclusion of Medicare benefits
35.1 0.27
Exclusion of investment income in life insurance,
annuity contracts
28.0 0.21
Exclusion of benefits provided under cafeteria
plans 27.9 0.21
Exclusion of interest on public purpose state and
local government bonds
26.0 0.20
Exclusion of capital gains on sales of principal
residences
24.1 0.18
Exclusion of untaxed Social Security benefits
23.1 0.18
Deduction for property taxes on owner-occupied
residences
19.9 0.15
Source: Reproduced from CRS Report RL33641,
Tax
Expenditures: Trends and Critiques, by
Thomas Hungerford
The President's Advisory Panel on Tax Reform
proposed a variety of base broadeners, including
disallowing the itemized deduction for state and
local taxes, in their tax reform plans.13
Some of these revisions did not involve total
elimination of the tax benefits, but placed limits
on them, such as a cap on deductions for health
insurance or a floor on deductions for charitable
contributions. It might be more feasible to restrict
rather than eliminate major tax expenditures.
CBO has also provided a list of possible base
broadeners that in many cases would modify rather
than eliminate tax provisions.14 For
example, they discuss
proposals for a 2% floor for state and local tax
deductions and for charitable contributions, which
would respectively raise $26.6 billion and $19.9
billion in FY2009. Floors already exist for some
itemized deductions (casualty losses and medical
expenses) and they tend to simplify tax compliance,
especially in the case of charitable contributions.
The CBO study from 2005 also discussed a proposal to
limit health benefit deductions which would raise
$30.3 billion in FY2007, and lower the ceiling on
mortgage interest deduction from $1 million to
$400,000, which would raise $4.9 billion in FY2009.
A proposal to allow the benefits of itemized
deductions at a 15% rate is estimated to yield $53.5
billion in FY2009. CBO also discussed proposals that
primarily affect corporations, such as eliminating
graduated tax rates ($3 billion in FY2009) and
lengthening depreciable lives ($12.9 billion in
FY2009).
Offsetting AMT Revisions by Reducing the Tax Gap and
Greater Tax Compliance
The tax gap is the difference between the taxes
legally owed and the taxes actually collected. The
latest estimate of the tax gap (for 2001) indicated
a gross tax gap of $345 billion.15 If a
significant fraction of that gap could be collected,
then it would be possible to finance the AMT
revisions with tax compliance measures. (The net
gap, after collections IRS expects to make with
audits and other measures, is estimated to be $290
billion).
The discussion below summarizes some legislative
options aimed at closing the tax gap.16
It is not comprehensive,
as there are numerous small changes in rules and
requirements that could alter tax compliance; these
changes are discussed in some of the sources cited
in this section. Unfortunately, there are no
estimates for the revenue gains for many of the
measures and those that are available indicate that
the revenue gains are small.
Increased Withholding or Third Party Reporting.
Tax gap estimates indicate that compliance is
greatest with direct withholding, rather then with
third party reporting. Wages, which are subject to
withholding, have a 1% non-reporting rate. Interest,
dividends, social security payments, pensions, and
unemployment payments, which are generally subject
to third party reporting, have a 4.5% non-reporting
rate. For income that has some (but not substantial)
reporting -- such as partnership/S corporation
income, alimony, reportable exemptions, deductions,
and capital gains -- the rate is 8.5%. Income not
subject to reporting (which includes proprietorship
income, rents, and royalties) has a non-compliance
rate of 54%.17 Businesses with cash
transactions are estimated to have a non-compliance
rate of 81%.18
A number of possible revisions to increase third
party reporting include the following: (requiring
broker reporting of basis was included in H.R.
3996):
-
Withholding of non-employee compensation for
independent contractors (a rule recently imposed
on governments), or withholding if no taxpayer
identification number is provided.
-
Requiring credit card companies to report
payments made to merchants.
-
Requiring information reporting on services
provided by corporations (presently
corporations, including small corporations, are
exempt).
-
Requiring brokers to report basis on capital
gains.19
-
Requiring the reporting of proceeds of auction
sales.
-
Requiring reporting of real estate taxes by
state and local governments.
-
Requiring more detailed reporting of mortgage
interest, including information on whether the
loan is refinanced or exceeds the mortgage
limit.
-
Adopting a due diligence rule for preparers
relating to offshore banks and similar
operations.
-
Reporting distributions to partners and S
corporation shareholders in personal service
businesses.
-
Requiring corporations to report interest
deductions limited by earnings stripping.
Some of these information reporting provisions are
aimed at the part of the taxpaying population that
tends to have the lowest compliance rates, small
businesses. Proposals to withhold taxes on
independent contractors, require credit card
reporting of payments, and require information
reporting on corporate services purchased are all
aimed at this particular sector.
It appears that these changes have a limited ability
to close the tax gap. For example, the gap arising
from the failure to report basis (generally, the
acquisition cost of the asset) on capital gains is
estimated at $11 billion, and misreporting of gain
is estimated at 36% for assets where basis is not
reported, as compared to 13% for mutual funds where
net capital gains are reported.20 These
differences seem to imply a potential gain of
several billion dollars. The Administration
estimates in their FY2009 budget, however, that a
basis reporting requirement after 2008 would yield a
revenue gain that is less than $628 million per year
by FY2013, and would provide only $1,203 million in
cumulative revenue through FY2013.
For the first three items in the list above,
withholding on independent contractors without a
taxpayer identification number, reporting credit
card sales, and information reporting on payments to
corporations, the revisions would yield respectively
$70 million, $2,027 million, and $886 million for
FY2013. They would yield respectively $248 million,
$5,735 million, and $2,849 million cumulatively
through FY2013. (Note that full withholding on
payments to independent contractors would yield more
revenue, perhaps considerably more).
Information reporting on sales of tangible personal
property (reporting proceeds of auctions), included
in the FY2008 budget, would raise $220 million in
2012, and $233 million through 2010. The
Administration also proposed in the 2009 budget
increased reporting on non-wage payments by
governments, yielding $27 million by 2013 and $248
million through FY2013. All of the Administration's
FY2009 compliance provisions, which include most of
the significant items on the list above, would yield
slightly $10.5 billion through 2010.
The provision enacted in the Tax Increase Prevention
and Reconciliation Act of 2006, which required
withholding on independent contractor payments by
governments, had a one-time increase of $6 billion
(reflecting timing effects), but afterwards raised
about $200 million a year. It is possible that
expansion to withholding on all independent
contractors would yield more revenue, but it would
likely be a controversial proposal since it would
affect many taxpayers (both payers and recipients).
For most of the proposals that have been considered
to improve compliance and reduce the tax gap through
third party reporting, the revenue raised is a small
fraction of the revenue needed to pay for the AMT
patch or other AMT reforms.
Tax Shelters.
Many proposals to restrict tax shelters would have
relatively small revenue effects, but there are some
provisions that could help offset the cost of an AMT
patch. Some of these provisions have been contained
in prior legislative proposals and some in general
tax reform proposals.
Economic Substance Doctrine.
Even when transactions meet the letter of the tax
law, tax benefits may be disallowed by the courts if
the activity is found to be a type of sham
transaction; in the particular case of tax shelters
the related issues of economic substance or business
purpose are often used.21 That is, if an
activity does not have economic substance or there
is no business purpose, the tax benefits are
disallowed.
Several bills that were introduced in the 109th
Congress would have codified the economic substance
doctrine. For instance, a provision in S. 2020 was
projected to eventually gain about $2.5 billion in
revenue annually. H.R. 3970, Chairman Rangel's tax
reform proposal, introduced in the 110th Congress
would also have included the economic substance
doctrine, with a 10-year gain in revenue of $3.9
billion.
These changes would have recognized these doctrines
in the tax law itself and provided several specific
guidelines. For example, if a court found the
economic substance doctrine to be relevant, the bill
provided that the taxpayer must meet both the
objective test of economic substance and the
subjective test of having a non-tax business purpose
to keep the tax benefit. Requiring both is referred
to as a conjunctive rule, while requiring
either is referred to as a disjunctive rule.
This legislation sought to strengthen the rule and
to bring more uniformity to court decisions. Some
court cases have required both aspects to be met and
others only one. The bill also set out specific
rules for determining when the taxpayer meets the
economic substance test of demonstrating profit
potential, by requiring that the return outside the
tax benefits exceeds the riskless rate of return.
The bill would also require that the transactions
must be a reasonable means of achieving the business
purpose.
There has been controversy about how much revenue
codifying the economic substance doctrine would
actually raise and the revenue estimates have varied
over time.
Earnings Stripping.
Reducing U.S. tax with debt or other deductible
payments to related firms is referred to as
"earnings stripping." Because of the potential for
abuse, the current tax code has a restriction on
deductibility of interest for thinly capitalized
U.S. firms (with more than 60% of assets held in
debt and with more than 50% of earnings paid in
interest).
H.R. 2896 in the 108th Congress would have tightened
the general earnings stripping rules by eliminating
the asset share test (i.e., disallowing interest
based only on the interest as a share of income) and
lowering the interest share (to 25% for ordinary
debt and 50% for guaranteed, or 30% overall). This
provision would have raised about $2.7 billion over
2004-2013 and would have brought in almost $400
million annually by 2013.
Some interest in earnings stripping developed from
concerns about corporate inversions. A corporate
inversion occurs when a
U.S. company sets
up a foreign incorporated firm to become the parent
corporation, making the current U.S. firm the
subsidiary corporation. Proposals to penalize
corporate inversions have been considered in a
number of previous Congresses, but some have not
been enacted. A provision considered but not adopted
in 2005 would have raised revenues by about $50
million annually.
International Tax Shelters.
Earnings stripping and corporate inversions can be
used as tax shelters by shifting income to low tax
countries. There are numerous ways to accomplish
this income shifting: by shifting debt to high tax
countries, by shifting intangible income (such as
that related to innovations and marketing), and
through inter-company pricing. There are many
possible legislative responses to these tax
sheltering activities, although the revenue
consequence of each is likely small.22
Robert McIntyre,23
testifying before the Senate Budget Committee,
summarized the recommendations that came out of that
committee, along with some additional revisions that
he suggested. Among them is a proposal to tax
currently the income of foreign subsidiaries of U.S.
companies. This proposal would have policy
implications beyond reducing tax shelter
opportunities. Under current income tax law, this
income is not taxed until repatriated. Estimates
suggest that taxing this income now rather than
waiting until it is repatriated could result in a
revenue gain of around $6 billion per year. Another
proposal to curtail this form of tax sheltering
activity is to provide an apportionment formula for
allocating profits (allocate profits based on
physical assets, employment, sales, or some
combination).
Summing Up: Tax Gap Issues.
The IRS estimates that there is a significant tax
gap but the legislative measures that could be
undertaken to close that gap appear limited. For
many measures, there are no estimates of the revenue
that could be generated. The revenue estimates that
have been done tend to suggest only small revenue
gains.
When assessing provisions aimed at reducing the tax
gap it is critical to differentiate between
potential collections (as measured by the tax gap
estimates) and the amount of revenue that might
realistically be collected through provisions aimed
at increasing tax compliance.
Conclusion
Addressing the growing reach of the AMT through
repeal or through some form of a temporary patch is
a major fiscal challenge. The cost of addressing the
AMT is large. There is no shortage of potential ways
to pay for these revisions, whether it
be through revisions to
the AMT itself, raising income tax rates, broadening
the income tax base, or some combination of all of
these options. Although there is much discussion of
the tax gap and the potential revenue associated
with closing that gap, revenue estimates of gains
from legislative proposals, where they do exist,
suggest attempts to close the tax gap are unlikely,
by themselves, to raise adequate revenues to address
the AMT problem.
Appendix.
Capital Gains Realization Response
In the late 1980s, there was a debate about the
magnitude of the capital gains realizations
response. This response is usually characterized as
an elasticity, the
percentage change in realizations divided by the
percentage change in tax rates.
Empirical studies had produced widely ranging
estimates. There were two types of empirical
studies: times series
studies that examined aggregate changes in capital
gains realizations over time as tax rates changed,
and cross-section or panel studies that compared
many individuals' realizations within a time period.
The time series studies yielded a much smaller and
less variable estimate of the realizations response
than did cross sections studies.24
There were difficulties with both types of studies.
For example, time series studies confronted
difficulties in controlling for other factors, such
as falling stock transaction costs and changes in
potential realizations. The cross section and panel
studies also had some significant limitations.
Perhaps the most serious of these potential problems
was the likelihood that much of the response might
reflect a transitory effect. High income taxpayers,
who tended to have variable income, would time their
realizations to coincide with periods when tax rates
were low, so that the relationship between high
realizations and low tax rates may have merely been
a timing response, and did not reflect a response to
a permanent change. The seriousness of this problem
and the variable, and in some cases, extremely
large, elasticities in
these studies led the Joint Committee on Taxation
(JCT) and Congressional Budget Office (CBO) to rely
on their own time series estimates for their revenue
estimating and forecasting purposes.25
Most estimates of capital gains realizations
responses were made using nonlinear forms. A popular
one, and one used by JCT and CBO, was a semi-log
function, where the elasticity (percentage change in
realizations divided by percentage change in tax
rate) rose proportionally with the tax rate.26
At a tax rate of 0.22 (which is roughly the midpoint
between the 15% capital gains tax rate and the top
AMT rates), at the time, the JCT estimate of
elasticity was 0.76, but after accounting for a
portfolio response was 0.70. The first-year response
was 70% larger at 1.20, so that, at least for a cut
in the capital gains tax, realizations would be
expected to rise so much the first year that
projected revenue would increase.
Subsequent to the adoption of this elasticity, a
number of studies and events suggested that the
elasticity estimates should be lowered. First, the
importance of transitory responses was highlighted
by the huge surge of realizations that were
eventually documented following the proposed capital
gains rate increases in the 1986 Tax Reform Act.
This observation increased concerns about transitory
effects in cross section and panel studies. Second,
a study that used the limits to the behavioral
response (since realizations can never exceed
accruals), suggested elasticities that were likely
to be under 0.5.27 Third, Burman and
Randolph published a major new study using cross
section data that controlled for transitory effects
by using the variation in state tax rates to measure
the permanent response to differential tax rates.28
They found a very low permanent elasticity of 0.18
at a 16 % average tax rate, a number that was not
statistically significant. This measure implied an
elasticity of 0.25 at a 22% rate, using the semi-log
estimating function. When weighted by population,
they found a smaller elasticity, 0.06, with a 12%
average marginal tax rate, implying
a 0.11 elasticity at 22%
rate. They found a transitory elasticity of 6.4.
Finally, as data were added to the aggregate time
series in CBO's continuing studies, the elasticities
fell, and are currently at 0.46 at a 22% rate.
A subsequent study by Auerbach and Siegel confirmed
the relatively low elasticities in the Burman and
Randolph study (finding an elasticity of 0.33, and
also finding elasticities at virtually zero for very
wealthy and very sophisticated taxpayers).29
The elasticity makes a great deal of difference for
the share of the static revenue gain from capital
gains that is estimated to be collected. Measuring
all elasticities at a 22 percent rate, with the
JCT's 0.70 elasticity, only 27% of the static
revenue gain from moving the tax rate from 15% to
the top rate of 28% would be collected. With CBO's
0.46 elasticity, 49% would be collected. Burman and
Randolph found that 71% would be collected with the
0.25 elasticity and 86% would be collected with the
0.11 elasticity. This realizations elasticity, of
course, only applies to capital gains.
In the aggregate, 22% of the total of capital gains
and dividends reflects dividend payments. Thus, if
this share also applies to the AMT, the total shares
collected would begin at 43% for the 0.70 JCT
elasticity (0.22 plus 0.78 times 0.27), by 60% if
one assumes the CBO elasticity, and 77% and 89% for
the two Burman and Randolph measures.
These calculations apply only before 2011, or assume
that the dividend and capital gains tax benefits
adopted in 2003 will be made permanent. If one
assumes that the dividend and capital gains relief
enacted in 2003 will expire, then there will be no
revenue gain from dividends at all and the capital
gains tax rate will begin at a higher level of 20%.
In that case, the share of static revenue collected
will be smaller for example, 22% at the original JCT
elasticity and 46% at the CBO elasticity, but about
the same for the Burman and Randolph measures. The
absolute value of the static gain would also be
smaller than under the assumption that these
provisions are made permanent, but total federal
revenues would be larger.
NOTES
1 The original minimum tax was an add-on
minimum tax. It was paid in addition to the regular
income tax. For a more detailed discussion of the
history of the minimum tax and information on how it
is calculated, see CRS Report RL30149, The
Alternative Minimum Tax for Individuals, by
Steven Maguire.
2
The Economic Growth and Tax Relief Reconciliation
Act of 2001 (P.L. 107-16) and the Jobs and Growth
Tax Relief Reconciliation Act of 2003 (P.L. 108-27).
3
Starting in 2008, the dependent care credit, the
credit for the elderly and disabled, the credit for
interest on certain home mortgages, the HOPE
Scholarship and Lifetime Learning credits, the
credit for certain nonbusiness energy property, the
credit for residential energy efficient property,
and the D.C. first-time home buyer credit will not
be allowed against the AMT. The child tax credit,
the adoption tax credit, and the savers credit will
continue to be allowed against the AMT in full.
4
See previous footnote.
5
Leonard E. Burman, William Gale, Jeffrey Rohaly, and
Benjamin H. Harris, The Individual AMT: Problems
and Potential Solutions, at [http://taxpolicycenter.org/publications/urlprint.cfm?ID=7912].
6
See Citizen's for Tax Justice, "A Progressive
Solution to the AMT Problem," December 2006, at [http://www.ctj.org/].
7
Leonard E. Burman, William G. Gale, Gregory
Leiserson, and Jeffrey Rohaly, Options to Fix the
AMT, Tax Policy Center, January 19, 2007,
available at [http://www.taxpolicycenter.org/home/].
This study examines a variety of revisions to the
AMT that would be revenue neutral over a ten-year
budget horizon. However, the baseline for their
estimates is current law, which assumes that the
reductions in the regular income tax expire after
2010. If the tax cuts are extended, either in part
or in total, then these options to reform the AMT
would not be revenue neutral.
8
U.S. Congress.
Joint Committee on Internal
Revenue Taxation. General Explanation of
the Tax Reform Act of 1969, December 3, 1970, p.
105. It is worth noting that after 1986, when the
preferential tax treatment of capital gains income
was repealed under the regular income tax, the
number of taxpayers subject to the AMT fell from
around 60,000 in 1986 to around 11,000 by 1989.
9
This proposal is reviewed in CRS Report RL34249,
The Tax Reform and Reduction Act of 2007:
An Overview, by Jane
G. Gravelle.
10
For a discussion ,see CRS
Report RS22717, Taxation of Private Equity and
Hedge Fund Partnerships: Characterization of Carried
Interest, by Donald J. Marples, and CRS Report
RS22689 Taxation of Hedge Fund and Private Equity
Managers, by Mark Jickling and Donald J.
Marples.
11
Congressional Budget Office, letter to Chairman
Charles E. Grassley, February 23, 2006.
12
Both the Administration and the Joint Committee on
Taxation provide annual lists which can be found
respectively in the budget documents and on the
Joint Tax Committee's website. For a more detailed
discussion of these provisions, see Senate Budget
Committee, Tax Expenditures: Compendium of
Background Material on Individual Provisions,
prepared by the Congressional Research Service, S.
Prnt. 109-072, December 2006.
13
Simple, Fair, and Pro-Growth: Proposals to Fix
America's Tax System,
November 2005, which can be found at [http://www.taxreformpanel.gov/].
For a review see CRS Report RL33545, The Advisory
Panel's Tax Reform Proposals, by Jane G.
Gravelle.
14
Congressional Budget Office,
Budget Options, February 2007.
15
U.S. Treasury Office of Tax Policy,
A Comprehensive
Strategy for Reducing the Tax Gap, September 26,
2006.
16
These proposals come from a variety of sources,
including the Treasury study cited above, past
administration budget proposals, and prior
congressional proposals. They also include
statements made at a hearing of the Senate Finance
Committee on the tax gap, on July 26, 2006:
testimony of Michael Brostek, Government
Accountability Office; J. Russell George, Treasury
Inspector General for Tax Administration; and Nina
Olsen, Taxpayer Advocate, posted at [http://finance.senate.gov/sitepages/hearing072606.htm].
They also include reports by the Joint Committee on
Taxation, including JCS-2-05, Options to Improve
Compliance and Reform Tax Policy, January 27,
2005, and an unnumbered report, Additional
Options to Improve Tax Compliance, August 3,
2006. Finally, many of these proposals are included
in the Administration's FY2008 revenue proposals.
Their revenue estimates can be found in General
Explanations of the Administration's Fiscal Year
2008 Revenue Proposals, Department of the
Treasury, February 2007.
17
U.S. Treasury Office of Tax Policy,
A Comprehensive
Strategy for Reducing the Tax Gap, September 26,
2006.
18
Statement of J. Russell George, Treasury Inspector
General for Tax Administration, before the Senate
Finance Committee, July 26, 2006.
19
Currently gross proceeds are reported, but not
basis. To institute this rule would require some
type of rule about how basis is established when
some but not all of a type of assets (for example,
shares of particular stock) are sold. Currently, a
variety of rules are available.
20
Government Accountability Office, Capital Gains
Tax Gap: Requiring Brokers to Report Securities Cost
Basis would Improve Compliance if Related Challenges
Are Addressed, GAO-06-603, June 2006.
21
For a general background on the economic substance
doctrine see Joseph Bankman, "The Economic Substance
Doctrine," Southern California Law Review,
vol. 74, November 2000, pp. 5-30; Gerald R. Miller,
"Corporate Tax Shelters and Economic Substance: An
Analysis of the Problem and Its Common Law
Solution," Texas Tech Law Review, vol. 34,
2003, pp. 1015-1069; and Martin J. McMahon, Jr.,
"Economic Substance, Purposive Activity, and
Corporate Tax Shelters," Tax Notes, February
25, 2002, pp. 1017-1026. See also CRS Report
RL32193, Anti-Tax Shelter and Other
Revenue-Raising Provisions Considered in the 108th
Congress, by Jane G. Gravelle; and CRS Report
RS22586, The Economic Substance Doctrine: Recent
Significant Legal Decisions, by Erica Lunder.
22
See, for example, the report released by the
Permanent Subcommittee on Investigations of the
Committee on Homeland Security and Government
Affairs, U.S. Senate, Tax Haven Abuses, The
Enablers, the Tools and Secrecy, August 1, 2006.
23
Proposals made by the chairman and ranking member of
that committee are summarized in testimony of Robert
McIntyre before the Senate Budget Committee, January
23, 2007.
24
The issues surrounding the debate at that time are
discussed in CRS Report 90-16, Can A Capital
Gains Tax Cut Pay for Itself?,
by Jane G. Gravelle. This archived report can be
requested from the Congressional Research Service.
It is also reprinted in Tax Notes, vol. 48,
July 9, 1990, pp. 209-219.
25
The Administration also had an estimate that was
somewhat higher than that of the JCT and CBO but did
not come from a explicit
estimating equation. It is not clear how the value
was chosen.
26
Holding all other variables constant, under this
formula, G = Ae-bt, where G is gains, A is a
constant reflecting other variables and fixed
amounts, b is the coefficient of the realizations
response, and the elasticity is bt.
27
CRS Report 91-250, Limits to Capital Gains
Feedback Effects, by Jane G. Gravelle. This
archived report is available from the Congressional
Research Service. It is also reprinted in Tax
Notes, vol. 51, April 22, 1991, pp. 363-371
28
Leonard E. Burman and William C. Randolph,
"Measuring Permanent Responses to Capital-Gains Tax
Changes in Panel Data," The American Economic
Review, vol. 84, September 1994, pp. 794-809.
29
Alan J. Auerbach and Jonathan M. Siegel, "Capital
Gains Realizations of the Rich and Sophisticated,"
The American Economic Review, Papers and
Proceedings, vol. 90, May 2000, pp. 276-282. This
study also reported a very large 1.7 elasticity;
however, discussions with researchers at the
Congressional Budget Office (where this research was
performed) indicate subsequent concerns that this
measure is reflecting transitory effects.