The Changing Impact of the Alternative Minimum Tax on Horizontal Equity

While prior research (Anderson 1985, 1988) indicates that the Alternative Minimum Tax (AMT) increases the fairness, or horizontal equity (HE), of the federal income tax system, changes in tax laws and the general inability of the AMT system to account for inflation raise serious questions about whether the AMT continues to increase fairness. Burman et al. (2002) observe that the reason many more taxpayers are now subject to the AMT is because of the increasing divergence of the regular tax and the AMT. This divergence subjects more lower‐income taxpayers to the AMT, thus resulting in higher total tax liability. Using individual income tax return data for 1992, 1995, and 2000, and both dispersion‐based and rank reversal‐based measures, this study observes that the AMT still increases HE in many upper income groups, but decreases HE in many lower income groups. Moreover, overall measures of HE indicate that the AMT has a net decreasing effect on HE. There are two implications to these findings. First, it can no longer be assumed that the AMT uniformly improves HE. Second, the AMT generally continues to achieve its intended result at the upper income levels. This result suggests that regulators and legislators wishing to improve the AMT system need to address the causes of low‐income taxpayers being subject to the AMT while maintaining the impact on upper income taxpayers.