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Recessions and the Social Safety Net: The Alternative Minimum Tax as a Counter-Cyclical Fiscal Stabilizer


Brian D. Galle


Boston College Law School

Jonathan Klick


University of Pennsylvania Law School; Erasmus School of Law; PERC - Property and Environment Research Center

January 26, 2011

Stanford Law Review, Vol. 63, p. 187, 2010
U of Penn, Inst for Law & Econ Research Paper No. 10-09
Boston College Law School Legal Studies Research Paper No. 209

Abstract:     
We present an argument from micro-economic foundations suggesting that the federal Alternative Minimum Tax has potentially salutary – and heretofore unrecognized – effects that counteract pathologies of state budgets over the business cycle. AMT liability increases with income, and acts to eliminate federal tax subsidies for state revenue-raising. Thus, as a states’ income grow and the AMT hits more state residents, state spending becomes more expensive in flush times as the federal tax subsidy for state and local taxes is reduced. Conversely, when state fiscal health deteriorates, the federal tax subsidy grows as fewer state residents fall under the AMT, boosting taxpayer support for state spending. This stabilizing mechanism has the potential to overcome problems state politicians face committing to saving during boom times and spending during bust times.

We present empirical evidence suggesting that the AMT does indeed provide some degree of fiscal stabilization in accordance with micro-theory. We also provide policy suggestions regarding how the AMT could be modified to leverage this stabilization effect.

Number of Pages in PDF File: 61

Keywords: State finances, revenue, taxation, recession, pro-cyclical, federal remedies, moral hazard, risk, automatic stabilization, alternative minimum tax, AMT reform, ATM, Fiscal federalism tax, Tax, Social Insurance

JEL Classification: H20, H24, H53, H71, H72, H77, K34

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Date posted: May 21, 2010 ; Last revised: January 27, 2011

Suggested Citation

Galle, Brian D. and Klick, Jonathan, Recessions and the Social Safety Net: The Alternative Minimum Tax as a Counter-Cyclical Fiscal Stabilizer (January 26, 2011). Stanford Law Review, Vol. 63, p. 187, 2010; U of Penn, Inst for Law & Econ Research Paper No. 10-09; Boston College Law School Legal Studies Research Paper No. 209. Available at SSRN: http://ssrn.com/abstract=1590466

Contact Information

Brian D. Galle (Contact Author)
Boston College Law School ( email )
885 Centre Street
Newton, MA 02459-1163
United States
Jonathan Klick
University of Pennsylvania Law School ( email )
3501 Sansom Street
Philadelphia, PA 19104
United States
2157463455 (Phone)
Erasmus School of Law ( email )
3000 DR Rotterdam
Netherlands
PERC - Property and Environment Research Center
2048 Analysis Drive
Suite A
Bozeman, MT 59718
United States

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