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

72 Pages Posted: 5 Jul 2010  

Brian D. Galle

Georgetown University Law Center

Jonathan Klick

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

Multiple version iconThere are 2 versions of this paper

Date Written: June 25, 2010

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.

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

Suggested Citation

Galle, Brian D. and Klick, Jonathan, Recessions and the Social Safety Net: The Alternative Minimum Tax as a Counter-Cyclical Fiscal Stabilizer (June 25, 2010). Stanford Law Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1634068

Brian D. Galle (Contact Author)

Georgetown University Law Center ( email )

600 New Jersey Avenue, NW
Washington, DC 20001
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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