The Theory of Marginal Tax Rates for Alternative Minimum Tax Firms

Abstract

Due to the complexity of the alternative minimum tax (AMT), marginal tax rates (MTR) estimation studies deem AMT firms’ MTRs almost impossible to estimate. We develop an analytical model for estimating AMT firms’ MTRs. The model shows that AMT firms’ MTRs are essentially the opportunity cost of AMT payments: it is a rate of return weighted average of the firm’s effective tax rate and the statutory AMT rate. Retests utilizing AMT MTRs, instead of the traditional MTRs, for AMT firms in two prior empirical studies reveal improved statistical significance of the MTR coefficient. The impact of applying AMT MTR in empirical estimates may depend on the proportion and characteristics of AMT firms in the sample.

Keywords: Marginal tax rates, Alternative minimum tax, Net operating loss carryforwards

JEL Classification: C02, H25, H22, H32