INVESTMENT INCENTIVES UNDER THE ALTERNATIVE MINIMUM TAX

Abstract

This paper develops a model of the cost of capital for firms anticipating Alternative Minimum Tax (AMT) liability. The cost of capital for firms subject to the AMT can be either higher or lower than for firms permanently subject to the regular tax system. The cost of capital under the AMT is shown to vary widely, depending on the duration a firm is subject to the AMT, whether the firm is currently subject to the AMT or will be subject to the AMT at some future date, and the source of financing for the investment.