WASHINGTON -- The U.S. tax system would be fairer more efficient if Congress repealed the corporate alternative minimum tax and exempted shareholders from paying taxes on corporate dividends, the Treasury Department's Office of Tax Policy said yesterday.

Eliminating the minimum tax would be a boon to the municipal market, which has chafed under the levy since it was imposed in 1986. But ending taxation of corporate dividends at the shareholder level would make corporate securities more attractive to investors at the expense of tax-exempt debt, municipal bond proponents have warned.

The tax policy office made the recommendations in a white paper entitled "Restructuring the U.S. Tax System for the 21st Century: An Option for Fundamental Reform." The office said it was publishing the paper in response to a request by Treasury Secretary Nicholas Brady, who had asked department tax analysts to study whether the tax system could be made more efficient and equitable. Brady's term as Treasury secretary will expire on Jan. 20.

"Investment incentives would be increased, and market distortions and complexity would be reduced by repealing the corporate alternative minimum tax and elimination of business-related preferences from the individual AMT," the paper states.

The Tax Reform Act of 1986 subjects interest earned from private-activity bonds -- except 501(c)(3) bonds -- to the individual and corporate alternative minimum taxes at rates of 24% and 20%, respectively. It also subjects so-called preference items -- including interest earned from public-purpose and 501(c)(3) bonds -- to an additional special adjustment to a corporation's minimum tax.

Exempting shareholders from taxes on corporate dividends would mean that "the tax law bias in favor of debt financing and the cost of corporate equity capital would be reduced, and incentives for private savings would be increased," the paper states.

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