How does the corporate AMT impact the cost of capital for firms

1. Increased cost of capital for firms temporarily subject to the AMT:
- Calculations indicate that firms undertaking investment in equipment while temporarily subject to the AMT generally face a higher cost of capital than firms not subject to the AMT. [3]
- This is because the AMT reduces the value of tax deductions and credits that would otherwise lower the firm's tax liability and cost of capital.

2. Uncertainty around future AMT liability:
- The uncertain nature of a firm's future exposure to the AMT makes it difficult to capture the impact on investment and financing behavior through a purely deterministic analysis. [2]
- This uncertainty around future AMT liability can also increase the firm's cost of capital, as it creates additional risk and complexity.

3. Timing impact of AMT credits:
- Firms that pay the AMT can claim credits to offset future regular tax liability. However, the delay in using these credits represents a cost to the firm in terms of forgone earnings on those funds. [3]
- The longer it takes a firm to claim its AMT credits, the more this timing impact can increase its effective cost of capital.

4. Potential distortions in investment and financing decisions:
- The AMT may affect the statutory tax rate applicable to the depreciation deductions associated with prior investments, making it no longer appropriate to consider a constant statutory rate when measuring marginal effective tax rates. [2]
- This could lead firms to alter their investment and financing decisions in response to the AMT, further impacting their cost of capital.

In summary, the corporate AMT can increase the cost of capital for firms through reduced tax benefits, uncertainty around future liability, timing impacts of AMT credits, and potential distortions to investment and financing decisions. This can create inefficiencies and complicate the analysis of marginal effective tax rates.