Ask the Scholar
Document scope · 1 page
Scholar
Ask about this object, its catalog metadata, its source description, or the page inventory.
For page-specific OCR and visual context, open one of the page chats.
Scholar Source Context
Document identity
localId
286240307
label
"Contract with America" Analysis [binder]
core
doc
dtoType
document
citationUrl
pageCount
1
Source metadata
id
286240307
contentType
document
title
"Contract with America" Analysis [binder]
citationUrl
collections
Records of the National Economic Council (Clinton Administration)
Gene Sperling's Subject Files
imageCount
1
hasImages
yes
source
import
hasTranscription
no
Source extras
naId
286240307
levelOfDescription
fileUnit
otherTitles
4212804-20190568F-001-010-2021
recordType
description
ocrSource
nara-archive
Single page context
seq
1
pageIndex
0
type
document
mediaId
998135cc106fb3d2
ocrText
FOIA Number: 2019-0568-F
FOIA
MARKER
This is not a textual record. This is used as an
administrative marker by the William J. Clinton
Presidential Library Staff.
Collection/Record Group:
Clinton Presidential Records
Subgroup/Office of Origin:
National Economic Council
Series/Staff Member:
Gene Sperling
Subseries:
OA/ID Number:
9227
FolderID:
Folder Title:
"Contract with America" Analysis [binder]
Stack:
Row:
Section:
Shelf:
Position:
S
16
2
6
3
"Contract with America" Analysis
PHOTOCOPY
PRESERVATION
"Contract
with
America"
Analysis
PHOTOCOPY
PRESERVATION
CONTENTS
I.
"Contract with America Tax Relief Act of 1995." Analysis done by Department of
Treasury, Office of Tax Analysis, March 14, 1995.
II.
"Who Gains from Contract" Charts
III.
"Contract with America Tax Relief Act of 1995." Analysis done by Joint Committee on
Taxation, March 11, 1995.
IV.
"Macroeconomic Aspects of the Republican Contract with America." Analysis done by
Laurence H. Meyer and Associates, Ltd. February 1995.
V.
"The Contract with America Proposal: Assessing the Long-Term Impact." Analysis done
by the Center on Budget and Policy Priorities, November 1994.
03/14/95
15:16
9 202 6222633
DTR ECON POLICY
002
DEPARTMENT OF THE TREASURY
OF
TREASURY
DEPARTMENT THE TREASURY THE
NEWS
1789
OFFICE OF PUBLIC AFFAIRS 1500 PENNSYLVANIA AVENUE, N.W. WASHINGTON, D.C. 20220 (202) 622-2960
FOR IMMEDIATE RELEASE
March 14, 1995
and
TOP EARNERS GET BULK OF GOP TAX PLAN BENEFITS, STUDY SAYS
The wealthiest 12 percent of Americans would receive more than half of the tax
cuts proposed in the House Ways and Means Committee, according to Treasury
Department estimates released Tuesday.
The estimates also show the cuts would cost $630 billion over the next 10 years.
"Tax cuts need to satisfy three criteria -- promoting economic growth, tax fairness
and a full funding with no budget gimmicks," Treasury Secretary Robert Rubin said.
"Whatever we do, it must be paid for. You don't balance budgets by cutting taxes
and not cutting spending," Rubin said.
According to the Treasury estimates, the Republican proposal would give more
than half (51.5 percent) of the tax benefits to the 13.4 million families earning $100,000
or more a year. That's only the top 12 percent of American familes. And some 20
percent of the tax benefits go to just 1 percent, or 1.1 million, of American families
earning nearly $350,000 or more a year.
Meanwhile, Americans earning between $30,000 and $100,000 51.8 million
familes would receive only 43.2 percent of the tax relief, the estimates show.
President Clinton is proposing a 10-year, $172 billion tax cut for working middle
class Americans. The Middle Class Bill of Rights included in the President's fiscal 1996
budget calls for a $500 tax credit for dependent children under age 13, a deduction of up
to $10,000 for education expenses, and expanded individual retirement accounts (IRAs).
The GOP package, pending before the House tax-writing panel, includes several
costly tax breaks for corporations and upper income individuals. For example, scaling
(more)
RR-151
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
Premiumary Revenue Estimates
Middle-Class Tax Cut
Fiscal Years
13-Mar-95
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
1995-2000
1995-2005
($'s in billions)
Child Tax Benefit
Credit for children 12-years and under; credit = $300 for 1996, 1997, and
APR-24-1995 16:35
1998, $500 for 1999 and thereafter; phase-out AGI between
$60,000 . $75,000; effective 1/1/96
0.0
-3.5
-6.8
-6.6
-8.3
-10.1
-10.1
-9.9
-9.7
-9.4
-9.8
-35.4
-84.2
Education and Job Training Incentive
Phased-in deduction for up-to $10,000 In post-secondary education and training
expenses with phase-out AGI between $70,000 . $90,000 single,
$100,000 - $120,000 joint; phase-in= $5,000 for 1996, 1997, and
1998, $10,000 for 1999 and thereafter
0.0
-0.7
-4.7
-5.0
-5.8
-7.6
-7.6
-7.9
-8.1
-8.3
-8.5
-23.7
-64.1
Savings Incentive
Expand eligibility for deductible "front-loaded" IRAs by Increasing AGI
eligibility phase-out from current $40,000 - $50,000 to $80,000 - $100,000
for joint returns (current $25,000 - $35,000 phase-out increased to $50,000
$70,000 for single returns); add new "back-loaded IRA option; allow
conversion of existing IRAs Into "back-loaded" IRAs and retain current law
DAS TAX POLICY
non-working spouse limit; allow penalty-free withdrawals for education,
first home, medical expenses, long-term unemployment and care for elderly
0.0
0.4
-0.3
-0.8
-1.0
-2.0
-3.3
-3.6
-3.9
-4.2
-4.5
-3.8
-23.3
Middle-class tax cut total
0.0
-3.8
-11.8
-12.4
-15.1
-19.7
-21.0
-21.4
-21.7
-21.9
-22.9
-62.8
-171.7
Department of the Treasury
Office of Tax Analysis
TOTAL P.02
202 622 8784 P.02/02
ESTIMATED EFFECTS ON RECEIPTS 1/
"CONTRACT WITH AMERICA TAX RELIEF ACT OF 1995"
WAYS AND MEANS CHAIRMAN'S MARK
03/14/95
Fiscal Years
Provision 2/
13-Mar-95
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
1995
-2000
1995
-2005
(5's in billions)
15:17
1 $500 per child credit
-
-11.7
-23.5
-24.5
-25.4
-25.2
-25.8
-26.0
-25.1
-24.7
-23.9
-110.3
-235.8
2 American Dream Savings Accounts
-
0.3
1.1
1.6
0.9
-0.1
-2.2
-4.1
-5.3
-6.5
-7.5
3.8
-21.8
69
3 Favorable tax treatment of long-term care insurance and services
-
-0.5
-1.1
-1.2
-1.4
-1.6
-1.8
-2.1
-2.3
-2.6
-2.9
-5.9
-17.6
4 Tax-free accelerated death benefits under life insurance contracts
-
-0.0
-0.1
-0.1
-0.1
-0.1
-0.1
-0.1
-0.1
-0.1
-0.1
-0.3
-0.8
202
5 Increased expensing limit for small business
-
-0.5
-1.4
-2.0
-2.3
-1.8
-1.3
-1.1
-0.8
-0.7
-0.7
-8.0
-12.5
6 $5,000 tax credit for adoption expenses
-
-0.0
-0.2
-0.2
-02
-0.2
-0.2
-0.2
-0.2
-0.2
-0.2
-0.9
-2.0
2222633
7 $500 tax credit for elderly care
-
-0.0
-0.2
-0.2
-0.2
-0.2
-0.2
-0.2
-0.2
-0.2
-0.2
-0.9
-2.1
8 Neutral Cost Recovery 3/
3.3
10.0
13.4
8.5
-2.6
-14.1
-21.5
-26.0
-28.7
-30.4
322
18.4
-120.4
9 Corporate and Individual Alternative Minimum Tax (AMT) relief 4/
-1.3
-3.3
-4.0
-3.6
-3.4
-3.1
-4.2
-4.2
-3.3
-2.8
-2.5
-18.7
-35.6
10 Interaction between Neutral Cost Recovery and AMT provisions
0.4
1.1
1.3
1.0
0.6
0.1
-0.2
-0.3
-0.3
-0.3
-0.2
4.5
3.1
11 Leasehold improvements provison
-0.0
-0.0
-0.0
-0.0
-0.0
-0.0
-0.0
-0.0
-0.0
-0.0
-0.0
-0.2
-0.4
12 Capital gains tax preferences
0.7
1.4
-3.8
-7.8
-9.0
-10.0
-11.0
-11.9
-12.7
-13.5
-14.4
-28.4
-91.9
13 Phase-out of the 85 percent maximum Inclusion rate for social security benefits
-
-0.5
-1.9
-3.2
-4.3
-5.3
-6.0
-6.4
-6.8
-7.1
-7.5
-15.3
-49.1
14 Tax credit to reduce marriage penalties
-
-0.4
-2.0
-2.0
-2.1
-2.1
-2.1
-2.1
-2.1
-2.1
-2.1
-8.6
-19.0
DTR ECON POLICY
15 Expansion of the home office deduction
-
-0.0
-0.2
-0.2
-0.2
-0.2
-0.2
-0.2
-0.2
-0.2
-0.2
-0.7
-1.6
16 Increase unified estate and gift tax exclusions and exemptions
-
0.0
-1.4
-1.6
-1.8
-2.0
-2.4
-2.7
-3.0
-3.6
-4.1
-6.7
-22.6
Total effect on receipts
3.1
-4.4
-24.0
-35.8
-51.3
-65.9
-79.2
-87.7
-91.2
-95.1
-98.9
-178.1
-630.2
Department of the Treasury
Office of Tax Analysis
1/ Does not Include outley effects of modifications to social security earnings limitations.
2/ Provisions are effective 1/1/96 unless otherwise noted. Estimates are based upon March 9. 1995 JCT provision descriptions (JCX-9-95).
3/ Effective for property placed in service after 12/31/94.
4/ Generally effective 1/1/96. The AMT depreciation adjustment would be repealed for 1) all property covered under NCRS and 2) all other deprectable property placed
in service after 3/13/95.
004
Revenue Effect of Contract With America
Ways and Means Chairman's Mark
Billions
$50
03/14/95 99 15:18 202 2222633
3
$0
-4
-24
-$50
-36
-51
-66
-79
DTR ECON POLICY
-$100
-88 -91 -95 -99
-$150
1995
1997
1999
2001
2003
2005
Fiscal Years
5 year cost: $178 billion
10 year cost: $630 billion
005
Source: Department of the Treasury, Office of Tax Analysis
Top 12 Percent Get More Than Half of the Tax Benefits
Ways and Means Chairman's Mark
Percent
35
30
28.1
03/14/95 15:18 89 202 6222633
25
23.4
20
16.4
15.2
15
11.6
DTR ECON POLICY
10
5
3.3
1.3
0.23
0
0-10 10-20 20-30 30-50 50-75 75-100 100-200 over 200
Family Economic Income in Thousands of Dollars
900
Source: Department of the Treasury, Office of Tax Analysis
Tax Benefits As A Share of Income
Ways and Means Chairman's Mark
Percent
5
6222633 9'9 15:19 202 03/14/95
4
3
2
DTR ECON POLICY
1
0
0-10 10-20 20-30 30-50 50-75 75-100 100-200 over 200
Family Economic Income in Thousands of Dollars
0007
Source: Department of the Treasury, Office of Tax Analysis
Top 12 Percent Get Three-Fourths of the Capital Gains Benefits
Ways and Means Chairman's Mark
Percent
70
60
58.1
03/14/95 99 15:19 202 2222633
50
40
30
DTR ECON POLICY
20
18.2
10
4.6
6.6
6.1
0.67
1.3
1.9
0
0-10
10-20
20-30
30-50
50-75
75-100
100-200
over
200
Family Economic Income in Thousands of Dollars
800 8007
Source: Department of the Treasury, Office of Tax Analysis
Tax Benefits As A Share of Income
Capital Gains Cut
Ways and Means Chairman's Mark
Percent
2
03/14/95 15:19 89 202 6222633
1.5
1
DTR ECON POLICY
0.5
0
0-10 10-20 20-30 30-50 50-75 75-100 100-200 over 200
Family Economic Income in Thousands of Dollars
600 600
Source: Department of the Treasury, Office of Tax Analysis
04/24/95
12:56
9 202 6222633
DTR ECON POLICY
002
President's Middle-Class Tax Cut Proposal (1)
(1996 Income Levels)
Tax Change
Number
Total Tax Change
Tax Change
as a Percent
Family Economic
of
Average
Percent
as a Percent
of Current
Income Class (2)
Families
Tax Change
Amount (3)
Distribution
of Income
Federal Taxes
(000)
(millions)
($)
($M)
(%)
(%)
(%)
0 10
12.5
-5
-63
0.3
-0.09
-1.11
10 20
16.2
-29
-461
1.9
-0.19
-2.15
20 30
15.1
-69
-1040
4.2
-0.28
-2.08
30 50
22.7
-251
-5700
22.9
-0.64
-3.65
50 75
18.3
-422
-7746
31.1
-0.69
-3.46
75 100
10.8
-558
-6025
24.2
-0.65
-3.07
100 200
10.6
-342
-3616
14.5
-0.26
-1.19
200 & over
2.8
-82
-227
0.9
-0:02
-0.07
Total (4)
109.4
-227
-24881
100.0
-0.39
-1.95
Department of the Treasury
March 13. 1995
Office of Tax Analysis
(1) This table distributes the estimated change in tax burdens due to the President's middle-class tax cut proposal The proposal
includes a $500 nonrefundable credit for children aged 12 and under which phases out between AGIs of 360 000 and $75,000 on all
returns. regardless of filing status The credit would be taken after the EITC The credit and the phaseout range would be indexed for
inflation after 2000 The proposal also includes an above the line deduction for post-secondary education and training expenses of
up to $10,000. The deduction phases out between AGIs of $70,000 and $90.000 on single returns and $100 000 and $120.000 on
joint returns Finally, the proposal includes an increase in the phaseout range for deductible IRA contributions to AGIs between
$50,000 and $70,000 for single returns and $80,000 and $100.000 on joint returns allows taxpayers below these income limits the
option of making nondeductible contributions to a "back-loaded" IRA. and provides penalty-free withdrawais for specified purposes
(2) Family Economic Income (FEI) is a broad-based income concept FEI is constructed by adding to AG
unreported and underreported income IRA and Keogh deductions nontaxable transfer payments such
as Social Security and AFDC, employer-provided fringe benefits. inside build-up on-pensions IRAs
Keoghs, and life insurance: tax-exempt interest. and imputed rent on owner-occupied housing
Capital gains are computed on an accrual basis. adjusted for inflation to the extent reliable data allow
Inflationary losses of lenders are subtracted and gains of borrowers are added There IS also an
adjustment for accelerated depreciation of noncorporate businesses FEI IS shown on a family rather
than a tax-return basis. The economic incomes of all members of a family unit are added to arrive at
the family's economic income used in the distributions
(3) The change in Federal taxes IS estimated at 1996 income levels but assuming fully phased in (2000) law and behavior
For the IRA proposal, the change IS measured as the present value of the tax savings from one-year's contributions
(4) Families with negative incomes are included in the total line but not shown separately
04/24/95
12:57
9 202 6222633
DTR ECON POLICY
003
President's Middle-Class Tax Cut Proposal (1)
(1996 Income Levels)
62
2
Tax Change
Number
Total Tax Change
Tax Change
as a Percent
of
Average
Percent
as a Percent
of Current
Family Economic
Families
Tax Change
Amount (3)
Distribution
of Income
Federal Taxes
Income Quintile (2)
(millions)
($)
($M)
(%)
(%)
(%)
Lowest (4)
21.4
-12
-267
1.1
-0.14
-1.88
Second
21.9
-57
-1248
5.0
-0.25
-2.04
Third
21.9
-242
-5286
21.2
-0.63
-3.61
Fourth
21.9
-430
-9402
37.8
-0.69
-3.46
Highest
21.9
-396
-8675
34.9
-0.25
-1.11
Total (4)
109.4
-227
-24881
100.0
-0.39
-1.95
Top 10%
10.9
-243
-2664
10.7
-011
-0.47
Top 5%
5.5
-126
-688
2.8
-0 04
-0.17
Top 1%
1.1
-63
-69
03
-0.01
-0.03
Department of the Treasury
March 13, 1995
Office of Tax Analysis
(1) This table distributes the estimated change in tax burdens due to the President's middle-class tax cut proposal The proposal
includes a $500 nonrefundable credit for children aged 12 and under which phases out between AGIs of $60,000 and $75,000 on all
returns, regardless of filing status. The credit would be taken after the EITC The credit and the phaseout range would be indexed for
inflation after 2000. The proposal also includes an above the line deduction for post-secondary education and training expenses of
up to $10,000 The deduction phases out between AGIs of $70,000 and $90.000 on single returns and $100,000 and $120,000 on
joint returns Finally, the proposal includes an increase in the phaseout range for deductible IRA contributions to AGIs between.
$50,000 and $70,000 for single returns and $80,000 and $100,000 on joint returns. allows taxpayers below these income limits the
option of making nondeductible contributions to a "back-loaded" IRA. and provides penalty-free withdrawals for specified purposes
(2) Family Economic Income (FEI) is a broad-based income concept FEI IS constructed by adding to AGI
unreported and underreported income, IRA and Keogh deductions. nontaxable transfer payments such
as Social Security and AFDC. employer-provided fringe benefits. inside build-up on pensions, IRAs.
Keoghs, and life insurance; tax-exempt interest. and imputed rent on owner-occupied housing
Capital gains are computed on an accrual basis. adjusted for inflation to the extent reliable data allow
Inflationary losses of lenders are subtracted and gains of borrowers are added There IS also an
adjustment for accelerated depreciation of noncorporate businesses FEI IS shown on a family rather
than a tax-return basis. The economic incomes of all members of a family unit are added to arrive at
the family's economic income used in the distributions
(3) The change in Federal taxes IS estimated at 1996 income levels but assuming fully phased in (2000) law and behavior
For the IRA proposal. the change IS measured as the present value of the tax savings from one-year's contributions
(4) Families with negative incomes are excluded from the lowest quintile but included in the total line
NOTE: Quintiles begin at FEI of Second $15,604. Third $29.717. Fourth $48,660: Highest $79,056.
Top 10% $108,704; Top 5% $145.412. Top 1% $349,438.
04/24/95
12:57
9 202 6222633
DTR ECON POLICY
004
Percentage Distribution of Tax Cuts:
Republican "Contract with America" and the
President's Middle-Class Tax Cut Proposal
(1996 Income Levels)
Percentage Distribution of Tax Cuts:
Republican
President's
Family Economic
Number
"Contract with
Middle-Class
Income Class (1)
of Families
America"
Tax Cut
(000)
(millions)
(%)
(%)
0 - 10
12.5
0.4
0.3
10 20
16.2
1.6
1.9
20 30
15.1
4.1
4.2
30 50
22.7
12.4
22.9
50 75
18.3
16.2
31.1
75 100
10.8
14.8
24.2
100 200
10.6
22.8
14.5
200 & over
2.8
27.4
0.9
Total (2)
109.4
100.0
100.0
Department of the Treasury
March 9, 1995
Office of Tax Analysis
(1) Family Economic Income (FEI) is a broad-based income concept. FEI is constructed by adding to AGI
unreported and underreported income, IRA and Keogh deductions; nontaxable transfer payments such
as Social Security and AFDC: employer-provided fringe benefits. inside build-up on pensions, IRAs.
Keoghs, and life insurance; tax-exempt interest; and imputed rent on owner-occupied housing
Capital gains are computed on an accrual basis, adjusted for inflation to the extent reliable data allow
Inflationary losses of lenders are subtracted and gains of borrowers are added. There is also an
adjustment for accelerated depreciation of noncorporate businesses. FEI is shown on a family rather
than a tax-return basis. The economic incomes of all members of a family unit are added to arrive at
the family's economic income used in the distributions
(2) Families with negative incomes are included in the total line but not shown separately.
04/24/95
12:58
9 202 6222633
DTR ECON POLICY
005
Percentage Distribution of Tax Cuts:
Republican "Contract with America" and the
President's Middle-Class Tax Cut Proposal
(1996 Income Levels)
Percentage Distribution of Tax Cuts:
Republican
President's
Number
Contract with
Middle-Class
Family Economic
of Families
America"
Tax Cut
Income Quintile (1)
(millions)
(%)
(%)
Lowest (2)
21.4
0.9
1.1
Second
21.9
4.9
5.0
Third
21.9
11.7
21.2
Fourth
21.9
19.7
37.8
Highest
21.9
62.2
34.9
Total (2)
109.4
100.0
100.0
Top 10%
10.9
46.1
10.7
Top 5%
5.5
35.3
2.8
Top 1%
1.1
19.5
0.3
Department of the Treasury
March 9, 1995
Office of Tax Analysis
(1) Family Economic Income (FEI) is a broad-based income concept FEI IS constructed by adding to AGI
unreported and underreported income, IRA and Keogh deductions, nontaxable transfer payments such
as Social Security and AFDC: employer-provided fringe benefits. inside build-up on pensions, IRAs.
Keoghs, and life insurance; tax-exempt interest. and imputed rent on owner-occupied housing
Capital gains are computed on an accrual basis. adjusted for inflation to the extent reliable data allow
Inflationary losses of lenders are subtracted and gains of borrowers are added There IS also an
adjustment for accelerated depreciation of noncorporate businesses FEI IS shown on a family rather
than a tax-return basis. The economic incomes of all members of a family unit are added to affive at
the family's economic income used in the distributions
(2) Families with negative incomes are excluded from the lowest quintile but included in the total line
NOTE Quintiles begin at FEI of Second $15,604. Third $29,717. Fourth $48,660: Highest $79,056.
Top 10% $108,704: Top 5% $145,412 Top 1% $349,438.
03/14/95
15:20
9 202 6222633
DTR ECON POLICY
010
Tax Proposals in "Contract with America Tax Relief Act of 1995" (1)
(Ways and Means Chairman's Mark)
(1996 Income Levels)
Tax Change
Number
Total Tax Change
Tax Change
as a Percent
Family Economic
of
Average
Percent
as a Percent
of Current
Income Class (2)
Families
Tax Change
Amount (3)
Distribution
of Income
Federal Taxes
(000)
(millions)
($)
($M)
(%)
(%)
(%)
0 10
12.5
-20
-251
0.23
-0.35
-4.43
10 20
16.2
-90
-1462
1.3
-0.60
-6.81
20 30
15.1
-247
-3718
3.3
-0.99
-7.42
30 50
22.7
-569
-12934
11.6
-1.45
-8.28
50 75
18.3
-997
-18293
16.4
-1.62
-8.17
75 100
10.8
-1572
-16976
15.2
-1.82
-8.66
100 200
10.6
-2465
-26049
23.4
-1.89
-8.60
200 & over
2.8
-11266
-31319
28.1
-2.34
-9.89
Total (4)
109.4
-1019
-111517
100.0
-1.76
-8.75
Department of the Treasury
March 13, 1995
Office of Tax Analysis
(1) This table distributes the estimated change in tax burdens due to the tax provisions in the "Contract with America
Tax Relief Act of 1995," as released by the Ways and Means Chairman March 11, 1995.
(2) Family Economic Income (FEI) is a broad-based income concept. FEI is constructed by adding to AGI
unreported and underreported income; IRA and Keogh deductions; nontaxable transfer payments such
as Social Security and AFDC; employer-provided fringe benefits; inside build-up on pensions, IRAs,
Keoghs, and life insurance; tax-exempt interest; and imputed rent on owner-occupied housing.
Capital gains are computed on an accrual basis, adjusted for inflation to the extent reliable data allow.
Inflationary losses of lenders are subtracted and gains of borrowers are added. There is also an
adjustment for accelerated depreciation of noncorporate businesses. FEI is shown on a family rather
than a tax-return basis. The economic incomes of all members of a family unit are added to arrive at
the family's economic income used in the distributions.
(3) The change in Federal taxes is estimated at 1996 income levels but assuming fully phased in law and long-run behavior.
The effect of the back-loaded ADSA proposal is measured as the present value of tax savings on one year's contributions.
The effect of the neutral cost recovery proposal is measured as the present value of the tax savings from one year's
investment. The effect of the prospective capital gains indexing proposal is the fully phased in tax savings, multiplied by the
ratio of the sum of the present values of prospective indexing over 17 years to the sum of the present values of fully phased
in indexing over 17 years, holding realizations constant. The effect on tax burdens of the proposed capital gains exclusion
prospective indexing are based on the level of capital gains realizations under current law. The incidence assumptions for
tax changes is the same as for current law taxes.
(4) Families with negative incomes are included in the total line but not shown separately.
03/14/95
15:20
9 202 6222633
DTR ECON POLICY
011
Tax Proposals in "Contract with America Tax Relief Act of 1995" (1)
(Ways and Means Chairman's Mark)
(1996 Income Levels)
Tax Change
Number
Total Tax Change
Tax Change
as a Percent
of
Average
Percent
as a Percent
of Current
Family Economic
Families
Tax Change
Amount (3)
Distribution
of Income
Federal Taxes
Income Quintile (2)
(millions)
($)
($M)
(%)
(%)
(%)
Lowest (4)
21.4
-36
-781
0.7
-0.42
-5.51
Second
21.9
-205
-4492
4.0
-0.91
-7.33
Third
21.9
-555
-12149
10.9
-1.44
-8.29
Fourth
21.9
-1021
-22353
20.0
-1.64
-8.22
Highest
21.9
-3255
-71228
63.9
-2.05
-9.14
Total (4)
109.4
-1019
-111517
100.0
-1.76
-8.75
Top 10%
10.9
-4821
-52755
47.3
-2.14
-9.33
Top 5%
5.5
-7369
-40316
36.2
-2.26
-9.71
Top 1%
1.1
-20362
-22276
20.0
-2.46
-10.04
Department of the Treasury
March 13, 1995
Office of Tax Analysis
(1) This table distributes the estimated change in tax burdens due to the tax provisions in the "Contract with America
Tax Relief Act of 1995," as released by the Ways and Means Chairman March 11, 1995.
(2) Family Economic Income (FEI) is a broad-based income concept. FEI is constructed by adding to AGI
unreported and underreported income; IRA and Keogh deductions; nontaxable transfer payments such
as Social Security and AFDC; employer-provided fringe benefits; inside build-up on pensions, IRAs,
Keoghs, and life insurance; tax-exempt interest; and imputed rent on owner-occupied housing.
Capital gains are computed on an accrual basis, adjusted for inflation to the extent reliable data allow.
Inflationary losses of lenders are subtracted and gains of borrowers are added. There is also an
adjustment for accelerated depreciation of noncorporate businesses. FEI is shown on a family rather
than a tax-return basis. The economic incomes of all members of a family unit are added to arrive at
the family's economic income used in the distributions.
(3) The change in Federal taxes is estimated at 1996 income levels but assuming fully phased in law and long-run behavior.
The effect of the back-loaded ADSA proposal is measured as the present value of tax savings on one year's contributions.
The effect of the neutral cost recovery proposal is measured as the present value of the tax savings from one year's
investment. The effect of the prospective capital gains indexing proposal is the fully phased intax savings, multiplied by the
ratio of the sum of the present values of prospective indexing over 17 years to the sum of the present values of fully phased
in indexing over 17 years, holding realizations constant. The effect on tax burdens of the proposed capital gains exclusion
prospective indexing are based on the level of capital gains realizations under current law. The incidence assumptions for
tax changes is the same as for current law taxes.
(4) Families with negative incomes are excluded from the lowest quintile but included in the total line.
NOTE: Quintiles begin at FEI of: Second $15,604; Third $29,717; Fourth $48,660; Highest $79,056;
Top 10% $108,704; Top 5% $145,412; Top 1% $349,438.
03/14/95
15:21
9 202 6222633
DTR ECON POLICY
012
Tax Proposals in "Contract with America Tax Relief Act of 1995" (1)
(Ways and Means Chairman's Mark)
(1996 Income Levels)
Federal Taxes Under Current Law (2)
Change in Federal Taxes (3)
Total Federal Taxes After Change
As a Percent
As a Percent
As a Percent
As a Percent
As a Percent
As a Percent
Family Economic
of Pre-Tax
of After-Tax
of Pre-Tax
of After-Tax
of Pre-Tax
of After-Tax
Income Class (4)
Amount
Income
Income
Amount
Income
Income
Amount
Income
Income
(000)
($B)
(%)
(%)
($B)
(%)
(%)
($B)
(%)
(%)
0-10
5.7
8.0
8.7
-0.3
(0.4)
(0.4)
5.4
7.7
8.3
10 20
21.5
8.8
9.7
-1.5
(0.6)
(0.7)
20.0
8.2
9.0
20-30
50.1
13.3
15.4
-3.7
(1.0)
(1.1)
46.4
12.3
14.2
30-50
156.3
17.5
21.2
-12.9
(1.4)
(1.8)
143.4
16.0
19.4
50 75
224.0
19.9
24.8
-18.3
(1.6)
(2.0)
205.7
18.3
22.8
75-100
196.1
21.1
26.7
-17.0
(1.8)
(2.3)
179.1
19.2
24.4
100 - 200
303.0
22.0
28.1
-26.0
(1.9)
(2.4)
277.0
20.1
25.7
200 & over
316.6
23.7
31.1
-31.3
(2.3)
(3.1)
285.3
21.4
28.0
Total (5)
1,275.1
20.1
25.2
-111.5
(1.8)
(2.2)
1,163.6
18.4
23.0
Department of the Treasury
March 13, 1995
Office of Tax Analysis
(1) This table distributes the estimated change in tax burdens due to the tax provisions in the "Contract with America Tax Relief Act of 1995," as
released by the Ways and Means Chairman March 11, 1995.
(2) The taxes included are individual and corporate income, payroll (Social Security and unemployment), and excises. Estate and gift taxes and customs
duties are excluded. The individual income tax is assumed to be borne by payors, the corporate income tax by capital income generally, payroll taxes
(employer and employee shares) by labor (wages and self-employment income), excises on purchases by individuals by the purchaser, and excises
on purchases by business in proportion to total consumption expenditures. Taxes due to provisions that expire prior to the end of the Budget period
are excluded.
(3) The change in Federal taxes is estimated at 1996 income levels but assuming fully phased in law and long-run behavior. The effect of the back-loaded
ADSA proposal is measured as the present value of tax savings on one year's contributions. The effect of the neutral cost recovery proposal is measured as
the present value of the tax savings from one year's investment. The effect of the prospective capital gains indexing proposal is the fully phased in tax savings,
multiplied by the ratio of the sum of the present values of prospective indexing over 17 years to the sum of the present values of fully phased in indexing over
17 years, holding realizations constant. The effect on tax burdens of the proposed capital gains exclusion and prospective indexing are based on the level of
capital gains realizations under current law. The incidence assumptions for tax changes is the same as for current law taxes (see footnote 2).
(4) Family Economic Income (FEI) is a broad-based income concept. FEI is constructed by adding to AGI unreported and underreported income; IRA
and Keogh deductions; nontaxable transfer payments, such as Social Security and AFDC; employer-provided fringe benefits; inside build-up on
pensions, IRAs, Keoghs, and life insurance; tax-exempt interest; and imputed rent on owner-occupied housing. Capital gains are computed on
an accrual basis, adjusted for inflation to the extent reliable data allow. Inflationary losses of lenders are subtracted and of borrowers are added.
There is also an adjustment for accelerated depreciation of noncorporate businesses. FEI is shown on a family, rather than on a tax return basis, The
economic incomes of all members of a family unit are added to arrive at the family's economic income used in the distributions.
(5) Families with negative incomes are included in the total line but not shown separately.
03/14/95
15:22
9
202 6222633
DTR ECON POLICY
013
Tax Proposals in "Contract with America Tax Relief Act of 1995" (1)
(Ways and Means Chairman's Mark)
(1996 Income Levels)
Federal Taxes Under Current Law (2)
Change in Federal Taxes (3)
Total Federal Taxes After Change
As a Percent
As a Percent
As a Percent
As a Percent
As a Percent
As a Percent
of Pre-Tax
of After-Tax
of Pre-Tax
of After-Tax
of Pre-Tax
of After-Tax
Family Economic
Amount
Income
Income
Amount
Income
Income
Amount
Income
Income
Income Quintile (4)
($B)
(%)
(%)
($B)
(%)
(%)
($8)
(%)
(%)
Lowest (5)
14.2
7.6
8.3
-0.8
(0.4)
(0.5)
13.4
7.2
7.8
Second
61.2
12.4
14.2
-4.5
(0.9)
(1.0)
56.7
11.5
13.2
Third
146.5
17.3
21.0
-12.1
(1.4)
(1.7)
134.3
15.9
19.2
Fourth
271.8
19.9
24.9
-22.4
(1.6)
(2.0)
249.4
18.3
22.8
Highest
779.5
22.4
28.9
-71.2
(2.1)
(2.6)
708.3
20.4
26.3
Total (5)
1,275.1
20.1
25.2
-111.5
(1.8)
(2.2)
1,163.6
18.4
23.0
Top 10%
565.3
22.9
29.8
-52.8
(2.1)
(2.8)
512.5
20.8
27.0
Top 5%
415.3
23.2
30.3
-40.3
(2.3)
(2.9)
375.0
21.0
27.3
Top 1%
221.9
24.5
32.5
-22.3
(2.5)
(3.3)
199.7
22.1
29.2
Department of the Treasury
March 13, 1995
Office of Tax Analysis
(1) This table distributes the estimated change in tax burdens due to the tax provisions in the "Contract with America Tax Relief Act of 1995," as
released by the Ways and Means Chairman March 11. 1995.
(2) The taxes included are individual and corporate income, payroll (Social Security and unemployment), and excises. Estate and gift taxes and customs
duties are excluded. The individual income tax is assumed to be bome by payors, the corporate income tax by capital income generally, payroll taxes
(employer and employee shares) by labor (wages and self-employment income). excises on purchases by individuals by the purchaser, and excises
on purchases by business in proportion to total consumption expenditures. Taxes due to provisions that expire prior to the end of the Budget period
are excluded.
(3) The change in Federal taxes is estimated at 1996 income levels but assuming fully phased in law and long-run behavior. The effect of the back-loaded
ADSA proposal is measured as the present value of tax savings on one year's contributions. The effect of the neutral cost recovery proposal is measured as
the present value of the tax savings from one year's investment. The effect of the prospective capital gains indexing proposal is the fully phased in tax savings,
multiplied by the ratio of the sum of the present values of prospective indexing over 17 years to the sum of the present values of fully phased in indexing over
17 years, holding realizations constant. The effect on tax burdens of the proposed capital gains exclusion and prospective indexing are based on the level of
capital gains realizations under current law. The incidence assumptions for tax changes is the same as for current law taxes (see footnote 2).
(4) Family Economic Income (FEI) is a broad-based income concept. FEI is constructed by adding to AGI unreported and underreported income; IRA
and Keogh deductions; nontaxable transfer payments. such as Social Security and AFDC; employer-provided fringe benefits; inside build-up on
pensions, IRAs, Keoghs, and life insurance; tax-exempt interest; and imputed rent on owner-occupied housing. Capital gains are computed on
an accrual basis, adjusted for inflation to the extent reliable data allow. Inflationary losses of tenders are subtracted and of borrowers are added.
There is also an adjustment for accelerated depreciation of noncorporate businesses. FEI is shown on a family, rather than on a tax return basis. The
economic incomes of all members of a family unit are added to arrive at the family's economic income used in the distributions.
(5) Families with negative incomes are excluded from the lowest quintile but included in the total line.
NOTE: Quintiles begin at FEI of: Second $15,604; Third $29,717: Fourth $48,660; Highest $79,056; Top 10% $108,704; Top 5% $145,412; Tup 1% $349,438.
03/14/95
15:23
9
202 6222633
DTR ECON POLICY
014
50% Exclusion and Indexing of Capital Gains for Individuals
in the "Contract with America Tax Relief Act of 1995" (1)
(Ways and Means Chairman's Mark)
(1996 Income Levels)
Families with Tax Change
Tax Change
Percent
Total Tax Change
Tax Change
as a Percent
Family Economic
of All
Average
Percent
as a Percent
of Current
Income Class (2)
Number
Families
Tax Change
Amount
Distribution
of Income
Federal Taxes
(000)
(millions)
(%)
($)
($M)
(%)
(%)
(%)
0 10
0.1
0.8
-1347
-128
0.67
-0.18
-2.25
10 20
0.3
2.0
-778
-246
1.3
-0.10
-1.15
20 30
0.5
3.4
-694
-360
1.9
-0.10
-0.72
30 50
1.4
6.0
-657
-889
4.6
-0.10
-0.57
50 75
1.6
9.0
-772
-1270
6.6
-0.11
-0.57
75 100
1.4
12.5
-868
-1173
6.1
-0.13
-0.60
100 200
2.4
22.7
-1448
-3480
18.2
-0.25
-1.15
200 & over
1.4
51.6
-7766
-11137
58.1
-0.83
-3.52
Total (3)
9.1
8.4
-2097
-19164
100.0
-0.30
-1.50
Department of the Treasury
March 13, 1995
Office of Tax Analysis
(1) This table distributes the estimated change in tax burdens due to the proposed 50% exclusion and indexing of capital gains for
individuals. The effect of the prospective capital gains indexing proposal is the fully phased in tax savings, multiplied by the
ratio of the sum of the present values of prospective indexing over 17 years to the sum of the present values of fully phased in
indexing over 17 years, holding realizations constant. The effect on tax burdens of the exclusion and indexing are based on
the level of capital gains realizations under current law.
(2) Family Economic Income (FEI) is a broad-based income concept. FEI is constructed by adding to AGI
unreported and underreported income; IRA and Keogh deductions; nontaxable transfer payments such
as Social Security and AFDC; employer-provided fringe benefits; inside build-up on pensions, IRAs,
Keoghs, and life insurance; tax-exempt interest; and imputed rent on owner-occupied housing.
Capital gains are computed on an accrual basis, adjusted for inflation to the extent reliable data allow.
Inflationary losses of lenders are subtracted and gains of borrowers are added. There is also an
adjustment for accelerated depreciation of noncorporate businesses. FEI is shown on a family rather
than a tax-return basis. The economic incomes of all members of a family unit are added to arrive at
the family's economic income used in the distributions.
(3) Families with negative incomes are included in the total line but not shown separately.
03/14/95
15:24
9 202 6222633
DTR ECON POLICY
015
50% Exclusion and Indexing of Capital Gains for Individuals
in the "Contract with America Tax Relief Act of 1995" (1)
(Ways and Means Chairman's Mark)
(1996 Income Levels)
Families with Tax Change
Tax Change
Percent
Total Tax Change
Tax Change
as a Percent
of All
Average
Percent
as a Percent
of Current
Family Economic
Number
Families
Tax Change
Amount
Distribution
of Income
Federal Taxes
Income Quintile (2)
(millions)
(%)
($)
($M)
(%)
(%)
(%)
Lowest (3)
0.2
1.1
-992
-240
1.3
-0.13
-1.69
Second
0.7
3.1
-701
-472
2.5
-0.10
-0.77
Third
1.3
5.9
-686
-882
4.6
-0.10
-0.60
Fourth
2.0
9.0
-761
-1500
7.8
-0.11
-0.55
Highest
4.9
22.6
-3152
-15589
81.3
-0.45
-2.00
Total (3)
9.1
8.4
-2097
-19164
100.0
-0.30
-1.50
Top 10%
3.5
31.6
-4100
-14159
73.9
-0.57
-2.50
Top 5%
2.3
42.3
-5508
-12746
66.5
-0.71
-3.07
Top 1%
0.7
62.2
-12931
-8793
45.9
-0.97
-3.96
Department of the Treasury
March 13, 1995
Office of Tax Analysis
(1) This table distributes the estimated change in tax burdens due to the proposed 50% exclusion and indexing of capital gains for
individuals. The effect of the prospective capital gains indexing proposal is the fully phased in tax savings, multiplied by the
ratio of the sum of the present values of prospective indexing over 17 years to the sum of the present values of fully phased in
indexing over 17 years, holding realizations constant. The effect on tax-burdens of the exclusion and indexing are based on
the level of capital gains realizations under current law.
(2) Family Economic Income (FEI) is a broad-based income concept. FEI is constructed by adding to AGI
unreported and underreported income; IRA and Keogh deductions; nontaxable transfer payments such
as Social Security and AFDC; employer-provided fringe benefits; inside build-up on pensions, IRAs,
Keoghs, and life insurance; tax-exempt interest; and imputed rent on owner-occupied housing.
Capital gains are computed on an accrual basis, adjusted for inflation to the extent reliable data allow.
Inflationary losses of lenders are subtracted and gains of borrowers are added. There is also an
adjustment for accelerated depreciation of noncorporate businesses. FEI is shown on a family rather
than a tax-return basis. The economic incomes of all members of a family unit are added to arrive at
the family's economic income used in the distributions.
(3) Families with negative incomes are excluded from the lowest quintile but included in the total line.
NOTE: Quintiles begin at FEI of: Second $15,604; Third $29,717; Fourth $48,660; Highest $79,056;
Top 10% $108,704; Top 5% $145,412; Top 1% $349,438.
03/14/95
15:25
202 6222633
DTR ECON POLICY
016
$500 Nonrefundable Credit for Children 17 and Under
in the "Contract with America Tax Relief Act of 1995" (1)
(Ways and Means Chairman's Mark)
(1996 Income Levels)
Families with Tax Change
Tax Change
Percent
Total Tax Change
Tax Change
as a Percent
Family Economic
of All
Average
Percent
as a Percent
of Current
Income Class (2)
Number
Families
Tax Change
Amount
Distribution
of Income
Federal Taxes
(000)
(millions)
(%)
($)
($M)
(%)
(%)
(%)
0 10
0.02
0.1
-400
-6
0.03
-0.008
-0.11
10 20
1.3
8.3
-330
-442
1.9
-0.18
-2.06
20 30
3.4
22.9
-493
-1700
7.2
-0.45
-3.39
30 50
7.2
31.6
-735
-5291
22.6
-0.59
-3.39
50 75
7.9
42.8
-846
-6646
28.3
-0.59
-2.97
75 100
5.5
51.0
-871
-4796
20.4
-0.52
-2.45
100 200
4.8
45.6
-856
-4123
17.6
-0.30
-1.36
200 & over
0.6
22.9
-704
-449
1.9
-0.03
-0.14
Total (3)
30.8
28.2
-761
-23456
100.0
-0.37
-1.84
Department of the Treasury
March 13, 1995
Office of Tax Analysis
(1) This table distributes the estimated change in taxes due to the proposed $500 nonrefundable credit for
children aged 17 and under which phases out between AGIs of $200,000 and $250,000 on all returns,
regardless of filing status. The credit would be taken before the EITC. The credit amount and phaseout range
would be indexed for inflation.
(2) Family Economic income (FEI) is a broad-based income concept. FEI is constructed by adding to AGI
unreported and underreported income; IRA and Keogh deductions; nontaxable transfer payments such
as Social Security and AFDC; employer-provided fringe benefits; inside build-up on pensions, IRAs,
Keoghs, and life insurance; tax-exempt interest; and imputed rent on owner-occupied housing.
Capital gains are computed on an accrual basis, adjusted for inflation to the extent reliable data allow.
Inflationary losses of lenders are subtracted and gains of borrowers are added. There is also an
adjustment for accelerated depreciation of noncorporate businesses. FEI is shown on a family rather
than a tax-return basis. The economic incomes of all members of a family unit are added to arrive at
the family's economic income used in the distributions.
(3) Families with negative incomes are included in the total line but not shown separately.
03/14/95
15:25
9
202 6222633
DTR ECON POLICY
017
$500 Nonrefundable Credit for Children 17 and Under
in the "Contract with America Tax Relief Act of 1995" (1)
(Ways and Means Chairman's Mark)
(1996 Income Levels)
Families with Tax Change
Tax Change
Percent
Total Tax Change
Tax Change
as a Percent
of All
Average
Percent
as a Percent
of Current
Family Economic
Number
Families
Tax Change
Amount
Distribution
of Income
Federal Taxes
Income Quintile (2)
(millions)
(%)
($)
($M)
(%)
(%)
(%)
Lowest (3)
0.4
1.8
-236
-93
0.4
-0.05
-0.66
Second
4.3
19.6
-462
-1980
8.4
-0.40
-3.23
Third
6.9
31.3
-724
-4966
21.2
-0.59
-3.39
Fourth
9.4
43.2
-848
-8008
34.1
-0.59
-2.95
Highest
9.8
44.9
-855
-8406
35.8
-0.24
-1.08
Total (3)
30.8
28.2
-761
-23456
100.0
-0.37
-1.84
Top 10%
4.2
38.6
-822
-3474
14.8
-0.14
-0.61
Top 5%
1.7
31.1
-770
-1310
5.6
-0.07
-0.32
Top 1%
0.1
5.9
-631
-41
0.2
-0.00
-0.02
Department of the Treasury
March 13, 1995
Office of Tax Analysis
(1) This table distributes the estimated change in taxes due to the proposed $500 nonrefundable credit for
children aged 17 and under which phases out between AGIs of $200,000 and $250,000 on all returns,
regardless of filing status. The credit would be taken before the EITC. The credit amount and phaseout range
would be indexed for inflation.
(2) Family Economic Income (FEI) is a broad-based income concept. FEI is constructed by adding to AGI
unreported and underreported income; IRA and Keogh deductions; nontaxable transfer payments such
as Social Security and AFDC; employer-provided fringe benefits; inside build-up on pensions, IRAs,
Keoghs, and life insurance; tax-exempt interest; and imputed rent on owner-occupied housing.
Capital gains are computed on an accrual basis, adjusted for inflation to the extent reliable data allow.
Inflationary losses of lenders are subtracted and gains of borrowers are added. There is also an
adjustment for accelerated depreciation of noncorporate businesses. FEI is shown on a family rather
than a tax-return basis. The economic incomes of all members of a family unit are added to arrive at
the family's economic income used in the distributions.
(3) Families with negative incomes are excluded from the lowest quintile but included in the total line.
NOTE: Quintiles begin at FEI of: Second $15,604; Third $29,717; Fourth $48,660; Highest $79,056;
Top 10% $108,704; Top 5% $145,412; Top 1% $349,438.
-
UNITED STATES DEPARTMENT OF LABOR
OFFICE OF THE SECRETARY
To: Jon orszag
Fr: RBR
Good!
I assme
I
Do there Treasury numbers
on the Capital carns The wt
Label should be: "who cams from
apply to the Cvt in the Contract &
E Cupital The Capitol Couns anx
an in the Contract."
2
Has Tremmy anaryzd
Aroher; larcot my idear?
3
Cand we make the columns in
Size of group - in & quink groph?
raigh proportion to the (in width) to
WORKING FOR AMERICA'S WORKFORCE
[
Who Gains from the "Contract with America"?
Distribution of Tax Cuts by Family Income Quintile
Percent of Tax Cuts
70%
64%
60%
DRAFT
50%
40%
30%
20%
20%
11%
10%
4%
1%
0%
Bottom 20%
Second 20%
Middle 20%
Fourth 20%
Top 20%
Source: Office of Tax Analysis, Department of Treasury.
Who Gains from the "Contract with America"?
Average Tax Cut per Family by Income Group
Dollars (in Thousands)
$20
DRAFT
$15
$10
$5
$0
Bottom 20% Second 20% Middle 20% Fourth 20%
Top 20%
Top 10%
Top 5%
Top 1%
Source: Office of Tax Analysis, Department of Treasury.
Who Gains from a Capital Gains Tax Cut?
Distribution of Tax Cut by Family Income Quintile
/
Percent of Tax Cuts
100%
DRAFT
81%
80%
60%
40%
20%
8%
3%
5%
1%
0%
Bottom 20%
Second 20%
Middle 20%
Fourth 20%
Top 20%
Source: Office of Tax Analysis, Department of Treasury. Analysis assumes 50% exclusion and indexing of Capital Gains for
Individuals.
Who Gains from the "Contract with America"?
Average Tax Cut per Family from the Contract's Tax Package
Dollars (in Thousands)
$12
$10
DRAFT
$8
$6
$4
$2
$0
Less than
$30,000-
$50,000-
$75,000-
$100,000-
More than
$30,000
$50,000
$75,000
$100,000
$200,000
$200,000
Family Income
Source: Office of Tax Analysis, Department of Treasury.
Congress of the United States
JOINT COMMITTEE ON TAXATION
@lashington, DC 20515-6453
MEMORANDUM
MAR 11 1995
TO:
Janice Mays
FROM:
Kenneth J. Kies
SUBJECT: Distribution of Taxpayers by Income
In response to your request of March 9, 1995, we are
providing the attached tables. Tables #D-95-23 through
#D-95-31 provide distributional analyses for certain tax
provisions for the "Contract With America Tax Relief Act of 1995"
as a package and separately. Table #D-95-32 shows the total
number of taxpayers by income category. Table #D-95-33 shows the
estimated number of taxpayers affected by certain provisions
included in the attached distribution analyses. In the case of
the American Dream Savings Accounts, the capital gains
provisions, and the long-term care provisions, we are unable to
provide the number of taxpayers affected.
Attachment [Tables: #D-95-23, #D-95-24, #D-95-25,
#D-95-26, #D-95-27, #D-95-28,
#D-95-29, #D-95-30, #D-95-31,
#D-95-32 & #D-95-33]
Do not copy
Do not distribute
This document has
not been released.
#D-95-23
8-Mar-95
DISTRIBUTIONAL EFFECTS OF THE TAX
PROVISIONS CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995 (1)
Calendar Year 1995
CHANGE IN
FEDERAL TAXES (3)
FEDERAL TAXES (3)
Effective Tax Rate (4)
INCOME
FEDERAL
UNDER
UNDER
Present
CATEGORY (2)
TAXES (3)
PRESENT LAW
PROPOSAL
Law
Proposal
Millions
Percent
Billions
Percent
Billions
Percent
Percent
Percent
Less than $10,000
$2
(5)
$8
0.7%
$8
0.7%
7.8%
7.8%
10,000 to 20,000
7
(5)
36
3.2%
36
3.2%
9.5%
9.4%
20,000 to 30,000
6
(5)
72
6.4%
72
6.4%
14.2%
14.1%
30,000 to 40,000
49
(5)
100
9.0%
101
8.9%
17.3%
17.2%
40,000 to 50,000
201
0.2%
106
9.5%
106
9.4%
19.4%
19.1%
50,000 to 75,000
1,497
0.7%
227
20.3%
228
20.2%
21.2%
20.9%
75,000 to 100,000
1,024
0.6%
161
14.4%
162
14.3%
23.2%
22.7%
100,000 to 200,000
3,400
1.8%
188
16.8%
191
16.9%
24.4%
23.5%
200,000 and over
7,466
3.4%
222
19.8%
229
20.2%
29.8%
27.6%
Total, All Taxpayers
$13,651
1.2%
$1,119
100.0%
$1,133
100.0%
20.8%
20.3%
Source: Joint Committee on Taxation
Detail may not add to total due to rounding.
(1) Includes the family tax credit, the marriage penalty credit, American Dream Savings Accounts, spousal IRAs, repeal of the Social
Security Benefit tax increase, long term care, capital gains deduction and indexing, the credit for adoption expense, and the
custodial care credit.
(2) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation;
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1995 levels.
(3) Federal taxes are equal to individual income tax, employment tax (attributed to employees), and excise taxes (attributed
to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax. Individuals who are
dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
(4) The effective tax rate is equal to Federal taxes described in footnote (3) divided by: income described in footnote (2) plus additional
income attributable to the proposal.
(5) Less than 0.05%.
Page 1 of 6
#D-95-23
8-Mar-95
DISTRIBUTIONAL EFFECTS OF THE TAX
PROVISIONS CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995 (1)
Calendar Year 1996
CHANGE IN
FEDERAL TAXES (3)
FEDERAL TAXES (3)
Effective Tax Rate (4)
INCOME
FEDERAL
UNDER
UNDER
Present
CATEGORY (2)
TAXES (3)
PRESENT LAW
PROPOSAL
Law
Proposal
Millions
Percent
Billions
Percent
Billions
Percent
Percent
Percent
Less than $10,000
$21
0.3%
$8
0.7%
$8
0.7%
7.8%
7.8%
10,000 to 20,000
-787
-2.1%
37
3.1%
36
3.1%
9.3%
9.1%
20,000 to 30,000
-2,248
-3.0%
74
6.3%
72
6.3%
14.0%
13.5%
30,000 to 40,000
-3,923
-3.7%
105
8.9%
101
8.8%
17.2%
16.5%
40,000 to 50,000
-3,980
-3.6%
111
9.5%
107
9.3%
19.1%
18.3%
50,000 to 75,000
-8,178
-3.4%
237
20.3%
229
20.1%
21.0%
20.1%
75,000 to 100,000
-4,435
-2.6%
169
14.4%
165
14.4%
23.1%
22.2%
100,000 to 200,000
-4,023
-2.0%
201
17.2%
197
17.2%
24.3%
23.1%
200,000 and over
-2,092
-0.9%
230
19.6%
228
19.9%
29.8%
28.0%
Total, All Taxpayers
-$29,645
-2.5%
$1,172
100.0%
$1,142
100.0%
20.6%
19.8%
Source: Joint Committee on Taxation
Detail may not add to total due to rounding.
(1) Includes the family tax credit, the marriage penalty credit, American Dream Savings Accounts, spousal IRAs, repeal of the Social
Security Benefit tax increase, long term care, capital gains deduction and indexing, the credit for adoption expense, and the
custodial care credit.
(2) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1995 levels.
(3) Federal taxes are equal to individual income tax, employment tax (attributed to employees), and excise taxes (attributed
to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax. Individuals who are
dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
(4) The effective tax rate is equal to Federal taxes described in footnote (3) divided by: income described in footnote (2) plus additional
income attributable to the proposal.
(5) Less than 0.05%.
Page 2 of 6
#D-95-23
8-Mar-95
DISTRIBUTIONAL EFFECTS OF THE TAX
PROVISIONS CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995 (1)
Calendar Year 1997
CHANGE IN
FEDERAL TAXES (3)
FEDERAL TAXES (3)
Effective Tax Rate (4)
INCOME
FEDERAL
UNDER
UNDER
Present
CATEGORY (2)
TAXES (3)
PRESENT LAW
PROPOSAL
Law
Proposal
Millions
Percent
Billions
Percent
Billions
Percent
Percent
Percent
Less than $10,000
-$11
-0.1%
$8
0.7%
$8
0.7%
8.0%
8.0%
10,000 to 20,000
-893
-2.3%
38
3.1%
37
3.1%
9.2%
8.9%
20,000 to 30,000
-2,332
-3.0%
77
6.2%
74
6.2%
13.9%
13.5%
30,000 to 40,000
-4,124
-3.8%
109
8.9%
105
8.8%
17.1%
16.4%
40,000 to 50,000
-4,286
-3.7%
117
9.5%
112
9.4%
19.0%
18.2%
50,000 to 75,000
-9,093
-3.7%
247
20.1%
238
19.9%
20.9%
20.0%
75,000 to 100,000
-5,492
-3.1%
180
14.6%
174
14.6%
23.1%
22.1%
100,000 to 200,000
-5,915
-2.8%
213
17.3%
207
17.3%
24.3%
23.1%
200,000 and over
-4,779
-2.0%
243
19.7%
238
19.9%
29.9%
28.2%
Total, All Taxpayers
-$36,927
-3.0%
$1,232
100.0%
$1,195
100.0%
20.6%
19.7%
Source: Joint Committee on Taxation
Detail may not add to total due to rounding.
(1) Includes the family tax credit, the marriage penalty credit, American Dream Savings Accounts, spousal IRAs, repeal of the Social
Security Benefit tax increase, long term care, capital gains deduction and indexing, the credit for adoption expense, and the
custodial care credit.
(2) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1995 levels.
(3) Federal taxes are equal to individual income tax, employment tax (attributed to employees), and excise taxes (attributed
to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax. Individuals who are
dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
(4) The effective tax rate is equal to Federal taxes described in footnote (3) divided by: income described in footnote (2) plus additional
income attributable to the proposal.
(5) Less than 0.05%.
Page 3 of 6
#D-95-23
8-Mar-95
DISTRIBUTIONAL EFFECTS OF THE TAX
PROVISIONS CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995 (1)
Calendar Year 1998
CHANGE IN
FEDERAL TAXES (3)
FEDERAL TAXES (3)
Effective Tax Rate (4)
INCOME
FEDERAL
UNDER
UNDER
Present
CATEGORY (2)
TAXES (3)
PRESENT LAW
PROPOSAL
Law
Proposal
Millions
Percent
Billions
Percent
Billions
Percent
Percent
Percent
Less than $10,000
-$52
-0.6%
$9
0.7%
$9
0.7%
8.2%
8.1%
10,000 to 20,000
-1,040
-2.6%
39
3.0%
38
3.1%
9.1%
8.8%
20,000 to 30,000
-2,615
-3.3%
80
6.1%
77
6.2%
13.9%
13.4%
30,000 to 40,000
-4,636
-4.0%
115
8.9%
110
8.8%
17.0%
16.3%
40,000 to 50,000
-4,884
-4.0%
122
9.4%
117
9.3%
18.8%
18.0%
50,000 to 75,000
-10,445
-4.1%
257
19.8%
246
19.7%
20.7%
19.8%
75,000 to 100,000
-6,563
-3.4%
192
14.8%
185
14.8%
23.0%
22.0%
100,000 to 200,000
-7,155
-3.2%
226
17.4%
218
17.5%
24.2%
22.9%
200,000 and over
-6,071
-2.4%
257
19.8%
251
20.0%
29.9%
27.9%
Total, All Taxpayers
-$43,460
-3.4%
$1,295
100.0%
$1,251
100.0%
20.6%
19.6%
Source: Joint Committee on Taxation
Detail may not add to total due to rounding.
(1) Includes the family tax credit, the marriage penalty credit, American Dream Savings Accounts, spousal tRAs, repeal of the Social
Security Benefit tax increase, long term care, capital gains deduction and indexing, the credit for adoption expense, and the
custodial care credit.
(2) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1995 levels.
(3) Federal taxes are equal to individual income tax, employment tax (attributed to employees), and excise taxes (attributed
to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax. Individuals who are
dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
(4) The effective tax rate is equal to Federal taxes described in footnote (3) divided by: income described in footnote (2) plus additional
income attributable to the proposal.
(5) Less than 0.05%.
Page 4 of 6
#D-95-23
8-Mar-95
DISTRIBUTIONAL EFFECTS OF THE TAX
PROVISIONS CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995 (1)
Calendar Year 1999
CHANGE IN
FEDERAL TAXES (3)
FEDERAL TAXES (3)
Effective Tax Rate (4)
INCOME
FEDERAL
UNDER
UNDER
Present
CATEGORY (2)
TAXES (3)
PRESENT LAW
PROPOSAL
Law
Proposal
Millions
Percent
Billions
Percent
Billions
Percent
Percent
Percent
Less than $10,000
-$97
-1.1%
$9
0.7%
$9
0.7%
8.4%
8.3%
10,000 to 20,000
-1,165
-2.9%
41
3.0%
40
3.0%
9.2%
8.9%
20,000 to 30,000
-2,781
-3.4%
83
6.1%
80
6.1%
13.6%
13.1%
30,000 to 40,000
-4,817
-4.0%
120
8.8%
115
8.8%
16.9%
16.2%
40,000 to 50,000
-5,113
-4.0%
126
9.3%
121
9.2%
18.6%
17.8%
50,000 to 75,000
-11,256
-4.2%
270
19.8%
259
19.7%
20.6%
19.6%
75,000 to 100,000
-7,418
-3.7%
202
14.8%
195
14.8%
22.9%
21.8%
100,000 to 200,000
-8,316
-3.5%
240
17.6%
232
17.6%
24.2%
22.7%
200,000 and over
-7,123
-2.6%
271
19.9%
264
20.1%
29.9%
27.8%
Total, All Taxpayers
-$48,086
-3.5%
$1,362
100.0%
$1,314
100.0%
20.5%
19.5%
Source: Joint Committee on Taxation
Detail may not add to total due to rounding.
(1) Includes the family tax credit, the marriage penalty credit, American Dream Savings Accounts, spousal IRAs, repeal of the Social
Security Benefit tax increase, long term care, capital gains deduction and indexing, the credit for adoption expense, and the
custodial care credit.
(2) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1995 levels.
(3) Federal taxes are equal to individual income tax, employment tax (attributed to employees), and excise taxes (attributed
to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax. Individuals who are
dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
(4) The effective tax rate is equal to Federal taxes described in footnote (3) divided by: income described in footnote (2) plus additional
income attributable to the proposal.
(5) Less than 0.05%.
Page 5 of 6
#D-95-23
8-Mar-95
DISTRIBUTIONAL EFFECTS OF THE TAX
PROVISIONS CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995 (1)
Calendar Year 2000
CHANGE IN
FEDERAL TAXES (3)
FEDERAL TAXES (3)
Effective Tax Rate (4)
INCOME
FEDERAL
UNDER
UNDER
Present
CATEGORY (2)
TAXES (3)
PRESENT LAW
PROPOSAL
Law
Proposal
Millions
Percent
Billions
Percent
Billions
Percent
Percent
Percent
Less than $10,000
-$211
-2.3%
$9
0.6%
$9
0.6%
8.6%
8.3%
10,000 to 20,000
-1,409
-3.4%
42
2.9%
41
2.9%
9.0%
8.7%
20,000 to 30,000
-3,304
-3.9%
86
6.0%
82
6.0%
13.6%
13.0%
30,000 to 40,000
-5,407
-4.3%
125
8.7%
120
8.7%
16.8%
16.0%
40,000 to 50,000
-5,860
-4.4%
133
9.3%
127
9.2%
18.5%
17.6%
50,000 to 75,000
-12,433
-4.4%
280
19.6%
268
19.4%
20.5%
19.4%
75,000 to 100,000
-8,570
-4.0%
215
15.0%
206
15.0%
22.8%
21.6%
100,000 to 200,000
-9,466
-3.7%
255
17.8%
245
17.8%
24.1%
22.6%
200,000 and over
-8,413
-2.9%
289
20.2%
281
20.3%
30.0%
27.8%
Total, All Taxpayers
-$55,073
-3.8%
$1,434
100.0%
$1,379
100.0%
20.5%
19.4%
Source: Joint Committee on Taxation
Detail may not add to total due to rounding.
(1) Includes the family tax credit, the marriage penalty credit, American Dream Savings Accounts, spousal IRAs, repeal of the Social
Security Benefit tax increase, long term care, capital gains deduction and indexing, the credit for adoption expense, and the
custodial care credit.
(2) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1995 levels.
(3) Federal taxes are equal to individual income tax, employment tax (attributed to employees), and excise taxes (attributed
to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax. Individuals who are
dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
(4) The effective tax rate is equal to Federal taxes described in footnote (3) divided by: income described in footnote (2) plus additional
income attributable to the proposal.
(5) Less than 0.05%.
Page 6 of 6
#D-95-24
9-Mar-95
DISTRIBUTIONAL EFFECTS OF THE FAMILY TAX CREDIT
CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995
Calendar Year 1996
CHANGE IN
FEDERAL TAXES (2)
FEDERAL TAXES (2)
Effective Tax Rate (3)
INCOME
FEDERAL
UNDER
UNDER
Present
CATEGORY (1)
TAXES (2)
PRESENT LAW
PROPOSAL
Law
Proposal
Millions
Percent
Billions
Percent
Billions
Percent
Percent
Percent
Less than $10,000
-$2
(4)
$8
0.7%
$8
0.7%
7.8%
7.8%
10,000 to 20.000
-751
-2.0%
37
3.1%
36
3.1%
9.3%
9.1%
20,000 to 30,000
-2,264
-3.1%
74
6.3%
72
6.3%
14.0%
13.5%
30,000 to
40,000
-3,742
-3.6%
105
8.9%
101
8.8%
17.2%
16.6%
40,000 to
50,000
-3.623
-3.3%
111
9.5%
107
9.3%
19.1%
18.5%
50,000 to 75,000
-7,036
-3.0%
237
20.3%
230
20.1%
21.0%
20.3%
75,000 to 100,000
-3,419
-2.0%
169
14.4%
166
14.4%
23.1%
22.7%
100,000 to 200,000
-2,182
-1.1%
201
17.2%
199
17.3%
24.3%
24.0%
200,000 and over
-166
-0.1%
230
19.6%
230
20.0%
29.8%
29.7%
Total, All Taxpayers
-$23,184
-2.0%
$1,172
100.0%
$1,148
100.0%
20.6%
20.2%
Source: Joint Committee on Taxation
Detail may not add to total due to rounding.
(1) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1995 levels.
(2) Federal taxes are equal to individual income tax, employment tax (attributed to employees), and excise taxes (attributed
to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax. Individuals who are
dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
(3) The effective tax rate is equal to Federal taxes described in footnote (2) divided by income described in footnote (1).
(4) Less than 0.05%.
Page 1 of 5
#D-95-24
9-Mar-95
DISTRIBUTIONAL EFFECTS OF THE FAMILY TAX CREDIT
CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995
Calendar Year 1997
CHANGE IN
FEDERAL TAXES (2)
FEDERAL TAXES (2)
Effective Tax Rate (3)
INCOME
FEDERAL
UNDER
UNDER
Present
CATEGORY (1)
TAXES (2)
PRESENT LAW
PROPOSAL
Law
Proposal
Millions
Percent
Billions
Percent
Billions
Percent
Percent
Percent
Less than $10,000
-$2
(4)
$8
0.7%
$8
0.7%
8.0%
8.0%
10,000 to 20,000
-785
-2.1%
38
3.1%
37
3.1%
9.2%
9.0%
20,000 to 30,000
-2,289
-3.0%
77
6.2%
75
6.2%
13.9%
13.5%
30,000 to 40,000
-3,805
-3.5%
109
8.9%
106
8.7%
17.1%
16.5%
40,000 to 50,000
-3,692
-3.2%
117
9.5%
113
9.4%
19.0%
18.4%
50,000 to 75,000
-7,071
-2.9%
247
20.1%
240
19.9%
20.9%
20.3%
75,000 to 100,000
-3,521
-2.0%
180
14.6%
176
14.6%
23.1%
22.6%
100,000 to 200,000
-2,239
-1.1%
213
17.3%
210
17.4%
24.3%
24.0%
200,000 and over
-168
-0.1%
243
19.7%
242
20.1%
29.9%
29.8%
Total, All Taxpayers
-$23,570
-1.9%
$1,232
100.0%
$1,208
100.0%
20.6%
20.2%
Source: Joint Committee on Taxation
Detail may not add to total due to rounding.
(1) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1995 levels.
(2) Federal taxes are equal to individual income tax, employment tax (attributed to employees), and excise taxes (attributed
to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax. Individuals who are
dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
(3) The effective tax rate is equal to Federal taxes described in footnote (2) divided by income described in footnote (1).
(4) Less than 0.05%.
Page 2 of 5
#D-95-24
9-Mar-95
DISTRIBUTIONAL EFFECTS OF THE FAMILY TAX CREDIT
CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995
Calendar Year 1998
CHANGE IN
FEDERAL TAXES (2)
FEDERAL TAXES (2)
Effective Tax Rate (3)
INCOME
FEDERAL
UNDER
UNDER
Present
CATEGORY (1)
TAXES (2)
PRESENT LAW
PROPOSAL
Law
Proposal
Millions
Percent
Billions
Percent
Billions
Percent
Percent
Percent
Less than $10,000
-$2
(4)
$9
0.7%
$9
0.7%
8.2%
8.2%
10,000 to 20,000
-849
-2.2%
39
3.0%
38
3.0%
9.1%
8.9%
20,000 to 30,000
-2,481
-3.1%
80
6.1%
77
6.1%
13.9%
13.4%
30,000 to 40,000
-4,208
-3.7%
115
8.9%
110
8.7%
17.0%
16.4%
40,000 to 50,000
-4,078
-3.4%
122
9.4%
118
9.3%
18.8%
18.2%
50,000 to 75,000
-7,803
-3.0%
257
19.8%
249
19.6%
20.7%
20.1%
75,000 to 100,000
-3,984
-2.1%
192
14.8%
188
14.8%
23.0%
22.6%
100,000 to 200,000
-2,546
-1.1%
226
17.4%
223
17.6%
24.2%
23.9%
200,000 and over
-198
-0.1%
257
19.8%
257
20.2%
29.9%
29.9%
Total, All Taxpayers
-$26,149
-2.0%
$1,295
100.0%
$1,269
100.0%
20.6%
20.1%
Source: Joint Committee on Taxation
Detail may not add to total due to rounding.
(1) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1995 levels.
(2) Federal taxes are equal to individual income tax, employment tax (attributed to employees), and excise taxes (attributed
to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax. Individuals who are
dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
(3) The effective tax rate is equal to Federal taxes described in footnote (2) divided by income described in footnote (1).
(4) Less than 0.05%.
Page 3 of 5
#D-95-24
9-Mar-95
DISTRIBUTIONAL EFFECTS OF THE FAMILY TAX CREDIT
CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995
Calendar Year 1999
CHANGE IN
FEDERAL TAXES (2)
FEDERAL TAXES (2)
Effective Tax Rate (3)
INCOME
FEDERAL
UNDER
UNDER
Present
CATEGORY (1)
TAXES (2)
PRESENT LAW
PROPOSAL
Law
Proposal
Millions
Percent
Billions
Percent
Billions
Percent
Percent
Percent
Less than $10,000
-$1
(4)
$9
0.7%
$9
0.7%
8.4%
8.4%
10,000 to 20,000
-891
-2.2%
41
3.0%
40
3.0%
9.2%
9.0%
20,000 to 30,000
-2.559
-3.1%
83
6.1%
80
6.0%
13.6%
13.2%
30,000 to 40.000
-4,269
-3.6%
120
8.8%
116
8.7%
16.9%
16.3%
40,000 to 50,000
-4.060
-32%
126
9.3%
122
9.2%
18.6%
18.0%
50,000 to 75.000
-7,943
-2.9%
270
19.8%
262
19.6%
20.6%
20.0%
75,000 to 100,000
-4,081
-2.0%
202
14.8%
198
14.8%
22.9%
22.5%
100,000 to 200,000
-2,615
-1.1%
240
17.6%
237
17.8%
24.2%
23.9%
200,000 and over
-198
-0.1%
271
19.9%
271
20.3%
29.9%
29.9%
Total, All Taxpayers
-$26,618
-2.0%
$1,362
100.0%
$1,336
100.0%
20.5%
20.1%
Source: Joint Committee on Taxation
Detail may not add to total due to rounding.
(1) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1995 levels.
(2) Federal taxes are equal to individual income tax, employment tax (attributed to employees), and excise taxes (attributed
to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax. Individuals who are
dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
(3) The effective tax rate is equal to Federal taxes described in footnote (2) divided by income described in footnote (1).
(4) Less than 0.05%.
Page 4 of 5
#D-95-24
9-Mar-95
DISTRIBUTIONAL EFFECTS OF THE FAMILY TAX CREDIT
CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995
Calendar Year 2000
CHANGE IN
FEDERAL TAXES (2)
FEDERAL TAXES (2)
Effective Tax Rate (3)
INCOME
FEDERAL
UNDER
UNDER
Present
CATEGORY (1)
TAXES (2)
PRESENT LAW
PROPOSAL
Law
Proposal
Millions
Percent
Billions
Percent
Billions
Percent
Percent
Percent
Less than $10,000
-$1
(4)
$9
0.6%
$9
0.7%
8.6%
8.5%
10,000 to 20,000
-934
-2.2%
42
2.9%
41
2.9%
9.0%
8.8%
20,000 to 30,000
-2,626
-3.1%
86
6.0%
83
5.9%
13.6%
13.2%
30,000 to 40,000
-4,329
-3.5%
125
8.7%
121
8.6%
16.8%
16.2%
40,000 to 50,000
-4,155
-3.1%
133
9.3%
129
9.1%
18.5%
17.9%
50,000 to 75,000
-7,912
-2.8%
280
19.6%
272
19.4%
20.5%
19.9%
75,000 to 100,000
-4,208
-2.0%
215
15.0%
211
15.0%
22.8%
22.4%
100,000 to 200,000
-2,670
-1.0%
255
17.8%
252
17.9%
24.1%
23.9%
200,000 and over
-204
-0.1%
289
20.2%
289
20.5%
30.0%
30.0%
Total, All Taxpayers
-$27,038
-1.9%
$1,434
100.0%
$1,407
100.0%
20.5%
20.1%
Source: Joint Committee on Taxatlon
Detail may not add to total due to rounding.
(1) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1995 levels.
(2) Federal taxes are equal to individual income tax, employment tax (attributed to employees), and excise taxes (attributed
to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax. Individuals who are
dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
(3) The effective tax rate is equal to Federal taxes described in footnote (2) divided by income described in footnote (1).
(4) Less than 0.05%.
Page 5 of 5
#D-95-25
9-Mar-95
DISTRIBUTIONAL EFFECTS OF THE CAPITAL GAINS
PROVISIONS CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995 (1)
Calendar Year 1995
CHANGE IN
FEDERAL TAXES (3)
FEDERAL TAXES (3)
Effective Tax Rate (4)
INCOME
FEDERAL
UNDER
UNDER
Present
CATEGORY (2)
TAXES (3)
PRESENT LAW
PROPOSAL
Law
Proposal
Millions
Percent
Billions
Percent
Billions
Percent
Percent
Percent
Less than $10,000
$2
(5)
$8
0.7%
$8
0.7%
7.8%
7.8%
10,000 to 20,000
7
(5)
36
3.2%
36
3.2%
9.5%
9.4%
20,000 to 30,000
6
(5)
72
6.4%
72
6.4%
14.2%
14.1%
30,000 to 40,000
49
(5)
100
9.0%
101
8.9%
17.3%
17.2%
40,000 to 50,000
201
0.2%
106
9.5%
106
9.4%
19.4%
19.1%
50,000 to 75,000
1,497
0.7%
227
20.3%
228
20.2%
21.2%
20.9%
75,000 to 100,000
1,024
0.6%
161
14.4%
162
14.3%
23.2%
22.7%
100,000 to 200,000
3,400
1.8%
188
16.8%
191
16.9%
24.4%
23.5%
200,000 and over
7,466
3.4%
222
19.8%
229
20.2%
29.8%
27.6%
Total, All Taxpayers
$13,651
1.2%
$1,119
100.0%
$1,133
100.0%
20.8%
20.3%
Source: Joint Committee on Taxation
Detail may not add to total due to rounding.
(1) Includes the capital gains deduction and indexing.
(2) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1995 levels.
(3) Federal taxes are equal to individual income tax, employment tax (attributed to employees), and excise taxes (attributed
to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax. Individuals who are
dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
(4) The effective tax rate is equal to Federal taxes described in footnote (3) divided by: income described in footnote (2) plus additional
income attributable to the proposal.
(5) Less than 0.05%.
Page 1 of 6
#D-95-25
9-Mar-95
DISTRIBUTIONAL EFFECTS OF THE CAPITAL GAINS
PROVISIONS CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995 (1)
Calendar Year 1996
CHANGE IN
FEDERAL TAXES (3)
FEDERAL TAXES (3)
Effective Tax Rate (4)
INCOME
FEDERAL
UNDER
UNDER
Present
CATEGORY (2)
TAXES (3)
PRESENT LAW
PROPOSAL
Law
Proposal
Millions
Percent
Billions
Percent
Billions
Percent
Percent
Percent
Less than $10,000
-$2
0.0%
$8
0.7%
$8
0.7%
7.8%
7.8%
10,000 to 20,000
-11
0.0%
37
3.1%
37
3.1%
9.3%
9.3%
20,000 to 30,000
-64
-0.1%
74
6.3%
74
6.3%
14.0%
13.9%
30,000 to 40,000
-110
-0.1%
105
8.9%
105
9.0%
17.2%
17.1%
40,000 to 50,000
-162
-0.1%
111
9.5%
111
9.5%
19.1%
19.0%
50,000 to 75,000
-386
-0.2%
237
20.3%
237
20.3%
21.0%
20.8%
75,000 to 100,000
-282
-0.2%
169
14.4%
169
14.5%
23.1%
22.7%
100,000 to 200,000
-1,000
-0.5%
201
17.2%
200
17.1%
24.3%
23.5%
200,000 and over
-1,628
-0.7%
230
19.6%
228
19.5%
29.8%
28.1%
Total, All Taxpayers
-$3,643
-0.3%
$1,172
100.0%
$1,168
100.0%
20.6%
20.2%
Source: Joint Committee on Taxation
Detail may not add to total due to rounding.
(1) Includes the capital gains deduction and indexing.
(2) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1995 levels.
(3) Federal taxes are equal to individual income tax, employment tax (attributed to employees), and excise taxes (attributed
to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax. Individuals who are
dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
(4) The effective tax rate is equal to Federal taxes described in footnote (3) divided by: income described in footnote (2) plus additional
income attributable to the proposal.
(5) Less than 0.05%.
Page 2 of 6
#D-95-25
9-Mar-95
DISTRIBUTIONAL EFFECTS OF THE CAPITAL GAINS
PROVISIONS CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995 (1)
Calendar Year 1997
CHANGE IN
FEDERAL TAXES (3)
FEDERAL TAXES (3)
Effective Tax Rate (4)
INCOME
FEDERAL
UNDER
UNDER
Present
CATEGORY (2)
TAXES (3)
PRESENT LAW
PROPOSAL
Law
Proposal
Millions
Percent
Billions
Percent
Billions
Percent
Percent
Percent
Less than $10,000
-$3
0.0%
$8
0.7%
$8
0.7%
8.0%
8.0%
10,000 to 20,000
-19
-0.1%
38
3.1%
38
3.1%
9.2%
9.1%
20,000 to 30,000
-80
-0.1%
77
6.2%
77
6.3%
13.9%
13.9%
30,000 to 40,000
-194
-0.2%
109
8.9%
109
8.9%
17.1%
17.0%
40,000 to 50,000
-278
-0.2%
117
9.5%
116
9.5%
19.0%
18.9%
50,000 to 75,000
-713
-0.3%
247
20.1%
246
20.1%
20.9%
20.7%
75,000 to 100,000
-724
-0.4%
180
14.6%
179
14.7%
23.1%
22.7%
100,000 to 200,000
-2,262
-1.1%
213
17.3%
210
17.2%
24.3%
23.5%
200,000 and over
-4,064
-1.7%
243
19.7%
239
19.5%
29.9%
28.3%
Total, All Taxpayers
-$8,337
-0.7%
$1,232
100.0%
$1,223
100.0%
20.6%
20.2%
Source: Joint Committee on Taxation
Detail may not add to total due to rounding.
(1) Includes the capital gains deduction and indexing.
(2) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1995 levels.
(3) Federal taxes are equal to individual income tax, employment tax (attributed to employees), and excise taxes (attributed
to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax. Individuals who are
dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
(4) The effective tax rate is equal to Federal taxes described in footnote (3) divided by: income described in footnote (2) plus additional
income attributable to the proposal.
(5) Less than 0.05%.
Page 3 of 6
#D-95-25
9-Mar-95
DISTRIBUTIONAL EFFECTS OF THE CAPITAL GAINS
PROVISIONS CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995 (1)
Calendar Year 1998
CHANGE IN
FEDERAL TAXES (3)
FEDERAL TAXES (3)
Effective Tax Rate (4)
INCOME
FEDERAL
UNDER
UNDER
Present
CATEGORY (2)
TAXES (3)
PRESENT LAW
PROPOSAL
Law
Proposal
Millions
Percent
Billions
Percent
Billions
Percent
Percent
Percent
Less than $10,000
-$3
0.0%
$9
0.7%
$9
0.7%
8.2%
8.2%
10,000 to 20,000
-23
-0.1%
39
3.0%
39
3.1%
9.1%
9.0%
20,000 to 30,000
-95
-0.1%
80
6.1%
80
6.2%
13.9%
13.8%
30,000 to 40,000
-230
-0.2%
115
8.9%
114
8.9%
17.0%
16.9%
40,000 to 50,000
-330
-0.3%
122
9.4%
121
9.4%
18.8%
18.7%
50,000 to 75,000
-862
-0.3%
257
19.8%
256
19.9%
20.7%
20.5%
75,000 to 100,000
-915
-0.5%
192
14.8%
191
14.8%
23.0%
22.6%
100,000 to 200,000
-2,756
-1.2%
226
17.4%
223
17.4%
24.2%
23.3%
200,000 and over
-5,134
-2.0%
257
19.8%
252
19.6%
29.9%
28.0%
Total, All Taxpayers
-$10,347
-0.8%
$1,295
100.0%
$1,284
100.0%
20.6%
20.1%
Source: Joint Committee on Taxation
Detail may not add to total due to rounding.
(1) Includes the capital gains deduction and indexing.
(2) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1995 levels.
(3) Federal taxes are equal to individual income tax, employment tax (attributed to employees), and excise taxes (attributed
to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax. Individuals who are
dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
(4) The effective tax rate is equal to Federal taxes described in footnote (3) divided by: income described in footnote (2) plus additional
income attributable to the proposal.
(5) Less than 0.05%.
Page 4 of 6
#D-95-25
9-Mar-95
DISTRIBUTIONAL EFFECTS OF THE CAPITAL GAINS
PROVISIONS CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995 (1)
Calendar Year 1999
CHANGE IN
FEDERAL TAXES (3)
FEDERAL TAXES (3)
Effective Tax Rate (4)
INCOME
FEDERAL
UNDER
UNDER
Present
CATEGORY (2)
TAXES (3)
PRESENT LAW
PROPOSAL
Law
Proposal
Millions
Percent
Billions
Percent
Billions
Percent
Percent
Percent
Less than $10,000
-$3
0.0%
$9
0.7%
$9
0.7%
8.4%
8.4%
10,000 to 20,000
-25
-0.1%
41
3.0%
41
3.0%
9.2%
9.1%
20,000 to 30,000
-106
-0.1%
83
6.1%
83
6.1%
13.6%
13.6%
30,000 to 40,000
-259
-0.2%
120
8.8%
120
8.9%
16.9%
16.8%
40,000 to 50,000
-397
-0.3%
126
9.3%
126
9.3%
18.6%
18.5%
50,000 to 75,000
-1,003
-0.4%
270
19.8%
269
19.9%
20.6%
20.4%
75,000 to 100,000
-1,143
-0.6%
202
14.8%
201
14.9%
22.9%
22.5%
100,000 to 200,000
-3,302
-1.4%
240
17.6%
237
17.5%
24.2%
23.2%
200,000 and over
-5,950
-2.2%
271
19.9%
265
19.6%
29.9%
27.9%
Total, All Taxpayers
-$12,186
-0.9%
$1,362
100.0%
$1,350
100.0%
20.5%
20.0%
Source: Joint Committee on Taxation
Detail may not add to total due to rounding.
(1) Includes the capital gains deduction and indexing.
(2) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1995 levels.
(3) Federal taxes are equal to individual income tax, employment tax (attributed to employees), and excise taxes (attributed
to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax. Individuals who are
dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
(4) The effective tax rate is equal to Federal taxes described in footnote (3) divided by: income described in footnote (2) plus additional
income attributable to the proposal.
(5) Less than 0.05%.
Page 5 of 6
#D-95-25
9-Mar-95
DISTRIBUTIONAL EFFECTS OF THE CAPITAL GAINS
PROVISIONS CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995 (1)
Calendar Year 2000
CHANGE IN
FEDERAL TAXES (3)
FEDERAL TAXES (3)
Effective Tax Rate (4)
INCOME
FEDERAL
UNDER
UNDER
Present
CATEGORY (2)
TAXES (3)
PRESENT LAW
PROPOSAL
Law
Proposal
Millions
Percent
Billions
Percent
Billions
Percent
Percent
Percent
Less than $10,000
-$4
0.0%
$9
0.6%
$9
0.6%
8.6%
8.5%
10,000 to 20,000
-28
-0.1%
42
2.9%
42
3.0%
9.0%
9.0%
20,000 to 30,000
-119
-0.1%
86
6.0%
86
6.0%
13.6%
13.5%
30,000 to 40,000
-295
-0.2%
125
8.7%
125
8.8%
16.8%
16.7%
40,000 to 50,000
-435
-0.3%
133
9.3%
132
9.3%
18.5%
18.3%
50,000 to 75,000
-1,114
-0.4%
280
19.6%
279
19.7%
20.5%
20.2%
75,000 to 100,000
-1,328
-0.6%
215
15.0%
214
15.1%
22.8%
22.4%
100,000 to 200,000
-3,687
-1.4%
255
17.8%
251
17.7%
24.1%
23.1%
200,000 and over
-6,949
-2.4%
289
20.2%
282
19.9%
30.0%
27.9%
Total, All Taxpayers
-$13,960
-1.0%
$1,434
100.0%
$1,420
100.0%
20.5%
20.0%
Source: Joint Committee on Taxation
Detail may not add to total due to rounding.
(1) Includes the capital gains deduction and indexing.
(2) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1995 levels.
(3) Federal taxes are equal to individual income tax, employment tax (attributed to employees), and excise taxes (attributed
to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax. Individuals who are
dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
(4) The effective tax rate is equal to Federal taxes described in footnote (3) divided by: income described in footnote (2) plus additional
income attributable to the proposal.
(5) Less than 0.05%.
Page 6 of 6
#D-95-26
9-Mar-95
DISTRIBUTIONAL EFFECTS OF THE AMERICAN DREAM SAVINGS
ACCOUNTS CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995 (1)
Calendar Year 1996
CHANGE IN
FEDERAL TAXES (3)
FEDERAL TAXES (3)
Effective Tax Rate (4)
INCOME
FEDERAL
UNDER
UNDER
Present
CATEGORY (2)
TAXES (3)
PRESENT LAW
PROPOSAL
Law
Proposal
Millions
Percent
Billions
Percent
Billions
Percent
Percent
Percent
Less than $10,000
$43
0.5%
$8
0.7%
$8
0.7%
7.8%
7.8%
10,000 to 20,000
63
0.2%
37
3.1%
37
3.1%
9.3%
9.3%
20,000 to 30,000
313
0.4%
74
6.3%
74
6.3%
14.0%
14.0%
30,000 to 40,000
370
0.4%
105
8.9%
105
9.0%
17.2%
17.2%
40,000 to 50,000
336
0.3%
111
9.5%
111
9.5%
19.1%
19.2%
50,000 to 75,000
411
0.2%
237
20.3%
238
20.3%
21.0%
21.0%
75,000 to 100,000
211
0.1%
169
14.4%
169
14.4%
23.1%
23.2%
100,000 to 200,000
65
(5)
201
17.2%
201
17.1%
24.3%
24.3%
200,000 and over
2
(5)
230
19.6%
230
19.6%
29.8%
29.8%
Total, All Taxpayers
$1,814
0.2%
$1,172
100.0%
$1,173
100.0%
20.6%
20.7%
Source: Joint Committee on Taxation
Detail may not add to total due to rounding.
(1) Includes the spousal IRA provision.
(2) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1995 levels.
(3) Federal taxes are equal to individual income tax, employment tax (attributed to employees), and excise taxes (attributed
to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax. Individuals who are
dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
(4) The effective tax rate is equal to Federal taxes described in footnote (3) divided by income described in footnote (2).
(5) Less than 0.05%.
Page 1 of 5
#D-95-26
9-Mar-95
DISTRIBUTIONAL EFFECTS OF THE AMERICAN DREAM SAVINGS
ACCOUNTS CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995 (1)
Calendar Year 1997
CHANGE IN
FEDERAL TAXES (3)
FEDERAL TAXES (3)
Effective Tax Rate (4)
INCOME
FEDERAL
UNDER
UNDER
Present
CATEGORY (2)
TAXES (3)
PRESENT LAW
PROPOSAL
Law
Proposal
Millions
Percent
Billions
Percent
Billions
Percent
Percent
Percent
Less than $10.000
$16
0.2%
$8
0.7%
$8
0.7%
8.0%
8.0%
10.000 to 20,000
11
(5)
38
3.1%
38
3.1%
9.2%
9.2%
20,000 to 30,000
278
0.4%
77
6.2%
77
6.3%
13.9%
14.0%
30,000 to 40,000
347
0.3%
109
8.9%
110
8.9%
17.1%
17.1%
40,000 to 50,000
291
0.2%
117
9.5%
117
9.5%
19.0%
19.0%
50,000 to 75,000
294
0.1%
247
20.1%
247
20.1%
20.9%
20.9%
75,000 to 100,000
138
0.1%
180
14.6%
180
14.6%
23.1%
23.1%
100,000 to 200,000
-12
(5)
213
17.3%
213
17.2%
24.3%
24.3%
200,000 and over
-51
(5)
243
19.7%
243
19.7%
29.9%
29.8%
Total, All Taxpayers
$1,310
0.1%
$1,232
100.0%
$1,233
100.0%
20.6%
20.6%
Source: Joint Committee on Taxation
Detail may not add to total due to rounding.
(1) Includes the spousal IRA provision.
(2) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1995 levels.
(3) Federal taxes are equal to individual income tax, employment tax (attributed to employees), and excise taxes (attributed
to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax. Individuals who are
dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
(4) The effective tax rate is equal to Federal taxes described in footnote (3) divided by income described in footnote (2).
(5) Less than 0.05%.
Page 2 of 5
#D-95-26
9-Mar-95
DISTRIBUTIONAL EFFECTS OF THE AMERICAN DREAM SAVINGS
ACCOUNTS CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995 (1)
Calendar Year 1998
CHANGE IN
FEDERAL TAXES (3)
FEDERAL TAXES (3)
Effective Tax Rate (4)
INCOME
FEDERAL
UNDER
UNDER
Present
CATEGORY (2)
TAXES (3)
PRESENT LAW
PROPOSAL
Law
Proposal
Millions
Percent
Billions
Percent
Billions
Percent
Percent
Percent
Less than $10,000
-$23
-0.3%
$9
0.7%
$9
0.7%
8.2%
8.2%
10,000 to 20,000
-62
-0.2%
39
3.0%
39
3.0%
9.1%
9.0%
20,000 to 30,000
212
0.3%
80
6.1%
80
6.2%
13.9%
13.9%
30,000 to 40,000
294
0.3%
115
8.9%
115
8.9%
17.0%
17.0%
40,000 to 50,000
212
0.2%
122
9.4%
122
9.4%
18.8%
18.8%
50,000 to 75,000
115
(5)
257
19.8%
257
19.8%
20.7%
20.7%
75,000 to 100,000
29
(5)
192
14.8%
192
14.8%
23.0%
23.0%
100,000 to 200,000
-118
-0.1%
226
17.4%
225
17.4%
24.2%
24.2%
200,000 and over
-122
(5)
257
19.8%
257
19.8%
29.9%
29.9%
Total, All Taxpayers
$536
(5)
$1,295
100.0%
$1,295
100.0%
20.6%
20.6%
Source: Joint Committee on Taxation
Detail may not add to total due to rounding.
(1) Includes the spousal IRA provision.
(2) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1995 levels.
(3) Federal taxes are equal to individual income tax, employment tax (attributed to employees), and excise taxes (attributed
to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax. Individuals who are
dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
(4) The effective tax rate is equal to Federal taxes described in footnote (3) divided by income described in footnote (2):
(5) Less than 0.05%.
Page 3 of 5
#D-95-26
9-Mar-95
DISTRIBUTIONAL EFFECTS OF THE AMERICAN DREAM SAVINGS
ACCOUNTS CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995 (1)
Calendar Year 1999
CHANGE IN
FEDERAL TAXES (3)
FEDERAL TAXES (3)
Effective Tax Rate (4)
INCOME
FEDERAL
UNDER
UNDER
Present
CATEGORY (2)
TAXES (3)
PRESENT LAW
PROPOSAL
Law
Proposal
Millions
Percent
Billions
Percent
Billions
Percent
Percent
Percent
Less than $10.000
-$67
-0.8%
$9
0.7%
$9
0.6%
8.4%
8.3%
10,000 to 20,000
-145
-0.4%
41
3.0%
41
3.0%
9.2%
9.1%
20,000 to 30,000
136
0.2%
83
6.1%
83
6.1%
13.6%
13.7%
30,000 to 40,000
233
0.2%
120
8.8%
120
8.8%
16.9%
17.0%
40,000 to 50,000
121
0.1%
126
9.3%
127
9.3%
18.6%
18.6%
50,000 to 75,000
-90
(5)
270
19.8%
270
19.8%
20.6%
20.6%
75,000 to 100,000
-95
(5)
202
14.8%
202
14.8%
22.9%
22.9%
100,000 to 200,000
-239
-0.1%
240
17.6%
240
17.6%
24.2%
24.1%
200,000 and over
-203
-0.1%
271
19.9%
271
19.9%
29.9%
29.9%
Total, All Taxpayers
-$349
(5)
$1,362
100.0%
$1,362
100.0%
20.5%
20.5%
Source: Joint Committee on Taxation
Detail may not add to total due to rounding.
(1) Includes the spousal IRA provision.
(2) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1995 levels.
(3) Federal taxes are equal to individual income tax, employment tax (attributed to employees), and excise taxes (attributed
to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax. Individuals who are
dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
(4) The effective tax rate is equal to Federal taxes described in footnote (3) divided by income described in footnote (2)
(5) Less than 0.05%.
Page 4 of 5
#D-95-26
9-Mar-95
DISTRIBUTIONAL EFFECTS OF THE AMERICAN DREAM SAVINGS
ACCOUNTS CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995 (1)
Calendar Year 2000
CHANGE IN
FEDERAL TAXES (3)
FEDERAL TAXES (3)
Effective Tax Rate (4)
INCOME
FEDERAL
UNDER
UNDER
Present
CATEGORY (2)
TAXES (3)
PRESENT LAW
PROPOSAL
Law
Proposal
Millions
Percent
Billions
Percent
Billions
Percent
Percent
Percent
Less than $10,000
-$178
-1.9%
$9
0.6%
$9
0.6%
8.6%
8.4%
10,000 to 20,000
-334
-0.8%
42
2.9%
42
2.9%
9.0%
9.0%
20,000 to 30,000
-292
-0.3%
86
6.0%
85
6.0%
13.6%
13.5%
30,000 to 40,000
-228
-0.2%
125
8.7%
125
8.7%
16.8%
16.8%
40,000 to 50,000
-352
-0.3%
133
9.3%
132
9.3%
18.5%
18.4%
50,000 to 75,000
-813
-0.3%
280
19.6%
280
19.6%
20.5%
20.4%
75,000 to 100,000
-496
-0.2%
215
15.0%
215
15.0%
22.8%
22.8%
100,000 to 200,000
-489
-0.2%
255
17.8%
254
17.8%
24.1%
24.1%
200,000 and over
-328
-0.1%
289
20.2%
289
20.2%
30.0%
30.0%
Total, All Taxpayers
-$3,512
-0.2%
$1,434
100.0%
$1,430
100.0%
20.5%
20.4%
Source: Joint Committee on Taxation
Detail may not add to total due to rounding.
(1) Includes the spousal IRA provision.
(2) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1995 levels.
(3) Federal taxes are equal to individual income tax, employment tax (attributed to employees), and excise taxes (attributed
to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax. Individuals who are
dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
(4) The effective tax rate is equal to Federal taxes described in footnote (3) divided by income described in footnote (2):
(5) Less than 0.05%.
Page 5 of 5
#D-95-27
9-Mar-95
DISTRIBUTIONAL EFFECTS OF THE MARRIAGE PENALTY RELIEF
CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995
Calendar Year 1996
CHANGE IN
FEDERAL TAXES (2)
FEDERAL TAXES (2)
Effective Tax Rate (3)
INCOME
FEDERAL
UNDER
UNDER
Present
CATEGORY (1)
TAXES (2)
PRESENT LAW
PROPOSAL
Law
Proposal
Millions
Percent
Billions
Percent
Billions
Percent
Percent
Percent
Less than $10,000
$0
0.0%
$8
0.7%
$8
0.7%
7.8%
7.8%
10,000 to 20,000
-9
(4)
37
3.1%
37
3.1%
9.3%
9.3%
20,000 to 30,000
-92
-0.1%
74
6.3%
74
6.3%
14.0%
14.0%
30,000 to 40,000
-258
-0.2%
105
8.9%
105
8.9%
17.2%
17.1%
40,000 to 50,000
-312
-0.3%
111
9.5%
110
9.4%
19.1%
19.1%
50,000 to 75,000
-509
-0.2%
237
20.3%
237
20.2%
21.0%
20.9%
75,000 to 100,000
-415
-0.2%
169
14.4%
169
14.4%
23.1%
23.1%
100,000 to 200,000
-319
-0.2%
201
17.2%
201
17.2%
24.3%
24.3%
200,000 and over
-55
(4)
230
19.6%
230
19.6%
29.8%
29.8%
Total, All Taxpayers
-$1,968
-0.2%
$1,172
100.0%
$1,170
100.0%
20.6%
20.6%
Source: Joint Committee on Taxation
Detail may not add to total due to rounding.
(1) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1995 levels.
(2) Federal taxes are equal to individual income tax, employment tax (attributed to employees), and excise taxes (attributed
to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax. Individuals who are
dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
(3) The effective tax rate is equal to Federal taxes described in footnote (2) divided by income described in footnote (1).
(4) Less than 0.05%.
Page 1 of 5
#D-95-27
9-Mar-95
DISTRIBUTIONAL EFFECTS OF THE MARRIAGE PENALTY RELIEF
CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995
Calendar Year 1997
CHANGE IN
FEDERAL TAXES (2)
FEDERAL TAXES (2)
Effective Tax Rate (3)
INCOME
FEDERAL
UNDER
UNDER
Present
CATEGORY (1)
TAXES (2)
PRESENT LAW
PROPOSAL
Law
Proposal
Millions
Percent
Billions
Percent
Billions
Percent
Percent
Percent
Less than $10,000
$0
0.0%
$8
0.7%
$8
0.7%
8.0%
8.0%
10,000 to 20,000
-9
(4)
38
3.1%
38
3.1%
9.2%
9.2%
20,000 to 30,000
-92
-0.1%
77
6.2%
77
6.2%
13.9%
13.9%
30,000 to 40,000
-257
-0.2%
109
8.9%
109
8.9%
17.1%
17.0%
40,000 to 50,000
-311
-0.3%
117
9.5%
116
9.5%
19.0%
18.9%
50,000 to 75,000
-502
-0.2%
247
20.1%
247
20.1%
20.9%
20.8%
75,000 to 100,000
-427
-0.2%
180
14.6%
180
14.6%
23.1%
23.0%
100,000 to 200,000
-323
-0.2%
213
17.3%
212
17.3%
24.3%
24.2%
200,000 and over
-57
(4)
243
19.7%
243
19.7%
29.9%
29.8%
Total, All Taxpayers
-$1,977
-0.2%
$1,232
100.0%
$1,230
100.0%
20.6%
20.6%
Source: Joint Committee on Taxation
Detail may not add to total due to rounding.
(1) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1995 levels.
(2) Federal taxes are equal to individual income tax, employment tax (attributed to employees), and excise taxes (attributed
to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax. Individuals who are
dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
(3) The effective tax rate is equal to Federal taxes described in footnote (2) divided by income described in footnote (1).
(4) Less than 0.05%.
Page 2 of 5
#D-95-27
9-Mar-95
DISTRIBUTIONAL EFFECTS OF THE MARRIAGE PENALTY RELIEF
CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995
Calendar Year 1998
CHANGE IN
FEDERAL TAXES (2)
FEDERAL TAXES (2)
Effective Tax Rate (3)
INCOME
FEDERAL
UNDER
UNDER
Present
CATEGORY (1)
TAXES (2)
PRESENT LAW
PROPOSAL
Law
Proposal
Millions
Percent
Billions
Percent
Billions
Percent
Percent
Percent
Less than $10.000
$0
0.0%
$9
0.7%
$9
0.7%
8.2%
8.2%
10.000 to 20,000
6.
(4)
39
3.0%
39
3.0%
9.1%
9.0%
20,000 to 30,000
-94
-0.1%
80
6.1%
80
6.2%
13.9%
13.8%
30,000 to 40,000
-259
-0.2%
115
8.9%
114
8.8%
17.0%
17.0%
40,000 to 50,000
-311
-0.3%
122
9.4%
121
9.4%
18.8%
18.8%
50,000 to 75,000
-499
-0.2%
257
19.8%
256
19.8%
20.7%
20.7%
75,000 to 100,000
-437
-0.2%
192
14.8%
191
14.8%
23.0%
23.0%
100,000 to 200,000
-330
-0.1%
226
17.4%
225
17.4%
24.2%
24.2%
200,000 and over
-58
(4)
257
19.8%
257
19.9%
29.9%
29.9%
Total, All Taxpayers
-$1,996
-0.2%
$1,295
100.0%
$1,293
100.0%
20.6%
20.5%
Source: Joint Committee on Taxation
Detail may not add to total due to rounding.
(1) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1995 levels.
(2) Federal taxes are equal to individual income tax, employment tax (attributed to employees), and excise taxes (attributed
to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax. Individuals who are
dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
(3) The effective tax rate is equal to Federal taxes described in footnote (2) divided by income described in footnote (1).
(4) Less than 0.05%.
Page 3 of 5
#D-95-27
9-Mar-95
DISTRIBUTIONAL EFFECTS OF THE MARRIAGE PENALTY RELIEF
CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995
Calendar Year 1999
CHANGE IN
FEDERAL TAXES (2)
FEDERAL TAXES (2)
Effective Tax Rate (3)
INCOME
FEDERAL
UNDER
UNDER
Present
CATEGORY (1)
TAXES (2)
PRESENT LAW
PROPOSAL
Law
Proposal
Millions
Percent
Billions
Percent
Billions
Percent
Percent
Percent
Less than $10,000
$0
0.0%
$9
0.7%
$9
0.7%
8.4%
8.4%
10,000 to 20,000
-9
(4)
41
3.0%
41
3.0%
9.2%
9.2%
20,000 to 30,000
-92
-0.1%
83
6.1%
83
6.1%
13.6%
13.6%
30,000 to 40,000
-262
-0.2%
120
8.8%
120
8.8%
16.9%
16.9%
40,000 to 50,000
-306
-0.2%
126
9.3%
126
9.3%
18.6%
18.6%
50,000 to 75,000
-507
-0.2%
270
19.8%
269
19.8%
20.6%
20.6%
75,000 to 100,000
-442
-0.2%
202
14.8%
202
14.8%
22.9%
22.9%
100,000 to 200,000
-337
-0.1%
240
17.6%
240
17.6%
24.2%
24.1%
200,000 and over
-59
(4)
271
19.9%
271
19.9%
29.9%
29.9%
Total, All Taxpayers
-$2,014
-0.1%
$1,362
100.0%
$1,360
100.0%
20.5%
20.5%
Source: Joint Committee on Taxation
Detail may not add to total due to rounding.
(1) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1995 levels.
(2) Federal taxes are equal to individual income tax, employment tax (attributed to employees), and excise taxes (attributed
to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax. Individuals who are
dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
(3) The effective tax rate is equal to Federal taxes described in footnote (2) divided by income described in footnote (1).
(4) Less than 0.05%.
Page 4 of 5
#D-95-2,
9-Mar-95
DISTRIBUTIONAL EFFECTS OF THE MARRIAGE PENALTY RELIEF
CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995
Calendar Year 2000
CHANGE IN
FEDERAL TAXES (2)
FEDERAL TAXES (2)
Effective Tax Rate (3)
INCOME
FEDERAL
UNDER
UNDER
Present
CATEGORY (1)
TAXES (2)
PRESENT LAW
PROPOSAL
Law
Proposal
Millions
Percent
Billions
Percent
Billions
Percent
Percent
Percent
Less than $10,000
$0
0.0%
$9
0.6%
$9
0.6%
8.6%
8.6%
10,000 to 20,000
6'
(4)
42
2.9%
42
2.9%
9.0%
9.0%
20,000 to 30,000
-95
-0.1%
86
6.0%
86
6.0%
13.6%
13.6%
30,000 to 40,000
-261
-0.2%
125
8.7%
125
8.7%
16.8%
16.8%
40,000 to 50,000
-307
-0.2%
133
9.3%
132
9.2%
18.5%
18.4%
50,000 to 75,000
-504
-0.2%
280
19.6%
280
19.6%
20.5%
20.5%
75,000 to 100,000
-456
-0.2%
215
15.0%
215
15.0%
22.8%
22.8%
100,000 to 200,000
-342
-0.1%
255
17.8%
254
17.8%
24.1%
24.1%
200,000 and over
-61
(4)
289
20.2%
289
20.2%
30.0%
30.0%
Total, All Taxpayers
-$2,034
-0.1%
$1,434
100.0%
$1,432
100.0%
20.5%
20.5%
Source: Joint Committee on Taxation
Detail may not add to total due to rounding.
(1) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1995 levels.
(2) Federal taxes are equal to individual income tax, employment tax (attributed to employees), and excise taxes (attributed
to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax. Individuals who are
dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
(3) The effective tax rate is equal to Federal taxes described in footnote (2) divided by income described in footnote (1).
(4) Less than 0.05%.
Page 5 of 5
#D-95-28
9-Mar-95
DISTRIBUTIONAL EFFECTS OF THE REPEAL OF THE SOCIAL SECURITY
BENEFITS TAX CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995
Calendar Year 1996
CHANGE IN
FEDERAL TAXES (2)
FEDERAL TAXES (2)
Effective Tax Rate (3)
INCOME
FEDERAL
UNDER
UNDER
Present
CATEGORY (1)
TAXES (2)
PRESENT LAW
PROPOSAL
Law
Proposal
Millions
Percent
Billions
Percent
Billions
Percent
Percent
Percent
Less than $10.000
$0
0.0%
$8
0.7%
$8
0.7%
7.8%
7.8%
10,000 to 20,000
0
0.0%
37
3.1%
37
3.1%
9.3%
9.3%
20,000 to 30,000
0
0.0%
74
6.3%
74
6.3%
14.0%
14.0%
30,000 to 40,000
-1
(4)
105
8.9%
105
9.0%
17.2%
17.2%
40,000 to 50,000
-41
(4)
111
9.5%
111
9.5%
19.1%
19.1%
50,000 to 75,000
-305
-0.1%
237
20.3%
237
20.3%
21.0%
20.9%
75,000 to 100,000
-355
-0.2%
169
14.4%
169
14.4%
23.1%
23.1%
100,000 to 200,000
-414
-0.2%
201
17.2%
201
17.1%
24.3%
24.2%
200,000 and over
-154
-0.1%
230
19.6%
230
19.6%
29.8%
29.7%
Total, All Taxpayers
-$1,271
-0.1%
$1,172
100.0%
$1,170
100.0%
20.6%
20.6%
Source: Joint Committee on Taxation
Detail may not add to total due to rounding.
(1) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1995 levels.
(2) Federal taxes are equal to individual income tax, employment tax (attributed to employees), and excise taxes (attributed
to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax. Individuals who are
dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
(3) The effective tax rate is equal to Federal taxes described in footnote (2) divided by income described in footnote (1).
(4) Less than 0.05%.
Page 1 of 5
#D-95-28
9-Mar-95
DISTRIBUTIONAL EFFECTS OF THE REPEAL OF THE SOCIAL SECURITY
BENEFITS TAX CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995
Calendar Year 1997
CHANGE IN
FEDERAL TAXES (2)
FEDERAL TAXES (2)
Effective Tax Rate (3)
INCOME
FEDERAL
UNDER
UNDER
Present
CATEGORY (1)
TAXES (2)
PRESENT LAW
PROPOSAL
Law
Proposal
Millions
Percent
Billions
Percent
Billions
Percent
Percent
Percent
Less than $10,000
$0
0.0%
$8
0.7%
$8
0.7%
8.0%
8.0%
10,000 to 20,000
0
0.0%
38
3.1%
38
3.1%
9.2%
9.2%
20,000 to 30,000
-1
(4)
77
6.2%
77
6.3%
13.9%
13.9%
30,000 to 40,000
-5
(4)
109
8.9%
109
8.9%
17.1%
17.1%
40,000 to 50,000
-96
-0.1%
117
9.5%
117
9.5%
19.0%
19.0%
50,000 to 75,000
-699
-0.3%
247
20.1%
246
20.1%
20.9%
20.8%
75,000 to 100,000
-760
-0.4%
180
14.6%
179
14.6%
23.1%
23.0%
100,000 to 200,000
-869
-0.4%
213
17.3%
212
17.2%
24.3%
24.2%
200,000 and over
-326
-0.1%
243
19.7%
242
19.7%
29.9%
29.8%
Total, All Taxpayers
-$2,756
-0.2%
$1,232
100.0%
$1,229
100.0%
20.6%
20.6%
Source: Joint Committee on Taxation
Detail may not add to total due to rounding.
(1) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1995 levels.
(2) Federal taxes are equal to individual income tax, employment tax (attributed to employees), and excise taxes (attributed
to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax. Individuals who are
dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
(3) The effective tax rate is equal to Federal taxes described in footnote (2) divided by income described in footnote (1).
(4) Less than 0.05%.
Page 2 of 5
#D-95-28
9-Mar-95
DISTRIBUTIONAL EFFECTS OF THE REPEAL OF THE SOCIAL SECURITY
BENEFITS TAX CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995
Calendar Year 1998
CHANGE IN
FEDERAL TAXES (2)
FEDERAL TAXES (2)
Effective Tax Rate (3)
INCOME
FEDERAL
UNDER
UNDER
Present
CATEGORY (1)
TAXES (2)
PRESENT LAW
PROPOSAL
Law
Proposal
Millions
Percent
Billions
Percent
Billions
Percent
Percent
Percent
Less than $10,000
$0
0.0%
$9
0.7%
$9
0.7%
8.2%
8.2%
10,000 to 20,000
0
0.0%
39
3.0%
39
3.0%
9.1%
9.1%
20,000 to 30,000
-1
(4)
80
6.1%
80
6.2%
13.9%
13.9%
30,000 to 40,000
-10
(4)
115
8.9%
115
8.9%
17.0%
17.0%
40,000 to 50,000
-161
-0.1%
122
9.4%
121
9.4%
18.8%
18.8%
50,000 to 75,000
-965
-0.4%
257
19.8%
256
19.8%
20.7%
20.7%
75,000 to 100,000
-1,031
-0.5%
192
14.8%
190
14.8%
23.0%
22.9%
100,000 to 200,000
-1,157
-0.5%
226
17.4%
224
17.4%
24.2%
24.1%
200,000 and over
-427
-0.2%
257
19.8%
256
19.9%
29.9%
29.9%
Total, All Taxpayers
-$3,752
-0.3%
$1,295
100.0%
$1,291
100.0%
20.6%
20.5%
Source: Joint Committee on Taxation
Detail may not add to total due to rounding.
(1) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1995 levels.
(2) Federal taxes are equal to individual income tax, employment tax (attributed to employees), and excise taxes (attributed
to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax. Individuals who are
dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
(3) The effective tax rate is equal to Federal taxes described in footnote (2) divided by income described in footnote (1).
(4) Less than 0.05%.
Page 3 of 5
#D-95-28
9-Mar-95
DISTRIBUTIONAL EFFECTS OF THE REPEAL OF THE SOCIAL SECURITY
BENEFITS TAX CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995
Calendar Year 1999
CHANGE IN
FEDERAL TAXES (2)
FEDERAL TAXES (2)
Effective Tax Rate (3)
INCOME
FEDERAL
UNDER
UNDER
Present
CATEGORY (1)
TAXES (2)
PRESENT LAW
PROPOSAL
Law
Proposal
Millions
Percent
Billions
Percent
Billions
Percent
Percent
Percent
Less than $10,000
$0
0.0%
$9
0.7%
$9
0.7%
8.4%
8.4%
10,000 to 20,000
0
0.0%
41
3.0%
41
3.0%
9.2%
9.2%
20,000 to 30,000
-1
(4)
83
6.1%
83
6.1%
13.6%
13.6%
30,000 to 40,000
-26
(4)
120
8.8%
120
8.9%
16.9%
16.9%
40,000 to 50,000
-247
-0.2%
126
9.3%
126
9.3%
18.6%
18.6%
50,000 to 75,000
-1,247
-0.5%
270
19.8%
269
19.8%
20.6%
20.5%
75,000 to 100,000
-1,407
-0.7%
202
14.8%
201
14.8%
22.9%
22.8%
100,000 to 200,000
-1,524
-0.6%
240
17.6%
238
17.6%
24.2%
24.0%
200,000 and over
-549
-0.2%
271
19.9%
271
19.9%
29.9%
29.9%
Total, All Taxpayers
-$5,001
-0.4%
$1,362
100.0%
$1,357
100.0%
20.5%
20.4%
Source: Joint Committee on Taxation
Detail may not add to total due to rounding.
(1) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1995 levels.
(2) Federal taxes are equal to individual income tax, employment tax (attributed to employees), and excise taxes (attributed
to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax. Individuals who are
dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
(3) The effective tax rate is equal to Federal taxes described in footnote (2) divided by income described in footnote (1).
(4) Less than 0.05%.
Page 4 of 5
#D-95-28
9-Mar-95
DISTRIBUTIONAL EFFECTS OF THE REPEAL OF THE SOCIAL SECURITY
BENEFITS TAX CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995
Calendar Year 2000
CHANGE IN
FEDERAL TAXES (2)
FEDERAL TAXES (2)
Effective Tax Rate (3)
INCOME
FEDERAL
UNDER
UNDER
Present
CATEGORY (1)
TAXES (2)
PRESENT LAW
PROPOSAL
Law
Proposal
Millions
Percent
Billions
Percent
Billions
Percent
Percent
Percent
Less than $10,000
$0
0.0%
$9
0.6%
$9
0.6%
8.6%
8.6%
10,000 to 20,000
0
0.0%
42
2.9%
42
2.9%
9.0%
9.0%
20,000 to 30,000
-2
(4)
86
6.0%
86
6.0%
13.6%
13.6%
30,000 to 40,000
-53
(4)
125
8.7%
125
8.8%
16.8%
16.8%
40,000 to 50,000
-370
-0.3%
133
9.3%
132
9.3%
18.5%
18.4%
50,000 to 75,000
-1.590
-0.6%
280
19.6%
279
19.5%
20.5%
20.4%
75,000 to 100,000
-1,799
-0.8%
215
15.0%
213
14.9%
22.8%
22.7%
100,000 to 200,000
-1,923
-0.8%
255
17.8%
253
17.7%
24.1%
23.9%
200,000 and over
-671
-0.2%
289
20.2%
288
20.2%
30.0%
29.9%
Total, All Taxpayers
-$6,408
-0.4%
$1,434
100.0%
$1,427
100.0%
20.5%
20.4%
Source: Joint Committee on Taxation
Detail may not add to total due to rounding.
(1) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1995 levels.
(2) Federal taxes are equal to individual income tax, employment tax (attributed to employees), and excise taxes (attributed
to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax. Individuals who are
dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
(3) The effective tax rate is equal to Federal taxes described in footnote (2) divided by income described in footnote (1).
(4) Less than 0.05%.
Page 5 of 5
#D-95-29
9-Mar-95
DISTRIBUTIONAL EFFECTS OF THE LONG TERM CARE
PROVISIONS CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995 (1)
Calendar Year 1996
CHANGE IN
FEDERAL TAXES (3)
FEDERAL TAXES (3)
Effective Tax Rate (4)
INCOME
FEDERAL
UNDER
UNDER
Present
CATEGORY (2)
TAXES (3)
PRESENT LAW
PROPOSAL
Law
Proposal
Millions
Percent
Billions
Percent
Billions
Percent
Percent
Percent
Less than $10,000
-$19
-0.2%
$8
0.7%
$8
0.7%
7.8%
7.8%
10,000 to 20,000
-67
-0.2%
37
3.1%
37
3.1%
9.3%
9.3%
20,000 to 30,000
-96
-0.1%
74
6.3%
74
6.3%
14.0%
14.0%
30,000 to 40,000
-116
-0.1%
105
8.9%
105
8.9%
17.2%
17.2%
40,000 to 50,000
-109
-0.1%
111
9.5%
111
9.4%
19.1%
19.1%
50,000 to 75,000
-183
-0.1%
237
20.3%
237
20.3%
21.0%
21.0%
75,000 to 100,000
-113
-0.1%
169
14.4%
169
14.4%
23.1%
23.1%
100,000 to 200,000
-150
-0.1%
201
17.2%
201
17.2%
24.3%
24.3%
200,000 and over
-87
(5)
230
19.6%
230
19.6%
29.8%
29.8%
Total, All Taxpayers
-$939
-0.1%
$1,172
100.0%
$1,171
100.0%
20.6%
20.6%
Source: Joint Committee on Taxation
Detail may not add to total due to rounding.
(1) Includes the deductibility of long term care expenses and insurance premiums, tax free exchanges of life insurance for long term
care policies ,and tax free withdrawal from IRAs and 401(k) plans for the purchase of long term care insurance.
(2) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1995 levels.
(3) Federal taxes are equal to individual income tax, employment tax (attributed to employees), and excise taxes (attributed
to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax. Individuals who are
dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
(4) The effective tax rate is equal to Federal taxes described in footnote (3) divided by income described in footnote (2).
(5) Less than 0.05%.
Page 1 of 5
#D-95-29
9-Mar-95
DISTRIBUTIONAL EFFECTS OF THE LONG TERM CARE
PROVISIONS CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995 (1)
Calendar Year 1997
CHANGE IN
FEDERAL TAXES (3)
FEDERAL TAXES (3)
Effective Tax Rate (4)
INCOME
FEDERAL
UNDER
UNDER
Present
CATEGORY (2)
TAXES (3)
PRESENT LAW
PROPOSAL
Law
Proposal
Millions
Percent
Billions
Percent
Billions
Percent
Percent
Percent
Less than $10,000
-$22
-0.3%
$8
0.7%
$8
0.7%
8.0%
8.0%
10,000 to 20,000
-79
-0.2%
38
3.1%
38
3.1%
9.2%
9.1%
20,000 to 30,000
-113
-0.1%
77
6.2%
77
6.2%
13.9%
13.9%
30,000 to 40,000
-136
-0.1%
109
8.9%
109
8.9%
17.1%
17.1%
40,000 to 50,000
-130
-0.1%
117
9.5%
117
9.5%
19.0%
19.0%
50,000 to 75,000
-224
-0.1%
247
20.1%
247
20.1%
20.9%
20.8%
75,000 to 100,000
-140
-0.1%
180
14.6%
180
14.6%
23.1%
23.1%
100,000 to 200,000
-187
-0.1%
213
17.3%
212
17.3%
24.3%
24.2%
200,000 and over
-106
(5)
243
19.7%
243
19.7%
29.9%
29.8%
Total, All Taxpayers
-$1,137
-0.1%
$1,232
100.0%
$1,230
100.0%
20.6%
20.6%
Source: Joint Committee on Taxation
Detail may not add to total due to rounding.
(1) Includes the deductibility of long term care expenses and insurance premiums, tax free exchanges of life insurance for long term
care policies and tax free withdrawal from IRAs and 401 plans for the purchase of long term care insurance.
(2) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1995 levels.
(3) Federal taxes are equal to individual income tax, employment tax (attributed to employees), and excise taxes (attributed
to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax. Individuals who are
dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
(4) The effective tax rate is equal to Federal taxes described in footnote (3) divided by income described in footnote (2).
(5) Less than 0.05%.
Page 2 of 5
#D-95-29
9-Mar-95
DISTRIBUTIONAL EFFECTS OF THE LONG TERM CARE
PROVISIONS CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995 (1)
Calendar Year 1998
CHANGE IN
FEDERAL TAXES (3)
FEDERAL TAXES (3)
Effective Tax Rate (4)
INCOME
FEDERAL
UNDER
UNDER
Present
CATEGORY (2)
TAXES (3)
PRESENT LAW
PROPOSAL
Law
Proposal
Millions
Percent
Billions
Percent
Billions
Percent
Percent
Percent
Less than $10,000
-$25
-0.3%
$9
0.7%
$9
0.7%
8.2%
8.2%
10,000 to 20,000
-87
-0.2%
39
3.0%
39
3.0%
9.1%
9.0%
20,000 to 30,000
-123
-0.2%
80
6.1%
79
6.1%
13.9%
13.8%
30,000 to 40,000
-146
-0.1%
115
8.9%
114
8.8%
17.0%
17.0%
40,000 to 50,000
-142
-0.1%
122
9.4%
121
9.4%
18.8%
18.8%
50,000 to 75,000
-253
-0.1%
257
19.8%
257
19.8%
20.7%
20.7%
75,000 to 100,000
-166
-0.1%
192
14.8%
191
14.8%
23.0%
23.0%
100,000 to 200,000
-224
-0.1%
226
17.4%
225
17.4%
24.2%
24.2%
200,000 and over
-126
(5)
257
19.8%
257
19.9%
29.9%
29.9%
Total, All Taxpayers
-$1,291
-0.1%
$1,295
100.0%
$1,293
100.0%
20.6%
20.5%
Source: Joint Committee on Taxation
Detail may not add to total due to rounding.
(1) Includes the deductibility of long term care expenses and insurance premiums, tax free exchanges of life insurance for long term
care policies and tax free withdrawal from IRAs and 401(k) plans for the purchase of long term care insurance.
(2) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1995 levels.
(3) Federal taxes are equal to individual income tax, employment tax (attributed to employees), and excise taxes (attributed
to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax. Individuals who are
dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
(4) The effective tax rate is equal to Federal taxes described in footnote (3) divided by income described in footnote (2).
(5) Less than 0.05%.
Page 3 of 5
#D-95-29
9-Mar-95
DISTRIBUTIONAL EFFECTS OF THE LONG TERM CARE
PROVISIONS CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995 (1)
Calendar Year 1999
CHANGE IN
FEDERAL TAXES (3)
FEDERAL TAXES (3)
Effective Tax Rate (4)
INCOME
FEDERAL
UNDER
UNDER
Present
CATEGORY (2)
TAXES (3)
PRESENT LAW
PROPOSAL
Law
Proposal
Millions
Percent
Billions
Percent
Billions
Percent
Percent
Percent
Less than $10,000
-$26
-0.3%
$9
0.7%
$9
0.6%
8.4%
8.3%
10,000 to 20,000
-90
-0.2%
41
3.0%
41
3.0%
9.2%
9.1%
20,000 to 30,000
-128
-0.2%
83
6.1%
83
6.1%
13.6%
13.6%
30,000 to 40,000
-152
-0.1%
120
8.8%
120
8.8%
16.9%
16.9%
40,000 to 50,000
-149
-0.1%
126
9.3%
126
9.3%
18.6%
18.6%
50,000 to 75,000
-286
-0.1%
270
19.8%
270
19.8%
20.6%
20.6%
75,000 to 100,000
-189
-0.1%
202
14.8%
202
14.8%
22.9%
22.9%
100,000 to 200,000
-273
-0.1%
240
17.6%
240
17.6%
24.2%
24.1%
200,000 and over
-157
-0.1%
271
19.9%
271
19.9%
29.9%
29.9%
Total, All Taxpayers
-$1,450
-0.1%
$1,362
100.0%
$1,361
100.0%
20.5%
20.5%
Source: Joint Committee on Taxation
Detail may not add to total due to rounding.
(1) Includes the deductibility of long term care expenses and insurance premiums, tax free exchanges of life insurance for long term
care policies ,and tax free withdrawal from IRAs and 401 (k) plans for the purchase of long term care insurance.
(2) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1995 levels.
(3) Federal taxes are equal to individual income tax, employment tax (attributed to employees), and excise taxes (attributed
to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax. Individuals who are
dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
(4) The effective tax rate is equal to Federal taxes described in footnote (3) divided by income described in footnote (2).
(5) Less than 0.05%.
Page 4 of 5
#D-95-29
9-Mar-95
DISTRIBUTIONAL EFFECTS OF THE LONG TERM CARE
PROVISIONS CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995 (1)
Calendar Year 2000
CHANGE IN
FEDERAL TAXES (3)
FEDERAL TAXES (3)
Effective Tax Rate (4)
INCOME
FEDERAL
UNDER
UNDER
Present
CATEGORY (2)
TAXES (3)
PRESENT LAW
PROPOSAL
Law
Proposal
Millions
Percent
Billions
Percent
Billions
Percent
Percent
Percent
Less than $10,000
-$28
-0.3%
$9
0.6%
$9
0.6%
8.6%
8.5%
10,000 to 20,000
-99
-0.2%
42
2.9%
42
2.9%
9.0%
9.0%
20,000 to 30,000
-140
-0.2%
86
6.0%
86
6.0%
13.6%
13.6%
30,000 to 40,000
-162
-0.1%
125
8.7%
125
8.7%
16.8%
16.8%
40,000 to 50,000
-160
-0.1%
133
9.3%
133
9.3%
18.5%
18.5%
50,000 to 75,000
-325
-0.1%
280
19.6%
280
19.6%
20.5%
20.5%
75,000 to 100,000
-216
-0.1%
215
15.0%
215
15.0%
22.8%
22.8%
100,000 to 200,000
-330
-0.1%
255
17.8%
254
17.8%
24.1%
24.1%
200,000 and over
-193
-0.1%
289
20.2%
289
20.2%
30.0%
30.0%
Total, All Taxpayers
-$1,652
-0.1%
$1,434
100.0%
$1,432
100.0%
20.5%
20.5%
Source: Joint Committee on Taxation
Detail may not add to total due to rounding.
(1) Includes the deductibility of long term care expenses and insurance premiums, tax free exchanges of life insurance for long term
care policies and tax free withdrawal from IRAs and 401 (k) plans for the purchase of long term care insurance.
(2) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1995 levels.
(3) Federal taxes are equal to individual income tax, employment tax (attributed to employees), and excise taxes (attributed
to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax. Individuals who are
dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
(4) The effective tax rate is equal to Federal taxes described in footnote (3) divided by income described in footnote (2).
(5) Less than 0.05%.
0
Page 5 of 5
#D-95-30
9-Mar-95
DISTRIBUTIONAL EFFECTS OF THE ADOPTION CREDIT
CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995
Calendar Year 1996
CHANGE IN
FEDERAL TAXES (2)
FEDERAL TAXES (2)
Effective Tax Rate (3)
INCOME
FEDERAL
UNDER
UNDER
Present
CATEGORY (1)
TAXES (2)
PRESENT LAW
PROPOSAL
Law
Proposal
Millions
Percent
Billions
Percent
Billions
Percent
Percent
Percent
Less than $10,000
$0
0.00%
$8
0.7%
$8
0.7%
7.8%
7.8%
10,000 to 20,000
0
0.00%
37
3.1%
37
3.1%
9.3%
9.3%
20,000 to 30,000
-2
(4)
74
6.3%
74
6.3%
14.0%
14.0%
30,000 to 40,000
-23
-0.02%
105
8.9%
105
8.9%
17.2%
17.2%
40,000 to 50,000
-39
-0.04%
111
9.5%
111
9.4%
19.1%
19.1%
50,000 to 75,000
-112
-0.05%
237
20.3%
237
20.3%
21.0%
21.0%
75,000 to 100,000
-42
-0.02%
169
14.4%
169
14.4%
23.1%
23.1%
100,000 to 200,000
-11
-0.01%
201
17.2%
201
17.2%
24.3%
24.3%
200,000 and over
-3
(4)
230
19.6%
230
19.6%
29.8%
29.8%
Total, All Taxpayers
-$233
-0.02%
$1,172
100.0%
$1,171
100.0%
20.6%
20.6%
Source: Joint Committee on Taxation
Detail may not add to total due to rounding.
(1) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1995 levels.
(2) Federal taxes are equal to individual income tax, employment tax (attributed to employees), and excise taxes (attributed
to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax. Individuals who are
dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
(3) The effective tax rate is equal to Federal taxes described in footnote (2) divided by income described in footnote (1).
(4) Less than 0.005%.
Page 1 of 5
#D-95-30
9-Mar-95
DISTRIBUTIONAL EFFECTS OF THE ADOPTION CREDIT
CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995
Calendar Year 1997
CHANGE IN
FEDERAL TAXES (2)
FEDERAL TAXES (2)
Effective Tax Rate (3)
INCOME
FEDERAL
UNDER
UNDER
Present
CATEGORY (1)
TAXES (2)
PRESENT LAW
PROPOSAL
Law
Proposal
Millions
Percent
Billions
Percent
Billions
Percent
Percent
Percent
Less than $10,000
$0
0.00%
$8
0.7%
$8
0.7%
8.0%
8.0%
10,000 to 20,000
0
0.00%
38
3.1%
38
3.1%
9.2%
9.2%
20,000 to 30,000
-2
(4)
77
6.2%
77
6.2%
13.9%
13.9%
30,000 to 40,000
-23
-0.02%
109
8.9%
109
8.9%
17.1%
17.1%
40,000 to 50,000
-40
-0.03%
117
9.5%
117
9.5%
19.0%
19.0%
50,000 to 75,000
-112
-0.05%
247
20.1%
247
20.1%
20.9%
20.8%
75,000 to 100,000
-40
-0.02%
180
14.6%
180
14.6%
23.1%
23.1%
100,000 to 200,000
-11
-0.01%
213
17.3%
213
17.3%
24.3%
24.3%
200,000 and over
-3
(4)
243
19.7%
243
19.7%
29.9%
29.9%
Total, All Taxpayers
-$231
-0.02%
$1,232
100.0%
$1,231
100.0%
20.6%
20.6%
Source: Joint Committee on Taxation
Detail may not add to total due to rounding.
(1) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1995 levels.
(2) Federal taxes are equal to individual income tax, employment tax (attributed to employees), and excise taxes (attributed
to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax. Individuals who are
dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
(3) The effective tax rate is equal to Federal taxes described in footnote (2) divided by income described in footnote (1).
(4) Less than 0.005%.
Page 2 of 5
#D-95-30
9-Mar-95
DISTRIBUTIONAL EFFECTS OF THE ADOPTION CREDIT
CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995
Calendar Year 1998
CHANGE IN
FEDERAL TAXES (2)
FEDERAL TAXES (2)
Effective Tax Rate (3)
INCOME
FEDERAL
UNDER
UNDER
Present
CATEGORY (1)
TAXES (2)
PRESENT LAW
PROPOSAL
Law
Proposal
Millions
Percent
Billions
Percent
Billions
Percent
Percent
Percent
Less than $10.000
$0
0.00%
$9
0.7%
$9
0.7%
8.2%
8.2%
10.000 to 20,000
0
0.00%
39
3.0%
39
3.0%
9.1%
9.1%
20.000 to 30,000
-2
(4)
80
6.1%
80
6.1%
13.9%
13.9%
30,000 to 40,000
-24
-0.02%
115
8.9%
115
8.9%
17.0%
17.0%
40,000 to 50,000
-42
-0.03%
122
9.4%
122
9.4%
18.8%
18.8%
50,000 to 75,000
-112
-0.04%
257
19.8%
257
19.8%
20.7%
20.7%
75,000 to 100,000
-38
-0.02%
192
14.8%
191
14.8%
23.0%
23.0%
100,000 to 200,000
-10
(4)
226
17.4%
226
17.4%
24.2%
24.2%
200,000 and over
-3
(4)
257
19.8%
257
19.8%
29.9%
29.9%
Total, All Taxpayers
-$231
-0.02%
$1,295
100.0%
$1,294
100.0%
20.6%
20.6%
Source: Joint Committee on Taxation
Detail may not add to total due to rounding.
(1) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1995 levels.
(2) Federal taxes are equal to individual income tax, employment tax (attributed to employees), and excise taxes (attributed
to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax. Individuals who are
dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
(3) The effective tax rate is equal to Federal taxes described in footnote (2) divided by income described in footnote (1).
(4) Less than 0.005%.
Page 3 of 5
#D-95-30
9-Mar-95
DISTRIBUTIONAL EFFECTS OF THE ADOPTION CREDIT
CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995
Calendar Year 1999
CHANGE IN
FEDERAL TAXES (2)
FEDERAL TAXES (2)
Effective Tax Rate (3)
INCOME
FEDERAL
UNDER
UNDER
Present
CATEGORY (1)
TAXES (2)
PRESENT LAW
PROPOSAL
Law
Proposal
Millions
Percent
Billions
Percent
Billions
Percent
Percent
Percent
Less than $10,000
$0
0.00%
$9
0.7%
$9
0.7%
8.4%
8.4%
10,000 to 20,000
0
0.00%
41
3.0%
41
3.0%
9.2%
9.2%
20,000 to 30,000
-2
(4)
83
6.1%
83
6.1%
13.6%
13.6%
30.000 to 40,000
-25
-0.02%
120
8.8%
120
8.8%
16.9%
16.9%
40,000 to 50,000
-42
-0.03%
126
9.3%
126
9.3%
18.6%
18.6%
50,000 to 75,000
-112
-0.04%
270
19.8%
270
19.8%
20.6%
20.6%
75,000 to 100,000
-36
-0.02%
202
14.8%
202
14.8%
22.9%
22.9%
100,000 to 200,000
-10
(4)
240
17.6%
240
17.6%
24.2%
24.2%
200,000 and over
-3
(4)
271
19.9%
271
19.9%
29.9%
29.9%
Total, All Taxpayers
-$231
-0.02%
$1,362
100.0%
$1,362
100.0%
20.5%
20.5%
Source: Joint Committee on Taxation
Detail may not add to total due to rounding.
(1) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1995 levels.
(2) Federal taxes are equal to individual income tax, employment tax (attributed to employees), and excise taxes (attributed
to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax. Individuals who are
dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
(3) The effective tax rate is equal to Federal taxes described in footnote (2) divided by income described in footnote (1).
(4) Less than 0.005%.
Page 4 of 5
#D-95-30
9-Mar-95
DISTRIBUTIONAL EFFECTS OF THE ADOPTION CREDIT
CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995
Calendar Year 2000
CHANGE IN
FEDERAL TAXES (2)
FEDERAL TAXES (2)
Effective Tax Rate (3)
INCOME
FEDERAL
UNDER
UNDER
Present
CATEGORY (1)
TAXES (2)
PRESENT LAW
PROPOSAL
Law
Proposal
Millions
Percent
Billions
Percent
Billions
Percent
Percent
Percent
Less than $10,000
$0
0.00%
$9
0.6%
$9
0.6%
8.6%
8.6%
10,000 to 20,000
0
0.00%
42
2.9%
42
2.9%
9.0%
9.0%
20,000 to 30,000
-2
(4)
86
6.0%
86
6.0%
13.6%
13.6%
30,000 to 40,000
-26
-0.02%
125
8.7%
125
8.7%
16.8%
16.8%
40,000 to 50,000
-42
-0.03%
133
9.3%
133
9.3%
18.5%
18.5%
50,000 to 75,000
-112
-0.04%
280
19.6%
280
19.6%
20.5%
20.5%
75,000 to 100,000
-36
-0.02%
215
15.0%
215
15.0%
22.8%
22.8%
100,000 to 200,000
-10
(4)
255
17.8%
254
17.8%
24.1%
24.1%
200,000 and over
-3
(4)
289
20.2%
289
20.2%
30.0%
30.0%
Total, All Taxpayers
-$231
-0.02%
$1,434
100.0%
$1,433
100.0%
20.5%
20.5%
Source: Joint Committee on Taxation
Detail may not add to total due to rounding.
(1) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1995 levels.
(2) Federal taxes are equal to individual income tax, employment tax (attributed to employees), and excise taxes (attributed
to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax. Individuals who are
dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
(3) The effective tax rate is equal to Federal taxes described in footnote (2) divided by income described in footnote (1).
(4) Less than 0.005%.
Page 5 of 5
#D-95-31
9-Mar-95
DISTRIBUTIONAL EFFECTS OF THE CUSTODIAL CARE
CREDIT CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995
Calendar Year 1996
CHANGE IN
FEDERAL TAXES (2)
FEDERAL TAXES (2)
Effective Tax Rate (3)
INCOME
FEDERAL
UNDER
UNDER
Present
CATEGORY (1)
TAXES (2)
PRESENT LAW
PROPOSAL
Law
Proposal
Millions
Percent
Billions
Percent
Billions
Percent
Percent
Percent
Less than $10,000
$0
0.00%
$8
0.7%
$8
0.7%
7.8%
7.8%
10,000 to 20,000
-12
-0.03%
37
3.1%
37
3.1%
9.3%
9.3%
20,000 to 30,000
-43
-0.06%
74
6.3%
74
6.3%
14.0%
14.0%
30,000 to 40,000
-43
-0.04%
105
8.9%
105
8.9%
17.2%
17.2%
40,000 to 50.000
-30
-0.03%
111
9.5%
111
9.5%
19.1%
19.1%
50,000 to 75,000
-58
-0.02%
237
20.3%
237
20.3%
21.0%
21.0%
75,000 to 100,000
-20
-0.01%
169
14.4%
169
14.4%
23.1%
23.1%
100,000 to 200,000
-13
-0.01%
201
17.2%
201
17.2%
24.3%
24.3%
200,000 and over
-2
(4)
230
19.6%
230
19.6%
29.8%
29.8%
Total, All Taxpayers
-$221
-0.02%
$1,172
100.0%
$1,171
100.0%
20.6%
20.6%
Source: Joint Committee on Taxation
Detail may not add to total due to rounding.
(1) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1995 levels.
(2) Federal taxes are equal to individual income tax, employment tax (attributed to employees), and excise taxes (attributed
to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax. Individuals who are
dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
(3) The effective tax rate is equal to Federal taxes described in footnote (2) divided by income described in footnote (1).
(4) Less than 0.005%.
Page 1 of 5
#D-95-31
9-Mar-95
DISTRIBUTIONAL EFFECTS OF THE CUSTODIAL CARE
CREDIT CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995
Calendar Year 1997
CHANGE IN
FEDERAL TAXES (2)
FEDERAL TAXES (2)
Effective Tax Rate (3)
INCOME
FEDERAL
UNDER
UNDER
Present
CATEGORY (1)
TAXES (2)
PRESENT LAW
PROPOSAL
Law
Proposal
Millions
Percent
Billions
Percent
Billions
Percent
Percent
Percent
Less than $10,000
$0
0.00%
$8
0.7%
$8
0.7%
8.0%
8.0%
10,000 to 20,000
-12
-0.03%
38
3.1%
38
3.1%
9.2%
9.2%
20,000 to 30,000
-34
-0.04%
77
6.2%
77
6.2%
13.9%
13.9%
30,000 to 40,000
-52
-0.05%
109
8.9%
109
8.9%
17.1%
17.1%
40,000 to 50,000
-29
-0.02%
117
9.5%
117
9.5%
19.0%
19.0%
50,000 to 75,000
-66
-0.03%
247
20.1%
247
20.1%
20.9%
20.8%
75,000 to 100,000
-19
-0.01%
180
14.6%
180
14.6%
23.1%
23.1%
100,000 to 200,000
-13
-0.01%
213
17.3%
213
17.3%
24.3%
24.3%
200,000 and over
-4
(4)
243
19.7%
243
19.7%
29.9%
29.9%
Total, All Taxpayers
-$229
-0.02%
$1,232
100.0%
$1,231
100.0%
20.6%
20.6%
Source: Joint Committee on Taxation
Detail may not add to total due to rounding.
(1) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1995 levels.
(2) Federal taxes are equal to individual income tax, employment tax (attributed to employees), and excise taxes (attributed
to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax. Individuals who are
dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
(3) The effective tax rate is equal to Federal taxes described in footnote (2) divided by income described in footnote (1).
(4) Less than 0.005%.
Page 2 of 5
#D-95-31
9-Mar-95
DISTRIBUTIONAL EFFECTS OF THE CUSTODIAL CARE
CREDIT CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995
Calendar Year 1998
CHANGE IN
FEDERAL TAXES (2)
FEDERAL TAXES (2)
Effective Tax Rate (3)
INCOME
FEDERAL
UNDER
UNDER
Present
CATEGORY (1)
TAXES (2)
PRESENT LAW
PROPOSAL
Law
Proposal
Millions
Percent
Billions
Percent
Billions
Percent
Percent
Percent
Less than $10,000
$0
0.00%
$9
0.7%
$9
0.7%
8.2%
8.2%
10,000 to 20,000
-10
-0.03%
39
3.0%
39
3.0%
9.1%
9.0%
20,000 to 30,000
-31
-0.04%
80
6.1%
80
6.1%
13.9%
13.8%
30,000 to 40,000
-53
-0.05%
115
8.9%
115
8.8%
17.0%
17.0%
40,000 to 50,000
-31
-0.03%
122
9.4%
122
9.4%
18.8%
18.8%
50,000 to 75,000
-67
-0.03%
257
19.8%
257
19.8%
20.7%
20.7%
75,000 to 100,000
-21
-0.01%
192
14.8%
192
14.8%
23.0%
23.0%
100,000 to 200,000
-14
-0.01%
226
17.4%
226
17.4%
24.2%
24.2%
200,000 and over
-3
(4)
257
19.8%
257
19.8%
29.9%
29.9%
Total, All Taxpayers
-$230
-0.02%
$1,295
100.0%
$1,294
100.0%
20.6%
20.6%
Source: Joint Committee on Taxation
Detail may not add to total due to rounding.
(1) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1995 levels.
(2) Federal taxes are equal to individual income tax, employment tax (attributed to employees), and excise taxes (attributed
to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax. Individuals who are
dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
(3) The effective tax rate is equal to Federal taxes described in footnote (2) divided by income described in footnote (1).
(4) Less than 0.005%.
Page 3 of 5
#D-95-31
9-Mar-95
DISTRIBUTIONAL EFFECTS OF THE CUSTODIAL CARE
CREDIT CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995
Calendar Year 1999
CHANGE IN
FEDERAL TAXES (2)
FEDERAL TAXES (2)
Effective Tax Rate (3)
INCOME
FEDERAL
UNDER
UNDER
Present
CATEGORY (1)
TAXES (2)
PRESENT LAW
PROPOSAL
Law
Proposal
Millions
Percent
Billions
Percent
Billions
Percent
Percent
Percent
Less than $10,000
$0
0.00%
$9
0.7%
$9
0.7%
8.4%
8.4%
10,000 to 20,000
-5
-0.01%
41
3.0%
41
3.0%
9.2%
9.2%
20,000 to
30,000
-29
-0.03%
83
6.1%
83
6.1%
13.6%
13.6%
30,000 to 40,000
-57
-0.05%
120
8.8%
120
8.8%
16.9%
16.9%
40,000 to 50.000
-34
-0.03%
126
9.3%
126
9.3%
18.6%
18.6%
50,000 to 75,000
-69
-0.03%
270
19.8%
270
19.8%
20.6%
20.6%
75,000 to 100,000
-24
-0.01%
202
14.8%
202
14.8%
22.9%
22.9%
100,000 to 200,000
-16
-0.01%
240
17.6%
240
17.6%
24.2%
24.2%
200,000 and over
-4
(4)
271
19.9%
271
19.9%
29.9%
29.9%
Total, All Taxpayers
-$238
-0.02%
$1,362
100.0%
$1,362
100.0%
20.5%
20.5%
Source: Joint Committee on Taxation
Detail may not add to total due to rounding.
(1) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1995 levels.
(2) Federal taxes are equal to individual income tax, employment tax (attributed to employees), and excise taxes (attributed
to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax. Individuals who are
dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
(3) The effective tax rate is equal to Federal taxes described in footnote (2) divided by income described in footnote (1).
(4) Less than 0.005%.
Page 4 of 5
#D-95-31
9-Mar-95
DISTRIBUTIONAL EFFECTS OF THE CUSTODIAL CARE
CREDIT CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995
Calendar Year 2000
CHANGE IN
FEDERAL TAXES (2)
FEDERAL TAXES (2)
Effective Tax Rate (3)
INCOME
FEDERAL
UNDER
UNDER
Present
CATEGORY (1)
TAXES (2)
PRESENT LAW
PROPOSAL
Law
Proposal
Millions
Percent
Billions
Percent
Billions
Percent
Percent
Percent
Less than $10,000
$0
0.00%
$9
0.6%
$9
0.6%
8.6%
8.6%
10,000 to 20,000
-5
-0.01%
42
2.9%
42
2.9%
9.0%
9.0%
20,000 to 30,000
-28
-0.03%
86
6.0%
86
6.0%
13.6%
13.6%
30,000 to 40,000
-54
-0.04%
125
8.7%
125
8.7%
16.8%
16.8%
40,000 to 50,000
-38
-0.03%
133
9.3%
133
9.3%
18.5%
18.5%
50,000 to 75,000
-63
-0.02%
280
19.6%
280
19.6%
20.5%
20.5%
75,000 to 100,000
-31
-0.01%
215
15.0%
215
15.0%
22.8%
22.8%
100,000 to 200,000
-16
-0.01%
255
17.8%
254
17.8%
24.1%
24.1%
200,000 and over
-4
(4)
289
20.2%
289
20.2%
30.0%
30.0%
Total, All Taxpayers
-$239
-0.02%
$1,434
100.0%
$1,433
100.0%
20.5%
20.5%
Source: Joint Committee on Taxation
Detail may not add to total due to rounding.
(1) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1995 levels.
(2) Federal taxes are equal to individual income tax, employment tax (attributed to employees), and excise taxes (attributed
to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax. Individuals who are
dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
(3) The effective tax rate is equal to Federal taxes described in footnote (2) divided by income described in footnote (1).
(4) Less than 0.005%.
Page 5 of 5
#D-95-32
10-Mar-95
DISTIBUTION OF TAXPAYERS BY INCOME
AND CALENDAR YEAR
(Returns in thousands)
INCOME
CATEGORY (1)
1995
1996
1997
1998
1999
2000
Less than $10,000
22,322
21,691
21,049
20,553
19,914
19,431
10,000 to 20,000
25,530
25,826
26,270
26,594
26,246
26,485
20,000 to 30,000
20,519
20,728
20,835
20,985
21,485
21,557
30,000 to 40,000
16,655
16,956
17,224
17,503
17,843
18,116
40,000 to 50,000
12,214
12,490
12,851
13,062
13,276
13,568
50,000 to 75,000
17,630
18,013
18,239
18,455
18,861
19,085
75,000 to 100,000
8,087
8,248
8,512
8,784
9,007
9,305
100,000 to 200,000
5,930
6,163
6,310
6,489
6,683
6,868
200,000 and over
1,633
1,648
1,690
1,727
1,779
1,827
Total, All Taxpayers
130,520
131,763
132,980
134,152
135,094
136,242
Source: Joint Committee on Taxation
Detail may not add to total due to rounding.
(1) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus:
[1] tax exempt interest, [2] employer contributions for health plans and life insurance, [3] employer share
of FICA tax, [4] workers compensation, [5] nontaxable social security benefits, [6] insurance value of
Medicare benefits, [7] alternative minimum tax preference items, and [8] excluded income of U.S. citizens
living abroad. Excludes individuals who are dependents of other taxpayers and taxpayers with income
less than zero. Categories are measured at 1995 levels.
#D-95-33
10-Mar-95
NUMBER OF TAXPAYERS AFFECTED BY CERTAIN
PROVISIONS CONTAINED IN THE CONTRACT WITH AMERICA
TAX RELIEF ACT OF 1995
Calendar Year 1996
(Returns in thousands)
*
SOCIAL
INCOME
FAMILY
SECURITY
MARRIAGE
CUSTODIAL
ADOPTION
CATEGORY (1)
TAX
TAX
PENALTY
CARE
CREDIT
CREDIT
REPEAL
RELIEF
CREDIT
Less than $10,000
22
0
0
0
(2)
10,000 to 20,000
2,125
1
77
46
(2)
20,000 to 30,000
4,146
2
716
93
(2)
30,000 to 40,000
4.792
35
1,857
79
(2)
40,000 to 50,000
4,153
386
2,230
47
(2)
50,000 to 75,000
7,673
1,793
3,702
78
(2)
75,000 to 100,000
3.759
1,136
2,944
30
(2)
100,000 to 200,000
2.489
1,055
2,230
17
(2)
200,000 and over
290
258
383
6
(2)
Total, All Taxpayers
29,448
4,667
14,138
396
65
Source: Joint Committee on Taxation
Detail may not add to total due to rounding
(1) The income concept used to place tax returns into income categories is adjusted gross
income (AGI) plus: [1] tax exempt interest. [2] employer contributions for health plans and life
insurance, [3] employer share of FICA tax. [4] workers compensation, [5] nontaxable social
security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax
preference items. and [8] excluded income of U.S. citizens living abroad.
Excludes individuals who are dependents of other taxpayers and taxpayers with income
less than zero. Categories are measured at 1995 levels.
(2) Not available.
Macroeconomic
Aspects of the
Republican
Contract With America
February 28 - March 2, 1995
Washington, DC
Laurence H. Meyer & Associates, Ltd.
231 South Bemiston Ave. Suite 775
St. Louis, MO 63105
314-721-4747
DEFICIT PROJECTIONS & CWA TAX CUTS
BILLIONS OF DOLLARS
500
CWA TAX CUTS
CBO, JAN 1995
BBA PATH
400
300
1
200
100
O
1995
1996
1997
1998
1999
2000
2001
2002
2003
7 2005
FISCAL YEARS
SOURCE: CBO, ADM., & LHM&A
MATH OF THE
BALANCED BUDGET AMENDMENT
(Billions of Dollars, Fiscal Years)
TAX
CBO*
CUTS*
ToT
BBA***
DIFF
1996
207
8
215
153
62
1997
224
25
249
127
122
1998
222
38
260
102
158
1999
253
54
307
76
231
2000
284
67
351
51
300
2001
297
75
372
25
347
2002
322
83
405
0
405
CUM
1809
350
2159
534
1625
3 A
* CBO, January 1995
and was total delst
**ADM, LHM&A
*** Linear Decline Assumed
2
C.W.A. TAX CUTS: THE STATIC PRICE TAG*
(FY 1996 - 2000, Billions of Dollars)
$500/Child Tax Credit
111
Capital Gains Tax Cut
59
Repeal '93 Soc. Sec. Tax Hike
15
Reduce Marriage Penalty
9
Lift Estate Tax Exemption
8
Dep. Care Credit for Seniors
5
Small Business Expensing
4
Tax Incentive for Adoption
1
Tax Credit for Elderly Care
1
Back Loaded IRAs
1
Expanded Home Office Deduction
1
Neutral Cost Recovery
-23
Total
192
*Source: Adm. LHM&A, Rep. House Conf.
3
MACROSTATIC DEFICIT PROJECTIONS WITH & WITHOUT CWA TAX CUTS
(FISCAL YEARS, BILLIONS OF DOLLARS)
1996
1997
1998
1999
2000
2001
2002
CUM
CBO DEFICIT, JAN 1995
207
224
222
253
284
297
322
1809
CWA TAX CUTS, TOTAL*
8
25
38
54
67
75
83
350
"Demand Side"
16
30
33
36
38
40
42
236
$500/child Credit
12
23
25
25
26
28
29
168
Repeal 1993 SS
1
2
3
4
5
6
6
27
4
Other
4
5
6
6
7
7
7
41
"Supply Side"
-9
-5
5
19
29
35
41
115
50% Excl. Indexed Gains
C
4
8
13
16
18
18
20
97
N.C.R.S. & Expensing
-13
-13
-9
3
11
17
21
18
e
TOTAL
215
249
260
307
351
372
405
2159
*Source: LHM&A
Deficit Reduction: Transitional Demand
and Permanent Supply Effects
AS
LM
R
IS
IS'
a
b
C
Y
5
FISCAL POLICY, SAVING, AND INVESTMENT
Deficit Reduction and the Saving Offset
Investment Incentives & the Saving Response
S₀
S'o
S₀
R
l'
I
S
R
S
I
b
S'
c
9
a
c
s*
d
S*
a
9
S₀
S₁
is
S,Y
s,
S₁
S₂
S,I
KEY MODEL PARAMETERS
A. NO GOVERNMENT CAPITAL
B. UNITARY ELASTICITY OF SUBSTITUTION
C. CAPITAL'S SHARE: 0.27
D. PUTTY-CLAY ADJUSTMENT: SLOW
E. ELASTICITY OF LABOR SUPPLY
1. AFTER-TAX WAGES 0.11
2. TRANSFERS: 0
F. ELASTICITY OF SAVING: SMALL
1. PRIVATE: 0
2. FOREIGN: +
G. WEALTH EFFECTS IN CONSUMPTION
7
SIMULATION DESIGN
A. BASELINE: JANUARY CBO
B. PROCEDURE
1.
TAX CUTS / PAYGO
2.
THEN BBA
C.
MONETARY POLICY
1.
UNEM RATE IN LONG-RUN
2.
ALSO IN SHORT-RUN, IF POSSIBLE
D.
BOND MARKET EFFECT: NO
E.
NAIRU: NO CHANGE
F.
DEMAND SHOCK UNDER BBA
8
DEPRECIATON FOR 7-YEAR PROPERTY
PERCENT OF HISTORICAL COST
30
MACRS: PV=85%
NCRS: PV=100%
25
20
15
10
5
0
1
2
3
4
5
6
7
8
YEAR
ASSUMES 3% INFLATION, 3.5% REAL RETURN
DEPRECIATON FOR 39-YEAR PROPERTY
PERCENT OF HISTORICAL COST
30
25
20
NCRS-1: PV=100%
15
10
NCRS-1: PV=55%
5
MACRS: PV=37%
0
1
5
10
15
20
25
30
35
40
YEAR
ASSUMES 3% INFLATION, 3.5% REAL RETURN
9
Most be getting additional sangs
Foem
MACRO IMPACTS OF CONTRACT WITH AMERICA
sury'
DEMAND-SIDE TAX CUTS UNDER PAY-GO
SUPPLY-SIDE TAX CUTS UNDER PAY-GO
EFFECT ON REAL GDP
EFFECT ON REAL GDP
PERCENT
PERCENT
1.75
1.75
1.5
1.5
77
1.25
1.25
NEUTRAL COST RECOVERY
1
1
0.75
instruct
ellet
0.75
0.5
0.5
0.25
0.25
CAP TAL GAINS
0
0
-0.25
-0.25
-0.5
-0.5
-0.75
-0.75
*1995
1996
1997
1998
1999
2000
2001
2002
2003
1995
1996
1997
1998
1999
2000
2001
2002
2003
SOURCE: LHM&A FEBRUARY 1995
SOURCE: LHM&A FEBRUARY 1995
10
TAX CUTS AND BBA
TAX CUTS AND BBA
EFFECT ON REAL GDP
EFFECT ON THE GOVERNMENT BOND RATE
PERCENT
PERCENTAGE POINTS
4
0.5
TAX CUTS UNDER PAY-GO
3.5
TAX CUTS AND BBA
0
3
2.5
-0.5
2
over
-1
1.5
TAX CUTS WITH PAY-GO
8ys.
TAX CUTS AND BBA
1
-1.5
0.5
0
-2
1995
1996
1997
1998
1999
2000
2001
2002
2003
1995
1996
1997
1998
1999
2000
2001
2002
2003
SOURCE: LHM&A FEBRUARY 1995
SOURCE: LHM&A FEBRUARY 1995
Composition of Deficit Reduction
(Billions of Dollars, diff. from base)
350
300
250
200
150
11
100
50
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
Total
Interest Saving
Spending X Tax Cuts
Source: Laurence H. Meyer & Associates
No Pree lunch luch
EFFECT BY 2003 OF CWA
ON STANDARD OF LIVING
PERCENT
5
PNF GDP
4
TOT GDP
3
2
PCE
12
1
O
DISP. INC.
- 1
PRIV+PUBL
CONS.
- 2
SOURCE: LHM&A FEBRUARY 1995
THE BALANCED BUDGET AMENDMENT AS
AN AUTOMATIC DE-STABILIZER?
2001
2002
2003
GDP (%CHG, 4/4)
BASELINE
2.8
2.5
3.3
RECESSION W/O BBA
-2.3
7.0
3.5
RECESSION W BBA
-3.5
6.1
5.1
UNEM RATE (%)
BASELINE
5.8
6.1
6.2
RECESSION W/O BBA
7.5
8.6
1.24
6.9
RECESSION W BBA
7.6
9.8
8.1
DEFICIT (BIL, FY)
BASELINE
8.0
0.0
-4.0
RECESSION W/O BBA 65.0
105.0
25.0
RECESSION W BBA
65.0
42.0
-41.0
13
EFFECT OF NCRS
ON REAL GDP
ON GOVERNMENT BOND RATE
PERCENT
PERCENTAGE POINTS
1.6
1.2
1.4
CLOSED ECONOMY, WITH OFFSET
1
FULL MODEL, NO OFFSET
1.2
0.8
1
0.8
0.6
FULL MODEL, WITH OFFSET
0.6
FULL MODEL, WITH OFFSET
0.4
0.4
0.2
0.2
FULL MODEL, NO OFFSET
CLOSED ECONOMY, WITH OFFSET
0
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
1995
1996
1997
1998
1999
2000
2001
2002
2003
SOURCE: LHM&A FEBRUARY 1995
SOURCE: LHM&A FEBRUARY 1995
14
ON FEDERAL DEFICIT
ON FEDERAL DEBT
BILLIONS OF DOLLARS, SAAR
BILLIONS OF DOLLARS
80
300
CLOSED ECONOMY, WITH OFFSET
60
200
CLOSED ECONOMY, WITH OFFSET
40
100
20
FULL MODEL, WITH OFFSET
0
o
FULL MODEL, WITH OFFSET
-100
-20
FULL MODEL, NO OFFSET
FULL MODEL, NO OFFSET
-40
-200
1995
1996
1997
1998
1999
2000
2001
2002
2003
1995
1996
1997
1998
1999
2000
2001
2002
2003
SOURCE: LHM&A FEBRUARY 1995
SOURCE: LHM&A FEBRUARY 1995
EFFECT OF NCRS (FULL MODEL WITH OFFSET)
ON USER COST OF EQUIPMENT
ON REAL STOCK OF EQUIPMENT
PERCENT
PERCENT
1
5
o
:
4
- 1
AVERAGE
3 -
-2
-3
2 -
- 4
MARGINAL
1
-5
-6
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
1995
1996
1997
1998
1999
2000
2001
2002
2003
SOURCE: LHM&A FEBRUARY 1995
SOURCE: LHM&A FEBRUARY 1995
15
ON USER COST OF STRUCTURES
ON REAL STOCK OF STRUCTURES
PERCENT
PERCENT
0
2.5
AVERAGE
- 1
2
-2
1.5
-3
1
MARGINAL
-4
0.5
-5
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
1995
1996
1997
1998
1999
2000
2001
2002
2003
SOURCE LHM&A FEBRUARY 1995
SOURCE: LHM&A FEBRUARY 1995
NCRS: SOURCES OF FINANCING
FULL MODEL WITH MONETARY OFFSET
BILLIONS OF DOLLARS
400
379 (100%)
300
254 (67%)
200
101 (27%)
100
24 (6%)
0
GPDI
FOREIGN
+
GOVERNMENT
+
PRIVATE
CLOSED ECONOMY WITH MONETARY OFFSET
BILLIONS OF DOLLARS
300
200
100
67
0
0
285
- -100
-200
- -218
-300
GPDI
-
FOREIGN
+
GOVERNMENT
+
PRIVATE
16
SPECIALANALYSIS
Macroeconomic Aspects of the Republican
Contract with America
Laurence H. Meyer & Associates
March 1995
MA
MA
MA
MA
MA
MA
MA
MA
MA
LAURENCE H. MEYER & ASSOCIATES, Ltd.
231 South Bemiston-Suite 775
St. Louis, Missouri 63105
Phone: (314) 721-4747 FAX: (314) 721-6383
I) Summary
The Republican Party's "Contract with America" (CWA) calls for sweeping changes in the law of the land with
implications for nearly every aspect of Federal domestic policy from the structure of welfare, to personal and
business taxes, to law enforcement, to regulatory and legal reform, to term limits, to federal budget policy and the
deficit. While many of its "planks," if put into law, would have a profound effect on the nation, we examine only those
elements of the CWA with significant macroeconomic implications. These include the call for a balanced budget
amendment and the business and personal tax cuts. The CWA itself does not specify the details of acheiving a
balanced budget, but does provide some detail regarding the business and personal tax cuts. Thus, in this Special
Analysis we study the macroeconomic effects of combining the specified personal and business tax cuts
with sufficient spending cuts to balance the budget by 2002.
Methodolgy
These proposals were analyzed using simulations of the Washington University Macroeconometric Model (WUMM)
of the US economy. The model was built and is maintained by LHM&A. A "base" simulation was prepared which
incorporated "current law" assumptions regarding taxes and spending, and which had a baseline deficit roughly
similar to that produced by the Congressional Budget Office (CBO). Then simulations were performed with alterna-
tive assumptions regarding taxes and spending that reflected the major components of the CWA that would be
expected to have an impact on macroeconomic performance. This methodology allows us to measure both the
transitional effects on aggregate demand and the
permanent effects on potential output¹ Of par-
Table 1
ticular interest are the long-run effects on the level
and composition of GDP, capital formation, labor
C.W.A. TAX CUTS: THE STATIC PRICE TAG*
productivity, and interest rates. We also consid-
(FY 1996 - 2000, Billions of Dollars)
ered the implications of a balanced budget
amendment (BBA) for the effectiveness of fiscal
built-in stabilizers in damping the magnitude and
$500/Child Tax Credit
111
persistence of recessions.
Capital Gains Tax Cut
59
Repeal '93 Soc. Sec. Tax Hike
15
The Tax Cuts
The analysis assumed the implementation of
Reduce Marriage Penalty
9
twelve proposed tax changes. These tax changes
Lift Estate Tax Exemption
8
are shown in Table 1, along with the estimates of
Dep. Care Credit for Seniors
5
the static 2 revenue loss (gain) over the first 5
Small Business Expensing
4
years. Note that the Nuetral Cost Recovery Sys-
Tax Incentive for Adoption
1
tem (NCRS) would gain revenue in the first five
years, but loose revenue in the next five. As a
Tax Credit for Elderly Care
1
result of the revenue losses stemming from the
Back Loaded IRAs
1
proposed tax reductions, the spending cuts re-
Expanded Home Office Deduction
1
quired to balance the budget by 2002 are in-
creased. Table 2 shows the year-by-year baseline
Neutral Cost Recovery
-23
deficit, static revenue losses from the proposed
Total
192
tax cuts, the resulting deficits, and the deficit that
would be targeted under a BBA to acheive bal-
*Source: Adm., LHM&A, Rep. House Conf.
ance by 2002. This last column indicates the
magnitude of the statically-estimated spending
reductions that would have to be made to achieve a balanced budget by 2002 assuming implementation of the
proposed tax cuts. As seen in Table 2, the static estimate of the revenue loss from the proposed tax changes
reaches $83 billion in the year 2002. When added to the CBO baseline deficit that year of $322 billion, the resulting
deficit, in the absence of spending reductions, would be $405 billion. Since the budget is to be in balance by the
year 2002, spending must be $405 billion lower than would have otherwise been the case in 2002. This is shown in
Figure 1. Thestacked bars indicate the CBO baseline deficit plus the static revenue loss from the CWA tax cuts.
1"Potential Output" refers to the maximum sustainable level of output of goods and services that the economy can produce without experiencing rising
inflation.
2"Static" revenue estimates are developed without regard to any possible macroeconomic effects of the proposed tax change and any resulting impact
on the relevant tax base.
1
Table 2
MATH OF THE
BALANCED BUDGET AMENDMENT
(Billions of Dollars, Fiscal Years, Budget Basis)
STATIC
BUDGET
REVENUE
DEFICIT
SAVINGS RE-
CBO*
LOSS FROM
PATH "RE-
QUIRED TO
BASELINE
+
PROPOSED
=
RESULTING
QUIRED" BY
BALANCE
DEFICIT
TAX CUTS**
DEFICIT
BBA***
BUDGET
(1)
(2)
(3)
(4)
(5)
1996
207
8
215
153
62
1997
224
25
249
127
122
1998
222
38
260
102
158
1999
253
54
307
76
231
2000
284
67
351
51
300
2001
297
75
372
25
347
2002
322
83
405
0
405
CUM
1809
350
2159
534
1625
*CBO, January Estimate
** LHM&A
**Linear Decline Assumed
The line shows the assumed path to a bal-
Figure 1
anced budget required by a BBA. The differ-
ence between the line and the bars is the
DEFICIT PROJECTIONS
amount of budget savings required to acheive
BILLIONS OF DOLLARS
a balanced budget.
500
CWA TAX CUTS
CBO, JAN 1995
BBA PATH
The Spending Cuts
400
The actual programmatic spending cuts re-
quired are less than shown in Figure 1 be-
300
cause of lower interest expense resulting from
lower interest rates and a lower level of out-
standing debt, as well as dynamic revenue
200
and spending offsets. Section II below pro-
vides details on the composition of the spend-
100
ing reductions which are summarized in Fig-
ure 2. This chart shows, year-by-year, the
0
composition of the required deficit reduction
1995
1996
1997
1998
1999
2000
2001
2002
2003
by programmatic spending reductions (net of
FISCAL YEARS
the revenue loss from the tax cuts) and inter-
SOURCE: CBO, ADM., & LHM&A
est savings. The line shows how much the
deficit must be reduced from the projected baseline deficit to hit the deficit target in each year. The dark bar
illustrates the contribution to deficit reduction from assumed programmatic spending cuts, after subtracting the
estimated revenue losses from the proposed tax cuts. The light bar shows the interest savings that result from both
lower interest rates and a lower stock of outstanding federal debt. The estimate of the interest savings is generated
from a simulation of the model where the tax and spending cuts have been implemented.
2
The Economic Effects
The economic effects of the CWA can be
Figure 2
thought of as originating from three broad
COMPOSITION OF DEFICIT REDUCTION
classes of proposed changes: 1) demand-
(BILLIONS OF DOLLARS, DIFF. FROM BASE)
side tax cuts, 2) supply-side tax cuts, and 3)
350
spending reductions required to balance the
budget. The demand-side tax cuts, such as
300
the $500 per child tax credit, provide no sig-
250
nificant "supply-side" incentives to supply la-
bor, save or invest, but they do increase af-
200
ter-tax income and hence boost consump-
150
tion and aggregate demand. The supply-side
tax cuts include the proposed 50% exclusion
100
for realized capital gains income, the pro-
50
spective indexing of capital gains for tax pur-
poses, and the proposed Neutral Cost Re-
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
covery System (NCRS). These tax changes
do provide additional incentives for saving
Total
Interest Saving
Spending X Tax Cuts
and investment, and as a result boost both
aggregate demand in the near term and po-
Source: LHM&A; NIPA BASIS
tential output in the long term. Finally, the
Figure 3
spending reductions required to acheive a
balanced budget by 2002 include both reduc-
TAX CUTS AND BBA
tions in transfer payments to individuals, and
EFFECT ON REAL GDP
reductions in direct purchases by the federal
PERCENT
government. The reduction in transfers has
4
an effect (dollar for dollar) which is simliar in
3.5
magnitude, but opposite in sign to demand-
TAX CUTS AND BBA
side tax reductions. The reductions in direct
3
purchases of goods and services reduce ag-
2.5
gregate demand dollar-for-dollar and thus
have a slightly larger effect on aggregate de-
2
mand than equivalent reductions in transfer
1.5
TAX CUTS WITH PAY-GO
payments.
1
As the above discussion implies, the demand-
0.5
side and supply-side tax cuts would boost
aggregate demand in the near-term. This
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
stimulus would be offset by the programmatic
SOURCE: LHM&A FEBRUARY 1995
spending reductions. Whether, on balance,
the economy strengthens or weakens in the near-term, depends on the relative magnitude of the forces boosting
and restraining demand. Under a wide range of assumptions we would expect a program of tax cuts and spending
restraint that results in a gradually declining deficit to reduce aggregate demand and GDP in the near term. How-
ever, the supply-side tax incentives in the CWA are responsible for a different outcome. First, the implementation
of NCRS would add to revenue initially, reducing the magnitude of the spending cuts required in the early years.
Second, the supply-side incentives, while they aim to boost potential output in the long run, work by promoting
investment (which is itself a component of aggregate demand) in the short and long run. Thus when the package is
examined in total, it raises aggregate demand and output relative to the base simulation continuously from 1996
through 2002.
For purposes of comparison, Figure 3 shows the effects on real GDP of two different simulations: 1) a simulation in
which the proposed tax cuts are "paid for" by spending reductions as would be required under the so-called "PAY-
GO" rules (line), 2) a simulation that begins from (1) and adds the additional spending reductions needed to balance
the budget by 2002 (bar). The difference between the line and the bar is the effect owing to the spending reductions
alone. In both alternative simulations the level of real GDP is higher than in the base simulation throughout.
3
Figure 4
Because the package simultaneously raises output and
TAX CUTS AND BBA
raises government saving (reduces government dissaving)
EFFECT ON THE GOVERNMENT BOND RATE
both absolutely and relative to GDP, the equilibrium real
interest rate would be expected to fall. In fact the simula-
PERCENTAGE POINTS
0.5
tion produced a significant decline in interest rates as
TAX CUTS UNDER PAY-GO
shown in Figure 4. The decline in interest rates reinforces
0
the favorable response of investment and potential out-
put in the long run. It also helps to reduce federal interest
-0.5
expense and thus reduces the size of the programmatic
spending cuts necessary to balance the budget.
TAX CUTS AND BBA
-1.5
-2
1995
1996
1997
1998
1999
2000
2001
2002
2003
SOURCE: LHM&A FEBRUARY 1995
II) Details of Tax Cuts and Spending Cuts in CWA
The Spending Cuts
CWA incorporates a commitment to pass a balanced budget amendment. We interpret this commitment as support
for balancing the budget, with or without the discipline afforded by a balanced budget amendment. In the absence
of a specific program of spending cuts in CWA, we had to impose our own allocation of required programmatic cuts
between transfer payments and discretionary purchases. Specifically, we held real medical transfers constant,
reduced the COLA for other transfers one percentage point below the CPI inflation rate, and satisfied any further
required spending cuts with reductions in discretionary purchases.
The Tax Cuts
The tax cuts in CWA are detailed in Table 1, along with their 5-year static revenue costs. Here we provide a brief
summary of the specific tax cuts in CWA.
The first "demand-side" tax cut in the CWA is the so-called "middle-class tax cut." It calls for a $500 per child tax
credit available for children 18 years or younger for families with incomes up to $200,000. It is estimated that this
tax cut would cost $111 billion in lost personal tax revenue over 5 years. Note that the middle-class tax cut in CWA
is not a decline in marginal personal income tax rates and therefore does not provide an incentive for additional
labor input (by raising the real after-tax wage rate). Indeed, by increasing after-tax income regardless of work effort,
it produces an income affect which would be expected to reduce work effort.
There is a second set of smaller demand-side tax cuts associated with a variety of other provisions, including a
reduction in the marriage penalty (accomplished through a tax credit), lifting the estate tax exemption, providing a
tax credit for dependent care for senior citizens, a tax incentive for adoption, and a tax credit for elderly care. We
lump expensing for small business in with these other miscellaneous tax cuts.
The third most costly tax cut is the repeal of the 1993 tax increase for higher-income social security recipients. This
would cost $15 billion over 5 years. The increase in the earnings limit that would be exempt from taxation makes
this a supply-side tax cut; however, any supply effects would be second order in magnitude so this tax cut was
lumped in with the demand-side tax cuts for purposes of the simulations.
The CWA calls for a new back-loaded IRA ("American Dream Savings Account"). The initial investment, up to
$2000 per year for an individual and $4000 for a married couple, would not be deductible; however, interest would
accumulate tax free. Taxes would be paid on the earnings upon withdrawal. After five years, sums could be
withdrawn without penalty for certain contingencies, including purchase of first owner-occupied home, educational
expenses at a post-secondary institution, and medical costs. During an initial two-year period, holders of existing
IRAs could switch them into the new IRAs without penalty to achieve the greater flexibility they afford. Such
switching would raise tax revenue to the extent that the IRAs that were cashed out were the result of tax-free
4
contributions. In addition, because the new IRAs are back-loaded (initial contributions are made with after-tax
dollars), their revenue cost is very small initially, though it of course builds over time.
CWA calls for a halving of the statutory capital gains tax rate (via introducing a 50% exclusion for capital gains) and
then indexing the capital gains with respect to future price increases. This is projected to cost $59 billion over 5
years, though there is considerable uncertainty about the initial revenue effects, as the lowering of the tax rate would
sharply reduce the lock-in effect and might therefore result in a large volume of realizations which initially raise tax
revenue.
The most dramatic tax change in CWA is the Neutral Cost Recovery System (NCRS). NCRS is a new set of rules
for calculating depreciation for tax purposes. Firms could elect to continue the current system or switch to NCRS.
The current system allows equipment to be depreciated over 8 years, using the double declining balance method.
Under NCRS, a 150 percent declining balance method is substituted, but the amount of the asset remaining to be
depreciated is raised each year by the inflation rate (indexation) and by a real interest rate (assumed to be 3.5%).
This procedure insures that the present value of depreciation allowances will be equal to the replacement cost of the
equipment. Under the present system, the present value of depreciation allowances equals only 85% of the original
cost of the equipment. Note that, compared to the present tax code, the depreciation allowances are smaller under
CWA during the first three years, although the present value over the 8-year period is higher.
The same system was initially proposed for business structures (plant and multi-family housing units). The program
for structures was subsequently revised to limit the change to adding indexation to the current 39-year straight line
depreciation employed for structures. It is this revised treatment that we assume in this study.
A few comments need to be made about NCRS. First, it is not "neutral," in the sense of eliminating distortions to
economic decisions from the tax code. In fact, NCRS may increase distortions because it would result in very
different tax treatment of equipment, depending, for example, on whether it was debt or equity financed, and
increases the difference between the tax treatment of equipment and structures. For example, allowing full non-
indexed interest deductions while indexing depreciation would result in a negative tax rate on debt-financed equip-
ment investments under NCRS. Second, many firms might not elect NCRS if given the option. Some report that
they would not want to suffer lower depreciation for the first three years, implying that they have such high discount
rates that the present value of depreciation is actually lower for NCRS. Many firms believe NCRS is, in fact, too
generous and would either be removed or offset by some other tax increase, perhaps an increase in the corporate
tax rate, a combination many would view as less preferable than the current tax system. In the analysis below, we
assume that all firms elect NCRS.
CWA and Deficit Accounting
The difficulty of the task and the potential size of the benefits of deficit reduction depend on the size of the deficit to
be eliminated. In this study, we use the Congressional Budget Office's January 1995 baseline for the unified budget
deficit as our point of departure, the path of the deficit in the absence of implementation of Contract with America.
The baseline deficits through 2002 are reported in column 1 of Table 2 and are illustrated by the light portion of the
bars in Figure 1. Note that the deficit begins near $200 billion in fiscal 1996 and rises to $322 billion in 2002. The
baseline deficits cumulate to $1.8 trillion over this period.
The next step is to add to the baseline deficit the static revenue effects of the tax cuts specified in Contract with
America. The annual static revenue effects are detailed in column 2 of Table 2 and are depicted by the dark
additions to the bars in Figure 1. The 5-year static cost of the tax cuts in CWA is $192 billion. Note that neutral cost
recovery is projected to raise $23 billion over this period and hence lowers the 5-year cost, even though it would be
a significant static revenue loser over the longer term. The cumulative cost of the tax cuts reported in Table 1 over
the 7 years is $350 billion, raising the cumulative deficit over the 7-year period to $2.159 trillion.
Next we allow for a gradual decline in the deficit during the transition to a balanced budget, illustrated by the straight
line beginning at the deficit in fiscal 1995 and declining to zero in 2002. The path of the deficit along this transition
is reported in column 4 of Table 2. The cumulative amount of deficit reduction is the difference between the
5
cumulative deficit augmented by the tax cuts (column 3) and the deficit path associated with the transition to deficit
reduction (column 4) and equals $1.625 trillion (column 5).
Table 2 and Figure 1 are based on a linear path to a balanced budget. In the simulation analysis, we used a path in
which the decline in the deficit was slower at first and steeper later in the period. This path resulted in smaller
cumulative deficit reduction than what is reported in Table 2.
Sources of Deficit Reduction
Although the deficit has to be reduced cumulatively by $1.6 trillion to balance the budget by 2002, the cumulative
programmatic spending cuts required to balance the budget by 2002 are much smaller than the $1.6 billion. First,
CWA would raise the level of income in the long run and therefore would raise various tax bases and generate
dynamic revenue gains. Second, deficit reduction, by lowing interest rates and by lowering the outstanding debt,
lowers federal interest payments. Every dollar of programmatic cuts is thus rewarded by some additional "painless"
decline in spending via lower interest payments and painless increase in revenue resulting from higher tax bases.
The required $1.6 trillion in cumulative deficit reduction, including the static tax cuts, is accomplished in our simu-
lation via about $800 billion in programmatic spending cuts, $300 billion in reduced interest payments on the debt,
and $500 billion in dynamic increases in tax revenue. The sources of deficit reduction in our simulation are depicted
in Figure 2.
III) The Economics of the CWA
The Economics of the Tax Cuts in CWA
Broadly speaking, tax cuts can be characterized as either demand-side or supply-side cuts: Supply-side tax cuts
are those that directly affect relative prices that influence decisions to work, save, or invest. They include cuts in
marginal tax rates as well as investment and saving incentives. Demand-side tax cuts do not alter the relative prices
which affect decisions to work, save or invest and have their exclusive short-run effect via aggregate demand. They
do have long-run supply effects as well, but these are adverse, reflecting the shift of resources toward consumption
and, via higher interest rates, away from investment. In Table 3 we show the static revenue losses by year associ-
ated with the demand-side and supply-side tax cuts.
In CWA, the two supply-side tax changes that potentially have the greatest effects are the cut in the tax rate on
capital gains (via both indexing and a halving in the statutory rate) and NCRS. Other tax changes in CWA which
Table 3
STATIC REVENUE LOSSES FROM CWA TAX CUTS
(Fiscal Years, Billions of Dollars)
1996
1997
1998
1999
2000
2001
2002
CUM
CWA TAX CUTS, TOTAL *
8
25
38
54
67
75
83
350
"Demand Side"
16
30
33
36
38
40
42
236
$500/child Credit
12
23
25
25
26
28
29
168
Repeal 1993 SS
1
2
3
4
5
6
6
27
Other
4
5
6
6
7
7
7
41
"Supply Side"
-9
-5
5
19
29
35
41
115
50% Excl. Indexed Gains
4
8
13
16
18
18
20
97
N.C.R.S. & Expensing
-13
-13
-9
3
11
17
21
18
*Source: LHM&A, Summary parts may not equal totals due to rounding
6
may also have immediate supply-side effects are the enhancement of saving incentives via the introduction of a
new back-loaded IRA, the partial repeal of the marriage penalty, the increase in the income threshold for social
security recipients, and welfare reform. Based on our research, we believe that targeted saving incentives do not
have a significant effect on the private saving rate. The tax cut associated with the new IRA is therefore grouped
with the demand-side tax cuts. We view the effect of the repeal of the marriage penalty and increased earnings
threshold for social security recipients as having only second-order effects on labor supply. Note that the tax saving
projected for partial repeal of the marriage penalty is only about 10% of the estimated cost of fully removing this
penalty and would yield maximum benefits of $145 per family that qualified. The supply-side effects of such a small
change should be nil. In the absence of a specific program for welfare reform and given the uncertainties about
what the effects might be on labor supply, we do not make any attempt to model the macro effects of welfare reform,
other than those related to lowering government spending.
The supply-side tax cuts in CWA differ in a couple of important respects from the demand-side tax cuts in the
program. First, although the demand-side and the supply-side tax cuts in CWA have an immediate positive impact
on aggregate demand, supply-side tax cuts in CWA have more "bang for the buck" initially on aggregate demand
than the demand-side tax cuts - i.e., they generate stimulus with less revenue loss initially. This turns out to be
critical to the simulation results we report below. Second, while demand-side tax cuts ultimately undermine aggre-
gate supply in the long run, supply-side tax cuts enhance aggregate supply in the long run.
The Role of Supply-side Tax Cuts in CWA
An important motivation for the budget and tax changes in CWA is the view that the current budget and tax system
distorts economic decisions in a way that lowers saving and investment. Given the low level of net national saving
in the U.S., both relative to earlier periods and relative to other industrial countries, eliminating these distortions
may reasonably be viewed as an important priority for public policy.
These distortions include high government deficits which directly lower national saving; inflation non-neutralities in
the tax code (such as the taxation of nominal capital gains and the use of original cost depreciation) which bias the
system to lower saving and investment; and the taxation of (indeed the double taxation of) capital income which
also lowers saving and hence investment.
The correction of the distortion introduced via high government deficits is readily achieved via deficit reduction,
though the benefits of deficit reduction depend importantly on how the deficit is reduced. Specifically, the benefits
can be significantly compromised if deficit reduction is accomplished by raising marginal tax rates or by removing
existing incentives for work, saving, or investment or by lowering government-sponsored investment in either hu-
man capital (e.g., education and training programs) or in the public infrastructure.
The distortions associated with inflation non-neutralities in the tax code can be eliminated via indexation, although
partial indexation (as proposed in CWA) can end up increasing rather than reducing distortions in the tax code.
Similarly, lowering the taxation of capital income can, in general, introduce additional distortions if, for example, the
changes result in wider discrepancies than exist now in the tax treatment of different investments and/or encourage
tax shelters that yield high investment with low productivity (e.g., buildings without tenants). In addition, lowering
the distortions can be done in ways that are relatively inexpensive (by targeting incentives to new investment) or in
ways that are relatively expensive (by conferring substantial windfalls on holdings of existing assets). Those famil-
iar with the details of the tax provisions in CWA will recognize in this discussion some serious deficiencies in that
program, accounting for the lack of enthusiasm for these provisions even among those who share the objective of
reducing distortions to saving and investment.
In addition, combining spending cuts and tax incentives for saving and investment with a middle-class tax cut which
encourages consumption reduces the overall beneficial effect of the program on saving, investment, productivity
growth, and output.
Finally, there is growing interest is tax reform, with a focus on both flattening the tax code and shifting toward
7
taxation of consumption rather than income. Given this interest, it would be imprudent to make dramatic changes
in the tax code that might interfere with or have to be reversed by subsequent tax reform legislation.
Key Properties of WUMM
Before proceeding to a discussion of the simulation results, it is useful to review the key theoretical and empirically
determined properties of WUMM which will have an important bearing on the results. The key properties of WUMM
relevant to the study of CWA is that it allows for both transitional demand and permanent supply effects of fiscal
policy innovations. These properties are illustrated in Figure 5. This is a standard IS-LM diagram, augmented to
include a long-run aggregate supply curve (AS). The AS curve is downward sloping because a decline in the
interest rate raises the desired capital stock and hence increases productive capacity and the level of output in the
long run. The AS curve shifts rightward when supply-side tax incentives are increased. For example, a cut in
marginal personal tax rates raises the labor force, shifting the AS curve rightward. Cuts in capital gains tax rates or
accelerations in depreciation lower the cost of capital to firms, raise the desired capital stock, and therefore also
shift the AS curve rightward.
Figure 5
In the short run, output is demand determined in WUMM.
Deficit Reduction: Transitional Demand
Deficit reduction reduces aggregate demand and, unless
and Permanent Supply Effects
offset by monetary easing, results in a transitional period
AS
of lower output. This is illustrated by the effect of a left-
R
LM
IS
ward shift in the IS curve, associated with a decline in
government purchases. In the short run, the economy
IS'
moves from point a to point b in Figure 5, to a lower level
of both output and interest rates.
Output is supply determined in the long run in WUMM. In
the long run, either via price flexibility or stabilization policy,
the economy ultimately moves back to full employment.
For example, beginning at point a, there is excess supply
in the labor and output markets, prices are falling, and the
real money supply is rising. The LM curve, as a result,
shifts rightward until a new equilibrium is achieved at point
C. Because interest rates are lower, investment is higher.
Y
Higher investment means a higher capital stock and hence
a higher level of productive capacity and output. There-
fore, in the long run, the lower level of government spend-
ing will lower interest rates, stimulate investment, and
raise both labor productivity and the level of output.
Figure 6
The middle-class tax cut would have just the opposite
Supply-Side Tax Cuts: Transitional Demand
effect of the cut in government spending. In the short-
and Permanent Supply Effects
run it would stimulate aggregate demand, but in the
AS
long run it would lower aggregate supply.
IS'
AS'
R
LM
IS
The supply-side tax cuts - specifically, the cut in capi-
tal gains tax rate and introduction of neutral cost recov-
ery - directly raise investment demand. These poli-
b,c
cies both raise aggregate demand in the short run and
aggregate supply in the long run. They can be illus-
trated as rightward shifts in both the IS and AS curves.
In the short run, via higher aggregate demand, the level
of demand and output will be higher, depicted by the
movement from point a to point b in Figure 6. In the
long run, as the economy returns to full equilibrium,
these policies will move the economy to point C where
the level of output is still higher than with unchanged
policies.
Y
8
The quantitative results depend importantly on key pa-
rameter estimates in the model, including (1) the re-
Table 4
sponse of saving to changes in the interest rate, (2) the
elasticity of substitution between labor and capital which
KEY PARAMETERS IN WUMM
determines the response of capital formation to both
changes in interest rates via deficit reduction and to
LABOR SUPPLY ELASTICITY
0.11
changes in the cost of capital associated with supply-
side tax changes, (3) the share of capital in national
SAVING ELASTICITY
income which determines the effect of increases in capi-
PRIVATE DOMESTIC
0*
tal formation on labor productivity, (4) the response of
FOREIGN
+
labor supply to changes in the after-tax real wage rate
which determines the response of labor supply to in-
DEMAND FOR CAPITAL
creases in the real wage rate associated with higher la-
ELASTICITY OF SUBSTITUTION
1.0
bor productivity, and (5) the dynamics of the investment
SHARE OF CAPITAL IN NAT. INC.
0.27
process (in our model, putty-clay technology) which af-
ADJUSTMENT SPEED
SLOW
fects the speed of adjustment of capital formation to
both interest rates and supply-side tax changes. Table 4
*No direct effect of after-tax real interest rates on the
summarizes some of the key parameter values in
saving rate. Small effects via interest-induced wealth
WUMM.
effect, low propensity to consume out of asset income,
and via business saving.
We noted earlier that WUMM estimates a very small
positive interest responsiveness of private saving to in-
terest rates. The model does, however, allow for a more significant effect of interest rates on foreign saving. An
increase in interest rates in the U.S. increases the attractiveness of dollar-denominated assets relative to foreign-
currency denominated assets, raising the demand for dollars, and resulting in an increase in the exchange rate.
This, in turn, makes U.S. goods less attractive in world markets, lowering net exports. The resulting increase in the
current account deficit is offset by an increase in the capital account surplus; i.e., by net capital inflows into the U.S.
which can be used to finance a higher level of domestic investment.
WUMM incorporates a Cobb-Douglas production function in which the elasticity of substitution between capital and
labor is unity. This implies that a decline in the cost of capital (e.g., resulting from lower real interest rates and/or
enhanced investment incentives) yields an equiproportional increase in the demand for capital. This result, which
is the outcome of our econometric estimation and not an assumption, means that investment is highly sensitive in
the long run to changes in both interest rates and investment incentives in WUMM.
The equation for labor productivity is one of the key equations in our model for determining the long-run response to
policy changes. This equation allows capital deepening to raise the level of labor productivity, allowing for an
increase in output for any given level of labor input. The response of labor productivity depends directly on the
share of capital in national income. The greater this share, the greater the response of labor productivity to a
change in the cost of capital. In our estimation, the coefficient on the cost of capital implies that the capital share of
national income is 27%, precisely the share we estimate from NIPA data.
Capital in WUMM is putty-clay, meaning that the capital labor ratio can be modified before the capital is purchased,
but is fixed for that capital thereafter until, of course, it wears out and can be replaced. This is also the outcome of
our estimation process. It implies a slow speed of adjustment of investment to both interest rate changes and
changes in investment incentives. As a result, the capital stock has not fully adjusted to either the interest rate
declines or the investment incentives during the simulation horizon in this study.
The elasticity of labor supply with respect to the after-tax real wage is relevant even though the program does not
lower the marginal tax rate on labor income. By raising the capital stock, the program will raise labor productivity.
This in turn will increase the real wage and induce an increase in labor supply, reinforcing the positive supply-side
effect of a higher capital stock.
The combination of supply-side tax cuts and deficit reduction dominate the qualitative features of the effects. In the
short run, the positive demand-side effects of the tax cuts more than offset the contractionary effect of the spending
9
cuts. In the long run, the positive supply-side effects of the capital gains and neutral cost recovery reinforce the
positive long-run supply effects of deficit reduction.
The Response of Saving to Investment Incentives and Deficit Deduction
One of the key determinants of the gains from deficit reduction and investment incentives is the response of saving
to after-tax interest rates. Some studies that yield significantly higher effects from investment incentives achieve
this result via extreme assumptions about the response of saving to such incentives.
How the effectiveness' of investment incentives
depends on the specification of the saving function
is illustrated in Figure 7a. Investment incentives
Figure 7
directly raise the demand for investment, depicted
Fiscal Policy, Saving, and Investment
as a rightward shift of the investment function. This
drives up interest rates. If saving responds posi-
7a Deficit Reduction and the Saving Offset
tively to interest rates, then investment incentives
will raise saving and investment and thereby raise
S₀
S'
productive capacity and GDP. This is illustrated as
R
the movement along the upward sloping saving
I
S
curve in Figure 7a, from point a to point b.
If saving is unresponsive to interest rates, however,
S'
investment incentives will simply raise interest rates
until they are high enough to offset the benefits of
the investment incentive and leave saving and in-
c
S*
a
vestment unchanged. This is depicted by the shift
of the investment curve along the vertical saving
&
curve, from point a to point C.
If saving is infinitely elastic with respect to the in-
terest rate, on the other hand, investment incen-
tives will have their largest possible impact. The
shift in the investment curve will be along the hori-
s,
s,
S₀'
S,Y
zontal saving curve; the interest rate in this case is
not bid up by the higher investment and the effect
on investment is greater than in the case of the
upward sloping saving curve.
7b Investment Incentives & the Saving Response
How the assumption about the response of saving
l'
S₀
to interest rates affects the economy's response to
R
I
a cut in the deficit is depicted in Figure 7b. A cut in
S
government spending which lowers the deficit re-
b
sults in a decline in government dissaving and thus
an increase in national saving. In this case, how-
c
ever, any positive response of U.S. private or for-
eign saving to interest rate changes damps the ef-
a
d
S*
fect of deficit reduction on overall saving, invest-
ment and hence productive capacity. As the inter-
est rate declines, the decline in private (or foreign
saving) partially offsets the initial increase in na-
tional saving and undermines the increase in in-
vestment.
The best possible case for deficit reduction is there-
fore a vertical saving curve, implying no interest-
S₀
S,
S₂
S,I
induced decline in private or foreign saving. This
10
would result in an increase in investment from point a to point C in Figure 7b. The worst possible case would be an
infinitely elastic saving curve. In this case, private and/or foreign saving fall dollar for dollar with any decline in
government dissaving. The interest rate therefore remains unchanged and there is no increase in investment.
Theory suggests an ambiguous effect of after-tax interest rates in the personal saving rate. The empirical evidence
is somewhat mixed, but dominated by results that suggest a negligible effect. In WUMM, personal saving does not
respond to changes in the after-tax rate of return. However, changes in wealth induced by changes in interest rates
do introduce some limited interest sensitivity to private saving in WUMM. However, foreign saving does appear to
be interest sensitive and this is confirmed by the estimates in WUMM. Thus investment incentives crowd out net
exports, raise foreign capital inflows, and thereby allow additional investment. It also follows that deficit reduction,
by lowering U.S. interest rates relative to those abroad, reduces net capital inflows, partially offsetting the effect on
overall saving of a cut in the government deficit. Thus the simulations with WUMM are best understood in terms of
the positively sloped saving curve, with most of the interest responsiveness coming from foreign rather, than private
domestic saving.
IV) The Policy Simulations
We structured the simulations so as to allow us to analyze the separate effects of several of the major CWA
components. First we constructed a policy simulation which included only the demand-side tax cuts described
above with offsetting spending cuts (as required under PAYGO). We then constructed two additional simulations of
the capital gains tax cuts and NCRS. Next we combined the demand-side and supply-side tax cuts (with PAYGO).
Finally we constructed a simulation which included the additional spending cuts required to balance the budget by
2002, consistent with the Balanced Budget Amendment proposed in CWA.
We did not simulate the tax cuts alone, but only in combination with offsetting spending cuts. This procedure
reflects the restrictions imposed via the PAYGO provision in the current budget law, introduced in the October 1990
budget accord. PAYGO requires that any tax cut be offset either by tax increases or by cuts in entitlement spending.
It is possible that PAYGO might be broadened to allow the offsetting spending cuts to come from discretionary
spending as well as entitlements. We assumed this more flexible treatment in our simulation.
The effects of CWA on output and interest rates in the short and long run are shown in Figure 8a through 8d. The
effects of the demand-side tax cuts are shown in Figure 8a. Each of the two key supply-side tax cuts are shown
separately in Figure 8b. In Figures 8c and 8d we show the results of the simulation combining both the demand and
supply-side tax cuts, and the final simulation which included all tax cuts and the spending cuts required to acheive
a balanced budget in 2002.
The Demand-side Tax Cuts
Offsetting the demand-side tax cuts with spending cuts gives us the textbook balanced budget fiscal policy change
and we see the expected result. Equal reductions in taxes and spending (which statically don't affect the budget
deficit) are contractionary because the cut in spending has a larger negative demand effect than the positive
demand effect of the cut in taxes. This net contractionary effect on demand results in an initial decline in GDP,
shown in Figure 8a. However, the initial adverse demand effect turns positive in the long run, shown by the
transition to higher levels of GDP later in the simulation period. As output declines initially, interest rates fall, and
investment increases. When the economy returns to full employment, the composition of output has changed,
away from private and/or public consumption and toward private investment, raising the capital stock and hence
labor productivity and productive capacity.
The Supply-side Tax Cuts
The case of the supply-side tax cuts is different. Because the supply-side tax cuts have such a large "bang for the
buck," they yield a positive demand stimulus even when offset by spending cuts. In effect, they have a negative
balanced budget multiplier; equal reductions in spending and taxes yield an increase in demand. As a result,
aggregate demand and hence output rises even in the short run. The supply-side incentive effects in the capital
gains tax cut and in neutral cost recovery also result in positive long-run supply effects. Thus output rises in both the
short and the long run. The output effect for the capital gains tax cut is relatively modest, 0.25% of GDP after 7
years. Neutral cost recovery has a larger long-run effect, about a 1% increase in GDP after 7 years.
11
Figure 8a
Figure 8b
DEMAND-SIDE TAX CUTS UNDER PAY-GO
SUPPLY-SIDE TAX CUTS UNDER PAY-GO
EFFECT ON REAL GDP
EFFECT ON REAL GDP
PERCENT
PERCENT
1.75
1.75
1.5
1.5
1.25
1.25
NEUTRAL COST RECOVERY
1
1
0.75
0.75
0.5
0.5
0.25
0.25
CAPITAL GAINS
0
0
-0.25
-0.25
-0.5
-0.5
-0.75
-0.75
1995
1996
1997
1998
1999
2000
2001
2002
2003
1995
1996
1997
1998
1999
2000
2001
2002
2003
SOURCE: LHM&A FEBRUARY 1995
SOURCE: LHM&A FEBRUARY 1995
12
Figure 8c
Figure 8d
TAX CUTS AND BBA
TAX CUTS AND BBA
EFFECT ON REAL GDP
EFFECT ON THE GOVERNMENT BOND RATE
PERCENT
PERCENTAGE POINTS
4
0.5
TAX CUTS UNDER PAY-GO
3.5
TAX CUTS AND BBA
0
3
2.5
-0.5
2
-1
1.5
TAX CUTS WITH PAY-GO
TAX CUTS AND BBA
1
-1.5
0.5
0
-2
1995
1996
1997
1998
1999
2000
2001
2002
2003
1995
1996
1997
1998
1999
2000
2001
2002
2003
SOURCE: LHM&A FEBRUARY 1995
SOURCE: LHM&A FEBRUARY 1995
The Combined Tax Cuts
In Figure 8c we show the impact on real GDP from the combination of all the tax cuts together. The result is a very
small net short-run stimulus and a sizeable long-run increase in supply. GDP is almost 2% higher after 7 years as
a result of the combined demand-side and supply-side tax cuts offset by spending cuts. Figure 8d shows the effect
on the 30-year government bond yield.
The Tax Cuts and a Balanced Budget
Finally we add on the additional spending cuts required to balance the budget. These have a short-run contractionary
effect and a long-run positive effect on aggregate supply. The total long-run supply effects are the sum of the
benefits of the supply-side tax cuts and spending reduction, partially offset by the effect of the demand side tax cuts.
The total effect is to raise the level of GDP 3.5% after 10 years, implying an increment to GDP growth of 0.35
percentage point per year during this period. The effects of the level of output are not yet complete, but the
increment to the growth rate is still only transitory and ultimately will fade away, leaving a permanent effect only on
the level of GDP. The higher growth rate reflects the benefits of a change in the composition of output away from
public consumption and toward private investment. Figure 8d shows a decline in long-term interest rates of 150
basis points that we estimate would result from the program.
Monetary Policy and the Bond Market Effect
One concern about deficit reduction is always the size and persistence of any transitional adverse effect on aggre-
gate demand and hence GDP growth and employment. To the extent that there were adverse transitional demand
effects, we would have to consider the potential for changes in monetary policy designed to offset the contractionary
demand effects of the fiscal policy.
But the powerful stimulative effects of the supply-side tax cuts allow the total program to be a net stimulus to
demand, even in the short run. Hence monetary policy is not needed to counter a contractionary demand impact.
Because the net demand stimulus is initially so small, we assume no Fed response in the short run. However, over
the longer run, the persistent declines in government spending do impose a contractionary effect on demand and we
assume that monetary policy becomes more stimulative, allowing interest rates to decline and thereby maintain the
economy on the path for the unemployment rate it would have achieved in the absence of CWA. Of course,
although the unemployment rate is the same in the base and policy simulations, the level of output is higher
because CWA raises labor productivity.
The implementation, or indeed the credible announcement, of significant spending reduction has the potential for a
so-called bond-market effect. This refers to the immediate decline in long-term interest rates which could dampen
(and some have even argued reverse) any transitional decline in aggregate demand associated with deficit reduc-
tion. If long-term bond rates fell initially because of a bond market effect, aggravating the stimulus already present
in this program, the Fed would have to move to raise short-term rates to offset the demand stimulus from the fiscal
policy changes.
The Effect of a Balanced Budget Amendment on Built-in Fiscal Stabilizers
There is one additional effect of the BBA that deserves careful scrutiny, that is the effect of neutralizing or at least
muting the action of built-in fiscal stabilizers. The BBA, of course, makes no distinction between cyclical and
structural deficits. Increases in cyclical deficits during recessions, however, are unambiguously good and prevent-
ing these deficits would seriously raise the cyclical instability of the economy. True, the BBA requirements could be
waived for cyclical reasons, but a minority could stand in the way of doing so. This problem could also be avoided
by running a sufficiently large surplus in good times, so that recessions only reduced this surplus rather than produc-
ing deficits. But this would force an average level of government spending below the level that would otherwise be
considered optimal.
Simulation experiments suggest that the increase in the depth of recessions under a balanced budget amendment
could be significant. A comparison of the effects of a recession on the deficit, output, and the unemployment rate,
with and without strict adherence to a balanced budget amendment are reported in Table 5.
We start out with an average post-war recession, involving a decline in GDP for a year and a cumulative decline in
output of 2.3%. In this case the deficit rises $65 billion in the first year. The BBA does not require any corrective
13
action within the current fiscal year, but would require
Table 5
tax increases and/or spending cuts which, based on
static scoring, would balance the budget in the follow-
THE BALANCED BUDGET AMENDMENT AS
ing fiscal year. In the absence of a BBA, the cyclical
AN AUTOMATIC DE-STABILIZER?
deficit would rise to $104 billion in the second year.
We therefore lower government spending by $104 bil-
lion in the second fiscal year, which begins in the last
2001
2002
2003
quarter of the first year of the simulation. The result is
to significantly deepen and to prolong the recession.
GDP (%CHG, 4/4)
The cumulative decline in GDP is now 3.5%, instead
BASELINE
2.8
2.5
3.3
of 2.3%, and the peak unemployment rate rises to 9.8%
RECESSION W/O BBA
-2.3
7.0
3.5
from 8.6%.
RECESSION W BBA
-3.5
6.1
5.1
V) Caveats and Trade-offs
UNEMPLOYMENT RATE (%)
Returning to the positive long-run effects on output, it
should be noted that these will be over-stated to the
BASELINE
5.8
6.1
6.2
extent that spending cuts undermine programs that
RECESSION W/O BBA
7.5
8.6
6.9
enhance training, education, public infrastructure, and
RECESSION W BBA
7.6
9.8
8.1
government-funded basic research.
DEFICIT (BIL, FY)
In addition, to the extent the tax provisions introduce
new distortions into the tax code and encourage tax
BASELINE
8.0
0.0
-4.0
shelters, the higher capital stock may have lower pro-
RECESSION W/O BBA
65.0
105.0
25.0
ductivity than estimated in our simulation results.
RECESSION W BBA
65.0
42.0
-41.0
Finally, we should not neglect the trade-offs forced by
this program: more output tomorrow is obtained at the sacrifice of lower public consumption now and in the future.
If the value of this public consumption is low, then this is likely to be a very desirable trade-off. But the value of the
programs cut should not be ignored in a welfare analysis of CWA. The nature of the trade off is illustrated in Figure
9. Note that the sum of public and private consumption is lower for the first 10 years of the program. This, of course,
is the investment phase where higher output is concentrated in investment. But it is important to understand that the
benefits of deficit reduction on living standards, measured in terms of private and public consumption, will not be
evident for a considerable period of time. This may well dampen the political support for the effort.
Figure 9
EFFECT BY 2003 OF CWA
ON STANDARD OF LIVING
PERCENT
5
PNF GDP
4
TOT GDP
3
2
PCE
1
0
DISP. INC.
PRIV+PUBL
CONS.
-2
SOURCE: LHM&A FEBRUARY 1995
14
CENTER ON BUDGET
AND POLICY PRIORITIES
9:30
THE CONTRACT WITH AMERICA PROPOSAL:
Angetique
ASSESSING THE LONG-TERM IMPACT
6th floor
By Iris Lav, Cindy Mann, and Pauline Abernathy
NI
Noth
Ellen
Overview
repsier
On September 27, 1994, a number of federal tax and budget changes were
proposed in a Contract with America released by a group including House Republican
Members of Congress. Among other proposals, the Contract calls for changes that
would reduce revenues by approximately $190 billion over the next five years.¹ The
revenue proposals include a new tax credit for children, a new type of Individual
Retirement Account, reductions in the rate of taxation of capital gains income for
individuals and corporations, a reduction in taxes for businesses that invest in
buildings, machinery, and equipment, and a reduction in the extent to which Social
Security income is taxable for higher-income taxpayers. In addition, the proposal calls
for a constitutional amendment requiring a balanced budget by the year 2002.
There are four key issues with respect to the long-term impact of the Contract.
The revenue loss under the plan would rise dramatically after five
years. The plan is presented as losing $190 billion in revenue over the
next five years, itself a substantial amount. But the IRA, capital gains, and
business depreciation provisions are designed so they lose smaller
amounts or even raise revenue over the next five years - and then lose
much larger amounts of revenue after the five-year budget period ends.
The IRA proposal is said to raise $5 billion over the next five years,
but past analyses show it could eventually lose $50 billion over
subsequent five-year periods.
The Contract puts the cost of the capital gains proposal at $56
billion over its first five years. But the Joint Committee on Taxation
has estimated that the cost in the second 5-year period after
enactment could exceed $160 billion.
1 House Budget Committee minority staff cost estimates for the Contract with America, September 22,
1994. No further estimates were released with the Contract. The staff estimate showed a total cost of $147.9
billion, which is comprised of $192.9 billion in net revenue reductions offset by $45 billion in spending cuts
in welfare, nutrition, and crime bill programs.
777 North Capitol Street, NE, Suite 705, Washington, DC 20002 Tel: 202-408-1080 Fax: 202-408-1056
Iris J. Lav and Isaac Shapiro, Acting Co-Directors
The Contract lists the depreciation proposal as raising $20 billion
over the first five years. Past analysis of similar proposals suggests
that the cost in subsequent five-year periods could reach $58
billion.
Just these three proposals in the Contract, which are said to have a net cost of $31
billion in their first five years, could have a combined cost in subsequent five-
year periods of more than $260 billion. Thus, the overall eventual revenue loss
from the Contract for subsequent five-year periods greatly exceeds $190 billion.
If the costs of all other tax provisions in the Contract remained constant at $159
billion, the cost in subsequent five-year periods could exceed $400 billion.
The revenue proposals would likely cause either a worsening of the
deficit or unusually large reductions in major benefit programs. The
deficit has been halved as a share of the Gross Domestic Product since
1992, but the proposals in the Contract would put further progress in
question. Over the next five years, large potential budget savings would
have to be devoted to paying for tax cuts rather than continuing to make
progress on deficit reduction. After five years, when the revenue losses
would escalate, much larger cuts would be needed to keep the deficit
from growing. If, in addition, the budget had to be balanced - as the
Contract calls for - cuts of unusual depth would likely have to be made
in many big-ticket items in the budget. This suggests that major benefit
programs such as Medicare, Medicaid, veterans programs, and Social
Security could be subject to substantial reductions.
Future Medicare benefit reductions or tax increases would be required.
The Medicare hospital insurance trust fund is out of long-term balance.
The Medicare actuaries project that without changes to reduce Medicare
costs or increase the revenues flowing into the trust fund, the Medicare
hospital insurance trust fund will be insolvent by 2001. Yet the Contract
would lower the taxes that are now deposited in the Medicare trust fund.
The Contract proposes to cut the taxes of higher-income Social Security
beneficiaries through
lowering the proportion
of their Social Security
Since 1984, the Center on Budget and Policy
benefits that are subject to
Priorities has been analyzing the effects of various
taxation; under a 1993
tax and budget proposals on low-income families.
Over the years, the Center has issued more than
law, these taxes go to the
20 analyses of tax plans, including analyses of
Medicare trust fund. By
Clinton, Bush, Gingrich, Bentsen, and
withdrawing these
Rostenkowski tax proposals. This analysis of the
revenues from the trust
"Contract with America" is the latest in this series.
2
fund, the Contract would push Medicare further out of balance and
require larger Medicare reductions or tax increases to avert insolvency.
High-income households would be the only clear winners. Several of
the major revenue proposals - including the changes in IRAs, capital
gains taxation, and the taxation of Social Security income - would
primarily benefit those at higher income levels.
Past analyses indicate, for example, that about 95 percent of the
benefits from the IRA proposal would accrue to the top fifth of the
population.
Almost half of the benefits from the capital gains provisions would
go to the wealthiest one percent of the population.
The reduction in the proportion of Social Security benefits that are
subject to taxation would give a tax break to the top 13 percent of
beneficiaries.
Middle income families would benefit significantly from the $500 per
child tax credit, but whether middle income families are better off in the
long-run would depend on how the costs of the various tax cuts are
financed. This is especially true in years after the five-year budget period
ends, when the costs of the tax cuts primarily benefitting upper-income
households and corporations begin to mushroom. If financing the tax
cuts required sharp cuts in programs from which middle income families
derive substantial benefits, significant numbers of middle income families
might find their disposable incomes reduced as a result of the offsetting
actions.
Low-income households are the clear losers. They would gain little from
the tax proposals but bear most of the burden from the budget cuts
identified in the Contract. They would likely also be affected by other
cuts that would ultimately have to be made.
Escalating Costs in Future Years
In issuing the Contract, its authors have provided estimates of its costs over the
next five years. This is the period for which the impact of tax bills are considered
under the provisions of the Budget Enforcement Act of 1990. Under that Act, any
revenue reduction must be offset within the five-year period through increases in other
taxes or reductions in entitlement spending, so that no increase in the deficit occurs.
3
Thus, even when a tax proposal such as the Contract does not include the offsetting
measures to achieve deficit neutrality, it is traditional to assess the costs over the five-
year period.
In years after the five-year estimation period, however, the costs of the
Contract's proposed new Individual Retirement Accounts, capital gains taxation, and
business depreciation allowances are likely to increase rapidly. Each of these proposals
has been structured to have costs that are relatively small in the initial years after
enactment but increase over time.
"American Dream Savings Accounts"
The Contract would establish "American Dream Savings Accounts (ADSAs),"
which are a new version of current Individual Retirement Accounts (IRAs). Prior to the
Tax Reform Act of 1986, taxpayers at all income levels could deposit up to $2,000 a year
in an IRA and deduct that amount in figuring their income taxes. The Tax Reform Act
eliminated the IRA deduction for single individuals with incomes exceeding $35,000,
and for married couples with incomes above $50,000, who are covered by an employer-
sponsored pension plan. This and other tax advantages for people at higher income
levels were eliminated in the 1986 act in exchange for sharply lower income tax rates.
Nevertheless, more than 70 percent of taxpayers with earnings remain eligible for an
up-front deduction for IRA contributions.
Simply restoring the $2,000 IRA deduction for those who lost it in 1986 would
cost between $30 billion and $40 billion over five years, based on past Joint Tax
Committee estimates of such proposals. The Contract's ADSA proposal, however, has a
number of provisions that are more generous than pre-1986 IRAs.
Like pre-1986 IRAs, the Contract would allow taxpayers at all income
levels to contribute to an ADSA. Unlike the pre-1986 law and the current
law on IRAs, however, the Contract would index for inflation in future
years the $2,000 maximum permitted deposit. Thus, the maximum
permitted deposit amount would grow over time.
In addition, the Contract would allow each spouse to make a contribution
up to the limit whether or not both spouses work. Under pre-1986 law
and current law on IRAs, non-working spouses may make a maximum
deductible contribution of only $250.
Because the ADSA provisions allow higher tax-advantaged contributions than pre-1986
IRAs, the proposal should cost more than simply restoring universal deductibility
4
would cost. Yet the Contract says its IRA expansion raises almost $5 billion over five
years.
How can a more generous tax break raise revenue? The Contract achieves this
feat through the use of several devices to shift the timing of tax payments. These
devices increase revenue collections in the short term but lead to large revenue losses
outside the five-year budget period.
Timing Devices Mask Exploding Costs
The Contract's ADSA is a version of what is often described as a backloaded IRA.
Under current law, eligible taxpayers may deposit funds into an IRA and deduct the
contribution from their taxable income. Funds deposited in IRA accounts then
accumulate interest that is tax free until the funds are withdrawn after retirement.
Withdrawals of both principal and interest are taxed as ordinary income at that point.
With a backloaded IRA, there is no up-front deduction, but all interest earned in the
account would be permanently tax free. As long as taxpayers leave the funds in the
account for at least a specified number of years (such as the five-year period the
Contract specifies for the ADSAs), both the interest and the principal could later be
withdrawn without paying tax. Thus, unlike current IRAs, the interest earned is never
subject to taxation.
Ultimately, backloaded IRAs cost the federal government about the same as
regular IRAs, but the timing of the revenue losses differs. Backloaded IRAs have very
little cost initially because the taxpayer receives no up-front tax deduction on the
amount put into the IRA. Over time, however, the costs mount. The total amount of
funds in backloaded IRAs increases as the years pass, and as a result, the interest
earned on a growing share of the personal savings in the United States becomes
exempt from taxation. The backloading intentionally shifts the bulk of the revenue loss
to a period not covered by the budget rules requiring deficit neutrality to be
maintained over the next five years.
In addition to being backloaded, the Contract's ADSA proposal also has another
key feature, known as a rollover provision. This provision also helps turn the proposal
from a revenue-loser to a revenue-gainer over the first five years. Under the rollover
option, a taxpayer who currently holds a regular IRA would be allowed - for the two
years after the ADSA provisions are enacted - to withdraw funds in current IRA
accounts free of penalty, pay taxes on the withdrawn funds (the tax payments would be
spread over the subsequent four years), and deposit the withdrawn funds into a new,
backloaded ADSA. The funds transferred to the ADSA would be tax-free in
perpetuity so long as the deposit remained in the account for at least five years.
5
The rollover provision is expressly designed to induce taxpayers with existing
IRAs to roll them over and pay tax now rather than paying tax after they retire. The
taxes collected now as a result of this provision are then used to offset the revenue
losses from the ADSA proposal over the next five years and to help turn the proposal
from a revenue-loser to revenue-gainer during the five-year budget period. After the
five-year budget period ends, however, so does the one-time infusion of revenues from
the rollover provision.
Moreover, the rollover provision causes revenue collections to be substantially
lower after the five-year period ends than otherwise would be the case. The rollover
device does not raise any new revenue; the revenue it brings in during the next five
years is revenue that would have been collected in subsequent years when IRA
account-holders retired. The rollover simply shifts the timing of the revenue collection.
The rollover provision is likely to be attractive to taxpayers who hold existing
IRAs, because the new ADSAs provide a vehicle for tax-advantaged savings for a
variety of purposes. Under current law, funds in an IRA must remain on deposit until
the taxpayer reaches age 59½. A taxpayer younger than age 59½ who withdraws funds
from an IRA must pay a penalty in addition to the taxes due on the withdrawn
amounts. By contrast, once funds have remained in an ADSA for five years, they may
be withdrawn without penalty for a variety of qualifying purposes. The qualifying
purposes include first-time home purchases; higher education expenses for the
taxpayer or the taxpayer's spouse, children or grandchildren; and a variety of medical
expenses, including the purchase of insurance for long-term care. Given the choice,
some taxpayers will want to rollover their accounts, thereby gaining the option to use
their tax-advantaged savings before retirement.
The combined effect of the backloading and rollover provisions is
simultaneously to push most of the revenue losses caused by the ADSAs outside the
five-year budget window, while accelerating into the five-year budget period billions
of dollars in revenue collections that normally would occur later. This is what allows
proponents to claim that an expensive tax cut raises almost $5 billion during the five-
year budget period.
The timing of revenue gains and loses is not accidental, nor was the concept of
backloaded IRAs and the rollover device invented by the authors of the Contract.
These devices were developed by both Democratic and Republican members of
Congress in the early 1990s for one purpose only - to circumvent the pay-as-you-go
requirements of the 1990 Budget Enforcement Act by artificially making most of the
costs of the IRA expansion disappear during the five-year budget period.
Thus, the ADSA provision portrayed by the Contract authors as a revenue-raiser
is actually a large revenue loser after the five-year budget period ends. Past analyses
6
have found the long-run annual costs of similar IRA proposals to be five times as large
as their costs in their fifth year. That suggests this provision could add $50 billion to
the federal deficit over subsequent five-year periods.²
While IRA type proposals are extremely costly, there is little or no evidence that
such provisions benefit the economy through increasing the rate of savings. For
example, a 1991 report of the Republican staff of the House Committee on the Budget
found that "most evidence suggests that savings is unresponsive to any tax incentives
designed to increase it Even the most optimistic estimates of the responsiveness of
savings to taxes are too low to support the argument that such incentives significantly
boost savings and growth.³ Because IRAs are likely to swell the long-term budget
deficit by an amount that would be greater than any likely increase in savings, another
report concluded that IRAs are likely to slow long-term economic growth.⁴ (See box on
pages 12-13.) In other words, if the ballooning revenue loss of the contract ADSA
proposal outside of the five-year budget period were not offset by increases in other
taxes or cuts in spending, economic growth could be impeded.
Taxation of Capital Gains
The Contract also includes proposals to cut the capital gains tax, which is the
income tax paid on profits from the sale of assets such as stocks, bonds, art, and rare
coins. The Contract proposals affecting the capital gains tax paid by individuals would
allow investors to lower the tax paid on profits in two ways. First, taxpayers could
exclude from taxation the portion of profits that is attributable to inflation. In addition,
half of the inflation-adjusted profits would be excluded from taxation. The
combination of these two provisions. would sharply lower the effective rate at which
most capital gains, or profits, are taxed. Although very high-income taxpayers pay a
marginal tax rate of 39.6 percent on other types of income, these taxpayers would face
a maximum rate of 19.8 percent on capital gains income - and lesser rates after
adjustment for inflation. At no time since 1954, has the maximum marginal tax rate
that high-income taxpayers pay on capital gains been this low. (See box on page 10.)
By combining a 50 percent exclusion with an adjustment for inflation, the
Contract goes beyond the major capital gains proposals advanced over the past several
2 Jane G. Gravelle, Congressional Research Service, Statement before the Committee on the Budget, U.S.
House of Representatives, February 11, 1992.
3
House Committee on the Budget, Republican Staff Report, Tax Incentives, Growth and Deficit Reduction,
Budget and Economic Analysis, Volume I, Number 3, November 6, 1991.
4
House Committee on the Budget, Republican Staff Report, The Truth About IRAs, Volume 1, Number 4,
November 22, 1991.
7
years. The capital gains cuts offered by President Bush in 1991 and 1992, for example,
called for exclusions that varied based on the length of time an asset was held. The
maximum exclusion proposed by President Bush was 45 percent, and his proposals did
not couple the exclusion with an adjustment for inflation. Other bills have included
inflation indexing (i.e., adjusting for inflation), but not coupled with an across-the-
board exclusion as high as 50 percent. Through the combination of an exclusion and
inflation indexing, the Contract would allow a substantial majority of capital gains
income to escape any taxation. This would provide a generous tax break
to high income individuals who, as explained below, receive the bulk of capital gains
income.
Figure 1
Amount of Capital Gain Subject to Tax:
Current Law Compared to Contract Plan
$100,000
$80,000
$60,000
$40,000
$20,000
$0
Current Law Contract Plan
Current Law Contract Plan
After 5 Years
After 10 Years
Center on Budget and Policy Priorities calculations
Assumes $100,000 purchase price, 3% inflation and 3% real growth in the asset's value
Consider, for example, an investor who purchases $100,000 worth of stock.
Figure 1 shows that the portion of the gain that is subject to taxation would be reduced
sharply. Assuming an average of three percent inflation and three percent real growth
in the value of the stock, the figure shows that if the stock were sold after five years the
investor would pay tax on a $33,820 capital gain under current law. Under the
5 The Contract plan proposes additional capital gains tax benefits as well, including reductions in the
capital gains tax for businesses and reductions for individuals who sustain a loss from the sale or exchange
of a principle residence.
8
Contract proposal, the taxpayer would pay tax on only $8,950. The amount of gain
which escapes taxation grows if the stock is held 10 years and then sold. Under current
law, the investor would pay tax at that point on a $79,085 gain. Under the Contract,
only $22,350 of the gain would be subject to taxation.
This translates into very substantial tax cuts. Assuming again a $100,000 stock
purchase, average annual inflation of three percent, and real annual growth of three
percent in the stock's value, an investor in the top income tax bracket who sold the
stock after five years would pay $6,000 less in income tax under the Contract than
under current law.
After 10 years, the investor would realize a tax benefit worth nearly $13,300.
By 20 years the benefit of the Contract capital gains tax changes to this investor would
jump to about $34,000. If the average inflation rate exceeded three percent, the tax
benefits would be even greater.
Table 1
The Contract Capital Gains
Tax Benefits Grow Sharply Over Time
Tax Under
Tax Under
Contract
Selling Price
Current Law
Proposals
Tax Savings
Initial Investment
$100,000
Year 1
$106,000
$1,680
$590
$1,090
Year 5
$133,800
$9,470
$3,540
$5,930
Year 10
$179,100
$22,140
$8,850
$13,290
Year 15
$239,700
$39,100
$16,600
$22,500
Year 20
$320,700
$61,800
$27,740
$34,060
Center on Budget and Policy Priorities calculations
Assumes three percent annual inflation and three percent annual real growth. Rows may not add due to
rounding.
Capital Gains Already Receive Favored Tax Treatment
Capital gains are already granted favored treatment under the tax code. An
estimated three-quarters of all capital gains escape taxation altogether because the gain
that accrues during the lifetime of an investor is not taxed if the asset is held until
9
death.⁶ This provides substantial unearned benefits to heirs of mostly wealthy asset-
holders.
In addition, unlike income from
interest on savings accounts - which is
Proposed Capital Gains Rate Lowest
taxed each year regardless of whether
in Four Decades
the investor withdraws the interest -
capital gains are not taxed until the asset
Although capital gains income has enjoyed prefer-
is sold. This deferral of tax favors those
ential tax treatment through much of the past four
decades, at no time during that period was the
who invest in stocks and bonds over
maximum effective marginal tax rate - including
those who put their (usually much
reductions in the effective rate that resulted from
smaller) capital into savings accounts.
excluding a portion of capital gains from taxation
- as low as it would be under the provisions of
Finally, if the capital gain is
the Contract. From 1954 through 1967, capital
gains income was subject to a maximum effective
taxed, current law already provides the
rate of 25 percent. Maximum tax rates on gains
equivalent of a 30 percent exclusion for
then rose gradually, and in 1976 and 1977 reached
very-high-income investors. Under
49.1 percent for some taxpayers and 35 percent for
current law, capital gains income is
other taxpayers. The maximum rate of taxation
subject to a maximum tax rate of 28
then declined to 20 percent by 1982 but was in-
creased to 28 percent in 1987, where it remains
percent - which is just over 70 percent
today. The Contract proposes lowering the maxi-
of the 39.6 percent top marginal tax rate
mum rate to 19.8 percent by allowing half of all
applied to other income. The
gains to be excluded from tax. Moreover, while
nontaxation of capital gains at death and
in the past most capital gains income has been
the lower maximum rate under current
taxed at the maximum rate, the indexing provi-
sions of the Contract would insure that almost all
law will cost the Treasury an estimated
gains are taxed at rates below the 19.8 percent
$94.2 billion between 1994 and 1998.7
maximum rate.
The Contract proposals would add
substantially to that cost.
Potential for Investment Bias May be Costly
Despite the fact that various forms of preferential treatment for capital gains
have been in place since the 1960s, preferential treatment of capital gains has not been
shown to stimulate savings or investment. This is largely because most transactions
that yield capital gains involve sales of stock between investors. These sales may result
in profit for the individual making the sale, but they do not necessarily result in new
investment in plant or equipment. In a 1990 study, the Congressional Budget Office
found that "cutting taxes on capital gains is not likely to increase saving, investment,
6
Henry L. Aaron, Statement before the Committee on Finance, U.S. Senate, March 28, 1990.
7 Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 1994 - 1998, April 22,
1993.
10
and GNP much if at all," a finding supported by a broad range of tax experts (See box
on next page.)
While savings and investment are not likely to be stimulated significantly by
capital gains tax advantages, capital gains tax cuts are likely to give rise to economic
distortions and investment inefficiencies. A reduced tax on capital gains would cause
investors to divert capital to projects that yield capital gains income and away from
projects that would produce ordinary business income, because ordinary business
income is taxed at a much higher corporate or partnership rate. Rather than
encouraging productive new investments, capital gains tax relief turns investors'
attention to maximizing tax advantages.⁸
The potential for economic distortion would be particularly strong under the
capital gains provisions of the Contract plan, since the Contract combines a 50 percent
capital gains exclusion with inflation indexing. When profits from asset sales are
indexed but borrowing costs are not adjusted for inflation, an imbalance is created.
Taxpayers who purchase assets with borrowed funds would receive a much larger tax
break than taxpayers who use other types of funds to purchase assets.
It is common for high-income investors to borrow substantial amounts of funds
with which to make large investments. Consider such an investor who borrows
$100,000 to be repaid over ten years at an eight percent rate of interest and uses those
funds to purchase $100,000 worth of stock. Over the lifetime of the loan, the investor's
interest payments on the loan will total approximately $45,000. Current law permits
the full amount of these interest payments to be taken as deductions from taxable
income.⁹
8
One analysis finds that after capital gains taxes were cut and other tax write-offs greatly expanded in
1978 and 1981, investment shifted from productive uses like industrial plant and equipment and into a
variety of tax shelters, most notably for commercial real estate. From 1981 to 1986, real investment in
commercial real estate climbed at an unusually high annual rate of 6.3 percent, while industrial investment
fell 2.7 percent a year. After the capital gains differential was removed and tax sheltering opportunities
severely narrowed in the 1986 Tax Reform Act, the situation reversed; industrial investment rose 6.3
percent a year between 1986 and 1989. See Robert McIntyre, Republican and Democratic Tax Plans, Citizens
for Tax Justice, Nov. 27, 1991.
9
Although "consumer interest" (such as interest on car loans) may not be deducted from taxable income,
"investment interest" may be deducted so long as it does not exceed the amount of investment income
reported in the year. If the investment in the example were the only investment the taxpayer had, then the
interest on the loan would not be deductible each year because there would be no reported investment
income until the stock was sold. By contrast, if the taxpayer had investment income each year from a large
portfolio of investments, he or she likely would have had sufficient investment income against which to
deduct the yearly investment interest.
11
Capital Gains and IRA Tax Relief
Does Little to Promote Savings, Investment or Growth
An impressive array of tax experts has concluded that tax-advantaged IRAs and cuts in the tax on
capital gains income are likely to do little to promote savings and investment. In 1991, the Republican
staff of the House Committee on the Budget, under the direction of Representative Bill Gradison, then
the Committee's ranking Republican, issued a report examining the relationship between tax incentives
- including capital gains tax cuts and IRA expansions - and savings and investment. It found that:
(M)ost evidence suggests that saving is unresponsive to any tax incentives designed to
increase it. And capital gains tax cuts and IRAs only affect a small part of saving.
Even the most optimistic estimates of the responsiveness of saving to taxes are too low
to support the argument that such incentives significantly boost saving and growth.¹
The House Budget Committee Republican staff also took a close look in 1991 at IRA proposals,
including proposals similar to that contained in the Contract. In a report on IRAs, the Republican
staff explained that to increase the pool of savings available for investment, an IRA proposal must
increase private savings by more than it adds to the federal budget deficit. Otherwise, any additional
private savings that are generated will have to be used to soak up the increase in the deficit. But while
IRAs are likely to add to the long-term deficit, they cannot be expected to generate a large increase in
private savings, the report added; as the Congressional Budget Office has noted, "studies of savings
behavior generally have not found that people save significantly more in response to higher after-tax
returns. " Thus, the Republican staff report concluded that any increase in savings would likely be
smaller than the increase in the long-term deficit and that "IRAs are likely to slow long-term economic
growth through their effects on the deficit."3
Others have examined proposals to cut capital gains taxes and concluded that here, also, the economic
benefits touted by supporters of these proposals are dubious. For example, Herbert Stein, Senior Fellow
at the American Enterprise Institute and chair of the Council of Economic Advisors under President
Nixon, has written that capital gains tax cuts are not likely to promote savings but will result in
inefficiencies and tax-avoidance schemes:
Unless cutting the capital gains tax increases the rate of saving, it will only divert
investments to projects that can be structured to yield capital gains away from
projects that cannot. I see no reason to want such a diversion. On the question
whether cutting the capital gains tax would increase saving you can get as many
different answers as you can find econometricians. My own view is that the effect
would be extremely small, and not worth betting on. In any case, if there is a strong
desire to try to increase saving and investment by increasing the after-tax return to
1
House Committee on the Budget, Republican Staff Report, Tax Incentives, Growth
and Deficit Reduction, Budget and Economic Analysis, Volume I, Number 3, November 6, 1991.
2 Congressional Budget Office, An Analysis of the President's Budgetary Proposals for
Fiscal Year 1992, March 1991, p. 45.
3 House Committee on the Budget, Republican Staff Report, The Truth About IRAs,
Volume 1, Number 4, November 22, 1991.
12
investment there are, in my opinion, better ways to do that. I think that the only
economic consequence we can confidently expect from reducing the capital gains tax
is increased activity by lawyers and accountants in converting other income into capital
gains.4
These views are shared by Henry Aaron, director of economic studies at The Brookings Institution
and one of the nation's leading tax experts. Aaron has stated that "tax concessions on capital gains
are a remarkably inefficient method of encouraging current real investment." Similarly, Jane
Gravelle, a leading tax expert at the Congressional Research Service, observed in testimony in 1992
that capital gains tax cuts cannot be expected to stimulate investment or growth and that their effect
on the nation's economic output would likely be negligible.⁶
4
Summary of the Statement of Herbert Stein, Senior Fellow, American Enterprise Institute, to
the House Ways and Means Committee, December 17, 1991.
5
Henry L. Aaron, Proposals to Expand a Part of Capital Gains from Taxable Income, March 28,
1990. See also Henry L. Aaron," The Capital Gains Tax Cut, Economic Panacea or Just Plan Snakeoil?,"
The Brookings Review", Summer, 1992.
6
Jane G. Gravelle, Congressional Research Services, Statement before the Committee on the
Budget, U.S. House of Representatives, February 11, 1992.
The interest payments, however, may be viewed as having two components - a
component that compensates the lender for inflation over the period of the loan and a
component that represents the amount paid for the privilege of borrowing funds. Only
that portion of the interest payment that exceeds the inflation rate represents the real
cost of borrowing. In this case, assuming a three percent inflation rate, approximately
$17,000 of the total interest paid represents the inflation component; only $28,000
represents the real cost of the loan to this investor. Nevertheless, the investor will have
taken $45,000 in tax deductions for interest payments over the life of the loan -
deducting $17,000 beyond the real cost of the loan.
Under current law, the ability of the investor to deduct the full amount of
interest paid is balanced by the way in which tax is assessed when the assets that were
purchased with the borrowed funds are sold. When the investor sells the stock, current
law requires that a tax is paid on the full capital gain and not just on the amount of the
gain that exceeds inflation. If, as in the example given above, the investor sells the
stock for approximately $79,000 more than the price paid ten years earlier (assuming a
three percent inflation rate and three percent real growth), capital gains tax will be due
on the entire $79,000 - with no downward adjustment to take inflation into account.
Under the Contract proposal, however, the symmetry disappears. In
determining how much capital gains tax is due, this investor will be able to adjust the
$79,000 profit downward by approximately $34,300 to account for inflation. The tax on
13
capital gains will be lowered substantially even though the investor will have deducted
the full amount of interest paid over the life of the loan - with no adjustment
downward to reflect the inflation component of the interest payments.
In addition to applying the inflation adjustment to the capital gain, the investor
will be able to exclude 50 percent of the inflation-adjusted gain. As a result, only about
$22,350 of the $79,000 would be subject to tax as a capital gain. But an amount
exceeding that $22,350 has already been taken by the investor as interest deductions
during the period the stock was held. Since the $45,000 of interest the investor
deducted over the life of the loan far exceeds the $22,350 capital gain subject to tax, the
investor has a negative rate of tax on this investment.
Under the Contract, it is likely that there would be no net taxes on the profits
from the investment made with borrowed funds. In addition, since the interest
deductions often would exceed the amount of capital gain subject to tax, those
deductions could offset taxes on profits from other investments made with non-
borrowed funds.
The unequal treatment of the inflation component of interest payments and the
inflation component of investment profits would create a considerable windfall for
investors. It also would encourage excessive borrowing and distort investment
decisions by allowing investors to realize higher rates of returns on otherwise less
attractive investments - as long as the investment is accomplished with borrowed
funds. Since, by and large, moderate income investors invest savings rather than
borrowed funds and only wealthy individuals have access to substantial amounts of
borrowed funds, the windfall created by the Contract's indexing proposal
predominantly benefits upper-income investors.
Cost of Capital Gains Proposals Grow Over Time
The Contract capital gains proposals would substantially increase the cost of
capital gains preferences. Contract sponsors estimate the cost of the capital gains
proposals to be $56 billion over five years. But this estimate likely understates long-
term costs.
For a short period of time, a capital gains tax cut can have a modest cost - or
can even increase federal revenues - as investors decide to sell assets sooner than they
otherwise might have to take advantage of a new provision, such as the proposal to
exclude 50 percent of capital gains profits from taxation. Under a 50 percent exclusion,
the maximum 19.8 percent tax rate would be the lowest rate of taxation on such income
in the past 40 years. As a consequence, investors are likely to assume the rate might be
raised again in the future and be anxious to avail themselves now of the tax break.
14
The surge in revenues that would result from these transactions, however, will
be short-lived. Once the sale of assets stabilizes, the cost of the lower rate of tax on
capital gains profits will increase rapidly - both because some of the sales that would
have produced future revenues will have already occurred and because the tax per
transaction will be cut by more than half as a result of the 50 percent exclusion and
indexing.
When the Joint Committee on Taxation analyzed President Bush's more modest
1992 proposal for a maximum 45 percent capital gains exclusion, it found the proposal
would lose $27 billion over a six-year
period, or an average of almost $4.5
State Revenues Would Also Be Reduced
billion per year. But the year-by-year
trend in revenue gains or losses also told
The capital gains and IRA proposals would in
another story - the Joint Committee
many cases reduce state as well as federal taxes
found an accelerating revenue loss.
on individuals with higher incomes. This is
Revenues would increase by $3.2 billion
because 36 states and the District of Columbia
during the first two years and then
incorporate the federal definition of adjusted
decrease by $30.3 billion over the
gross income (AGI) in their tax codes.
following four years. By the sixth year,
For instance, if a percentage of capital gains were
the annual revenue loss would have been
excluded from the definition of AGI, the excluded
gains would not be considered income in many
more than twice the average annual loss
states. Similarly, if expanded eligibility for the
for the six-year period as a whole. This
new type of IRA accounts sheltered interest
pattern demonstrates that the revenue
income from federal taxation, taxable income also
losses from capital gains tax cut
would decline in most states.
proposals like those included in the
In addition, the tax codes of 14 states conform to
Contract are likely to accelerate sharply
the federal treatment of Social Security benefits.
over subsequent periods.
These states' revenues would drop as a result of
the Contract's proposal to reduce the proportion
Inflation indexing makes the
of Social Security benefits subject to taxation.
potential for high revenue losses in later
If these Contract provisions were adopted, states
years even greater because it removes an
could lose billions of dollars in revenue in coming
ever-increasing amount of capital gains
years and could face the same problem the federal
government is likely to experience of exploding
from the tax base. The Joint Committee
revenue losses after the year 2000. To offset this
on Taxation reviewed an indexing
revenue loss, states would likely be forced to cut
proposal by Representative Gingrich in
programs, raise taxes, or do both. State spending
1991 and found it had a relatively small
cuts typically affect low- and moderate-income
families the most, while tax increases in most
cost - a total of $700 million - in the
states also are likely to affect low- and middle-
first three years of implementation, but a
income taxpayers disproportionately. Those
much larger cost - $2.6 billion - in the
benefiting the least from the new state tax cuts
fifth year. Taking this estimate a step
that would result from federal approval of the
further, a recent study by Jane Gravelle
Contract proposals likely would be those most
adversely affected by the actions states would
of the Congressional Research Service
take to offset the impact on state budgets.
suggests that the cost of capital gains
15
indexing in the fifth year represents about 30 percent of the annual cost that can be
expected when losses stabilize. 10 Applying Gravelle's calculations to the Joint
Committee estimate of the 1991 Gingrich indexing proposal suggests the eventual cost
of indexing could be at least $40 billion over five years.
Moreover, the Contract proposal will be more costly than the 1991 Gingrich
proposal because the earlier Gingrich indexing proposal applied only to assets
purchased after the effective date of the legislation. By contrast, the Contract would
allow indexing of all assets sold after the last day of 1994, including those purchased
years ago. 11 This would greatly expand the universe of assets subject to indexing.
Consistent with these earlier analyses, preliminary estimates by the Joint
Committee on Taxation of the revenue effects of the Contract capital gains proposals
project very large long-term revenue losses. The Joint Committee estimates the 10-year
cost of the Contract's proposals for reducing the taxation of capital gains for individuals
and corporations at $208 billion.
Like the estimates of prior, more modest capital gains tax cut proposals, the new
JCT estimates of the Contract proposals demonstrate the accelerating nature of the
revenue loss. The 50 percent capital gains tax exclusion for individuals is projected by
the Joint Committee on Taxation to cost $26.3 billion over the initial five-year period,
mushrooming to a $79.1 billion loss in the following five years. Indexing would cost
$7.7 billion in the first five years, and the cost would grow to $40 billion in the second
five years. 12 The average annual revenue loss from the 50 percent exclusion would be
three times greater in the second five-year period than in the first five-year period. The
growth in the average annual loss from indexing is even more pronounced; in the
second five years, the average annual cost of indexing would be more than five times as
much as the average yearly cost in the first five-year period. (See Figure 2.)
10 Jane G. Gravelle, "Estimating Long-Run Revenue Effects of Tax Law Changes," Eastern Economic Journal,
Vol. 19, No. 4, Fall 1993. Gravelle's analysis uses the historic average of five percent inflation and three
percent real growth and calculates that the losses grow over time and then stabilize after 18 years.
11 For assets purchased before the end of 1994, the inflation adjustment would be calculated beginning
with the calendar quarter ending December 31, 1994.
12 These are estimates of the revenue losses attributable to the capital gains cuts proposed for individuals.
Additional 10-year revenue losses of $14.8 billion would result from extending the 50 percent exclusion to
corporations and a $21.3 billion loss would result from applying the indexing proposal to assets held by
corporations. The losses resulting from the individual and corporate tax cuts do not sum to the total
because the JCT includes an "interaction effect." The Joint Committee estimates the total cost of the
Contract capital gains proposal at $47.4 billion in the first five years and $160.7 billion in the second five
years. Joint Committee on Taxation, Estimated Revenue Effects of Capital Gains Tax Reduction, October 6, 1994.
The Joint Committee on Taxation characterizes these estimates as "very preliminary."
16
Figure 2
The Cost of the Contract Capital Gains
Proposals Grows Sharply Over Time
(Fiscal Years 1995-2004)
50
40
Revenue Losses
30
(billions)
20
10
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Source: Joint Committee on Taxation, Estimated Revenue Effects of Capital Gains Tax Reduction,
October 6, 1994. The JCT estimate considers revenue changes that would result from
the individual and the corporate capital gains tax changes proposed by the Contract.
The "Neutral Cost Recovery System"
The Contract also proposes some complex changes in depreciation allowances.
Depreciation is the way that businesses account for the use of capital investments such
as buildings, machinery and equipment in the production of business income. The
proposed changes would increase the amount that businesses can deduct over the
useful life of an investment.
In determining their taxable income, businesses are permitted to deduct the cost
of capital investments such as buildings, machinery, and equipment. Since these items
typically have a useful life of a number of years, their cost is deducted as the asset
depreciates or wears out. For financial accounting purposes, the cost of machinery and
equipment is deducted in equal amounts each year of its expected life. Current tax law,
by contrast, allows businesses to deduct the cost of capital investments faster than it
wears out, using a system known as "accelerated depreciation." Accelerated
depreciation permits some acceleration of deductions into the early years of ownership,
with smaller deductions in subsequent years. Total deductions for depreciation,
however, are limited to the value of the initial investment. Compared to depreciation
17
of assets in equal increments over their useful life, current-law accelerated depreciation
is estimated to save businesses more than $100 billion over the next five years. 13
The "neutral cost recovery system" (NCRS) proposed in the Contract would
provide more generous depreciation deductions than current law. NCRS would both
allow businesses to continue to use a form of accelerated depreciation and allow
businesses to adjust the amount of their depreciation deduction upward each year by a
percentage that exceeds the rate of inflation. Total deductions would not be limited to
the initial investment and would exceed the amount of the original investment by a
substantial amount in most cases.
Consider the case of equipment purchased for $10,000 and expected to last for 10
years. Under a straight-line depreciation schedule used for normal accounting
purposes, the business could deduct $1,000 a year for 10 years. Under current-law
accelerated depreciation provisions, more than half of the value of the asset may be
deducted in the first four years, but lesser amounts are deducted in subsequent years,
so total depreciation deductions over the 10 years also equal $10,000. If the NCRS tax
break were in effect, however, the business could inflate the purchase price each year
by the rate of inflation plus another 3.5 percent. (The 3.5 percent bonus over the rate of
inflation is a number specified in the proposed law. It would not vary with the rate of
inflation or economic circumstances.) If the inflation rate were a modest three percent,
the business could deduct $13,500 over the 10-year period - 35 percent more than
under current law as a result of the NCRS adjustments. If the inflation rate were five
percent, the business would be able to deduct 50 percent more over the life of the asset.
For buildings or equipment expected to last longer than 10 years, the difference
between current law deductions and the NCRS system would grow dramatically as a
result of the compounding of inflation plus 3.5 percent. Assuming a modest three
percent rate of inflation, a business that purchased a $100,000 building or piece of
equipment expected to last 20 years could deduct $196,000 over 20 years, while a
$100,000 purchase expected to last 30 years would yield $290,000 in tax deductions. As
noted above, at present no more than $100,000 could be deducted. (See Figure 3.)
13 Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 1994-1998, April 1993.
14 The 3.5 percent factor is intended to make the depreciation deductions over the life of the asset
equivalent to deducting the entire cost of the asset in the year it is purchased. The inflation plus 3.5 percent
adjustment in effect pays interest to the business for delaying depreciation deductions beyond the year of
purchase.
18
Figure 3
Deductions Under Current Law
and the NCRS Proposal
$350,000
$300,000
Total Deductions Over Life of Asset
$250,000
$200,000
$150,000
$100,000
$50,000
$0
5 years
10 years
20 years
30 years
Asset Life
Current Law
NCRS Proposal
Source: Center on Budget and Policy Priorities calculations
Assumes an asset purchased for $100,000 and 3% inflation
Despite the large increase in permitted deductions, the Contract lists the
proposed depreciation changes as raising $20 billion over the next five years. This large
tax cut can raise revenue in the near term because the proposal changes the timing of
deductions for shorter-lived assets. For assets that may be depreciated over 10 or fewer
years, the degree of permitted acceleration of deductions would be reduced from what
is known as the "200-percent declining balance" method to a "150-percent declining
balance" method. The 150-percent method currently is used for longer-lived assets.
Therefore, while the total amount of allowed depreciation deductions would be greater
under NCRS than under current law, for shorter-lived assets the amount of deductions
permitted in the first few years would be less than under current law. Since only new
assets would be eligible for NCRS, and since shorter-lived assets such as vehicles and
computers wear out and are replaced more frequently than longer-lived assets, these
short-lived assets will make up the bulk of assets eligible for NCRS in the first few
years after implementation.
As longer-lived assets are slowly replaced and depreciated under the compound
growth path of NCRS, however, overall depreciation deductions would rise sharply.
The cost of NCRS would rise steadily beyond the five-year period. An analysis by the
Congressional Research Service of an earlier, identical NCRS proposal found that the
proposal could increase the taxable income of business by $87 billion in the first five
19
calendar years, but in the long run, after all assets came under the new system, the
proposal would reduce taxable income by $984 billion over a five-year period - an
amount in the opposite direction that is 11 times as large. The report notes that with
effects this large, it is very difficult to predict changes in tax liability or revenues, since
for some firms the depreciation deductions would exceed the taxable income that could
be offset by the deductions. But there is little question the long-term revenue loss
would be quite substantial.¹⁵
A Joint Committee on Taxation estimate of a 1991 depreciation proposal gives
some indication of the revenue impact beyond the five-year budget period. The
proposal that was analyzed included the adjustment of deductions for inflation plus 3.5
percent, but did not include the change in the accelerated depreciation for short-lived
assets - so the immediate cost of the proposal was not masked. The Joint Committee
on Taxation estimated that proposal to cost $58 billion over its first five years. 16 The
contract proposal is likely to cost at least that much in subsequent five-year periods.
Impact on Deficit Reduction
The revenue reductions in the Contract are estimated by its sponsors to cost
more than $190 billion over the first five years. As discussed above, the cost in
subsequent years is likely to be much greater. The cost of the IRA, capital gains, and
depreciation proposals in the Contract, which are said to have a net cost of $31 billion
in their first five years, could have combined cost in subsequent five-year periods of
more than $260 billion - - $50 billion for the new-style IRAs, $160 billion for the
reduction in capital gains taxation, and $58 billion for the more generous depreciation
allowances. If the costs of all other tax provisions in the Contract remained constant at
$159 billion, the cost in subsequent five-year periods could exceed $400 billion.
The sponsors do not indicate how the majority of these cuts will be financed.
Nevertheless, they call for a constitutional amendment requiring a balanced budget by
the year 2002. According to the Congressional Budget Office, balancing the budget
gradually over a five-year period would require spending cuts or tax increases totalling
approximately $750 billion. Balancing the budget gradually over a seven-year period
would require spending cuts or tax increases totalling approximately $1,200 billion.
These spending cuts or tax increases would be in addition to those needed to pay for
the revenue reductions proposed by the Contract.
15 Jane G. Gravelle, Background Information on the Neutral Cost Recovery Proposal, Congressional Research
Service, March 8, 1994.
16 Joint Committee on Taxation analysis of Kasten-Weber Tax Incentive Plan, 1991.
20
Substantial progress has been made in recent years in reducing the federal
budget deficit, but that progress has required difficult tax increases and painful budget
cuts. In its most recent analysis, the Congressional Budget Office projected that the
1995 deficit will be a smaller share of GDP - 2.3 percent - than in any year since 1979.
As a result of the 1990 and 1993 budget reconciliation laws and recent economic
growth, the deficit as a share of GDP will have been more than halved since 1992, when
it stood at 4.9 percent. And despite the Clinton Administration's proposals to increase
funding for various domestic programs identified as investment initiatives, total
spending for domestic non-entitlement programs will - by fiscal year 1998 -
constitute a lower percentage of GDP than in any year since 1962. 17
Under current forecasts, just maintaining the progress that has been achieved
will be difficult. In the absence of health care reform, further deficit reduction action
will be required to keep health care costs from driving the deficit higher by the end of
the decade. Maintaining or improving the progress on deficit reduction is important.
Most economists believe the nation is now better prepared to tackle the challenges
posed by a global economy and better able to invest in the future of our workers and
businesses as a result of the lower deficit.
The Contract puts further progress in question. Over the next five years,
potential budget savings would be devoted to paying for tax cuts, rather than
continuing progress on deficit reduction. And outside the five-year budget window,
the deficit likely would increase sharply unless massive cuts in domestic spending
programs were made.
As noted above, the Contract does not specify how the bulk of the tax cuts would
be offset with spending cuts or other tax revenues, either within the five-year budget
horizon or beyond that period. The sponsors suggest, however, that the financing
could include budget cuts along the lines of earlier proposals with which some of the
sponsors have been associated. In particular, some sponsors have pointed to a budget
plan developed in Spring 1994 by Representative John Kasich that contained substantial
budget cuts.
But many of the budget cuts in that plan would prove extremely difficult to
achieve as they would fall heavily on the middle class. Elderly Medicare beneficiaries
with incomes above $11,000 a year for individuals and $15,000 a year for couples would
pay significantly more for certain health care costs, large numbers of middle-income
17 The 1990 and 1993 budget reconciliation acts set strict caps on discretionary (non-entitlement) spending
though fiscal year 1998. To comply with these caps, the Clinton Administration's fiscal year 1995 budget
eliminated or reduced spending for various programs considered to be low priorities in order to increase
spending for the Administration's high-priority programs, such as crime control, infrastructure, Head Start,
and national service.
21
students would have to make significantly higher payments for student loans, and
support for school lunches for middle-income students would be eliminated. (These
proposals are discussed in more detail in the next section.) Proposals similar to these
have faced overwhelming bipartisan opposition in the past.
Moreover, cuts such as these would be only the tip of the iceberg. They would
be tiny compared to the cuts that would be required to pay for the new tax cuts and
balance the budget in years after 2000. If the budget gaps that would result had to be
closed without raising taxes, cutting defense, or touching Social Security, areas that
many Contract proponents have said should be immune from deficit reduction
measures - the reductions in the rest of the budget and especially in entitlement
programs that principally benefit the middle class would have to be massive. The
benefits provided to millions of primarily middle-class Americans under programs
such as Medicare, veterans programs benefits, student loans, and programs providing
retirement benefit for civilian and military employees would face reductions of
unprecedented severity. Otherwise, the numbers would not add up.
Impact on the Medicare Trust Fund
The Contract includes a provision that would lower the taxes of the highest-
income 13 percent of Social Security beneficiaries, reversing changes made in the 1993
budget reconciliation act. In 1993, Congress increased the percentage of Social Security
benefits subject to taxation from 50 percent to 85 percent for single taxpayers with
annual incomes above $34,000 and for married couples with annual incomes above
$44,000. This step was taken to improve the financial condition of the Medicare Trust
Fund, reduce the deficit, and control the growth in entitlement costs.
The Contract proposes repealing these changes at a cost of $17 billion over five
years. The repeal would be phased in gradually over the five-year period, so here,
also, the cost in subsequent five-year periods would be somewhat higher -
approximately $25 billion.¹⁸
Funds from the taxes collected as a result of the 1993 law are deposited directly
in the Hospital Insurance (Medicare) Trust Fund. Repeal of the law thus would
weaken the trust fund's financial condition.
The most recent report of the Social Security actuaries finds that the Medicare
Trust Fund is out of long-term balance. Without changes to reduce Medicare costs or
18 The 1993 law change was estimated by the Joint Committee on Taxation to raise $25 billion over five
years.
22
increase the revenue flowing into the trust fund, the Medicare Trust Fund will be
insolvent by 2001. This loss of tax revenue would push Medicare further out of
balance. Offsetting actions, such as reductions in Medicare benefits or increases in
taxes deposited in the trust fund, would be required as part of future efforts to avert
insolvency.
Distribution of Costs and Benefits
Low- and middle-income households will receive little benefit from the
expensive changes in IRA provisions and capital gains taxation proposed in the
Contract. Middle-income taxpayers would stand to benefit from the child tax credit
included in the Contract. At the same time, however, it is likely that a number of
federal programs primarily benefitting middle-income households would ultimately
have to be cut to compensate for the cost of the tax cuts, particularly beyond the five-
year budget period. Overall, high-income taxpayers would reap large gains, while
low-income households would lose ground. The effects on middle-income households
are unclear. Middle-income households could face a loss in disposable income if
benefits they receive are reduced by more than their taxes are cut.
Higher-Income Taxpayers
While proposals to expand IRAs are often described as middle-class tax cuts,
they are, in fact, primarily tax breaks for the affluent. A Joint Tax Committee analysis
of earlier IRA proposals found that the benefits from restoring universal full-IRA
deductibility would accrue overwhelmingly to higher-income people; not to the middle
class.¹⁹
The top one-fifth of taxpayers would receive approximately 95 percent of
the tax benefits from restoring universal eligibility for IRAs.
The wealthiest five percent of taxpayers - those with incomes of at least
$100,000 - would collect nearly one-third of the tax benefits.
19
These data are based on Joint Committee on Taxation estimates from 1989. The Joint Committee has
not provided similar data since then. The data are based on 1990 income levels and tax laws and on a
proposal to make IRA's only 50 percent deductible for taxpayers who lost deductibility under the Tax
Reform Act of 1986. These estimates are likely to understate the share of benefits received by high-income
taxpayers, because the 1993 budget reconciliation act raised the marginal tax rates on the highest-income
Americans and therefore increased the tax benefits of IRA contributions for this group.
23
Several factors explain why the tax benefits of IRA expansion proposals are so
skewed in this manner. First, most middle- and lower-income taxpayers are already
eligible for IRA tax deductions. In 1995, more than 70 percent of taxpayers with
earnings will be eligible for an up-front tax deduction for IRA contributions. Second,
the higher a taxpayer's income level, the more likely the taxpayer is to have money to
save and thus to use for IRA deductions. In 1986, the last year that IRA deductions
were available to all taxpayers, 66 percent of the tax filers in the top four percent of the
income scale made IRA contributions, but only 13 percent of those in the middle third
of the income scale did. (See Figure 4.) Finally, the higher an individual's tax bracket,
the greater the tax benefit derived from an IRA deduction. An IRA deduction is worth
more than twice as much to high-income people in the 36 percent or 39.6 percent tax
brackets - - taxpayers with incomes over $115,000 - as it is to middle-income people in
the 15 percent tax bracket.
Figure 4
Who Took IRA Deductions Before
the Tax Reform Act of 1986?
80%
Percent of Income Group Taking
60%
IRA Deductions in 1986
40%
20%
0%
$10,000-
$20,000-
$30,000-
$50,000-
$75,000-
$500,000-
$15,000
$25,000
$40,000
$75,000
$100,000
$1,000,000
Annual Adjusted Gross Income
Center on Budget and Policy Priorities
Source: IRS, Statistics of Income
Capital gains tax relief is likely to accrue to an even smaller portion of taxpayers
than would the benefits from expanded IRAs. Proposals to cut capital gains taxes
benefit primarily the wealthiest Americans because the distribution of capital gains
income is so highly skewed; higher-income households are far more likely to have
investment income that can yield capital gains income than other households.
24
Moreover, among those who have capital gains income, the average amount of capital
gains income received by high-income investors is much greater than the average
amount realized by middle-income investors. (See Figure 5.)
Figure 5
Distribution of Capital Gains Income
(Calendar Year 1990)
100%
80%
Percent of all Capital Gains
60%
40%
20%
0%
Lowest
Second
Middle
Fourth
Highest
Quintile
Quintile
Quintile
Quintile
Quintile
Center on Budget and Policy Priorities
Source: Based on data prepared by CBO, Committee on Ways and Means, U.S. House of
Representatives, Overview of the Federal Tax System, June 14, 1993, Part X, Table 14.
The Joint Committee on Taxation considered the distribution of the tax benefits
that would have resulted from President Bush's 1992 capital gains proposal to allow a
45 percent exclusion of the gain realized on certain assets. The Committee's data show
the following distribution:
20 Joint Committee on Taxation estimates of the Distributional Effects of the Administration's Capital Gains
Proposal, February 3, 1992. The proposal that was examined would have provided for a 45 percent
exclusion from income of the gain realized on certain qualified assets. In placing households into various
income categories, household income included adjusted gross income plus tax-exempt interest, employer
contributions for health plans, inside buildup on life insurance, workers compensation, nontaxable social
security benefits, deductible contributions to IRAs, minimum tax preferences, and net losses in excess of
minimum tax preferences from passive business activities. Households include filers and nonfilers. Since
the tax reduction reported assumes no change in taxpayer behavior, the Joint Committee's estimates
understates the tax benefit received by certain taxpayers who alter behavior to maximize their gains.
25
Less than four percent of households with incomes between $20,000 and
$30,000 would receive any benefit from the tax cut, and their average
benefit would be $180. Some seven percent of households with incomes
between $30,000 and $40,000 would benefit from the tax cut, receiving an
average benefit of about $300. Hardly any tax benefits would go to those
with incomes under $20,000.
By contrast, close to one-third of households with incomes between
$100,000 and $200,000 would receive an average tax cut worth $1,250.
And the 44 percent of households with incomes of $200,000 or more that
report capital gains profits would receive an average benefit of $8,478.
Looked at another way, 70 percent of the total benefit from the tax cut
would go to households with incomes of $100,000 or more, who
constituted the top five percent of households.
And the top one percent of taxpayers - those with incomes of at least
$200,000 - would capture more than half of the total tax benefits from the
capital gains exclusion.
The distribution of tax benefits resulting from proposals to index capital gains
for inflation is also tilted in favor of the wealthy. When the Joint Tax Committee
analyzed an indexing proposal in 1992, it found that a little more than half the benefits
would accrue to the wealthiest one percent of taxpayers - those with incomes $200,000
or more. 21
The lopsided distribution of benefits is also apparent in the analysis the Joint
Committee on Taxation recently conducted of the combined effect of the Contract's
capital gains exclusion and indexing proposal. The Committee's data show that less
than six percent of the total tax benefit would accrue to households with income under
$40,000, while nearly 45 percent of the benefit would go to households with incomes
over $200,000. Almost three-fourths of all the benefits would go to those with incomes
of $100,000 or more. (See Figure 6.)
21 Joint Committee on Taxation, Distributional Effect of Indexing the Cost Basis of Certain Capital Assets,
February 18, 1992. The analysis assumes indexing is fully phased in, with annual inflation equal to the
average rate assumed by the Congressional Budget Office for the 1992 - 1997 budget period. Income is
adjusted gross income, plus the items noted in footnote 20.
26
Figure 6
Distribution of Benefits of
Contract Capital Gains Proposals
(Calendar Year 1999)
50
40
Percent of Total Benefits
30
20
10
0
Less
than
10,000-
20,000-
30,000-
40,000-
50,000-
75,000-
100,000-
200,000
$10,000
20,000
30,000
40,000
50,000
75,000
100,000
200,000
and
over
Income
Source: Joint Committee on Taxation, Distribution of the Change in Federal Tax Liability Resulting
From a Fifty Percent Exclusion and Indexation of Cost Basis, October 6, 1994.
In short, wealthy individuals and families would be large winners under the
Contract. If government benefit programs were reduced to help pay for the tax cuts, it
would not be possible to recapture from those at high-income levels more than a small
fraction of the value of the tax cuts they would obtain. The wealthiest households do
not receive a large enough proportion of entitlement benefits for that to be done.
Moreover, upper income households secure a smaller percentage of their income from
government benefits than average families at middle- and lower-income levels do, and
so would be affected the least by benefit reductions.
Middle-Income Families
In addition to the large tax reductions for upper-income households and
corporations, the Contract proposes a children's tax credit. Under this proposal, a $500
tax credit would be allowed for each child in families with adjusted gross income up to
$200,000 a year. The credit would gradually phase out for families with incomes
between $200,000 and $250,000; families with incomes exceeding $250,000 would be
ineligible for the credit.
27
The children's credit would immediately benefit many middle-income families.
For families with federal income tax liability, the credit would result in a reduction in
taxes. And in limited circumstances, the credit would be refundable for some
moderate-income families with insufficient tax liability to utilize the entire credit as an
offset to taxes owed.²²
Whether middle-income families are better off under the Contract in the long-
term, however, would depend on how the costs of the tax cuts are financed, especially
in future years when the costs of the tax cuts that primarily benefit upper-income
households and corporations would grow rapidly.
If the budget gaps that resulted from the need to pay for the new tax cuts and
balance the budget in years after 2002 had to be closed without raising taxes, cutting
defense, or cutting Social Security, the reductions in the rest of the budget would have
to be extremely large. As noted above, the benefits provided to middle-class
Americans under programs such as Medicare, veterans benefits, farm programs,
student loans, and retirement benefits for current civilian and military employees
would likely face reductions of unprecedented depth. If financing the tax cuts
ultimately requires sharp reductions in programs from which middle-income families
benefit, significant numbers of middle-income families might find their incomes
reduced or their expenses increased as a result of such offsetting actions. (See box on
next page.)
Lower-Income Families
Low-income households are the clear losers under the Contract. They would
gain little from the tax proposals and bear a disproportionate share of the burden of the
22 Many moderate-income families whose income taxes are reduced or eliminated by the earned income
credit would not have sufficient tax liability to utilize the entire child credit to which they otherwise would
be entitled. The credit is refundable only to the extent that a household's income tax liability plus its
employee and employer FICA (Social Security and Medicare) contributions exceed its earned income
credit. Had the proposed children's credit been in effect for 1994, families of four with two qualifying
children and incomes between $15,640 and $22,817 would have received some benefit from the credit being
partially refundable. For example, a family of four with earnings of $20,000 would have 1994 income tax
liability of $578 before application of its EIC. The combined employer and employee FICA taxes on the
$20,000 of earnings would total $3,060, bringing total income and FICA taxes, before the EITC, to $3,638.
Since the EIC of $1,475 to which the family was entitled was $2,163 less than this, the family would have
been entitled to receive the portion of its children's credit that exceeded its income tax as a refund.
(Families of four with incomes above $22,817 will have income tax liability exceeding $1,000 in 1994, and so
would receive their entire children's credit as an offset their income tax income tax. Families of four with
incomes below $17,730 would receive some but not all of the credit through a combination of a tax offset
and a partial refund, while families of four with incomes below $15,640 would receive no benefit from the
children's credit.)
28
The Kasich Budget Cuts and Middle-Class Households
Some leading supporters of the Contract have pointed to the budget plans drawn up in the past two
years by Representative John Kasich as examples of ways in which the budget could be cut. Many of
the reductions in the Kasich plan would affect the middle class. A few examples follow.
Under the Kasich plan, the middle-class elderly would pay more for health care. For
example, the plan would make all elderly and disabled Medicare beneficiaries with
incomes above about $11,000 a year for individuals and $15,000 for couples pay 20
percent of the costs of clinical laboratory fees as well as 20 percent of the costs of home
health care. Over the next five years, that would require Medicare recipients to pay $21
billion more, with most of these payments coming from middle-class elderly and
disabled people. Those who have illnesses or health conditions requiring substantial
attention and only modest incomes could be significantly affected.
Middle-income students with student loans would be charged interest on the loans
while they are in college. Currently, interest charges begin to accrue after a student
leaves school. Under the Kasich proposal, the payment on these additional interest
charges would be deferred until the student left school, but middle-class students
would owe substantially more to the government than at present once they are out of
school.
All federal support would cease for school lunches provided to children with family
incomes above 185 percent of the poverty line - or above $22,800 for a family of three
and $27,400 for a family of four. The price of school lunch for these children would rise
at least 30 cents a day. A middle-class family with two children would pay over $100
more per year for school lunches.
Substantial cuts in federal support for mass transit could result in fewer transit routes,
higher fares, or higher state or local taxes. People using public recreation areas such as
national parks also would pay more.
Retirement benefits would be reduced substantially for all people entering federal
employment after October 1, 1994. The federal contributions to their pensions would
be reduced. In addition, no retirement benefits would be paid before age 65. For those
entering the military after October 1, 1994, no cost-of-living adjustments would be paid
before age 62.
resulting cuts in federal programs. The principal spending cuts specified in the
Contract are $40 billion over five years from reductions in AFDC, Supplemental
Security Income, public housing, and nutrition programs for the poor.
29
The proposals in the Contract thus would likely exacerbate recent trends in
income disparities. From 1977 to 1990, the average after-tax income of the richest one
percent of American households doubled, after adjusting for inflation, while the
income of the average American household in the middle fifth of the income
distribution rose a scant three percent, and the income of the lowest-income fifth of
American households dropped 12 percent.²³ The benefits of key tax proposals in the
Contract, such as the new IRA and the capital gains taxation changes, would accrue to
the groups that have fared the best in income growth over the past decade and a half.
While tax policies have not caused the widening gap in before-tax incomes, they
have contributed to the disparities in after-tax incomes. Between 1977 and 1990, the
richest Americans received large tax reductions, while middle-income Americans did
not. A study by the Congressional Budget Office shows that for most households -
the bottom four-fifths of the income distribution - the percentage of income paid in
federal taxes was about the same in 1990 as in 1977. Among the wealthiest one percent
of the population, however, the percentage of income paid in federal taxes fell one-
fourth.
Since 1990, most of the lost progressivity in the federal income tax has been
restored. The largest tax increases in both the 1990 and 1993 budget packages were
targeted on those with the highest incomes. In addition, both packages reduced the
taxes of low- and moderate-income working families by expanding the earned income
credit. Even so, the wealthiest one percent of Americans will still pay a modestly
smaller share of their income in federal taxes in 1995 than in 1977. The Contract, with
its restoration of IRA tax breaks for higher-income taxpayers, dramatic reduction of
taxes on capital gains income, and substantially more generous depreciation
deductions, would exacerbate the growing income gap and reverse much of the
progress in restoring fairness in the tax code.
Conclusion
The rapidly escalating revenue losses under the Contract for tax cuts primarily
benefitting upper-income households would risk increasing the federal budget deficit
substantially in future years. If the deficit were allowed to rise substantially, long-term
economic growth and competitiveness likely would be affected. If offsetting actions
were taken to prevent the deficit from rising - and, in fact, also to balance the budget
as the Contract proposes - the magnitude of the budget reductions required would be
unprecedented. Budget reductions this deep could not be achieved without very
substantial cuts in an array of programs on which middle-income and poor households
rely.
Revised November 9, 1994
23 Congressional Budget Office data, Committee on Ways and Means, 1993 Green Book, p. 1500.
30
04/06/95
16:33
202 456 7132
WHITE HOUSE/NEC
1
006
BILLIONAIRES TAX ESCAPE
The Billionaire Expatriates Tax Escape shows what the 100 Days are all about. Republicans
have fought and succeeded in dropping a tax provision designed to prevent 24
multimillionaires from escaping $1.4 billion in taxes by renouncing their citizenship.
PROTECTING THE VERY WEALTHIEST. The provision would have applied only to
multimillionaires--overwhelmingly in fact, to billionaires. Specifically, the provision would
have taxed only capital gains over $600,000. In order to have capital gains at that level,
it's estimated that individuals must have at least $5 million in assets.
PROTECTING THE FEW. Only about 24 very wealthy people per year would have
been affected by the tax provision.
HUGE TAX BREAKS FOR THE WEALTHIEST FEW. Over 10 years, this proposal
would have required billionaires avoiding U.S. taxes to pay an average of $150 million
each in taxes due. By fighting off this provision, Republicans protected a $150 million tax
break per wealthy individual for about 24 individuals per year.
ANSWERING TO SPECIAL INTEREST LOBBYISTS. Two former Republican
members of Congress with significant tax-writing responsibilities actively lobbied their
former colleagues on behalf of specific, wealthy individuals living abroad.
NOT SERIOUS ABOUT DEFICIT REDUCTION. The provision would have raised
$3.6 billion (10 years)--but cutting the deficit takes a backseat to protecting the wealthiest.
BACKGROUND. Each year. a handful of extremely wealthy individuals renourice their
U.S. citizenship specifically to avoid paying U.S. taxes on U.S. taxable income. These
individuals are able to avoid paying any taxes on profits they made in the United States
while enjoying all the benefits of U.S. citizenship and the U.S. economy. Their situations
are very different from those of the hundreds of middle-income people who abandon their
citizenship for reasons other than tax avoidance, such as wanting to become citizens of
countries that do not permit dual citizenship. In order to avoid taxes that are standard in the
industrialized world, these individuals often move to less developed countries such as Belize,
St. Kitts-Nevis, and Turks and Caicos. Other key points:
Comparison with Soviet Jewry an Insult. Unlike persecuted Soviet Jews, these
Americans can enjoy all the privileges of U.S. citizenship, including their wealth, if they
will just pay taxes like all other Americans. They choose to leave entirely of their own
free will. They can come back of their own free will. And, even once they have left,
they can spend up to 120 days per year here in the United States.
Gains Earned While Enjoying Protections of U.S. Citizenship. Individuals born in
the United States who expatriate are avoiding taxes on gains accrued entirely while
enjoying the privileges and protections of U.S. citizenship.
Most of the Gains Generated in the U.S. Most of the gains by these expatriates will
have been made in the United States, largely as a result of our strong economy, our
educated workforce, and our stable society.
Exceptions for Real Estate and Pensions. The proposal even includes certain
exceptions: one for U.S. real property and one for pensions.
04/06/95
16:33
202 456 7132
WHITE HOUSE/NEC
007
WHAT'S WRONG WITH THE "CONTRACT" TAX CUTS
ISSUE
CONTRACT WITH
AMERICA
TAX RELIEF ACT
Five-Year Cost
$178 billion
Ten-Year Cost
$630 billion
Percent of Tax Cuts for Those Earning Over $100,000
51.5%
Percent of Tax Cuts for Top 1%
20.0%
(1.1 million families earning more than $350,000)
Top 1% (1.1 million families)
Families
Benefits
Get Larger Share of Benefits Than
Top 1%:
20.0%
Bottom 60% (65.2 million families)
Bottom 60%:
15.6%
How Much Bigger Is Average Tax Cut for Top 1%
76 times
Than for Bottom 60%
($20,362 versus $267)
Percent of Capital Gains Tax Cut for Top 1%
45.9%
Child Tax Credit Smaller
$235 billion versus
Than Four Tax Cuts for the Wealthy and Corporations
$268 billion
(Neutral Cost Recovery, Capital Gains, AMT repeal, Gift and Estate)
Joint Committee on Taxation Analysis Excludes Corporate Tax Cuts;
Taxpayers
Benefits
Still Shows More Benefits for Top 10%
Top 10%
$22.7b
Than Bottom 80% in Year 2000
Bottom 80%
$21.6b
MAJOR CUTS FOR CHILDREN AMOUNT TO
TINY FRACTION OF TAX CUTS FOR WEALTHIEST
Average 1 Year Cost of Contract's Capital Gains Tax Cut
$9.2 billion
Savings from Rescissions of AmeriCorps, Summer Jobs, WIC, Goals
$2.8 billion
2000, and Safe and Drug Free Schools
Savings from Rescissions Above as a Percentage of 1 Year Cost of
30%
Contract's Capital Gains Tax Cut
PRESIDENT'S TAX BREAKS TARGET THE MIDDLE CLASS,
NOT THE WEALTHIEST
ISSUE
PRESIDENT'S MIDDLE
CONTRACT WITH
CLASS BILL OF RIGHTS
AMERICA
Ten-Year Cost
$172 billion
$630 billion
Tax Cuts for Those
84.6%
48.5%
Earning Under $100,000
Tax Cuts for Top 1%
(*)
20.0%
($20,362 per family)
(*) Less than one-half of one percent Sources: Department of Treasury: Joint Committee on Taxation (3/28/95)
04/06/95
16:30
202 456 7132
WHITE HOUSE/NEC
002
HOUSE REPUBLICANS: CUTTING EDUCATION AND TRAINING
TO PAY FOR TAX BREAKS FOR THE WEALTHY
Republicans still have not presented a budget with the $1.6 trillion in savings needed to fulfill
their promises to cut taxes and balance the budget. However, Republican efforts to date do
reflect a pattern: paying for tax cuts heavily targeted at the wealthiest by cutting spending for
education and training. The New York Times calls these "the deepest cuts proposed for
education spending in more than a decade." The cuts include:
Budget Committee Chairman John Kasich's "illustrative spending cuts," which make deep
reductions in job training and Goals 2000.
The House welfare and child block grants, which cut child nutrition in school.
The House rescissions, which gut national service and funding for drug-free schools. While
the bill theoretically will put savings in a deficit "lockbox," Kasich has said that the lockbox is
a "game" that will be "dropped"-thus admitting that the savings are necessary because of the
tax cuts.
BIG TAX CUTS FOR THE WEALTHY
The "Contract with America Tax Relief Act" includes $630 billion in tax cuts over 10 years
--with 51.5% of the benefits going to families making over $100,000 (Treasury estimates).
The wealthiest 1% (1.1 million families making over $350,000) get more tax breaks
than the bottom 60%--over 65 million families.
The average tax cut for the wealthiest 1% is over $20,000--over 75 times bigger than
the average break for the 65 million families in the bottom 60%.
Over a quarter trillion dollars of the tax cuts are targeted almost entirely at the very
wealthy and large corporations: a capital gains tax cut ($92 billion) with 46% of benefits for
the top 1% of Americans; a "neutral cost recovery system" that will encourage distorting, tax-
sheltering activities ($120 b); repeal of the corporate Alternative Minimum Tax, designed to
prevent major companies from paying no taxes ($36 b); and cuts in the gift and estate tax ($23 b).
DEEP CUTS IN EDUCATION
The cuts below are just a sampling of the Republicans' proposals for education. Cuts show 5-year
savings for block grants and Kasich's cuts and 1-year savings for rescissions.
1. K-12 EDUCATION
Cut Goals 2000 ($174 million rescission; further cuts by Kasich in Goals 2000 and School-to-
Work total $723 million). The rescission alone would cut off funds for 4,000 schools to
raise academic standards and improve teaching. Specifically eliminated are parental
assistance initiatives to ensure that parents play a strong role in school improvement.
Eliminate Drug-Free Schools and Communities funding ($472 million rescission). These
funds help schools prevent drug use and violence, through efforts that include buying metal
detectors and hiring security personnel.
04/06/95
16:31
202 456 7132
WHITE HOUSE/NEC
003
Cut School Lunches and Breakfasts ($2.3 billion block grant cut). The Republicans accept
CBO scoring that shows $2.3 billion in savings from their "School Nutrition block grant,"
with only 2.5% growth in 1996. That rate is inadequate to keep pace with annual inflation
(3.2%) and increases in the number of children (1.6%). Had the block grant been in place in
1989, over 1 million children who received nutritious free lunches in 1994 could not have
gotten them. Since the block grant provides inadequate funding in case of recession and
eliminates nutritional standards and guaranteed free lunches for poor children, the result will
be either lower quality meals or fewer children served, or both.
- Cut Education Technology and Improvement (Kasich cuts $214 million above a $97 million
rescission). Most of these funds help schools to put state-of-the-art technology and computers
in classrooms. Some funding is for building and supporting public libraries.
-- Cut Teacher Training in Math and Science (Rescission cuts $100 million). Eisenhower
grants help teachers develop top skills for teaching core subjects like math and science.
- Eliminate the Department of Education. Republican leaders, including Speaker Gingrich
and Majority Leader Dole, have called for eliminating the Department and its programs.
This would not just cut "bureaucracy," but would slash billions of dollars in education aid.
2. JOB TRAINING
- Cut Education, Training and Employment Services (Kasich cuts $10.2 billion above
rescissions, including literacy and adult education). President Clinton has proposed a major
consolidation that will put funds directly into workers' hands as Skill Grants. The cuts
would eliminate over 3 million training opportunities and Skill Grants.
Cut School-to-Work (Kasich cuts $723 million above rescissions from this program and
Goals 2000 together). These funds support a 50-state movement that is creating thousands
of paths out of high school and into jobs with good wages and a future. This proposal
would delay reforms in 22 states not already receiving support.
3.
NATIONAL SERVICE
-- Gut AmeriCorps (rescission would cut the program by $416 million, or 72%; Kasich
would cut an additional $681 million). The rescission would break a contract with tens of
thousands of young people serving their communities and earning aid for education. This
year and next, 30,000 young people would be sent home or prevented from serving,
and over 100,000 young people would lose the chance to serve over the next 5 years.
4.
STUDENT AID
-- Eliminate Student Loan In-School Interest Subsidy for 4 million students: (Kasich's
1995 budget proposal and "Contract with America" options from September 1994: $9.6
billion). For a four-year student who borrowed the maximum amount ($17,125) at the
maximum interest rate (8.25%), this proposal would increase costs by $3,150--18 percent.
-- Cut back the new Direct Lending program. By cutting out middlemen, the initiative has
saved billions of dollars for taxpayers, lowered costs for students, and allowed borrowers to
choose flexible repayments like pay-as-you-earn. Leading Republicans want to limit the
program and prevent hundreds of schools and millions of students from participating.
04/06/95
16:31
202 456 7132
WHITE HOUSE/NEC
004
DRAFT
CONTRACT PROVIDES HUGE TAX BREAKS
TARGETED AT CORPORATIONS AND WEALTHIEST
THE REPUBLICAN TAX BILL INCLUDES OVER A QUARTER OF A TRILLION
DOLLARS IN TAX BREAKS TARGETED ALMOST ENTIRELY AT THE VERY
WEALTHY AND LARGE CORPORATIONS-NOT AT MIDDLE-CLASS
FAMILIES. The following four tax breaks account for over 40% of the costs of the
Contract over 10 years-over $265 billion (Treasury estimates):
1. A CAPITAL GAINS TAX CUT, including indexing for inflation, with 46% of
benefits for the top 1% of Americans and over three-quarters of benefits for those
making over $100,000 ($92 billion).
2. A NEUTRAL COST RECOVERY SYSTEM that will encourage distorting, tax-
sheltering activities ($120 billion). The Wall Street Journal has said it "could be a very
sweet deal for the nation's big, capital intensive companies It probably would spur
the creation of a new generation of tax shelters. And it could allow some big and
profitable companies to escape taxes altogether." (WSJ, 12/5/94, emphasis added).
3. REPEAL OF THE CORPORATE ALTERNATIVE MINIMUM TAX, designed
to prevent major companies from paying no taxes ($36 billion). A study has shown that
prior to the 1986 reforms including the AMT, over half of the nation's largest and most
profitable corporations paid no federal income tax in at least one full ycar, despite
billions of dollars in U.S. profits. In one study, total U.S. profits for 130 corporations
in their no-tax years were $72.9 billion, yet their total federal income tax bill was
actually negative $6.1 billion. They received $6.1 billion in refunds.
4. CUTS IN THE GIFT AND ESTATE TAX ($23 billion), which would effectively
increase the amount of gifts and transfers at death not subject to taxation from $600,000
to $750,000, and then index the exemption for inflation. Individuals not making gifts
or leaving inheritances over $600,000 would not benefit from this provision
THE JOINT COMMITTEE ON TAXATION HAS NOT ANALYZED THE
DISTRIBUTIONAL EFFECTS OF THE CONTRACT'S CORPORATE TAX
BREAKS. The JCT analysis often cited by Republicans does not include corporate tax
cuts-like neutral cost recovery and repeal of the AMT--which go overwhelmingly to the
wealthy. Harvey Rosen, formerly the Bush Administration's top tax economist at Treasury
and now head of the economics department at Princeton, has said, "Ignoring the corporate
tax is clearly a loony thing to do." (Wall Street Journal, 3/23/95)
EVEN WITHOUT THE CORPORATE TAX CUTS, THE JOINT COMMITTEE'S
ANALYSIS SHOWS THAT THE CONTRACT TAX RELIEF OVERWHELMINGLY
BENEFITS THE WEALTHY-WITH MORE BENEFITS FOR THE TOP 10%
THAN THE BOTTOM 80%. The JCT analysis excludes corporate taxes and makes other
assumptions that lead to lower estimated benefits for high-income families. Even so, in the
year 2000, the very same JCT analysis that Republicans continue to cite shows that the top
10% of taxpayers receive a bigger tax cut than the bottom 80%-$22.7 billion versus
$21.6 billion in the year 2000.
04/06/95
16:32
202 456 7132
WHITE HOUSE/NEC
005
DRAFT
IF THE JCT INCLUDED THE CORPORATE TAX BREAKS, THEIR ANALYSIS
WOULD MORE CLOSELY RESEMBLE TREASURY'S, WHICH SHOWS:
51.5% of the Contract's benefits go to families making over $100,000.
The top 1% (1.1 million families making over $350,000) get more tax benefits
than the bottom 60%--over 65 million families.
The average tax benefit for the top 1% is over $20,000-over 75 times bigger
than the average benefit for the 65 million families in the bottom 60% ($267).
THE CHILD TAX CREDIT ONLY ACCOUNTS FOR 37% OF THE CONTRACT'S
TAX CUTS. Republicans sometimes use a pie chart showing the distribution of their child
tax credit. But this credit--which is still fully available to those making up to $200,000--is
only one of fifteen different tax cuts in the Contract bill. The child tax credit accounts for
only 37% of the costs of the Contract tax bill over 10 years-less than the cost of the
four tax breaks for the wealthy and big corporations listed above (Treasury estimates).
EVEN IF THE REPUBLICANS PHASE OUT THEIR CHILD TAX CREDIT
BEGINNING AT $95,000, MOST OF THE BENEFITS OF THEIR TAX BILL
WOULD STILL GO TO FAMILIES WITH INCOMES OVER $100,000. The child tax
credit has relatively little to do with the heavy targeting of high-income families in the
Republican tax bill. The real problems are the other very large tax benefits like the AMT
repeal and capital gains cut which disproportionately benefit high-income families.
BECAUSE OF THE CORPORATE BREAKS, THE COSTS OF THE CONTRACT
EXPLODE OVER 10 YEARS--WITH 72% OF THE TEN-YEAR COSTS IN THE
SECOND FIVE YEARS. While the costs of the Tax Relief Act over 5 years are $178
billion, the costs over 10 years are $630 billion (Treasury estimates). This means that 72%
of the tax bill's costs are in the second 5 years--beyond the budget window. Even if the
Republicans produce spending cuts to pay for the $178 billion over 5 years-which they have
not done-they still will not have paid for the exploding costs of their bill over time.
Specifically, it is the corporate tax breaks whose costs explode in the second five
years. The new depreciation schedule provided for under "neutral cost recovery," for
example, actually increases revenues in the first five years--the years for which
Republicans now want to pay. But in the second five years, the costs of neutral cost
recovery explode to nearly $140 billion, making the total 10-year cost over $120 billion.
When JCT analyzed the costs of the tax cut over 10 years, they got similar results.
Republicans may claim that these Treasury estimates are somehow biased. The Joint
Committee on Taxation has not scored the new Contract tax bill over 10 years. However,
when JCT scored the original (and very similar) provisions over 10 years, their cost
estimate showed 72% of the costs in the second 5 years. The JCT report also showed
that neutral cost recovery would bring in $16.7 billion in the first five years while costing
$105.3 billion in the second five years, producing an overall cost of $88.6 billion. And,
JCT showed that the child tax credit accounts for only about 40% of the total tax bill--an
amount that has diminished with the removal of partial refundability.
Joint Economic Committee
Connie Mack
CHAIRMAN
March. 1995
ISSUED BY:
ECONOMIC
POLICY
Connie Mack (FL). Chairman
[im Saxton (NJ). Vice Chairman
UPDATE
Dick Armey (TX). House Majority Leader
Class Warriors Claim Their First Victim:
The Middle Class
For over a decade, the inaccurate criticism that family incomes fell during the Reagan years
gained a certain currency in the press and among Democrats. A clear-headed look at the data,
however, demonstrates not only that middle class families did well during the Reagan years,
but that real family incomes have declined under President Clinton's policies of higher taxes
and more regulation. This may be why these same critics appear uncomfortable as they try to
explain the somewhat lackluster income record of the Clinton Administration.
real family
For years the critics of Reagan policies used inaccurate Congressional Budget Office (CBO)
incomes have
family income data which led the media and the public to believe that middle class family
declined under
income was falling during the 1980s, and that Reagan Administration policies were at fault.
President
This political argument was factually false as Census Bureau data show that real middle class
Clinton's poli-
family income climbed 13 percent during the Reagan expansion years. Under the Clinton
Administration's high tax and regulation policies, however, real family incomes declined 1.9
cies of higher
percent in President Clinton's first year alone.
taxes and more
regulation."
After the critics had based their "fairness" issue on inaccurate CBO data, Census Bureau
data released for 1993 show that, viewed from their own standpoint, the Clinton Administra-
tion presides over more unfairness than in any of the Reagan years, or indeed in any year in the
postwar period. As a Joint Economic Committee (JEC/GOP) report¹ released by Representa-
tive Dick Armey suggested before the election, the fall in middle class income offers "a reason
why a majority of Americans disapprove of Clinton Administration economic policies." It has
nothing to do with public relations or "getting the message out," and everything to do with the
decline of middle class income and earnings under Clinton.
Reich Test for Policy Supports Republican Initiatives
In a January 5, 1995, speech entitled "The Choice Ahead," Secretary of Labor Robert Reich
sidesteps the Clinton Administration's failure to improve the economic position of the middle
class by offering a disingenuous presentation of household income data using 1979 and 1993 as
endpoints. In a partisan attack on Republican economic policies and in defense of the Clinton
agenda, Reich ends his speech by setting this test for policy: "Which do you believe will make
working families better off?"
Given that the Republican "Contract with America" was a key issue for both Republicans
continued
G-01 Dirksen Senate Office. Building, Washington. D.C. 20510-6602 202-224-5171
104th CONGRESS
and Democrats in the 1994 election, the American people have alreadv provided their an-
swer. Real median family income grew at a 1.7 percent average annual growth rate during
the Reagan expansion years, compared to a 1.9 percent decline in real median family income
during the first year of the Clinton presidency. If the income statistics of the last "decade and
a half" provide any evidence for guiding policy, as Reich suggested, the one conclusion that
can be drawn is that the only growth in median family income occurred when Reagan Ad-
ministration policies were in effect.
Middle Class Family Income Rises During the Reagan Expansion Years
Real median family income increased 13 percent between 1982 and 1989, referred to as the
Reagan expansion years. However, the 1979-82 period had been a severe setback for family
'Real median
income growth, with 1980 documented as one of the worst years on record. This explains
why critics almost always include 1980, the last year of the Carter Administration, in the
family income
Reagan 1980s. While a proper demarcation point between the Carter and Reagan Adminis-
increased 13%
trations is debatable, even the most partisan Democrats should find it hard to argue that
between 1982
Reagan policies were bad enough to cause income declines the year previous to their pas-
and 1989.
sage. Implementation of Reagan income tax cuts began in the middle of 1982.
It also is misleading to say, as Reich did in his speech, that "for a decade and a half,
ordinary families have been working harder and getting less." There simply hasn't been the
long, gradual, downward trend in family income as the graph indicates. Partisan critics
typically include the severe 1979-80 decline in family income under Carter in the Reagan
years to flatten apparent income growth during the 1980s. Nonetheless, middle class income
started falling late in the Carter years and rebounded during the Reagan years.
Real Median Family Income Rises Under Reagan Policies
Value
$41,000
Post-Reagan
$40,000
39,869
Period
39,394
39,086
$39,000
38,838
39,320
Democratic Party Line
38,248
38,129
$38,000
37,246
37,668
$37,000
36,912
36,762
36,959
35,905
$36,000
Pre-Reagen
35,797
Reagan Expension Years
Period
35,419
$35,000
1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993
Source. Census Bureau
In other words, the Reagan expansion years, which Democrats and the media have re-
peatedly disparaged as the most harmful to the middle class, were actually the one and only
time that progress occurred in middle class family income over the last 15 years. It was not
until after reversal of the low tax and de-regulatory policies adopted in the 1980s did middle
class income start slipping again. In 1993, moreover, even as most other data showed eco-
nomic expansion, it was remarkable to see a $709 plunge in real median family income.
continued
Other Census data show that in 1993 real median earnings of full-time, vear-round workers
fell 2.2 percent for male workers and 1.2 percent for female workers. In fact, 1993 accounts
for more than half of the decline in earnings experienced by males since 1989. Furthermore,
real hourly earnings declined during 1994, and real median weeklv earnings fell between
the fourth quarter of 1993 and the fourth quarter of 1994.
Who's the Unfairest of Them All?
1993
According to the 1992 Clinton campaign, during the 1980s, the rich got richer, the
accounts for
forgotten middle class -- the people who work hard and play by the rules -- took it on the
more than half of
chin." The Clinton campaign also trumpeted the incorrect CBO data}, which was used by
the decline in
economist and then-Clinton ally Paul Krugman, in an attempt to show that the majority of
income growth accrued to the top 1 percent. This was all reported in a March 5, 1992, New
earnings experi-
York Times article that contained other factual errors³. In his speeches, Secretary Reich has
enced by males
recently returned to this discredited methodology in arguing that 98 percent of the income
since 1989.
growth since 1979 accrued to the top fifth of households. However, even using their dis-
credited data source and methodology, this would appear to be an improvement relative to
the Carter years when 100 percent of the income gains accrued to the top 1 percent.
First of all, this approach is very misleading because of the fluctuation of income over
the 1979-93 period. A more accurate description of the data is to say that the income gains
during the Reagan expansion years in the four bottom quintiles were virtually wiped out
by the income declines occurring in the bottom three quintiles during the other years in the
1979-93 period. Obviously, this pattern in the income data cannot support the argument
that neo-Reagan policies will have a negative impact on middle class family or household
real hourly
income growth, as Secretary Reich suggests, since the data clearly point to the opposite
earnings
conclusion. Furthermore, if Secretary Reich's accounting is accepted, then virtually 100
declined during
percent of the total income growth is attributed to the top fifth for the simple reason that his
1994.
approach means that there is practically no other net income growth.
The Labor Secretary's interpretation is invalid also because at any range of income, the
income of some families will be rising while that of others is falling regardless of changes in
average income. In contrast to the bleak picture reflected in Census Bureau data for the
Carter years, the average family income of all quintiles increased during the 1980s whether
1980, 1981, or 1982 is used as the base year. If the last year or two of the Carter Administra-
tion is used as the base year, this indeed changes the picture, but this has nothing to do with
Reagan policy.
Second, and most importantly, Secretary Reich's whole exercise is essentially meaning-
less for the simple reason that none of the quintiles is composed of the same people over
time. As has been stressed in a number of JEC/GOP studies, this way of misusing the
income data fundamentally misrepresents the American economy by wrongly assuming
that families or households are cemented into specific income strata for 10 years or more.
As shown in one JEC/GOP report4, there is actually a better chance that between 1979
and 1988 a household in the bottom fifth would move to the top fifth than remain in the
bottom quintile (in this case defined as a tax filer). With well over 80 percent of this bottom
fifth gone only nine years later, arguments such as Secretary Reich's have no relevance to
this group. Their incomes have mostly gone up and are no longer in the caste that Secretary
Reich has them assigned.
The same is generally true of the middle quintile. Nearly half of the middle fifth had
continued
moved to a higher strata by 1988, while only one-third remained. Furthermore, of house-
holds in the top 1 percent in 1979, over half had fallen to lower percentiles by 1988, replaced
by others moving up from below. The argument that Americans are locked in economic strata
is a caricature not rooted in reality.
real median
Third, Secretary Reich's argument is designed to mask the fact that, as pointed out earlier,
weekly earnings
the Reagan expansion years were actually a period of solid economic progress for the over-
fell between the
whelming majority of Americans. Far from being a period of setback for middle class fami-
lies, the Reagan expansion years were the one and only improvement for them in the last 15
fourth quarter of
years. Secretary Reich neglected to mention this important statistical fact about median fam-
1993 and the
ily income central to the main test he has raised with regard to Clinton Administration versus
fourth quarter of
conservative Republican policies: "Which do you believe will make working families better
1994.
off? This is the choice before us."
As reported by the Census Bureau, in 1993, the share of total household income in the
bottom fifth, at 3.6 percent, was lower under President Clinton than in any Reagan year, and
indeed lower than in any year in the postwar period. On the other hand, the share of income
in the top 5 percent, at 20.0 percent, was higher under Clinton than in any Reagan year, or any
year in the post-World War II period. Under this Administration, income dispersion has be-
come the most unequal on record.
In short, the increase in inequality is larger under President Clinton than in any of the
Reagan years. For those who view everything through the lens of redistributionism, the first
Clinton year would have to be seen as much more unfair than any of the Reagan expansion
years. From this perspective, the Clinton Administration should be viewed as the most unfair
in the postwar period. Even after consideration of a number of caveats about the core data
related to income mobility and data limitations, the Clinton record is a very shakv platform
from which to attack others on the basis of "fairness."
Conclusion
After years of partisan attacks immediately following the release of the annual Census
Bureau data on family income, the class warriors were virtually silent following the 1993
income release. Upon reflection and judged on the same basis, the Democratic White House
and Congress would have to be viewed as the unfairest of all, producing distributional results
real median
that far exceed even its worst caricatures of the allegedly unfair Reagan years. All this, and a
family income
decline in real middle class family income!
fell in all the
years chosen by
Secretary Reich's use of income data of the last 15 years as the basis of support for the
Secretary Reich
Clinton agenda and opposition to renewed Reaganism is disingenuous. According to Reich's
policy test, the evidence supports the argument that neo-Reagan policies would increase middle
except the
class real family income, and the alternatives depress real family income. That real median
Reagan Expan-
family income fell in all the years chosen by Secretary Reich except the Reagan expansion
sion years.
years compellingly refutes his arguments.
Christopher Frenze
Majority Senior Economist
End Notes:
See JEC/GOP report. Middle Class Income Declines in Clinton's First Year. October 18. 1994.
:
See Republican Views of the 1994 Joint Economic Committee Annual Report.
:
For example. even the correct number of families was misreported.
1
See JEC/GOP report. Income Mobility and Economic Opportunity. June 1992.
What's Store?
DANIEL E. SICHEL
n November 8, for the first time in more than 40
would actually boost revenues. But the nation lost that
years, American voters handed Republicans the keys to
fiscal gamble, and the government's budget deficit
the Capitol. Althoughthe causes of this dramatic shift
soared. As each year's hefty deficit was added on to
will long be debated frustration over long-standing
those of past years, the total debt of the federal govern-
economic problems was surely a key element. In the
ment surged upward as well.
minds of many,fiscal disarray in Washington was a
Figure 1 shows the ratio of total federal debt to
powerful symbol of the government's inability to solve
gross domestic product (GDP) since the end of World
these problems.
War II. Following heavy wartime deficit spending, the
sitheir solution, Republicans offered voters a 10-
ratio fell rapidly through the early 1970s and was
point "Contract with America." And since the election
roughly stable over the next decade. If the diagram
they have quickly gone to work on the contract, im-
ended in 1980, one would not conclude that the fed-
portant parts of which focus on how the government
eral household was mismanaged. On the contrary, the
conducts its business: how it taxes, how it spends, and
record until then showed that small deficits and robust
how it operates. In particular, the contract calls for tax
economic growth had combined to cause the debt to
cuts, deep spending cuts except for defense and Social
shrink as a share of GDP. This point bears emphasis.
Security, and a balanced budget by 2002.
The deficit problem is not age-old. It was created by
Although the balanced budget amendment in the
the policy mistakes of the early 1980s. At that time,
contract floundered and was defeated in the Senate
large budget deficits pushed the total stock of debt up
over the issue of how to treat Social Security, the fiscal
much faster than the economy, and the ratio turned
promises in the contract are likely to set the political
back up, reaching 70 percent by 1995.
agenda for some time to come. Senate Majority
Recent years have seen some progress on reducing
Leader Robert Dole has vowed to bring the balanced
the deficit and therefore slowing the rate at which to-
budget amendment up again later this year, and pres-
tal debt is growing. The deficit reduction agreements
sure to reduce the deficit is unlikely to diminish.
of 1990 and 1993 helped bring a 1992 deficit of $290
Moreover, the balanced budget amendment was just a
billion down to an estimated $176 billion by 1995. But
promise to balance the budget. Congress can still pur-
the Congressional Budget Office (CBO) now projects
sue a fiscal path leading to budget balance by 2002,
that the deficit will rise to $320 billion by 2002, the
even without a constitutional amendment in force.
year the contract promises a balanced budget.
Thus, the fiscal promises in the contract are still front
Large deficits do not cause immediate harm to the
and center. And the key question remains: what must
economy. Rather, they eat away at its foundations.
happen between now and 2002 to balance the budget
Saving and investment are key to future economic
and fulfill the other fiscal promises in the contract? But
growth. Given the already low private saving rate in
before looking ahead, it is helpful to look back a bit.
the United States, large deficits-or dissaving by the
government-leave even less saving for other produc-
How Did We Get into the Deficit Mess?
tive investments. Over extended periods, reduced in-
Large budget deficits in peacetime are a relatively new
vestment implies less capital per worker and the grad-
feature on the U.S. economic landscape. By and large,
ual buildup of losses in labor productivity and wages.
deficits were small before the 1980s, except during
Of course, investments in the United States can be
wars and recessions. But in the early 1980s, the nation
financed by borrowing overseas, but if foreigners help
spun the fiscal roulette wheel: taxes were cut and de-
foot the bill-as they did during the 1980s-then
fense spending raised without substantial spending cuts
they receive many of the benefits. Most economists
in other areas. At the time, the hope was that these
agree that getting the deficit down would significantly
changes would not boost the deficit because tax cuts
improve the nation's long-run economic health.
20
THE-BROOKINGS REVIEW
ILLUSTRATION BY ROBERT SOULE
The GOP Contract for Tax Cuts
and a Balanced Budget
How Does the Contract with America
Address These Problems?
Let us assume that the fiscal promises contained in the Republican
Daniel E. Sichel is it research
"Contract with America" are put into action. The budget is set on a
associate in the Brookings
path to balance by 2002, which of course can be done even without
a balanced budget amendment. Taxes are cut. As pledged, Social
Economic Studies program. He is
Security is not touched. Given the overwhelming anti-tax senti-
completing it book on the
ment expressed in the last election, Republicans in Congress
effect of computers on U.S.
seem committed to eliminating the budget deficit through
spending cuts. Now we look ahead to 2002 to see how
È
business productivity.
these pieces fit together.
As indicated earlier, the Congressional Budget Office
rojects a deficit of $320 billion in 2002 under current
law. The pledge to balance the budget would bring that
figure down to zero, implying a spending cut of $320
billion. But the actual task is much tougher be-
cause the contract also promises a tax cut.
In particular. the contract promises a lower
capital gains tax, a $500 per child tax credit, more
È
now
E
E
5001
a
NEW - mmp
generous depreciation rules for businesses, and a cut in
taxes paid by Social Security recipients. For this bud-
get exercise, we will assume that all those tax provi-
Figure 1. Federal Debt As a Share of GDP
sions are enacted. Last December, the U.S. Treasury
estimated that the cost of those tax cuts would average
$40 billion a year over the first five years, surging to
100%
more than $100 billion a year for the next five. In
2002, the estimated revenue loss equals $100 billion.
90
The tax cuts make balancing the budget in 2002 even
harder. because $100 billion of spending must be cut
80
just to stay even.
Thus, balancing the budget while paying for very ex-
70
pensive tax cuts means that $420 billion must be cut from
projected spending in 2002. If the budget cutters set to
60
work at once, rather than waiting until 2002, the debt on
which interest must be paid would be lower over the
50
next seven years and interest rates might be lower too,
possibly saving as much as $100 billion in interest pay-
40
ments by 2002. Thus, the Republicans must find roughly
$320 billion in annual programmatic cuts in 2002. (In
30
subsequent years, the challenge is even more difficult for
two reasons. First, CBO projects that under current law
20
the deficit will rise even further by 2005, pushed up by
rising health care costs. Second, the revenue loss from the
10
tax cuts in the contract explodes in later years.)
Such a cut would be difficult enough if it came out
0
of all programs. However, the contract shields Social
1950
1960
1970
1980
1990
Security and defense from the budget knife. Figure 2
highlights the significance of this exclusion, showing
CBO's projected spending shares for 2002 under cur-
rent law. Social Security, defense, and interest payments
on the debt account for more than half of all federal
outlays, a crucial but often overlooked point. Because
the contract promises to exclude these programs, the
entire $320 billion cut in programs must come from the
much diminished "targeted spending" category, imply-
ing a reduction of more than 30 percent.
Figure 2. Projected Spending Shares, 2002
Table 1 emphasizes the ramifications of placing a big
chunk of spending off limits for cuts. The top line
shows projected spending in 2002 for all programs ex-
cept interest and shows the spending cut of $320 billion
required to balance the budget under the promises of
the contract. As the table shows, the excluded pro-
grams-Social Security and defense-are not to be
touched, and therefore the targeted programs must be
cut by almost one-third.
Within the targeted programs, the ultimate distribu-
tion of hits remains to be determined. Nevertheless, an
examination of the components of the targeted spend-
ing category reveals who stands to lose under the con-
Targeted Programs
tract, and who, therefore, might be expected to oppose
$1050 billion
the budget cuts. As the table shows, grants to cities and
47:8%
Interest
states account for about a quarter of the targeted spend-
$344 billion
ing category. These grants cover highway construction,
15.6%
support for education, health programs including Med-
icaid, disaster relief, and a host of other activities.
According to a recent Treasury Department study,
Defense
some large states could be big losers if Social Security
$325 billion
and defense are exempt from cuts and all programs in
14.8%
"targeted spending" are cut by nearly a third. For ex-
ample, California-whose Republican governor Pete
Wilson has been mentioned as a presidential hope-
ful-stands to lose as much as $10.5 billion by 2002.
22
THE BROOKINGS REVIEW
New York, whose newly elected Republican governor
inflation. Critics argue that if spending could just bc
George Pataki has promised a large tax cut, would lose
frozen at current levels, then the budget would be in
a similar amount; making up this lost revenue would
balance by the end of the century. This line of reason-
require a state tax hike of more than 20 percent or
ing is correct in principle, but difficult in practice be-
stantial cuts in services. Governors and mayors may
cause most of the projected increases in spending are
go to the chopping block quietly.
for interest payments on the debt and entitlements that
Retirees also receive a big chunk of targeted spend-
will be politically painful to cut.
ing, with Medicare and pensions (civilian and military)
For example, spending for Social Security is pro-
accounting for about 40 percent of the targeted cate-
jected to rise about 5 percent a year in nominal terms
gory. Because retirees are a powerful political con-
because the number of retirees increases and because
stituency, their programs may be spared the full force
benefits are indexed to inflation. If spending on Social
of the budget ax, but then, of course, the cuts in other
Security were frozen at 1995 levels, benefits in 2002
programs would have to be that much greater.
would be more than 30 percent lower than they
Everything else in targeted spending is projected to
would be if every recipient received the benefit
cost $350 billion under current law. If painful choices
promised under current law. Even if Social Security
elsewhere make this category the chief target of the
were allowed to increase at 3 percent a year to cover
budget cutters, spending would be virtually eliminated
inflation, benefits in 2002 would still be 14 percent be-
for such programs as federal prisons, the federal court
low what current law promises.
system, the National Weather Service, NASA, cancer
Similarly, outlays for Medicare are expected to in-
research, the National Parks, and most other federal
crease more than 10 percent a year. Just as for Social
government activities.
Security, the number of retirees on Medicare is ex-
Figure 3 provides another perspective on the chal-
panding. And rapid increases in the price of medical
lenge facing budget cutters, highlighting the source of
care, accompanied by ever wider use of new tech-
pressure on federal spending. This figure charts shares
nologies, push up anticipated spending quite rapidly.
of federal spending back to 1965, broken down a little
Even if increases in Medicare outlays were held to
differently than in the pie charts. Social Security, de-
only 3 percent, benefits in 2002 would have to be cut
fense, and interest payments have accounted for more
by more than a third relative to what recipients would
than half of federal outlays for many years. The share
receive under current law. Medical services received
of spending for Medicare and Medicaid has risen
by retirees would necessarily be cut back.
rapidly since 1970, pushed up, in large part, by the
Simple formulas for achieving budget balance-
steep ascent in health care costs, which has also
such as holding current spending constant-entail
cted the private sector. Unless a way is found to
extremely hard political choices.
price increases for health care, either recipients of
vernment health care must pay more, access to gov-
Taking a Chain Saw to Federal Spending
ernment-financed care must be limited, or health care
The other frequent criticism of conventional budget
costs will continue to put pressure on the budget. The
analysis is that trimming around the edges of the cur-
category of spending labeled less So-
rent structure of federal spending will never work;
cial Security, defense, interest, Medicare, and Medi-
solving the deficit problem requires taking a chain saw
caid-has actually been on a downtrend as a share of
to entire programs. Consider estimated savings from
output since around 1980, a fact that may come as a
the following list of programs sometimes mentioned as
surprise to those subjected to the drumbeat of rhetoric
candidates for cuts.
about government programs eating up more and more
Completely eliminating federal payments for Aid to
of the economy's resources.
Families with Dependent Children-the govern-
ment's main welfare program providing cash benefits
Other Roads to a Balanced Budget
for the poor-would save an estimated $16.4 billion
According to this budget arithmetic, it will be next to
a year by the end of the decade. Zeroing out farm sub-
impossible to balance the budget if Social Security and
sidy programs would save $10.8 billion a year. Stop-
defense are exempt from cuts and future tax hikes are
ping subsidies for urban mass transit would hold down
ruled out. Some contend, however, that traditional
yearly spending by $4.8 billion. Defunding the space
budget arithmetic is the wrong way to frame the issue.
station would save another $2.4 billion. Shutting down
Either they argue that the use of baseline spending as-
the Small Business Administration would save $550
sumptions makes budget balance look harder to
million (yes, less than $1 billion). Eliminating federal
achieve than it really is. Or they contend that this bud-
support of Amtrak would save another $800 million or
get arithmetic implicitly-and wrongly-assumes a
so. Switching off the subsidies received by the Rural
continuation of the current structure of federal spend-
Electrification Administration would keep spending
ing. Does either critique offer an alternative road to
down by another $90 million. At this point, a lot of
budget balance?
political blood would have been spilled and the deficit
would be down by only $36 billion, a long way from
Holding the Line on Current Spending
the hundreds of billions in spending cuts needed to
e budget analysis summarized in the pie and bar
balance the budget.
S, "necessary spending cuts are calculated relative
Should spending be carefully examined to eliminate
to a baseline budget, which itself is growing over time
fat? Yes. Will that balance the budget? No. The lesson
to take account of increases in population and
of budget arithmetic is simple. Although spending can
SPRING 1995
23
be cut and efficiency improved in many areas, balancing
the budget will be virtually impossible without touch-
ing the big programs like Social Security, Medicare, and
Figure 3. Federal Spending as a Share of GDP
defense. Back in the 1930s Willie Sutton explained that
he robbed banks because that's where the money is. If
Willie were a member of the House or Senate Budget
Social Security, defense, and interest
Committee today, he would be looking up addresses for
Medicare and Medicaid
these large programs.
Other
20
What Happens Once the Budget Is Balanced?
The difficulty of balancing the budget, of course, is what
led many in Congress to support a constitutional amend-
ment to force the tough choices. But while getting the
15
deficit down would be a definite plus for the economy's
long-term health, doing so by amending the Constitu-
tion has some disadvantages. The likelihood that the is-
sue will arise again despite its recent defeat in the Senate
10
makes it important to keep four, in particular, in mind.
First, a balanced budget amendment could turn a
mild economic slowdown into a major recession, be-
cause fiscal policy will lose its ability to stabilize the
5
economy automatically. As jobs are lost and incomes
fall during a slowdown, tax revenues will decline. As
more jobless workers apply for unemployment insur-
ance and other benefits, spending will rise. Falling
0
revenues and higher spending could generate a very
1965
1970
1975
1980
1985
1990
1995
2002
large temporary deficit. Under the old rules, such
deficit spending would automatically boost the weak-
ened economy. But under the new rules, the budget
must be balanced. Congress would have to slash
spending or raise taxes, either of which would push
the economy deeper into recession. And the negative
effects of a downturn can linger for a long time, as
they did after the most recent recession, which offi-
cially ended in the spring of 1991.
But in the amendment just considered by Congress,
a three-fifths majority of the House and Senate could
waive the budget balance requirements. And often
Table I. Required Spending Cuts in 2002 under the Contract
they surely would. But given the uncertainties of eco-
nomic forecasting, would Congress always act before
(billions of dollars, except where noted)
serious economic damage was done? Would a deter-
CBO PROJECTIONS
PERCENT CUT
mined minority in either house ever block a move to
UNDER CURRENT
CUT REQUIRED
REQUIRED UNDER
waive the budget rules in time of economic crisis, per-
LAW
UNDER CONTRACT
CONTRACT
haps to delay recovery and weaken the election
Spending for programs
$1856
$320
-
prospects of the president? Such damage to the nation's
(excluding interest)
economy could all be done in the name of defending
the Constitution.
Excluded programs
806
0
0%
Second, requiring year-to-year budget balance
would hold Washington to an extreme standard. Al-
Social Security
481
0
0%
though it is often said that the federal government
Defense
325
0
0%
should balance its budget just as families do, most
households do not. Few families pay cash to buy
Targeted programs
1050
320
30%
homes, cars, and college educations; they borrow.
Businesses borrow to finance inventories or invest in
Cities and states*
265
?
?
plant and equipment. States issue bonds (borrow) to
finance capital expenditures like highways. Year-to-
Retireest
435
?
?
year budget balance would require that the federal
government's purchases of long-term capital (buildings,
Everything else
350
?
?
highways, defense equipment) be paid for in full in the
year of purchase, a very peculiar accounting standard.
Source: CBO, Treasury. and author's calculations.
Third, a balanced budget amendment could lead to
Medicaid and other grants.
increasingly outlandish budget shenanigans. Many tools
t Medicare, civilian, and military pensions.
are available to Congress besides direct spending.
2 4
THE BROOKINGS REVIEW
Congress could declare certain government expenses to
be off-budget. It could impose requirements on state
and local governments or on the private sector, perhaps
with off-budget loan guarantees to sweeten the pot.
Such maneuvers would further undermine the budget
process; dragging the debate even deeper into procedu-
ral muck and creating even more voter cynicism.
Fourth, a balanced budget amendment raises diffi-
cult enforcement questions. Suppose spending ex-
ceeds revenue in 2004? Would the federal courts en-
force the balanced budget amendment? Would they
raise income taxes? cut Social Security benefits?
Would they, as Bill Frenzel, a former Republican
Congressman now at Brookings, puts it, "send the
U.S. marshals in to arrest the check writers?" What-
ever the case, Congress and the president would have
ceded much of their authority to unelected judges.
Suppose instead that the amendment is simply ig-
nored or sidestepped with creative accounting,
something like Prohibition earlier this century. Al-
The fundamental economic challenges facing
though such a move might ease a temporary budget
crisis, it would damage respect for the rule of law and
voters' confidence in their government.
the nation, including sluggish growth in real
A Challenge Unmet
The fundamental economic challenges facing the na-
tion, including sluggish growth in real wages and pro-
ductivity for today's workers, diminished economic
wages and productivity for today's workers,
prospects for our children and grandchildren, and a
further falling behind of those at the bottom of the in-
come distribution, go well beyond the budget deficit.
Any solution to these problems will require greater in-
diminished economic prospects for our children
vestments in our future, and deficit reduction-which
frees up the nation's savings for productive invest-
ment-is surely a step in the right direction.
But the "Contract with America" may not move us
and grandchildren, and a further falling
in that direction. It does not specify how the budget
would be balanced, and once Social Security and de-
fense are taken off the cutting table and future tax
hikes are ruled out, budget balance will be extremely
behind of those at the bottom of the income
difficult to achieve. And tax cuts today unless paid
for by spending cuts or tax hikes elsewhere-only
make it harder to balance the budget.
Nevertheless, most Americans support the concept
distribution, go well beyond the budget deficit.
of a balanced budget amendment. A January 12 Wall
Street Journal opinion poll showed approval at almost
70 percent. Americans do not, however, support the
painful deficit reduction that the analysis here shows
will be necessary to actually balance the budget. The
same opinion poll finds that 60 percent of Americans
oppose the amendment if it entails substantial cuts in
entitlement programs such as Medicare, Medicaid, and
veterans' benefits.
The contract perfectly mirrors this inconsistency in
public opinion, promising budget balance without
pain. Its failure to come to grips with budget arith-
metic perpetuates the myth that the nation's fiscal
problems can be solved without sacrifice by most
Americans. The contract's supporters, Republicans and
Democrats alike, are merely deferring the political de-
bate we must one day have over how to get the deficit
down and how to improve the nation's long-run eco-
nomic prospects.
SPRING 1995
25
DESCRIPTION OF THE
"CONTRACT WITH AMERICA TAX RELIEF ACT OF 1995"
Scheduled for Markup
by the
HOUSE COMMITTEE ON WAYS AND MEANS
Beginning on March 14, 1995
Prepared by the Staff
of the
JOINT COMMITTEE ON TAXATION
March 9, 1995
JCX-9-95*
CONTENTS
Page
INTRODUCTION
ii
DESCRIPTION OF PROVISIONS
1
I.
THE AMERICAN DREAM RESTORATION TAX ACT (TITLE I)
1
A.
Family Tax Credit
1
B.
Credit to Reduce the Marriage Penalty
3
C.
American Dream Savings Accounts and Deductible Spousal IRAs
5
II.
SENIOR CITIZENS' EQUITY TAX ACT (TITLE II)
8
A.
Repeal of Increase in Tax on Social Security Benefits
8
B.
Treatment of Long-Term Care Insurance and Services
12
C.
Tax Treatment of Accelerated Death Benefits under Life Insurance Contracts
19
III.
JOB CREATION AND WAGE ENHANCEMENT TAX ACT (TITLE III)
22
A.
Capital Gains Provisions
22
1.
50-percent capital gains deduction for individuals
22
2.
Indexing of basis of certain assets for purposes of determining gain
24
3.
25-percent corporate alternative tax for capital gains
27
4.
Capital loss deduction allowed with respect to the sale or exchange
of principal residence
28
B.
Cost Recovery Provisions
29
1.
Neutral cost recovery
29
2.
Treatment of leasehold improvements
32
C.
Alternative Minimum Tax
34
D.
Public Debt Reduction Checkoff and Trust Fund
41
E.
Small Business Incentives
43
1.
Increase in unified estate and gift tax credits
43
2.
Increase in expensing for small businesses
46
3.
Clarification of definition of principal place of business;
Treatment of storage of product samples
47
IV.
FAMILY REINFORCEMENT TAX ACT (TITLE IV)
50
A.
Tax Credit for Adoption Expenses
50
B.
Nonrefundable Credit for Custodial Care of Certain Elderly Family Members
in Taxpayer's Home
52
V.
INCREASE IN THE SOCIAL SECURITY EARNINGS LIMIT (TITLE V)
54
VI.
THE TAX TECHNICAL CORRECTIONS ACT OF 1995 (TITLE VI)
55
i
INTRODUCTION
This document,¹ prepared by the staff of the Joint Committee on Taxation, provides a
description of the "Contract With America Tax Relief Act of 1995." The House Committee on Ways
and Means has scheduled a markup of these provisions beginning on March 14, 1995. The "Contract
With America Tax Relief Act of 1995" includes provisions derived from the revenue provisions
contained in the "Contract With America" (the "Contract"), as well as certain other revenue
proposals.
The Contract was signed by over 300 Republican House candidates and incumbents on
September 27, 1994, as an agenda for the first 100 days of the 104th Congress. The Contract was
introduced when the 104th Congress convened on January 4, 1995, and includes four bills that
contain various tax proposals: H.R. 6 ("American Dream Restoration Act"), H.R. 8 ("Senior Citizens'
Equity Act"); H.R. 9 ("Job Creation and Wage Enhancement Act"); and H.R. 11 ("Family
Reinforcement Act").
Part I of this document describes tax provisions derived from the American Dream
Restoration Act. Part II contains a description of tax provisions derived from the Senior Citizens'
Equity Act. Part III describes tax provisions derived from the Job Creation and Wage Enhancement
Act, with additional proposals regarding a 25-percent corporate alternative tax for capital gains, the
treatment of leasehold improvements, and the alternative minimum tax. Part IV of this document
contains a description of tax provisions derived from the Family Reinforcement Act; Part V describes
a proposal to increase the social security earnings limit derived from the Senior Citizens' Equity Act;
and Part VI relates to the provisions of H.R. 1121, the "Tax Technical Corrections Act of 1995,"
introduced on March 3, 1995 with certain modifications.
1
This document may be cited as follows: Joint Committee on Taxation, Description of the
"Contract With America Tax Relief Act of 1995" (JCX-9-95), March 9, 1995.
ii
DESCRIPTION OF PROVISIONS
I. THE AMERICAN DREAM RESTORATION TAX ACT (TITLE I)
A. Family Tax Credit
Present Law
Present law does not provide tax credits based solely on the number of dependent children.
Taxpayers with dependent children, however, generally are able to claim a personal exemption for
each of these dependents. The total amount of personal exemptions is subtracted (along with certain
other items) from adjusted gross income (AGI) in arriving at taxable income. The amount of each
personal exemption is $2,500 for 1995, and is adjusted annually for inflation. The amount of the
personal exemption is phased out for taxpayers with AGI in excess of $114,700 for single taxpayers,
$143,350 for heads of household, and $172,050 for married couples filing joint returns.
In addition, eligible low-income workers are able to claim a refundable earned income tax
credit (EITC). The amount of the credit an eligible taxpayer may claim depends upon whether the
taxpayer has one, more than one, or no qualifying children, and is determined by multiplying the credit
rate by the taxpayer's earned income up to an earned income threshold. The maximum amount of
the credit is the product of the credit rate and the earned income threshold. In 1995, the maximum
credit is $3,112 for taxpayers with more than one qualifying child, $2,093 for taxpayers with one
qualifying child, and $314 for taxpayers with no qualifying children. For taxpayers with earned
income (or AGI, if greater) in excess of the phaseout threshold, the credit amount is reduced by the
phaseout rate multiplied by the amount of earned income (or AGI, if greater) in excess of the
phaseout threshold. The credit is not allowed if earned income (or AGI, if greater) exceeds the
phaseout limit. In 1995, the phaseout limit is $26,676 for taxpayers with more than one qualifying
child, $24,388 for taxpayers with one qualifying child, and $9,234 for taxpayers with no qualifying
children.
Description of Provision
The provision would provide taxpayers with a maximum nonrefundable tax credit of $500 for
each qualifying child.
The credit would be phased out ratably for taxpayers with AGI over $200,000, and would be
fully phased out at AGI of $250,000. For purposes of this AGI test, the taxpayer's AGI would be
increased by the amount otherwise excluded from gross income under Code sections 911, 931, or 933
(relating to the exclusion of income of U.S. citizens or residents living abroad; residents of Guam,
American Samoa, and the Northern Mariana Islands; and residents of Puerto Rico, respectively). In
calendar years beginning after 1996, the maximum credit amount ($500) and the beginning point of
the phaseout range ($200,000) would be indexed annually for inflation with rounding to the nearest
$50. The size of the phaseout range would change as needed so as to remain 100 times the maximum
1
amount of the credit per child.
To be a qualifying child, an individual would have to satisfy a relationship test, a dependency
test, and an age test. An individual would satisfy the relationship test if the individual is a son or
daughter of the taxpayer, a descendant of a son or daughter of the taxpayer, a stepson or
stepdaughter of the taxpayer, or a foster or adopted child of the taxpayer. A foster child would have
to, for the taxable year of the taxpayer, (1) be a member of the taxpayer's household and (2) have
as his principal place of abode the home of the taxpayer. An adopted child would include a child who
is legally adopted or who is placed with the taxpayer by an authorized placement agency for adoption
by the taxpayer.
An individual would satisfy the dependency test if the individual is a dependent of the taxpayer
with respect to whom the taxpayer is entitled to claim a dependency deduction. For purposes of the
above test, the term "dependent" would not include an individual who is a resident of a country
contiguous to the United States unless that individual is an adopted child of a taxpayer who is a U.S.
citizen or national and, for the taxpayer's taxable year, the individual is a member of the taxpayer's
household and has as his principal place of abode the home of the taxpayer.
An individual would satisfy the age test if the individual has not attained the age of 18 as of
the close of the calendar year in which the taxable year of the taxpayer begins.
The provision would provide that couples who are married at the end of the taxable year must
file a joint return to receive the credit unless they lived apart for the last six months of the taxable year
and the individual claiming the credit (1) maintained as his or her home a household for the qualifying
child for more than one-half of the taxable year and (2) furnished over one-half of the cost of
maintaining that household in that taxable year.
Except in the case of a taxable year closed by reason of the taxpayer's death, no credit would
be allowable in the case of a taxable year covering a period of less than 12 months.
Effective Date
The provision would be effective for taxable years beginning after December 31, 1995.
2
B. Credit to Reduce the Marriage Penalty
Present Law
A married couple generally is treated as one tax unit that must pay tax on the unit's total
taxable income. Although married couples may elect to file separate returns, the rate schedules and
provisions are structured so that filing separate returns usually results in a higher tax than filing joint
returns. Other rate schedules apply to single persons and to single heads of household.
A "marriage penalty" exists when the sum of the tax liabilities of two unmarried individuals
filing their own tax returns (either single or head of household returns) is less than their tax liability
under a joint return (if the two individuals were to marry). A "marriage bonus" exists when the sum
of the tax liabilities of the individuals is greater than their combined tax liability under a joint return.
While the size of any marriage penalty or bonus under present law depends upon the
individuals' incomes, number of dependents, and itemized deductions, as a general rule married
couples whose earnings are split more evenly than 70-30 suffer a marriage penalty. Married couples
whose earnings are largely attributable to one spouse generally receive a marriage bonus.
Under present law, the size of the standard deduction and the bracket breakpoints follow
certain customary ratios across filing statuses. The standard deduction and bracket breakpoints for
single filers are roughly 60 percent of those for joint filers. The standard deduction and bracket
breakpoints for head of household filers are about 83 percent of those for joint filers. With these
ratios, unmarried individuals have standard deductions whose sum exceeds the standard deduction
they would receive as a married couple filing a joint return. Thus, their taxable income as joint filers
may exceed the sum of their taxable incomes as unmarried individuals. Furthermore, because of the
way the bracket breakpoints are structured, as joint filers they may have some of their taxable income
pushed into a higher marginal tax bracket than when they were not married.
The rate changes in the Revenue Reconciliation Act of 1993 exacerbated the existing marriage
penalty because the new bracket breakpoints did not provide the customary ratios across filing
statuses. For the new 36-percent bracket, the breakpoint for single filers and for head of household
filers are 82 percent and 91 percent, respectively, of the breakpoint for joint filers. For the 39.6-
percent bracket that results from the "surtax," the bracket breakpoint is $250,000 regardless of filing
status.
Description of Provision
Married couples who file a joint return could be eligible for a nonrefundable credit against
their income tax liability. The amount of the credit would be determined based on the earned income
of each of the spouses. The Secretary of the Treasury would issue tables calculating the marriage
penalty credit applicable for married taxpayers based on the earned incomes of the spouses.
3
The amount of the credit would be based on the hypothetical tax liabilities that would result
if the individual income tax rates applicable to single filers were applied to each spouse's earned
income, allowing for one personal exemption and the standard deduction allowed for single filers.
The sum of those hypothetical tax liabilities would be compared to the hypothetical tax liability that
would result if the individual income tax rates applicable to married couples filing joint returns were
applied to the aggregate earned income of the spouses, allowing for two personal exemptions and the
standard deduction allowed for joint filers.
If the hypothetical tax liability of the married couple exceeds the sum of the hypothetical tax
liabilities of the individual spouses, the married couple would be allowed a nonrefundable tax credit
equal to the lesser of that excess or $145, with amounts less than the maximum credit rounded to the
nearest $25. If the hypothetical tax liability of the married couple is less than or equal to the sum of
the hypothetical tax liabilities of the individual spouses, the married couple would not be allowed the
credit.
Effective Date
The provision would be effective for taxable years beginning after December 31, 1995.
4
C. American Dream Savings Accounts and Deductible Spousal IRAs
Present Law
Under present law, an individual may make deductible contributions to an individual
retirement arrangement (IRA) up to the lesser of $2,000 or the individual's compensation if the
individual is not an active participant in an employer-sponsored retirement plan (and, if married, the
individual's spouse also is not an active participant in such a plan). In addition, the $2,000 limit is
increased to $2,250 in the case of a married taxpayer who files a joint return and makes contributions
to an IRA for the benefit of his or her spouse, if the spouse has no compensation or elects to be
treated as having no compensation. The $2,250 contribution can be divided in any manner between
IRAs for each spouse, except that the maximum contribution to an IRA on behalf of one individual
cannot exceed $2,000.
If the individual (or the individual's spouse) is an active participant in an employer-sponsored
retirement plan, the $2,000 deduction limit (and the $2,250 spousal IRA deduction limit) is phased
out over certain adjusted gross income (AGI) levels. The limit is phased out between $40,000 and
$50,000 of AGI for married taxpayers, and between $25,000 and $35,000 of AGI for single
taxpayers. An individual may make nondeductible IRA contributions to the extent the individual is
not permitted to make deductible IRA contributions. Contributions cannot be made to an IRA after
age 70-1/2.
The amounts held in an IRA, including earnings on contributions, generally are not subject
to tax until withdrawn. Amounts withdrawn prior to attainment of age 59-1/2 are subject to an
additional 10-percent early withdrawal tax, unless the withdrawal is due to death, disability, or is
made in the form of certain periodic payments. A similar early withdrawal tax applies to distributions
from tax-qualified pension plans, with an additional exception for distributions used to pay medical
expenses that exceed 7.5 percent of AGI. This exception for distributions to pay extraordinary
medical expenses does not apply to withdrawals from IRAs.
In general, distributions from an IRA are required to begin at age 70-1/2. An excise tax is
imposed if the minimum required distributions are not made. Distributions to the beneficiary of an
IRA are generally required to begin within 5 years of the death of the IRA owner, unless the
beneficiary is the surviving spouse. Similar rules apply to distributions from tax-qualified pension
plans.
Present law imposes a 15-percent excise tax on excess distributions with respect to an
individual during any calendar year from qualified retirement plans, tax-sheltered annuities, and IRAs.
The purpose of the tax is to limit the total amount that can be accumulated on behalf of a particular
individual on a tax-favored basis. In general, excess distributions are defined as the aggregate amount
of retirement distributions (i.e., payments from applicable retirement plans) made with respect to an
individual during any calendar year to the extent such amounts exceed $150,000 (for 1995). The
5
dollar limit is indexed for inflation. Special rules apply in the case of lump-sum distributions and
post-death distributions.
Description of Provision
Tax-free nondeductible IRAs
The provision would replace present-law nondeductible IRAs with new American Dream
Savings accounts ("ADS accounts") to which individuals could make nondeductible contributions.
Contributions to an ADS account would be in addition to any contributions that can be made to a
deductible IRA under the present-law rules. An ADS account would be an IRA which is designated
at the time of establishment as an ADS account in the manner prescribed by the Secretary. Qualified
distributions from an ADS account would not be includible in income.
The maximum annual contribution that could be made to an ADS account would be the lesser
of $2,000 or the individual's compensation for the year. In the case of a married couple, the aggregate
compensation of the couple would be taken into account in determining the maximum permitted
contribution. Thus, for example, in 1996 each spouse in a married couple could make an ADS
contribution of $2,000 (for a total contribution by the couple of $4,000), provided the couple has at
least $4,000 in compensation. The $2,000 contribution limit would be adjusted annually for inflation
beginning after 1996. Inflation adjustments would be rounded to the nearest $50.
Contributions to an ADS account could be made even after the individual for whom the
account is maintained has attained age 70-1/2. The pre-death minimum distribution rules that apply
to IRAs would not apply to ADS accounts, and amounts in ADS accounts would not be taken into
account for purposes of the excise tax on excess distributions.
Qualified distributions from an ADS account would not be includible in gross income, nor
subject to the additional 10-percent tax on early withdrawals. A qualified distribution would be a
distribution that is made after the 5-taxable year period² beginning with the first taxable year in which
the individual made a contribution to an ADS account, and (2) which is (a) made on or after the date
on which the individual attains age 59-1/2, (b) made to a beneficiary (or to the individual's estate) on
or after the death of the individual, (c) attributable to the individual's being disabled, or (d) a qualified
special purpose distribution.
Qualified special purpose distributions (whether or not qualified distributions) would not be
2
In the case of rollover contributions that are not from another ADS account, the 5-year
holding period would begin on the date on which the rollover was made. As is the case with IRAs
generally, contributions to an ADS account could be made for a year by the due date for the
individual's tax return for the year (determined without regard to extensions). The 5-year holding
period would run from the taxable year in which the individual is deemed to make the contribution.
6
subject to the 10-percent tax on early withdrawals. Distributions from an ADS account other than
qualified distributions or qualified special purpose distributions would be includible in gross income
and subject to the 10-percent tax on early withdrawals.
In general, qualified special purpose distributions would be distributions: for the purchase or
acquisition of a principal residence of a first-time homebuyer; for qualified higher education expenses;
for medical expenses of the taxpayer or the taxpayer's spouse and dependents; or for long-term care
insurance premiums treated as medical expenses under the long-term care provisions.
First-time homebuyers would be individuals who did not own an interest in a principal
residence during the 3 years prior to the purchase of a home. In order to qualify as a first-time
homebuyer distribution, the distribution would have to be used within 60 days to pay the costs of
acquiring, contracting, or reconstructing a residence. If there is a delay in acquisition, construction,
or reconstruction, the distribution could be redeposited in an ADS account within 120 days without
imposition of tax.
Qualified higher education expenses would be tuition, fees, books, supplies and equipment
required for the enrollment or attendance of the taxpayer, the taxpayer's spouse, or a child or
grandchild of the taxpayer at an eligible educational institution (defined as under sec. 135). The
amount of qualified higher education expenses would be reduced by any amount excludable from
income under the present-law rules relating to education savings bonds (sec. 135).
Distributions from ADS accounts could be rolled over tax free to another ADS account. In
addition, amounts withdrawn from an IRA could be rolled over to an ADS account after December
31, 1995, and before January 1, 1998. The amount otherwise includible in gross income due to the
IRA distribution would be included in gross income ratably over the 4-taxable year period beginning
with the taxable year in which the distribution is made. The early withdrawal tax would not apply to
such rollovers.
Deductible contributions to spousal IRAs
The provision would modify the present-law rules relating to deductible IRAs by permitting
deductible IRA contributions of up to $2,000 to be made for each spouse (including, for example,
a home maker who does not work outside the home) if the combined compensation of both spouses
is at least equal to the contributed amount. The provision would not otherwise modify the rules
relating to deductible IRAs.
Effective Date
The provision would be effective for taxable years beginning after December 31, 1995.
7
II. SENIOR CITIZENS' EQUITY TAX ACT (TITLE II)
A. Repeal of Increase in Income Tax on Social Security Benefits
Present Law
In general
Under present law, taxpayers receiving Social Security and Railroad Retirement Tier 1
benefits are not required to include any such benefits in gross income if their "provisional income"
does not exceed $25,000 in the case of unmarried taxpayers or $32,000 in the case of married
taxpayers filing joint returns. For purposes of these computations, a taxpayer's provisional income
is defined as adjusted gross income plus tax-exempt interest plus certain foreign source income plus
one-half of the taxpayer's Social Security or Railroad Retirement Tier 1 benefit.
Certain taxpayers with provisional income in excess of those thresholds are required to include
in gross income up to 50 percent of their Social Security or Railroad Retirement Tier 1 benefit.
Under a provision added by the Revenue Reconciliation Act of 1993 ("1993 Act"), taxpayers with
provisional income in excess of a second-tier threshold ($34,000 in the case of unmarried taxpayers
or $44,000 in the case of married taxpayers filing joint returns) are required to include in gross
income up to 85 percent of their Social Security or Railroad Retirement Tier 1 benefit.
If the taxpayer's provisional income exceeds the lower threshold but does not exceed the
second-tier threshold, then the amount of the inclusion is the lesser of (1) 50 percent of the taxpayer's
Social Security or Railroad Retirement Tier 1 benefit, or (2) 50 percent of the excess of the
taxpayer's provisional income over the lower threshold.
If the amount of provisional income exceeds the second-tier threshold, then the amount of the
inclusion is the lesser of:
(1)
85 percent of the taxpayer's Social Security or Railroad Retirement Tier 1 benefit or
(2)
the sum of:
(a)
85 percent of the excess of the taxpayer's provisional income over the second-
tier threshold,
plus,
(b)
the smaller of (i) the amount of benefits that would have been included if the
50-percent inclusion rule (the rule in the previous paragraph) were applied, or
(ii) one-half of the difference between the taxpayer's second-tier threshold and
lower threshold.
8
Treatment of nonresident alien individuals
If a nonresident alien individual is engaged in a trade or business within the United States
during the taxable year, the individual is subject to U.S. tax at the normal graduated rates on net
taxable income that is effectively connected with the conduct of the U.S. trade or business. U.S.
source fixed or determinable annual or periodic income of a nonresident alien individual (for example,
salary, wages, annuities, compensation, remuneration, and emoluments) that is not effectively
connected with the conduct of a U.S. trade or business generally is subject to tax at a rate of 30
percent of the gross amount paid. This latter tax generally is collected by means of withholding
(hence this tax is often called a "withholding tax"). Withholding taxes are often reduced or eliminated
in the case of payments to residents of countries with which the United States has an income tax
treaty.
For purposes of taxing the income of nonresident alien individuals, the income thresholds for
including Social Security and Railroad Retirement Tier 1 benefits do not apply. Instead, a fixed
percentage of any such benefit is included in gross income. Until January 1, 1995, that percentage
was 50 percent. Thus, prior to 1995, a nonresident alien individual typically was subject to U.S.
withholding tax at an effective rate of 15 percent on the gross amount of U.S. Social Security
benefits. This tax was reduced or eliminated under some treaties. Although the Omnibus Budget
Reconciliation Act of 1993 increased the inclusion of benefits in some cases for taxpayers other than
nonresident aliens (to up to 85 percent of the benefits), it did not amend the rule that a nonresident
alien individual was required to include 50 percent (and only 50 percent) of these benefits in gross
income.
The implementing legislation for the General Agreement on Tariffs and Trade (P.L. 103-465)
increased from 50 percent to 85 percent the amount of Social Security or Railroad Retirement Tier
1 benefits included in the gross income of a nonresident alien individual, effective for benefits paid
after December 31, 1994, in taxable years ending after such date. Thus, a nonresident alien individual
may be subject to U.S. withholding tax at an effective rate of 25.5 percent on the gross amount of
U.S. Social Security or Railroad Retirement Tier 1 benefits.
Trust funds
Revenues from the income taxation of Social Security and Railroad Retirement Tier 1 benefits
attributable to the 1993 Act increase in the portion of benefits included in gross income are credited
quarterly to the Medicare Hospital Insurance (HI) Trust Fund. The remainder of the proceeds from
the income taxation of Social Security and Railroad Retirement Tier 1 benefits are credited quarterly
to the Old-Age and Survivors Insurance Trust Fund, the Disability Insurance Trust Fund, or the
Social Security Equivalent Benefit Account (of the Railroad Retirement system), as appropriate.
9
Description of Provision
In general
The provision would phase in a repeal of the higher rate of income inclusion for taxpayers
with provisional incomes in excess of the second-tier threshold.
For taxable years beginning in calendar years 1996 through 1999, if the amount of provisional
income exceeds the second-tier threshold, then the amount of the inclusion would be calculated as
under present law, except that the following rates would be substituted for "85 percent":
For taxable years
The percentage
beginning in
would be--
calendar year--
1996
75 percent
1997
65 percent
1998
60 percent
1999
55 percent.
For taxable years beginning after December 31, 1999, Social Security and Railroad Retirement
Tier 1 benefits would be treated as under the law prior to 1994: if the amount of provisional income
exceeds $25,000 in the case of unmarried taxpayers or $32,000 in the case of married taxpayers filing
joint returns, then the amount of the inclusion would be the lesser of (1) 50 percent of the taxpayer's
Social Security or Railroad Retirement Tier 1 benefit, or (2) 50 percent of the excess of the
taxpayer's provisional income over the threshold.
Treatment of nonresident alien individuals
The provision would phase in a reduction in the amount of Social Security or Railroad
Retirement Tier 1 benefits included in the gross income of a nonresident alien individual. The
inclusion percentage for any taxable year beginning in calendar years 1996 through 1999 would be
as given in the table above. For taxable years beginning after December 31, 1999, the amount of
Social Security or Railroad Retirement Tier 1 benefits included in the gross income of a nonresident
alien individual would be 50 percent.
10
Trust funds
Revenues from the income taxation of Social Security and Railroad Retirement Tier 1 benefits
attributable to the increased portion of benefits included in gross income under the 1993 Act (as
phased out under the provision) would be credited to the Old-Age and Survivors Insurance Trust
Fund.
Effective Date
The provision would be effective for taxable years beginning after December 31, 1995.
11
B. Treatment of Long-Term Care Insurance and Services
Present Law
In general
Present law generally does not provide explicit rules relating to the tax treatment of long-term
care insurance contracts or long-term care services. Thus, the treatment of long-term care contracts
and services is unclear. Present law does provide rules relating to medical expenses and accident or
health insurance.
Deduction for medical expenses
In determining taxable income for Federal income tax purposes, a taxpayer is allowed an
itemized deduction for unreimbursed expenses that are paid by the taxpayer during the taxable year
for medical care of the taxpayer, the taxpayer's spouse, or a dependent of the taxpayer, to the extent
that such expenses exceed 7.5 percent of the adjusted gross income of the taxpayer for such year (sec.
213).
Exclusion for amounts received under accident or health insurance
Amounts received by a taxpayer under accident or health insurance for personal injuries or
sickness generally are excluded from gross income to the extent that the amounts received are not
attributable to medical expenses that were allowed as a deduction for a prior taxable year (sec. 104).
Treatment of accident or health plans maintained by employers
Contributions of an employer to an accident or health plan that provides compensation
(through insurance or otherwise) to an employee for personal injuries or sickness of the employee,
the employee's spouse, or a dependent of the employee, are excluded from the gross income of the
employee (sec. 106). In addition, amounts received by an employee under such a plan generally are
excluded from gross income to the extent that the amounts received are paid, directly or indirectly,
to reimburse the employee for expenses incurred by the employer for the medical care of the
employee, the employee's spouse, or a dependent of the employee (sec. 105). For this purpose,
expenses incurred for medical care are defined in the same manner as under the rules regarding the
deduction for medical expenses.
A cafeteria plan is an employer-sponsored arrangement under which employees can elect
among cash and certain employer-provided qualified benefits. No amount is included in the gross
income of a participant in a cafeteria plan merely because the participant has the opportunity to make
such an election (sec. 125). Employer-provided accident or health coverage is one of the benefits that
may be offered under a cafeteria plan.
12
A flexible spending arrangement (FSA) is an arrangement under which an employee is
reimbursed for medical expenses or other nontaxable employer-provided benefits, such as dependent
care. An FSA may be part of a cafeteria plan or provided by an employer outside a cafeteria plan.
FSAs are commonly used reimburse employees for medical expenses not covered by insurance. If
certain requirements are satisfied, amounts reimbursed for nontaxable benefits from an FSA are
excludable from income.
Health care continuation rules
The health care continuation rules require that an employer must provide qualified
beneficiaries the opportunity to continue to participate for a specified period in the employer's health
plan after the occurrence of certain events (such as termination of employment) that would have
terminated such participation. Individuals electing continuation coverage can be required to pay for
such coverage.
Life insurance company reserve rules
In general, life insurance companies are allowed a deduction for a net increase in reserves and
must take into income any net decreases in reserves. Present law prescribes a tax reserve method
based on the nature of the contract. For noncancellable accident and health insurance contracts, the
prescribed method is a two-year full preliminary term method. Long-term care insurance reserves are
treated like noncancellable accident and health insurance for this purpose and, therefore, are subject
to the two-year full preliminary term method of reserves. In no event is the tax reserve for any
contract as of any time permitted to exceed the amount which would be taken into account in
determining statutory reserves (i.e., set forth on the annual statement for State law reporting
purposes). Under the National Association of Insurance Commissioners (NAIC) Long-Term Care
Insurance Model Act and Regulations, which have been adopted by some States, by contrast, long-
term care insurance reserves are calculated under a one-year full preliminary term method. Thus,
because of this inconsistency, in some cases life insurance companies establish reserves for long-term
care insurance contracts earlier for State regulatory purposes than they do for Federal tax purposes.
In addition, some life insurance companies have voluntary complied with the NAIC model act and
regulations, even though not required to do so in all cases.
Changes in reserve amounts due to changes in the basis on which reserves are calculated are
generally spread over a 10-year period.
13
Description of Provisions
Tax treatment and definition of long-term care insurance contracts and qualified long-term
care services
In general
A long-term care insurance contract would be accorded the following tax treatment. A long-
term care insurance contract would be treated as an accident and health insurance contract.³
Amounts (other than policyholder dividends or premium refunds) received under a long-term care
insurance contract would be excludable as amounts received for personal injuries and sickness. A
plan of an employer providing coverage under a long-term care insurance contract generally would
be treated as an accident and health plan; however, coverage under a long-term care insurance
contract would not be excludable by an employee if provided through a cafeteria plan and expenses
for long-term care services could not be reimbursed under an FSA.
Within certain limits, premiums for long-term care insurance would be treated as medical
expenses for purposes of the itemized deduction for medical expenses. Similarly, expenses for
qualified long-term care services would be treated as medical expenses for purposes of the itemized
deduction.
Definition of long-term care insurance contract
A long-term care insurance contract would be defined as any insurance contract that provides
only coverage of qualified long-term care services and that meets other requirements. The other
requirements would be that (1) the contract is guaranteed renewable, (2) the contract does not
provide for a cash surrender value or other money that can be paid, assigned, pledged or borrowed,
(3) refunds (other than refunds on death of the insured or complete surrender or cancellation of the
contract) and dividends under the contract may be used only to reduce future premiums or increase
future benefits, and (4) the contract generally does not pay or reimburse expenses reimbursable under
Medicare (except where Medicare is a secondary payor, or the contract makes per diem or other
periodic payments without regard to expenses). A contract would not fail to be treated as a long-
term care insurance contract solely because it provides for payments on a per diem or other periodic
basis without regard to expenses during the period. Long-term care insurance contracts would not
be subject to the rules requiring duplication of Medicare benefits.
3
Prior to December 31, 1993, a self-employed individual was entitled to deduct up to 25
percent of the health insurance expenses for the individual and his or her spouse and dependents.
The provision would treat long-term care insurance as health insurance. Thus, if the 25-percent
deduction were extended, it would apply to long-term care insurance premiums under the
provision.
14
Definition of qualified long-term care services
Qualified long-term care services would mean necessary diagnostic, preventive, therapeutic,
curing, treating, mitigating and rehabilitative services, and maintenance or personal care services that
are required by a chronically ill individual and that are provided pursuant to a plan of care prescribed
by a licensed health care practitioner.
A chronically ill individual would be one who has been certified within the previous 12 months
by a licensed health care practitioner as being unable to perform (without substantial assistance) at
least 2 activities of daily living for at least 90 days due to a loss of functional capacity or cognitive
impairment, or having a similar level of disability as determined by the Secretary of the Treasury in
consultation with the Secretary of Health and Human Services. Activities of daily living would be
eating, toileting, transferring, bathing, dressing and continence.
A licensed health care practitioner would be defined as a physician (as defined in sec.
1861(r)(l) of the Social Security Act) and any registered professional nurse, licenses social worker,
or other individual who meets such requirements as may be prescribed by the Secretary of the
Treasury.
Deduction for medical expenses
Unreimbursed expenses for qualified long-term care services provided to the taxpayer or the
taxpayer's spouse or dependent would be treated as medical expenses for purposes of the itemized
deduction for medical expenses (subject to the present-law floor of 7.5 percent of adjusted gross
income). Amounts received under a long-term care insurance contract (regardless of whether the
contract reimburses expenses or pays benefits on a per diem or other basis) would be treated as
reimbursement for expenses for this purpose. For purposes of this deduction, qualified long-term
care services would not include services provided to an individual by a relative or a related
corporation.
Within certain limits, long-term care insurance premiums would be treated as medical
expenses for purposes of the itemized deduction for medical expenses. The limits are as follows:
15
In the case of an individual
with an attained age before
The limitation
the close of the taxable year of:
would be:
Not more than 40
$ 200
More than 40 but not more than 50
375
More than 50 but not more than 60
750
More than 60 but not more than 70
2,000
More than 70
2,500
Beginning after 1996, these dollar limits would be indexed for increases in the medical care
component of the consumer price index. The Treasury Secretary would be directed to develop an
index based on increases in skilled nursing facility and home health care costs, that would be
substituted for the medical care component of the consumer price index.
Long-term care riders on life insurance contracts
In the case of long-term care insurance coverage provided by a rider on a life insurance
contract, the requirements applicable to long-term care insurance contracts would apply as if the
portion of the contract providing such coverage were a separate contract. The term "portion" would
mean only the terms and benefits that are in addition to the terms and benefits under the life insurance
contract without regard to long-term care coverage. The guideline premium limitation and
adjustment rules applicable under present law to the life insurance contract would be modified
appropriately to take account of charges with respect to the long-term care rider.
Life insurance company reserves
In determining reserves for insurance company tax purposes, the Federal income tax reserve
method would be the method prescribed by the National Association of Insurance Commissioners,
but no earlier and not in excess of the reserve under the method actually used by the company with
respect to the long-term care insurance contract for determining statutory reserves.
Health care continuation rules
The health care continuation rules would not apply to coverage under a long-term care
insurance contract.
Exchanges of life insurance and other contracts for long-term care insurance contracts
The exchange of a life insurance contract or an endowment or annuity contract for a qualified
long-term care insurance contract would not be taxable.
16
Certain distributions from IRAs and retirement plans for long-term care insurance excludable
from income
The provision would exclude from gross income distributions from individual retirement
arrangements (IRAs) and distributions attributable to elective deferrals to qualified cash or deferred
arrangements (sec. 401(k) plans), tax-sheltered annuities (sec. 403(b) plans), nonqualified deferred
compensation plans of governmental or tax-exempt employers (sec. 457 plans), and section
501(c)(18) plans used to pay premiums for long-term care insurance for the individual or the
individual's spouse. Such distributions would also not be subject to the 10-percent tax on early
withdrawals. Such plans would not fail to meet the qualification requirements applicable to such
plans merely because they permit such distributions.
Inclusion of excess long-term care benefits
In general, the provision would provide that the maximum annual amount of long-term care
benefits excludable from income with respect to an insured who is chronically ill (but not terminally
ill)⁴ as of the date the benefit is received could not exceed the equivalent of $200 per day for each day
the individual is chronically ill. Thus, the maximum annual exclusion for long-term care benefits with
respect to any chronically ill individual (who is not terminally ill) would be $73,000 (for 1996). Long-
term care benefits would include benefits paid under a long-term care insurance contract with respect
to the insured and benefits excludable from income under the provision relating to accelerated death
benefits by reason of the insured being chronically ill (but not terminally ill). If the insured is not the
same as the holder of the contract, the insured may assign some or all of this limit to the contract
holder at the time and manner prescribed by the Secretary.
This $200 per day limit would be indexed for inflation after 1996 for increases in the medical
care component of the consumer price index. The Secretary of the Treasury would be directed to
develop an index based on increases in skilled nursing facility and home health care costs that would
be substituted for the medical care component of the consumer price index.
A payor of long-term care benefits (as defined above) would be required to report the amount
of such benefits.
Effective Date
The provisions defining long-term care insurance contracts and qualified long-term care
services would apply to contracts issued after December 31, 1995. Any contract issued before
January 1, 1996, that met the long-term care insurance requirements in the State in which the policy
4
Terminally ill would be defined as under the provisions relating to accelerated death
benefits. In general, under that provision, a person would be considered to be terminally ill if they
were certified as having an illness or physical condition that reasonably can be expected to result in
death within 24 months of the date of the certification.
17
was sitused at the time it was issued would be treated as a long-term care insurance contract, and
services provided under or reimbursed by the contract would be treated as qualified long-term care
services.
A contract providing for long-term care insurance could be exchanged for a long-term care
insurance contract (or the former cancelled and the proceeds reinvested in the latter within 60 days)
tax-free between the date of enactment and January 1, 1996. Taxable gain would be recognized to
the extent money or other property is received in the exchange.
The issuance or conformance of a rider to a life insurance contract providing long-term care
insurance coverage would not be treated as a modification or a material change for purposes of
applying sections 101(f), 7702 and 7702A of the Code.
The provisions relating to (1) treatment as a medical expense of qualified long-term care
insurance services and eligible long-term care premiums and (2) tax-free exchanges of life insurance,
endowment and annuity contracts for long-term care insurance contracts, are effective for taxable
years beginning after December 31, 1995.
The change in treatment of reserves for long-term care insurance contracts would be effective
for contracts issued after December 31, 1995. In the event a company changes its reserve method
as set forth on the annual statement for long-term care insurance contracts after that date, the amount
of any adjustment arising from the change in tax reserve amounts would be spread over a 10-year
period.
The provision relating to certain distributions from IRAs and elective deferrals used to pay
long-term care insurance premiums is effective for payments and distributions after December 31,
1995.
The provision relating to the maximum exclusion for long-term care benefits would be
effective for taxable years beginning after December 31, 1995.
18
C. Tax Treatment of Accelerated Death Benefits under Life Insurance Contracts
Present Law
Treatment of amounts received under a life insurance contract
If a contract meets the definition of a life insurance contract, gross income does not include
insurance proceeds that are paid pursuant to the contract by reason of the death of the insured (sec.
101(a)). In addition, the undistributed investment income ("inside buildup") earned on premiums
credited under the contract is not subject to current taxation to the owner of the contract. The
exclusion under section 101 applies regardless of whether the death benefits are paid as a lump sum
or otherwise.
Amounts received under a life insurance contract (other than a modified endowment contract)
prior to the death of the insured are includible in the gross income of the recipient to the extent that
the amount received exceeds the taxpayer's investment in the contract (generally, the aggregate
amount of premiums paid less amounts previously received that were excluded from gross income).
If a contract fails to be treated as a life insurance contract under section 7702(a), inside
buildup on the contract is generally subject to tax.
Requirements for a life insurance contract
To qualify as a life insurance contract for Federal income tax purposes, a contract must be a
life insurance contract under the applicable State or foreign law and must satisfy either of two
alternative tests: (1) a cash value accumulation test or (2) a test consisting of a guideline premium
requirement and a cash value corridor requirement (sec. 7702(a)). A contract satisfies the cash value
accumulation test if the cash surrender value of the contract may not at any time exceed the net single
premium that would have to be paid at such time to fund future benefits under the contract. A
contract satisfies the guideline premium and cash value corridor tests if the premiums paid under the
contract do not at any time exceed the greater of the guideline single premium or the sum of the
guideline level premiums, and if the death benefit under the contract is not less than a varying
statutory percentage of the cash surrender value of the contract.
Proposed regulations on accelerated death benefits
The Treasury Department has issued proposed regulations under which certain "qualified
accelerated death benefits" paid by reason of the terminal illness of an insured are treated as paid by
reason of the death of the insured and therefore qualify for exclusion under section 101. In addition,
the proposed regulations permit an insurance contract that includes a qualified accelerated death
benefit rider to qualify as a life insurance contract under section 7702. Thus, the proposed regulations
provide that including this benefit would not cause an insurance contract to fail to meet the definition
of a life insurance contract.
19
Under the proposed regulations, a benefit qualifies as a qualified accelerated death benefit only
if it meets three requirements. First, the accelerated death benefit can be payable only if the insured
becomes terminally ill (as described below). Second, the amount of the benefit must equal or exceed
the present value of the reduction in the death benefit otherwise payable. Third, the cash surrender
value and the death benefit payable under the policy must be reduced proportionately as a result of
the accelerated death benefit.
For purposes of the proposed regulations, an insured is treated as terminally ill if he or she
has an illness that, despite appropriate medical care, the insurer reasonably expects to result in death
within twelve months from the payment of the accelerated death benefit. The proposed regulations
do not apply to viatical settlements.
Description of Provision
The provision would provide an exclusion from gross income for (1) any amount received
under a life insurance contract and (2) any amount received for the sale or assignment of a life
insurance contract to a qualified viatical settlement provider, provided that the insured under the life
insurance contract is either terminally ill or chronically ill.
The provision would not apply in the case of an amount paid to any taxpayer other than the
insured, if such taxpayer has an insurable interest by reason of the insured being a director, officer or
employee of the taxpayer, or by reason of the insured being financially interested in any trade or
business carried on by the taxpayer.
Under the provision, an individual would be considered terminally ill if a physician⁶ has
certified that the individual has an illness or physical condition that reasonably can be expected to
result in death within 24 months of the date of certification.
A "chronically ill" individual would be defined as under the separate provision relating to long-
term care. With respect to a chronically ill individual (who is not also terminally ill), the $200 per day
limitation on excess benefits under the separate long term care provision also would apply to
accelerated death benefit payments in a manner reflecting the period that the individual is chronically
ill.
5
For purposes of determining the present value, the maximum permissible discount rate is
the greater of (1) the applicable Federal rate that applies under the discounting rules for property
and casualty insurance loss reserves, and (2) the interest rate applicable to policy loans under the
contract. Also, the present value is determined assuming that the death benefit would have been
paid twelve months after payment of the accelerated death benefit.
6
The term "physician" would have the same meaning as in sec. 1861(r)(1) of the Social
Security Act.
20
A qualified viatical settlement provider would be any person that regularly purchases or takes
assignments of life insurance contracts on the lives of terminally ill or chronically ill individuals and
either (1) is licensed for such purposes in the State in which the insured resides, or (2) if the person
is not required to be licensed by that State, meets the requirements of sections 8 and 9 of the Viatical
Settlements Model Act, issued by the National Association of Insurance Commissioners.
For life insurance company tax purposes, the provision would treat a qualified accelerated
death benefit rider to a life insurance contract as life insurance. A qualified accelerated death benefit
rider would be any rider on a life insurance contract that provides only for payments of a type that
are excludable under this provision.
The issuance of a qualified accelerated death benefit rider to a life insurance contract would
not be treated as a modification or material change of the contract (and is not intended to affect the
issue date of any contract under section 101(f)).
Effective Date
The provision would apply to amounts received after December 31, 1995. The provision
treating a qualified accelerated death benefit rider as life insurance for life insurance company tax
purposes would be effective on January 1, 1996.
21
III. JOB CREATION AND WAGE ENHANCEMENT TAX ACT (TITLE III)
A. Capital Gains Provisions
1. 50-percent capital gains deduction for individuals
Present Law
In general, gain or loss reflected in the value of an asset is not recognized for income tax
purposes until a taxpayer disposes of the asset. On the sale or exchange of capital assets, the net
capital gain is taxed at the same rate as ordinary income, except that individuals are subject to a
maximum marginal rate of 28 percent of the net capital gain. Net capital gain is the excess of the net
long-term capital gain for the taxable year over the net short-term capital loss for the year. Gain or
loss is treated as long-term if the asset is held more than one year.
The Revenue Reconciliation Act of 1993 provided a 50-percent exclusion for gain from the
sale of certain small business stock acquired at original issue and held for at least five years. One-half
of the excluded amount is a minimum tax preference.
Prior to the enactment of the Tax Reform Act of 1986, individuals were allowed a deduction
equal to 60 percent of net capital gain. The deduction resulted in a maximum effective tax rate of 20
percent on such gains.
Capital losses are generally deductible in full against capital gains. In addition, individuals
may deduct capital losses against up to $3,000 of ordinary income in each year. Capital losses in
excess of the amount deductible are carried forward indefinitely in the case of individuals, and
generally carried back three years and forward five years in the case of corporations. Prior to the Tax
Reform Act of 1986, individuals were required to use two dollars of long-term capital loss to offset
each dollar of ordinary income.
Description of Provision
The provision would allow individuals a deduction equal to 50 percent of net capital gain for
the taxable year. The provision would repeal the present-law maximum 28-percent rate. Thus, the
effective rate on the net capital gain of an individual in the highest (i.e., 39.6 percent) rate bracket
would be 19.8 percent.
The provision would repeal the provisions in the Revenue Reconciliation Act of 1993
providing a capital gain exclusion for sales of certain small business stock.
The provision would reinstate the rule in effect prior to the 1986 Tax Reform Act that required
two dollars of the long-term capital loss of an individual to offset one dollar of ordinary income. The
$3,000 limitation on the deduction of capital losses against ordinary income would continue to apply.
22
Collectibles would be excluded from net capital gain. However, an individual could elect to
apply a maximum rate of 28 percent to the net capital gain attributable to collectibles, if the individual
foregoes the benefit of indexing the basis of the collectible.
Effective Date
The provision generally would apply to taxable years ending after December 31, 1994.
For a taxpayer's 1994-95 fiscal year or for the 1995 calendar year of a taxpayer holding
interests in one or more 1994-95 fiscal year pass-thru entities, the 50-percent capital gains deduction
would apply to the lesser of (1) the net capital gain for the taxable year, or (2) the net capital gain
determined by taking into account gain or loss properly taken into account for the portion of the
taxable year on or after January 1, 1995. Any net capital gain not eligible for the 50-percent capital
gains deduction would be subject to the present-law maximum rate of 28 percent. This generally has
the effect of applying the 50-percent deduction to capital assets sold or exchanged (or installment
payments received) on or after January 1, 1995, and subjecting gains from capital assets sold before
that date to a maximum rate of 28 percent.
In the case of gain taken into account by a pass-through entity (i.e., a RIC, a REIT, an S
corporation, a partnership, an estate or trust, or a common trust fund), the date taken into account
by the entity is the appropriate date for applying the rule in the preceding paragraph. Thus, gain taken
into account by a fiscal-year pass-thru entity in 1994 which an owner takes into account on its
calendar-year 1995 income tax return would not be eligible for the new capital gains deduction.
A taxpayer holding small business stock on the date of enactment would be able to elect,
within one year from the date of enactment, to have the provision of present law (rather than this
provision) apply to any gain from the sale of the stock.
The capital loss rule would not apply to losses arising in taxable years beginning before
January 1, 1996.
23
2. Indexing of basis of certain assets for purposes of determining gain
Present Law
Under present law, the amount taken into account in computing gain or loss from the
disposition of any asset is the sales price of the asset reduced by the taxpayer's basis in that asset. The
taxpayer's basis generally is the taxpayer's cost in the asset adjusted for depreciation, depletion, and
certain other amounts. No adjustment is allowed for inflation.
Description of Provision
In general
The provision generally would provide for an inflation adjustment to (i.e., indexing of) the
basis of certain assets (called "indexed assets") for purposes of determining gain (but not loss) upon
a sale or other disposition of such assets.
The provision would apply to assets acquired after December 31, 1994, held by taxpayers
other than C corporations. Assets held by individuals, trusts, estates, S corporations, regulated
investment companies ("RICs"), real estate investment trusts ("REITS"), and partnerships would be
eligible for indexing, to the extent gain is taken into account by taxpayers other than C corporations.
Indexed assets
Assets the basis of which would be eligible for the inflation adjustment generally would
include common stock of C corporations and tangible property that are capital assets or property used
in a trade or business and are held by the taxpayer for more than three years. No property using
neutral cost recovery would be an indexed asset.
Computation of inflation adjustment
The inflation adjustment under the provision would be computed by multiplying the taxpayer's
adjusted basis in the indexed asset by the percentage by which the GDP deflator for the last calendar
quarter ending before the disposition exceeds the GDP deflator for the last calendar quarter ending
before the asset was acquired by the taxpayer. The inflation adjustment would be rounded to the
nearest one-tenth of a percent. No adjustment would be made if the inflation adjustment is one or
less.
Special entities
RICs and REITs
In the case of shares held in a RIC or REIT, partial indexing would be provided based on the
24
ratio of the value of indexed assets held by the entity to its total assets. This ratio would be
determined every quarter (based on a three-month average). If the ratio of indexed assets to total
assets exceeds 80 percent in any quarter, full indexing of the shares would be allowed for that
quarter. If less than 20 percent of the assets are indexed assets in any quarter, no indexing would be
allowed for that quarter for the shares. Partnership interests held by a RIC or REIT would be subject
to a look-through test for purposes of determining whether, and to what degree, the shares in the RIC
or REIT could be indexed.
A return of capital distribution by a RIC or REIT would be treated by a shareholder as
allocable to stock acquired by the shareholder in the order in which the stock was acquired.
Partnership and S corporations, etc.
Under the provision, stock in an S corporation or an interest in a partnership or common trust
fund would not be an indexed asset. Instead, the individual owner would receive the benefit of the
indexing adjustment when the corporation, partnership, or common trust fund disposes of indexed
assets. Under the provision, any inflation adjustments at the entity level would flow through to the
holders and result in a corresponding increase in the basis of the holder's interest in the entity. If a
partnership has a section 754 election in effect, a partner transferring his interest in the partnership
would be entitled to any indexing adjustment that has accrued at the partnership level with respect
to the partner and the transferee partner would be entitled to the benefits of indexing for inflation
occurring after the transfer.
The indexing adjustment would be disregarded in determining any loss on the sale of an
interest in a partnership, S corporation or common trust fund.
Foreign corporations
Common stock of a foreign corporation generally would be an indexed asset only if the stock
is regularly traded on an established securities market. Indexed assets, however, would not include
stock in certain foreign corporations that are controlled by U.S. investors, or that hold substantial
amounts of passive assets, or earn substantial amounts of passive income. An American Depository
Receipt (ADR) for common stock in a foreign corporation would be treated as common stock in the
foreign corporation and, therefore, the basis in an ADR for common stock generally would be
indexed.
Other rules
Improvements and contributions to capital
No indexing would be provided for improvements or contributions to capital if the aggregate
amount during the taxable year with respect to the property or stock is less than $1,000. If the
aggregate amount of such improvements or contributions to capital is $1,000 or more, each addition
25
would be treated as a separate asset acquired at the close of the taxable year.
Suspension of holding period
No indexing adjustments would be allowed during any period during which there is a
substantial diminution of the taxpayer's risk of loss from holding the indexed asset by reason of any
transaction that the taxpayer, or a related party, entered into.
Short sales
In the case of a short sale of an indexed asset with a short sale period in excess of three years,
the provision would provide that the amount realized would be indexed for inflation in the same
manner that the basis would be indexed to the holder of the property.
Related parties
The provision would not index the basis of property for sales or dispositions between related
persons, except to the extent the basis of property in the hands of the transferee is a substitute basis
(e.g., gifts).
Collapsible corporations
Under the provision, indexing would not reduce the amount of ordinary gain that would be
recognized in cases where a corporation is treated as a collapsible corporation (under sec. 341) with
respect to a distribution or sale of stock.
Effective Date
The provisions would apply to property acquired after December 31, 1994. A taxpayer
holding any indexed asset on January 1, 1995, may elect to treat the indexed asset as having been sold
on such date for an amount equal to its fair market value, and as having been reacquired for an
amount equal to such value. If the election is made, the asset would be eligible for indexing under
the provision. Any gain resulting from the election is treated as received on the date of the deemed
sale, and any loss is not allowed. The adjusted basis of a principal residence that is held and used by
an individual on January 1, 1995 is subject to the indexing provision as of such date.
26
3. 25-percent corporate alternative tax for capital gains
Present Law
Under present law, the net capital gain of a corporation is taxed at the same rate as ordinary
income, and subject to tax at graduated rates up to 35 percent. Prior to the Tax Reform Act of 1986,
the net capital gain of a corporation was subject to a maximum effective tax rate of 28 percent (and
the highest rate was 46 percent for ordinary income).
Description of Provision
The provision would provide an alternative tax of 25 percent on the net capital gain of a
corporation if that rate is less than the corporation's regular tax rate.
Effective Date
The provision generally would apply to taxable years ending after December 31, 1994. For
taxable years ending after December 31, 1994, and beginning before January 1, 1996, the 25- percent
rate would apply to the lesser of (1) the net capital gain for the taxable year or (2) the net capital gain
taking into account only gain or loss properly taken into account for the portion of the taxable year
after December 31, 1994. The pass-through entity rules that apply to the capital gain deduction for
individuals would also apply for corporations.
27
4. Capital loss deduction allowed with respect to the sale or exchange of a principal residence
Present Law
Taxpayers generally may claim as a deduction any loss sustained during the taxable year and
not compensated by insurance or otherwise. In the case of an individual, however, the deduction is
limited to (1) losses incurred in a trade or business, (2) losses incurred in any transaction entered into
for profit though not connected with a trade or business, and (3) catastrophic losses of property that
arise from fire, storm, shipwreck, or other casualty or from theft. Deductions for losses from the sale
or exchange of capital assets are subject to the limitations described above. In addition, taxpayers
other than corporations may deduct capital losses against up to $3,000 of ordinary income each year.
A loss on the sale or exchange of a principal residence is treated as a nondeductible personal
loss. Gain on the sale or exchange of a principal residence generally is includible in gross income and
is subject to a maximum rate of 28 percent. If an individual purchases a new principal residence
within two years of selling the old residence, gain from the sale of the old residence (if any) is
recognized only to the extent that the taxpayer's adjusted sales price exceeds the taxpayer's cost of
purchasing the new residence (sec. 1034). A taxpayer also may elect to exclude from gross income
up to $125,000 of gain from the sale of a principal residence if the taxpayer (1) has attained age 55
before the sale and (2) has used the residence as a principal residence for three or more years of the
five years preceding the sale of the residence (sec. 121). This election may be made only once:
Description of Provision
The provision would provide that losses from the sale or exchange of a principal residence
would be treated as a deductible capital loss rather than a nondeductible personal loss.
Effective Date
The provision would be effective for sales and exchanges after December 31, 1994, in taxable
years ending after such date.
28
B. Cost Recovery Provisions
1. Neutral cost recovery
Present Law
Under present law, a taxpayer is allowed depreciation deductions for the cost of property used
in a trade or business. In general, depreciation for tangible property placed in service after 1986 is
determined under the modified Accelerated Cost Recovery System ("MACRS") enacted as part of
the Tax Reform Act of 1986. MACRS includes a general depreciation system and an alternative
depreciation system.
Under the general MACRS rules, property is divided into nine classes based on recovery
periods (3-year property, 5-year property, 7-year property, 10-year property, 15-year property,
20-year property, 27.5-year residential rental property, 39-year nonresidential real property and 50-
year railroad grading or tunnel bores) and is depreciated over such periods. The 200-percent
declining balance method of depreciation is used for 3-year, 5-year, 7-year, and 10-year property; the
150-percent declining balance method is used for 15-year and 20-year property and property used
in a farming business; and the straight-line method is used for other property (including real property).
In general, the value of MACRS deductions are reduced under the alternative depreciation
system by calculating depreciation using the straight-line method over the property's class life.⁷ A
property's class life generally corresponds to its Asset Depreciation Range ("ADR") midpoint life and
often is longer than the recovery period available under the general MACRS. (The class lives and
recovery periods of some assets are set by statute, regardless of the asset's ADR midpoint life.) The
alternative depreciation system applies to foreign use property, tax-exempt use property, tax-exempt
bond financed property, certain imported property, and property to which the taxpayer so elects and
is used to compute corporate earnings and profits. The class lives of the alternative depreciation
system are used for purposes of the corporate and individual alternative minimum tax. The alternative
minimum tax generally applies the 150-percent declining balance method to tangible personal property
placed in service after 1993.
Description of Provision
For MACRS property placed in service after December 31, 1994, the provision would allow
a taxpayer to elect, on a property-by-property basis, to determine depreciation deductions under
present law or under a new neutral cost recovery system ("NCRS"). The following describes the
treatment of property under NCRS.
7
Annual depreciation deductions for passenger automobiles also are limited under section
280F.
29
First, NCRS generally would follow MACRS but would replace the 200-percent declining
balance method of MACRS applicable to shorter-lived property with the 150-percent declining
balance method.
In addition, depreciation for any taxable year after the year in which the property is placed in
service would be determined by multiplying the deduction allowable for the property for the taxable
year (determined without regard to this provision) by the "applicable neutral cost recovery ratio" for
the year.
In the case of property that would otherwise qualify for the 200-percent declining balance
method (but for the election to use NCRS), the applicable neutral cost recovery ratio for the taxable
year is first determined by dividing (1) the gross domestic product deflator for the taxable year by (2)
the gross domestic product deflator for the year the property was placed in service by the taxpayer.
This ratio is then multiplied by the number equal to 1.035 raised to the nth power, where "n" is the
number of full years since the property was placed in service by the taxpayer. In the case of other
MACRS property (e.g., longer-lived property and property to which the alternative depreciation
system applies), the applicable neutral cost recovery ratio for the taxable year is determined by
dividing (1) the gross domestic product deflator for the taxable year by (2) the gross domestic
product deflator for the year the property was placed in service by the taxpayer.
The gross domestic product deflator for any taxable year is the price deflator released by the
Department of Commerce for the gross domestic product for the calendar quarter that includes the
mid-point of the taxpayer's taxable year. Thus, for example, the gross domestic product deflator
for a taxpayer with a fiscal year ending November 30 is the deflator published for the calendar quarter
ending June 30.⁸ The appropriate deflator for any calendar quarter would be the last deflator for such
quarter released by the Department of Commerce before the end of the next calendar quarter.
For any property, the applicable neutral cost recovery ratio may not be less than one and is
rounded to the nearest one-thousandth.
The depreciation allowances provided under NCRS for regular tax purposes also would be
applied for alternative minimum tax purposes (including for purposes of the adjusted current earnings
component of the corporate alternative minimum tax).
The application of the applicable neutral cost recovery ratio generally would not be taken into
account for purposes of (1) determining the adjusted basis of depreciable property,9 any interest in
8
The Secretary of the Treasury would be authorized to provide such rules as are
necessary to determine the appropriate deflator for any taxable year that is a short year.
9
The additional deductions allowed by the provision would increase the "unrecovered
basis" of a passenger automobile to the extent such deductions are not allowed by reason of
section 280F.
30
a pass-through entity (as defined in proposed sec. 1201(d)(2)), or the stock of a consolidated
subsidiary; (2) determining earnings and profits; or (3) the recapture provisions of sections 1245 and
1250. The additional deductions determined under NCRS would be subject to the built-in loss rules
of section 382. Finally, the additional deductions determined under NCRS would not be subject to
the at-risk rules to the extent the taxpayer's underlying MACRS depreciation deductions are not
subject to the at-risk rules.
NCRS would not apply to any property for which the taxpayer so elects¹⁰ or to property
placed in service pursuant to certain churning transactions.
Effective Date
The provision would be effective for qualifying property placed in service after December 31,
1994.
10 Any election, once made, would be irrevocable.
31
2. Treatment of leasehold improvements
Present Law
Depreciation of leasehold improvements
Improvements made on leased property are depreciated under the modified Accelerated Cost
Recovery System ("MACRS"), even if the MACRS recovery period assigned to the property is longer
than the term of the lease (sec. 168(i)(8)). 11 This rule applies regardless whether the lessor or lessee
places the leasehold improvements in service. 12 If a leasehold improvement constitutes an addition
or improvement to nonresidential real property already placed in service, the improvement is
depreciated using the straight-line method over a 39-year recovery period, beginning in the month
the addition or improvement was placed in service (secs. 168(b)(3), (c)(1), (d)(2), and (i)(6)). 13
Treatment of dispositions of leasehold improvements
A taxpayer generally recovers the adjusted basis of property for purposes of determining gain
or loss upon the disposition of the property. Upon the termination of a lease, the adjusted basis of
leasehold improvements that were made, but are not retained, by a lessee are taken into account to
compute gain or loss by the lessee. 14 The proper treatment of the adjusted basis of improvements
11 Prior to the adoption of the Accelerated Cost Recovery System ("ACRS") by the
Economic Recovery Act of 1981, taxpayers were allowed to depreciate the various components
of a building as separate assets with separate useful lives. The use of component depreciation was
repealed upon the adoption of ACRS. The denial of component depreciation also applies under
MACRS, as provided by the Tax Reform Act of 1986.
12 Former Code sections 168(f)(6) and 178 provided that in certain circumstances, a
lessee could recover the cost of leasehold improvements made over the remaining term of the
lease. These provisions were repealed by the Tax Reform Act of 1986.
13 If the improvement is characterized as tangible personal property, ACRS depreciation
is calculated using the shorter recovery periods and accelerated methods applicable to such
property. The determination of whether certain improvements are characterized as tangible
personal property or as nonresidential real property often depends on whether or not the
improvements constitute a "structural component" of a building (as defined by Treas. Reg. sec.
1.48-1(e)(1)). See, for example, Metro National Corp., 52 TCM 1440 (1987); King Radio Corp.,
486 F.2d 1091 (10th Cir., 1973); Mallinckrodt, Inc., 778 F.2d 402 (8th Cir., 1985) (with respect
various leasehold improvements).
14
See, Report of the Committee on Ways and Means on H.R. 3838 (H. Rept. 99-426),
p. 158, and Senate Finance Committee Report on H.R. 3838 (S. Rept. 99-313), p. 105 (Tax
Reform Act of 1986, 99th Cong.).
32
made by a lessor upon termination of a lease is less clear. Proposed Treasury regulation section
1.168-2(e)(1) provides that the unadjusted basis of a building's structural components must be
recovered as whole. In addition, proposed Treasury regulation sections 1.168-2(I)(1) and 1.168-6(b)
provide that "disposition" does not include the retirement of a structural component of real property
if there is no disposition of the underlying building. 15 Thus, it appears that it is the position of the
Internal Revenue Service that leasehold improvements made by a lessor that constitute structural
components of a building must be continued to be depreciated in the same manner as the underlying
real property, even if such improvements are retired at the end of the lease term. 16 Some lessors, on
the other hand, may be taking the position that a leasehold improvement is a property separate and
distinct from the underlying building and that an abandonment loss under section 165 is allowable at
the end of the lease term for the adjusted basis of the property. In addition, lessors may argue that
even if a leasehold improvement constitutes a structural component of a building, proposed Treasury
regulation section 1.168-2(I)(1) (that seemingly denies the deduction at the end of the lease term)
applies only to retirements, but not abandonments or demolitions, of such property. 17 Thus,
it
appears that some lessors take the position that, at least in certain circumstances, the adjusted basis
of leasehold improvements may be recovered at the end of the term of the lease to which the
improvements relate even if there is no disposition of the underlying building.
Description of Provision
The provision would conform the treatment of lessors and lessees with respect to leasehold
improvements disposed of at the end of a term of lease. Thus, under the provision, a lessor that
disposes of a leasehold improvement at the end of the term of a lease would be allowed to recover
the adjusted basis of the improvement at that time.
Effective Date
The provision would be effective for leasehold improvements disposed of after March 13,
1995. No inference is intended as to the proper treatment of such dispositions before March 14,
1995.
15
For example, if a taxpayer places a new roof on building subject to ACRS, the
taxpayer must continue to depreciate the allocable cost of the old roof as part of the cost of the
underlying building. (Prop. Treas. reg. sec. 1.168-6(b)(1)) See, also, Joint Committee on
Taxation, General Explanation of the Economic Recovery Tax Act of 1981 (97th Cong.), p. 86.
16 See, IRS General Information Letter, dated Sept. 17, 1992.
17
Compare the second and fourth sentences of proposed Treasury regulation section
1.168-2(I)(1).
33
C. Alternative Minimum Tax
Present Law
In general
Present law imposes a minimum tax on an individual or a corporation to the extent the
taxpayer's minimum tax liability exceeds its regular tax liability. The individual minimum tax is
imposed at rates of 26 and 28 percent on alternative minimum taxable income in excess of a phased-
out exemption amount; the corporate minimum tax is imposed at a rate of 20 percent on alternative
minimum taxable income in excess of a phased-out $40,000 exemption amount. Alternative minimum
taxable income ("AMTI") is the taxpayer's taxable income increased by certain preference items and
adjusted by determining the tax treatment of certain items in a manner that negates the deferral of
income resulting from the regular tax treatment of those items. In the case of a corporation, in
addition to the regular set of adjustments and preferences, there is a second set of adjustments known
as the "adjusted current earnings" adjustment.
Preference items in computing AMTI
The minimum tax preference items are:
(1) The excess of the deduction for percentage depletion over the adjusted basis of the
property at the end of the taxable year. For taxable years beginning after 1992, this preference does
not apply to percentage depletion allowed with respect to oil and gas properties.
(2) The amount by which excess intangible drilling costs arising in the taxable year exceed 65
percent of the net income from oil, gas, and geothermal properties. For taxable years beginning after
1992, this preference does not apply to independent producers to the extent the producer's AMTI is
reduced by 40 percent or less by ignoring the preference.
(3) The amount that a financial institution's bad debt deduction determined under section 593
exceeds the amount that would have determined based on the institution's actual experience.
(4) Tax-exempt interest income on private activity bonds (other than qualified 501(c)(3)
bonds) issued after August 7, 1986.
(5) Accelerated depreciation or amortization on certain property placed in service before
January 1, 1987.
(6) One-half of the amount excluded from income under section 1202 (relating to gains on
the sale of certain small business stock).
34
In addition, losses from any tax shelter farm or passive activities are denied. 18
Adjustments in computing AMTI
The adjustments that all taxpayers must make are:
(1) Depreciation on property placed in service after 1986 must be computed by using the
generally longer class lives prescribed by the alternative depreciation system of section 168(g) and
either (a) the straight-line method in the case of property subject to the straight-line method under
the regular tax or (b) the 150-percent declining balance method in the case of other property.
(2) Mining exploration and development costs must be capitalized and amortized over a 10-
year period.
(3) Taxable income from a long-term contract (other than a home construction contract) must
be computed using the percentage of completion method of accounting.
(4) The amortization deduction allowed for pollution control facilities (generally determined
using 60-month amortization for a portion of the cost of the facility under the regular tax) must be
calculated under the alternative depreciation system.
(5) Dealers in property (other than certain dealers of timeshares and residential lots) may not
use the installment method of accounting.
The adjustments applicable to individuals are:
(1) Miscellaneous itemized deductions;
(2) State, local, and foreign real property taxes; State and local personal property taxes; and
State, local, and foreign income, war profits, and excess profits taxes;
(3) Medical expenses except to the extent in excess of ten percent of the taxpayer's adjusted
gross income;
(4) Standard deductions and personal exemptions;
(5) The amount allowable as a deduction for circulation expenditures must be capitalized and
amortized over a 3-year period;
(6) The amount allowable as a deduction for research and experimental expenditures must be
18 Given the passage of section 469 (relating to the deductibility of losses from passive
activities), these provisions are largely deadwood.
35
capitalized and amortized over a 10-year period¹⁹; and
(7) The special rules relating to incentive stock options.
The adjustments applicable to corporations are:
(1) The special rules applicable to Merchant Marine capital construction funds;
(2) The special deduction allowable under section 833(b) (relating to Blue Cross and Blue
Shield organizations); and
(3) The adjusted current earnings adjustment.
Adjusted current earnings (ACE) adjustment
The adjusted current earnings adjustment is the amount equal to 75 percent of the amount by
which the adjusted current earnings (ACE) of a corporation exceeds its AMTI (determined without
the ACE adjustment and the alternative tax net operating loss deduction).²⁰ In determining ACE, the
following rules apply:
(1) For property placed in service before 1994, depreciation generally is determined using the
straight-line method and the class life determined under the alternative depreciation system.²¹
(2) Any amount that is excluded from gross income under the regular tax but is included for
purposes of determining earnings and profits is included in determining ACE.22
(3) The inside build-up of a life insurance contract is includible in ACE (and the related
premiums are deductible).
(4) Intangible drilling costs (other than those incurred by an independent producer after 1992)
19
No adjustment is required if the taxpayer materially participates in the activity that
relates to the research and experimental expenditures.
20
If ACE is less than AMTI, the ACE adjustment may reduce AMTI to the extent of prior-
year ACE inclusions.
21 No ACE adjustment is required for property placed in service after 1993.
22 Exceptions and special rules are provided for related expenses that are not deductible
for regular tax purposes but reduce earnings and profits, the dividends received deduction relating
to certain dividends, taxes on dividends from 936 companies, and certain dividends received by
certain cooperatives.
36
must be capitalized and amortized over a 60-month period.
(5) The regular tax rules of sections 173 (relating to circulation expenditures) and 248
(relating to organizational expenditures) do not apply.
(6) Inventory must be calculated using the FIFO, rather LIFO, method.
(7) The installment sales method generally may not be used.
(8) No loss may be recognized on the exchange of any pool of debt obligations for another
pool of debt obligations having substantially the same effective interest rates and maturities.
(9) Depletion (other than depletion claimed by an independent producer after 1992) must be
calculated using the cost, rather than the percentage, method.
(10) In certain cases, the assets of a corporation that has undergone an ownership change
must be stepped-down to their fair market values.
Other rules
The combination of the taxpayer's net operating loss carryover and foreign tax credits cannot
reduce the taxpayer's alternative minimum tax liability by more than 90 percent of the amount
determined without these items.
The various credits allowed under the regular tax generally are not allowed against the
alternative minimum tax.
If a taxpayer is subject to alternative minimum tax in one year, such amount of tax is allowed
as a credit in a subsequent taxable year to the extent the taxpayer's regular tax liability exceeds its
tentative minimum tax in such subsequent year. If the taxpayer is an individual, this credit is allowed
to the extent the taxpayer's alternative minimum tax liability is a result of adjustments that are timing
in nature.
Description of Provision
Repeal of the corporate alternative minimum tax
The provision would repeal the corporate alternative minimum tax for taxable years beginning
after December 31, 2000. The individual alternative minimum tax, as amended by the provision,
would remain in existence. In addition, as described below, the provision would make certain
changes to the corporate and individual alternative minimum taxes for taxable years beginning before
January 1, 2001.
37
Preference items in computing AMTI
The provision would make the following changes to the minimum tax preference items:
(1) The preference relating to depletion would be repealed for depletion claimed in taxable
years beginning after December 31, 1995.
(2) The preference relating to intangible drilling costs would be repealed for costs incurred
in taxable years beginning after December 31, 1995.
(3) The preference relating to bad debt losses of financial institutions would be repealed for
taxable years beginning after December 31, 1995.
(4) In the case of a corporation, the preference relating to tax-exempt interest on private
activity bonds would be repealed for interest accruing after December 31, 1995.
In addition, the special rules relating to tax shelter farm activity and passive losses would be
repealed for taxable years beginning after December 31, 1995.
Adjustments in computing AMTI
The provision would make the following changes to the adjustments used in computing
AMTI:
(1) The adjustment relating to depreciation would be repealed for property placed in service
after March 13, 1995. Under another proposed provision, property to which the proposed neutral
cost recovery system applies would not be subject to the alternative minimum tax depreciation
adjustment. The neutral cost recovery system generally would apply to qualified property placed in
service after December 31, 1994, unless the taxpayer irrevocably elects, on a property-by-property
basis, to not have the system apply.
(2) The adjustment relating to mining exploration and development costs would be repealed
for costs paid or incurred after December 31, 1995.
(3) The adjustment relating to long-term contracts would be repealed for contracts entered
into after December 31, 1995.
(4) The adjustment relating to pollution control facilities would be repealed for property
placed in service after December 31, 1995.
(5) The adjustment relating to installment sales would be repealed for dispositions after
December 31, 1995.
38
(6) The adjustments relating to circulation and research and experimental expenditures would
be repealed for costs paid or incurred after December 31, 1995.
(7) The adjustment relating to Merchant Marine capital construction funds would be repealed
for deposits made to a fund after December 31, 1995, and to earnings received or accrued after
December 31, 1995, on amounts in such funds. Withdrawals of deposits and earnings from a fund
after December 31, 1995, would be treated as allocable: (a) first to deposits (and earnings received
or accrued) before January 1, 1987; (b) then, to deposits (and earnings received or accrued) after
December 31, 1986, and before January 1, 1996; and (c) then, to deposits (and earnings received or
accrued) after December 31, 1995.
(8) The denial of the special deduction allowed under section 833(b) would be repealed for
taxable years beginning after December 31, 1995.
Adjusted current earnings (ACE) adjustment
The provision would make the following changes to the ACE adjustment of the corporate
alternative minimum tax:
(1) The ACE rules relating to the inclusion (or deduction) of items included (or excluded)
from the calculation of earnings and profits would not apply to taxable years beginning after
December 31, 1995.
(2) The ACE adjustment relating to intangible drilling costs would be repealed for amounts
paid or incurred after December 31, 1995.
(3) The ACE adjustment relating to section 173 and 248 costs would be repealed for amounts
paid or incurred after December 31, 1995.
(4) The ACE adjustment relating to LIFO inventory would be repealed for LIFO adjustments
arising in taxable years beginning after December 31, 1995.
(5) The ACE adjustment relating to installment sales would be repealed for sales after
December 31, 1995.
(6) The ACE adjustment relating to the exchange of debt pools would be repealed for
exchanges after December 31, 1995.
(7) The ACE adjustment relating to built-in losses with respect to certain changes of
ownership would be repealed for ownership changes after December 31, 1995.
(8) The ACE adjustments relating to section 173 and 248 costs would be repealed for
amounts paid or incurred after December 31, 1995.
39
(9) The ACE adjustment relating to depletion would be repealed for depletion allowed in
taxable years beginning after December 31, 1995.
Use of credits
The special rules relating to the use of net operating losses and foreign tax credits would be
repealed for net operating losses and foreign tax credits used in taxable years beginning after
December 31, 1995. Carrybacks of losses and credits to taxable years beginning before January 1,
1996, would continue to be subject to the 90 percent limitations.
The provision would not change the rules regarding the availability of other credits against
the alternative minimum tax.
For taxable years beginning after December 31, 1995, a taxpayer with alterative minimum tax
credit carryovers would be allowed to use these credits to offset 90 percent of its regular tax liability
(determined after the application of other credits). As under present law, in no event could alternative
minimum tax credit carryovers be used to reduce the taxpayer's tax liability below its tentative
minimum tax, if any.
Effective Date
Except as provided above, the provision would be effective for taxable years beginning after
December 31, 1995.
40
D. Public Debt Reduction Checkoff and Trust Fund
Present Law
The Presidential Election Campaign Fund ("Campaign Fund") provides for public financing
of a portion of qualified Presidential election campaign expenditures and certain convention costs
(sec. 9001 et seq.) The Campaign Fund is financed through the voluntary designation by individual
taxpayers on their Federal income tax returns of $3 of tax liability, which is commonly known as the
Presidential election campaign checkoff (sec. 6096). This checkoff can be made only by individuals
(not corporations) and does not affect the individual's tax liability. The Treasury Department
accumulates revenues in the Campaign Fund over a four-year period and then disburses funds to
eligible candidates for President, Vice President, and conventions during the Presidential election
year. 24
Individuals who itemize deductions (as well as corporations) are allowed a deduction, subject
to certain limitations, for contributions made to qualified charitable organizations or to Federal, State,
and local governments. Instructions to IRS income tax forms inform taxpayers that they may make
a gift to the Federal Government to reduce the public debt by enclosing with their return a separate
check made payable to the "Bureau of Public Debt." In addition, various public laws provide that
contributions to specific Federal entities or programs are regarded as gifts to the United States. Such
contributions to the Bureau of Public Debt and to specific Federal entities or programs are deductible
if the donor itemizes deductions for the year in which the contribution is made.
Description of Provision
Individual taxpayers would be allowed to designate an amount up to 10 percent of their
Federal income tax liability for a taxable year to be earmarked to reduce the Federal public debt.
Such a designation could be made only at the time the taxpayer files his or her income tax return for
a particular taxable year. An individual's decision whether or not to make a designation under the
provision would not affect his or her tax liability. If an individual has no Federal income tax liability
23
Prior to enactment of the Revenue Reconciliation Act of 1993, individuals could
designate $1 of their Federal income tax liability to the Campaign Fund. For calendar year 1992,
20.5 million returns, or 18 percent of the total number of individual income tax returns, designated
a total of $29.6 million in contributions to the Campaign Fund. See Statement of Maurice B. Foley,
Deputy Tax Legislative Counsel (Tax Legislation), Department of the Treasury, before the Ways
and Means Subcommittee on Select Revenue Measures, U.S. House of Representatives, November
16, 1993.
24
A number of States provide checkoffs on their income tax forms to permit taxpayers to
fund State electoral campaigns, private charitable organizations, and State governmental programs.
Some of the State programs require taxpayers to pay additional amounts to exercise the checkoff
option, generally by accepting a smaller refund.
41
for a taxable year--i.e., the individual owes no Federal income tax after claiming allowable credits
(other than the EITC) and any designation to the Presidential Election Campaign Fund--then such
individual would not be allowed to make a designation to reduce the Federal debt on his or her return
for that year.
Under the provision, amounts earmarked by taxpayers to reduce the public debt would be
transferred into a Public Debt Reduction Trust Fund, which would be used only to retire or purchase
Federal securities (other than obligations held by the Social Security Trust Fund, the Civil Service
Retirement and Disability Fund, and the Department of Defense Military Retirement Fund). Related
provisions (outside the jurisdiction of the committee and, thus, not included in the provision) would
require either specific spending cuts or an across-the-board sequestration in Federal spending (with
certain exceptions) to match the amounts designated by taxpayers for debt reduction.
Effective Date
The provision would be effective for taxable years ending after the date of enactment, and
would remain in effect until the entire outstanding Federal public debt is retired.
42
E. Small Business Incentives
1. Increase in unified estate and gift tax credits
Present Law
Application of the estate and gift tax
A gift tax is imposed on lifetime transfers and an estate tax is imposed on transfers at death.
Since 1976, the gift tax and the estate tax have been unified so that a single graduated rate schedule
applies to cumulative taxable transfers made by a taxpayer during his or her lifetime and at death. 25
Under this rate schedule, the unified estate and gift tax rates begin at 18 percent on the first $10,000
in cumulative taxable transfers and reach 55 percent on cumulative taxable transfers over $3 million.
The amount of gift tax payable for any calendar year generally is determined by multiplying
the applicable tax rate (from the unified rate schedule) by the cumulative lifetime taxable transfers
made by the taxpayer and then subtracting any gift taxes payable for prior taxable periods. This
amount is reduced by any available unified credit (and other applicable credits) to determine the gift
tax liability for the taxable period.
The amount of estate tax payable generally is determined by multiplying the applicable tax rate
(from the unified rate schedule) by the cumulative post-1976 taxable transfers made by the taxpayer
during his lifetime or at death and then subtracting any gift taxes payable for prior calendar years
(after 1976). This amount is reduced by any available unified credit (and other applicable credits) to
determine the estate tax liability.
Unified credit
A unified credit is available with respect to taxable transfers by gift and at death. Since 1987,
the unified credit amount has been fixed at $192,800, which effectively exempts a total of $600,000
in cumulative taxable transfers from the estate and gift tax. The benefits of the unified credit (and the
graduated estate and gift tax rates) are phased-out by a five-percent surtax imposed upon cumulative
taxable transfers over $10 million and not exceeding $21,040,000.20
The unified credit originally was enacted in the Tax Reform Act of 1976. As enacted, the
credit was phased in over five years to a level that effectively exempted $175,625 of taxable transfers
from the estate and gift tax in 1981 (i.e., a unified credit of $47,000). The Economic Recovery Tax
Act of 1981 increased the amount of the unified credit each year between 1982 and 1987, from an
25 Prior to 1976, separate tax rate schedules applied to the gift tax and the estate tax.
26 Thus, if a taxpayer has made cumulative taxable transfers exceeding $21,040,000, his or
her average transfer tax rate will be 55 percent under present law.
43
effective exemption of $225,000 in 1982 to an effective exemption of $600,000 in 1987. The unified
credit has not been increased since 1987.
Annual exclusion for gifts
A taxpayer may exclude $10,000 of gifts made to any one donee during a calendar year. This
annual exclusion does not apply to gifts of future interests (e.g., reversions or remainders). Prior to
1982, the annual exclusion was $3,000.
Special use valuation
Generally, for Federal transfer tax purposes, the value of property is its fair market value, i.e.,
the price at which the property would change hands between a willing buyer and a willing seller,
neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant
facts. Under Code section 2032A, an executor may elect for estate tax purposes to value certain
"qualified real property" used in farming or another qualifying closely-held trade or business at its
current use value, rather than its highest and best use value. Presently, the maximum reduction in the
value of such real property resulting from an election under Code section 2032A is $750,000.
Generation-skipping transfer tax
A generation-skipping transfer tax (GST tax) generally is imposed on transfers, either directly
or through a trust or similar arrangement, to a "skip person" (i.e., a beneficiary in a generation more
than one generation below that of the transferor). Transfers subject to the GST tax include direct
skips, taxable terminations and taxable distributions.²
A person is allowed an exemption from the GST tax of up to $1,000,000 for generation-
skipping transfers made during life or at death.
Installment payment of estate tax
Under Code section 6166, an executor generally may elect to pay the Federal estate tax
attributable to an interest in a closely held business in installments over, at most, a 14-year period.
To qualify for the election, the business must be an active trade or business and the value of the
decedent's interest in the closely held business must exceed 35 percent of the decedent's adjusted
27 For this purpose, a direct skip is any transfer subject to estate or gift tax of an interest
in property to a skip person (e.g., a gift from grandparent to grandchild). A taxable termination is
a termination (by death, lapse of time, release of power, or otherwise) of an interest in property
held in trust unless, immediately after such termination, a non-skip person has an interest in the
property, or unless at no time after the termination may a distribution (including a distribution
upon termination) be made from the trust to a skip person. A taxable distribution is a distribution
from a trust to a skip person (other than a taxable termination or a direct skip).
44
gross estate.
If an election is made, the estate pays only interest for the first four years, followed by up to
ten annual installments of principal and interest. Interest is generally imposed at the rate applicable
to underpayments of tax under Code section 6621 (i.e., the Federal short term rate plus three
percentage points). Under Code section 6601(j), however, a special four-percent interest rate applies
to the amount of deferred estate tax attributable to the first $1,000,000 in value of the closely-held
business. The maximum amount that may be subject to the four-percent rate is the lower of (1)
$345,800 (i.e., the amount of estate tax on the first $1,000,000), less the amount of allowable unified
credit, or (2) the amount of estate tax attributable to the closely-held business that is being paid in
installments pursuant to Code section 6166.
Description of Provision
The provision would increase the present-law unified credit of $192,800 to $248,300 over
a three-year period beginning in 1996. For decedents dying and gifts made in 1996, the unified credit
would be $229,800 (i.e., the amount that would effectively exempt $700,000 in taxable transfers from
the estate and gift tax). For decedents dying and gifts made in 1997, the unified credit would be
$239,050 (i.e., the amount that would effectively exempt $725,000 in taxable transfers from the estate
and gift tax). For decedents dying and gifts made after 1997, the unified credit would be $248,300
(i.e., the amount that would effectively exempt $750,000 in taxable transfers from the estate and gift
tax). After 1998, the unified credit would be indexed for inflation each year by multiplying the
applicable exclusion amount of $750,000 by a cost of living adjustment. The indexed exclusion
amount would be rounded to the nearest $10,000.
Conforming amendments to reflect the increased unified credit would be made (1) to the five-
percent surtax in order to permit the proper phase out of the increased unified credit, (2) to the
general filing requirements for estate and gift tax returns under Code section 6018(a), and (3) to the
amount of the unified credit allowed under Code section 2102(c)(3) with respect to nonresident aliens
with U.S. situs property who are residents of certain treaty countries.
In addition to increasing and indexing the unified credit, the provision would index the
following amounts for inflation beginning after 1998: (1) the $10,000 annual exclusion for gifts; (2)
the $750,000 ceiling amount on special use valuation under Code section 2032A; (3) the $1,000,000
generation-skipping transfer tax exemption; and (4) the value of a closely-held business (i.e.,
$1,000,000) eligible for the special four-percent interest rate under Code section 6601(j). Indexing
of the annual exclusion would be rounded to the nearest $1,000 and indexing of the other amounts
would be rounded to the nearest $10,000.
Effective Date
The provision would apply to the estates of decedents dying, and gifts made, after December
31, 1995.
45
2. Increase in expensing for small businesses
Present Law
In lieu of depreciation, a taxpayer with a sufficiently small amount of annual investment may
elect to deduct up to $17,500 of the cost of qualifying property placed in service for the taxable year
(sec. 179). 28 In general, qualifying property is defined as depreciable tangible personal property that
is purchased for use in the active conduct of a trade or business. The $17,500 amount is reduced (but
not below zero) by the amount by which the cost of qualifying property placed in service during the
taxable year exceeds $200,000. In addition, the amount eligible to be expensed for a taxable year may
not exceed the taxable income of the taxpayer for the year that is derived from the active conduct of
a trade or business (determined without regard to this provision). Any amount that is not allowed
as a deduction because of the taxable income limitation may be carried forward to succeeding taxable
years (subject to similar limitations).
Description of Provision
The provision would increase the $17,500 amount allowed to be expensed under Code section
179 to $35,000. The increase would be phased in as follows:
Maximum Expensing
Taxable Year
$22,500
1996
$27,500
1997
$32,500
1998
$35,000
1999
Effective Date
The provision would be effective for property placed in service in taxable years beginning after
December 31, 1995, subject to the phase-in schedule set forth above.
28
The amount permitted to be expensed under Code section 179 is increased by up to
$20,000 for certain property placed in service by a business located in an empowerment zone
(sec. 1397A).
46
3. Clarification of definition of principal place of business; Treatment of storage of product
samples
Present Law
A taxpayer's business use of his or her home may give rise to a deduction for the business
portion of expenses related to operating the home (e.g., a portion of rent or depreciation and repairs).
Code section 280A(c)(1) provides, however, that business deductions generally are allowed only with
respect to a portion of a home that is used exclusively and regularly in one of the following ways: (1)
as the principal place of business for a trade or business; (2) as a place of business used to meet with
patients, clients, or customers in the normal course of the taxpayer's trade or business; or (3) in
connection with the taxpayer's trade or business, if the portion so used constitutes a separate structure
not attached to the dwelling unit. In the case of an employee, the Code further requires that the
business use of the home must be for the convenience of the employer (sec. 280A(c)(1)). These
rules apply to houses, apartments, condominiums, mobile homes, boats, and other similar property
(sec. 280A(f)(1)). Under Internal Revenue Service (IRS) rulings, the deductibility of expenses
incurred for local transportation between a taxpayer's home and a work location sometimes depends
on whether the taxpayer's home office qualifies under section 280A(c)(1) as a principal place of
business (see Rev. Rul. 94-47, 1994-29 I.R.B. 6).
Prior to 1976, expenses attributable to the business use of a residence were deductible
whenever they were "appropriate and helpful" to the taxpayer's business. In 1976, Congress adopted
section 280A, in order to provide a narrower scope for the home office deduction, but did not define
the term "principal place of business." In Commissioner V. Soliman, 113 S.Ct. 701 (1993), the
Supreme Court reversed lower court rulings and upheld an IRS interpretation of section 280A that
disallowed a home office deduction for a self-employed anesthesiologist who practiced at several
hospitals but was not provided office space at the hospitals. Although the anesthesiologist used a
room in his home exclusively to perform administrative and management activities for his profession
(i.e., he spent two or three hours a day in his home office on bookkeeping, correspondence, reading
medical journals, and communicating with surgeons, patients, and insurance companies), the Supreme
Court upheld the IRS position that the "principal place of business" for the taxpayer was not the home
office but, rather, was at the hospitals where he performed the "essence of the professional service. "30
29 If an employer provides access to suitable space on the employer's premises for the conduct
by an employee of particular duties, then, if the employee opts to conduct such duties at home as a
matter of personal preference, the employee's use of the home office is not "for the convenience of
the employer." See, e.g., W. Michael Mathes, (1990) T.C. Memo 1990-483.
30 In response to the Supreme Court's decision in Soliman, the IRS revised its Publication
587, Business Use of Your Home, to more closely follow the comparative analysis used in
Soliman by focusing on the following two primary factors in determining whether a home office is
a taxpayer's principal place of business: (1) the relative importance of the activities performed at
each business location; and (2) the amount of time spent at each location.
47
Because the taxpayer did not meet with patients at his home office and the room was not a separate
structure, a deduction was not available under the second or third exception under section 280A(c)(1)
(described above).
Section 280A(c)(2) contains a special rule that allows a home office deduction for business
expenses related to a space within a home that is used on a regular (even if not exclusive) basis as a
storage unit for the inventory of the taxpayer's trade or business of selling products at retail or
wholesale, but only if the home is the sole fixed location of such trade or business.
Home office deductions may not be claimed if they create (or increase) a net loss from a
business activity, although such deductions may be carried over to subsequent taxable years (sec.
280A(c)(5)).
Description of Provision
The provision would amend present-law section 280A to specifically provide that a home
office qualifies as the "principal place of business" if (1) the office is used by the taxpayer to conduct
administrative or management activities for a trade or business and (2) there is no other fixed location
of the trade or business where the taxpayer conducts substantial administrative or management
activities. As under present law, deductions would be allowed for a home office meeting the above
two-part test only if the office is exclusively used on a regular basis as a place of business by the
taxpayer, and in the case of an employee, only if such exclusive use is for the convenience of the
employer.
Thus, under the provision, a home office deduction would be allowed (subject to the present-
law "convenience of the employer" rule governing employees) if a portion of a taxpayer's home is
exclusively and regularly used to conduct administrative or management activities for a trade or
business of the taxpayer, who does not conduct substantial administrative or management activities
at any other fixed location of the trade or business, regardless of whether administrative or
management activities connected with his trade or business (e.g., billing activities) are performed by
others at other locations. The fact that a taxpayer also carried out administrative or management
activities at sites that were not fixed locations of the business, such as a car or hotel room, would not
affect the taxpayer's ability to claim a home office deduction. Moreover, if a taxpayer conducts some
administrative or management activities at a fixed location of the business outside the home, the
taxpayer still would be eligible to claim a deduction so long as the administrative or management
activities conducted at any fixed location of the business outside the home were not substantial (e.g.,
the taxpayer occasionally does minimal paperwork at another fixed location of the business). In
addition, a taxpayer's eligibility to claim a home office deduction under the provision would not be
affected by the fact that the taxpayer conducts substantial non-administrative or non-management
business activities at a fixed location of the business outside the home.
In addition, the provision would clarify that the special rule contained in present-law section
280A(c)(2) permits deductions for expenses related to a storage unit in a taxpayer's home regularly
48
used for inventory or product samples (or both) of the taxpayer's trade or business of selling products
at retail or wholesale, provided that the home is the sole fixed location of such trade or business.
Effective Date
The provision would apply to taxable years beginning after 1995.
49
IV. FAMILY REINFORCEMENT TAX ACT (TITLE IV)
A. Tax Credit for Adoption Expenses
Present Law
Present law does not provide a tax credit for adoption expenses. The Federal Adoption
Assistance program (a Federal outlay program) provides financial assistance for the adoption of
certain special needs children. In general, a special needs child is defined as a child who (1) according
to a State determination, could not or should not be returned to the home of the natural parents and
(2) could not reasonably be expected to be adopted unless adoption assistance is provided, on
account of a specific factor or condition (such as ethnic background, age, membership in a minority
or sibling group, medical condition, or physical, mental or emotional handicap). Specifically, the
program provides assistance for adoption expenses for those special needs children receiving
Federally assisted adoption assistance payments as well as special needs children in private and State
funded programs. The maximum Federal reimbursement is $1,000 per special needs child.
Reimbursable expenses include those associated directly with the adoption process such as legal costs,
social service review, and transportation costs.
Description of Provision
The provision would provide taxpayers with a maximum nonrefundable tax credit of $5,000
per child for qualified adoption expenses paid or incurred by the taxpayer. Qualified adoption
expenses would be reasonable and necessary adoption fees, court costs, attorneys' fees and other
expenses that are directly related to, and the principal purpose of which, are the legal adoption of an
eligible child. An eligible child would be an individual: (1) who has not attained age 18 on the date
the adoption becomes final, or (2) who is physically or mentally incapable of caring for himself or
herself. No credit would be allowed for expenses incurred in violation of State or Federal law, any
surrogate parenting arrangement, or the adoption of a child of the taxpayer's spouse. The credit
would be phased out ratably for taxpayers with adjusted gross income (AGI) above $60,000 and
would be fully phased out at $100,000 of AGI. For purposes of this AGI test, the taxpayer's AGI
would be increased by the amount otherwise excluded from gross income under Code sections 911,
931. or 933 (relating to the exclusion of income of U.S. citizens or residents living abroad; residents
of Guam, American Samoa, and the Northern Mariana Islands, and residents of Puerto Rico,
respectively).
To avoid a double benefit, the provision would deny the credit to taxpayers to the extent the
taxpayer may use otherwise qualified adoption expenses as the basis of another credit or deduction.
Also, the credit would not be allowed for any expenses for which a grant is received under any
Federal, State, or local program except in the case of special needs children. The provision would
provide that couples who are married at the end of the taxable year must file a joint return to receive
the credit unless they lived apart for the last six months of the taxable year and the individual claiming
the credit (1) maintained as his or her home a household for the child for more than one-half of the
50
taxable year and (2) furnished over one-half of the cost of maintaining that household in that taxable
year. Finally, the provision would provide that an individual legally separated from his spouse under
a decree of divorce or separate maintenance would not be considered married.
Effective Date
The provision would be effective for taxable years beginning after December 31, 1995.
51
B. Nonrefundable Credit for Custodial Care of Certain Elderly
Family Members in Taxpayer's Home
Present Law
Generally, present law does not provide for tax credits based solely on custodial care of
parents or grandparents. However, taxpayers with dependent parents generally are able to claim a
personal exemption for these dependents. The total amount of personal exemptions is subtracted
(along with certain other items) from adjusted gross income (AGI) in arriving at taxable income. The
amount of each personal exemption is $2,500 for 1995, and is adjusted annually for inflation. The
amount of the personal exemption is phased out for taxpayers with AGI in excess of $114,700 for
single taxpayers, $143,350 for heads of household, and $172,050 for married couples filing joint
returns.
Description of Provision
The provision would provide taxpayers who maintain a household including one or more
"qualified persons" with a maximum nonrefundable credit of $500 for each qualified person.
To be a "qualified person," an individual would have to pass a relationship test, a residency
test and a disability test. The individual would satisfy the relationship test if the individual is the
father or mother of: (a) the taxpayer, (b) the taxpayer's spouse or (c) a former spouse of the
taxpayer. A stepfather, stepmother and ancestors of the father or mother would be treated as a father
or mother for these purposes.
An individual would satisfy the residency test if the individual has the same principal place of
abode as the taxpayer for more than one-half of the taxpayer's taxable year.
An individual would satisfy the disability test if the individual is physically or mentally
incapable of caring for himself or herself.
The provision would provide that an individual would be treated as maintaining a household
for any period only if over one-half of the cost of maintaining a household for such period is furnished
by such individual or, if such individual is married, by such individual and his or her spouse. The
provision would also provide that individuals who are married at the end of the taxable year must file
a joint return to receive the credit unless they lived apart for the last six months of the taxable year
and the individual claiming the credit (1) maintained as his or her home a household for the qualified
person for more than one-half of the taxable year and (2) furnished over one-half of the cost of
maintaining that household in that taxable year. Finally, the provision would provide that an individual
legally separated from his or her spouse under a decree of divorce or of separate maintenance would
not be considered married for purposes of this provision.
52
Effective Date
have
their worl
The provision would be effective for taxable years beginning after December 31, 1995.
53
V. INCREASE IN THE SOCIAL SECURITY EARNINGS LIMIT (TITLE V)
Present Law
Under present law, senior citizens age 70 and older receive full Social Security benefits
regardless of the amount of earnings they have from wages or self employment. Senior citizens
between age 65 and 69 are eligible for full benefits only if their earnings are lower than the earnings
limit amount determined by law. In 1995, the annual earnings limit for those age 65 to 69 is $11,280.
The earnings limit amount is indexed and increases annually in proportion to the rate of average wage
growth in the economy.
Senior citizens age 65 to 69 who earn more than the earnings limit lose $1 in Social Security
benefits for every $3 in wages or self employment income they earn over the limit.
Description of Provision
The provision would gradually raise the earnings limit for those age 65 to 69 to $30,000 by
the year 2000. The increase would be phased in over 5 years as follows:
Year
Proposed earnings limit
1996
$15,000
1997
$19,000
1998
$23,000
1999
$27,000
2000
$30,000
Senior citizens age 65 to 69 who earn over the given earnings limit for the year would
continue to lose $1 in benefits for every $3 earned over the limit.
Effective Date
The provision would be effective for taxable years beginning after 1995.
54
VI. THE TAX TECHNICAL CORRECTIONS ACT OF 1995 SIT 2 v1)
Description of Provision
The provision would incorporate (with modifications) the "Tax Technical Corrections Act of
1995,' previously introduced separately as H.R. 1121 by Chairman Archer and Mr. Gibbons on
March 3, 1995. The provisions of this legislation are described in detail in the Joint Committee on
Taxation pamphlet, Explanation of the Tax Technical Corrections Act of 1995 (H.R. 1121) (JCS-6-
95), March 8, 1995.
H.R. 1121 would be modified, for purposes of this provision, by dropping two provisions ((1)
section 2(a)(3) (relating to correction of head of household rate table for proper indexation) and (2)
section 3(f)(1) (relating to treatment of certain nonqualified withdrawals from Merchant Marine
capital construction funds)), and by adding new clerical corrections.
55