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    • Back to [Budget/Tax Programs – Economic Recovery] (1 of 9)

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    Records of the White House Office of Public Liaison (Reagan Administration)
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    Ronald Reagan Presidential Library Digital Library Collections This is a PDF of a folder from our textual collections. Collection: Blackwell, Morton: Files Folder Title: [Budget/Tax Programs - Economic Recovery] (1 of 9) Box: 3 To see more digitized collections visit: https://reaganlibrary.gov/archives/digital-library To see all Ronald Reagan Presidential Library inventories visit: https://reaganlibrary.gov/document-collection Contact a reference archivist at: [email protected] Citation Guidelines: https://reaganlibrary.gov/citing National Archives Catalogue: https://catalog.archives.gov/ MEMORANDUM THE WHITE HOUSE WASHINGTON Economic February 26, 1981 Package Pal TO: Elizabeth Dole FROM: Bob Bonitati RE: Tomorrow's Press Conference by Coalition for the Fiscal Year 1982 Budget Thelma Duggin and I have tried to gather information on the press conference scheduled for tomorrow by the Coalition on the Fiscal Year 1982 Budget. Here's what we have been able to find out: 1. The Coalition on the Fiscal Year 1982 Budget is being spearheaded by the Americans for Democratic Action and the AFL-CIO. 2. The Coalition appears to be a reassemblage of a similar coalition that was formed in 1980 to fight budget cuts proposed by President Carter. 3. The Coalition includes about 120 groups and organizations (see attached membership list). 4. The Coalition will be meeting tomorrow and has scheduled a press conference at the AFL-CIO building at 11:00 AM. Participants will be Lane Kirkland, Monsignor Higgins, Dick Hatcher and about eight other representatives of the NAACP, the ADA, the Urban League and the National Women's Political Caucus. 5. Based on the rhetoric of their initial press release, we can expect the Coalition to criticize the President's budget proposal as "reactionary," attacking the poor and benefitting the rich. In light of the short time available, I would suggest the following: 1. Alert the Press Office as they will probably be called for some reaction. - 2 - 2. Suggest that the Press Office treat the Coalition Announcement as one that was "expected" using the opportunity to emphasize the positive aspects of the program. 3. Try to get three or four spokesmen who broadly represent some of the constituencies in the Coalition to simultaneously issue statements that support the President's program. Hopefully, the statements can provide some of the "balance" that will be sought by the media. Americans for Democratic Action 1411 K Street, N.W. Suite 850 Washington, D.C. 20005 202/638-6447 February 1981 COALITION ON THE FEDERAL BUDGET MEMBERS American Assoc. of Univ. Women ACLU American Council on Education ACTWU AFL-CIO AFSCME American Friends Service Committee AFT American Jewish Committee American Nursing Association Anti-Defamation League B'nai B'rith B'nai B'rith Women Campaign for Housing Center for Community Change Center for National Policy Review Center for Theology and Public Policy Children's Defense Fund Children's Foundation Coalition for a New Foreign and Military Policy Coalition for Health Funding Coalition for Water Project Review Committee on Urban Program Universities Communications Workers of America Conf./Alt. State & Local Policies Conference of Mayors Congress Watch Congressional Black Caucus Consumer Federation of America Council of Churches Council for A Livable World Environmental Action Foundation Environmental Defense Fund Environmental Policy Center Environmentalists for Full Employment Epilepsy Foundation Federal Organization of Professional Women Food Research Action Council Friends Committee on National Legislation Full Employment Action Council Gray Panthers Hispanic Housing Coalition Housing Assistance Council Human Environment Center ILGWU Industrial Union Department, AFL-CIO Internationnal Association of Machinists I.U.E. IVI/ADA Japanese American Citizens League Leadership Conference cn Civil Rights League of Women Voters NAACP National Association for Economic Alternative National Association of Farmworkers Org. National Association of Housing Co-ops National Association of Neighborhoods National Association of Retarded Citizens National Association of Social Workers National Association of State Iniversities and Land Grant Colleges ever -2- National Caucus on the Black Aged National Center for Appropriate Tech. National Coalition Against Domestic Violence National Community Action Agency National Conference of Catholic Charities National Consumer Law Center National Council of Churches National Council of Jewish Women National Council of La Raza National Council of Senior Citizens National Conference on State Legislatures National Education Association National Employment Law Project National Farmers Union National Health Law Program National Hispanic Coalition for Better Housing National Housing Law Project National Low Income Housing Coalition National Organization for Women National Rural Housing Coalition National Rural Center National Senior Citizen's Law Center National Soc. for Autistic Children National Urban Coalition National Urban League National Wildlife Federation National Women's Political Caucus National Youth Alternatives Project National Youth Work Alliance Native American Rights Fund Natural Resources Defense Council Network New Democratic Coalition New York State Assembly Office of New York State Senate Minority Leader Organization of Chinese Americans Planned Parenthood Public Interest Economic Center Sheetmetal Workers Union, Int'l. Sierra. Club Tax Reform Research Group The Alan Guttmacher Institute The Progressive Alliance The Rural Coalition Unitarian Universalist Association United Auto Workers United Cerebral Palsy United Church of Christ United Food and Commercial Workers United Methodist Women United Presbyterian Church U.S.A. U.S. Catholic Conference United States Student Association Volunteer Washington State Department of Education Wider Opportunities for Women Women's Equity Action League Women's International League for Peace and Freedom Women U.S.A. Youth Policy Institute ### THE WRITE HOUSE Office of the Press Secretary EMBARGOED FOR RELEASE UNITIL 1:30 pm EST APRIL 15, 1981 STATEMENT BY THE PRESIDENT INCOME TAX DAY 1981 Today is the last day for filing income tax returns a day that reminds US that taxpayers pay too much of their earnings to the Federal Government. And Americans will continue to pay too much money to the Federal Covernment until the Congress acts on our proposals to reduce tax rates across the board. Without these reductions, there will be an automatic $200 billion tax increase over the next 2 years. While April 15 serves as a reminder, the people of the U.S. truly do not need to be reminded. They are victims of inflation which pushes them into higher tax brackets. They are robbed daily of a better standard of living. They are discouraged from work and investment. There are a few other alternative tax proposals now before the Congress, but compared to our proposals, they will result in higher taxes for the American people. In fact, these alternatives are not the answer; they are the problem. Taxes are much too high to deal in half measures. In 1965, less than 6 percent of all taxpayers faced marginal rates of 25 percent or more. Today, more than one of every three taxpayers is in at least the 25 percent bracket. In addition, since 1965 the marginal tax race for a median-income family of four has jumped from 17 percent to 24 percent in 1980. And under current law it would grow to a crushing 32 percent in 1984. We simply can't allow our alr dy overburdened and demoralized taxpayers to suffer this unacceptable increase. By commparison, our tax reduction program will reduce the marginal tax rate to 23 percent in 1984, a very important step in the right direction; a step that will play a significant role in rejuvenat- ing the economy. Our plan treats Americans at all income levels evenly and fairly. Three-fourths of the tax cuts will go to middle-income taxpayers. Under present law, these middle-income citizens - who make bewteen $10,000 and $60,000 pay 72 percent of all income taxes and will receive 73 percent of the benefits of our proposal. Thechoice before us is clear. I strongly feel that the great majority of Americans believe that nothing would better encourage economic growth than leaving more money in the hands of the people who earn it. It's time to stop stripping bare the productive citizens of America and funnelling their hard-earned income into the federal bureaucracy. Today is a day when the people reaffirm their commitment to our system by contributing a portion of their income to the government. Americans have always been prepared to pay their fair share, but today they should make it clear to all elected officials that government has gone beyond its bounds and that the people will not tolerate the ever-increasing tax burden they have experienced in recent years. I ask all Americans to join me in changing our tax syst:em so that next April 15 we shall begin to celebr to tax reductions instead of simply one more predictable and painful tax increase. # FOUR-PERSON MEDIAN INCOME FAMILY (Marginal Tax Rate Increases) Marginal Tax Rate 32% 30% Current Law 25% Reagan Proposal 24% 23% 22% 20% 19.5% 17% 15% 1965 1970 1975 1980 1984 Source: Department of the Treasury Marginal Tax Rates for Four-Person Families (parcent) : : : One-half Twice Year : : Madian income : median income median income : : : 1965 14% 17.0% 22.0% 1966 14 19.0 22.0 1967 15 19.0 22.0 1968 15 20.4 26.9 1969 15 20.9 27.5 1970 15 19.5 25.6 1971 15 19.0 28.0 1972 15 19.0 28.0 1973 16 19.0 28.0 1974 16 22.0 32.0 1975 17 22.0 32.0 1976 17 22.0 36.0 1977 16 22.0 36.0 1978 19 25.0 39.0 1979 16 24.0 37.0 1980 18 24.0 43.0 Current Law 1981 18 28.0 43.0 1982 18 28.0 49.0 1983 21 28.0 49.0 1984 21 32.0 49.0 Administration's Proposal 1981 17 27.0 41.0 1982 15 24.0 42.0 1983 16 22.0 38.0 1984 15 23.0 36.0 Office of the Secretary of the Treasury April 14, 1981 Office of Tax Analysis Dini file Reacon Document No. Toxpropsel WHITE HOUSE STAFFING MEMORANDUM Economic DATE: 6/9/81 ACTION/CONCURRENCE/COMMENT DUE BY: ECONOMIC RECOVERY TAX ACT OF 1981 SUBJECT: ACTION FYI ACTION FYI VICE PRESIDENT JAMES MEESE MURPHY BAKER NOFZIGER DEAVER WILLIAMSON STOCKMAN WEIDENBAUM ALLEN CANZERI ANDERSON FULLER (For Cabinet) BRADY HICKEY DOLE HODSOLL FIELDING MC COY FRIEDERSDORF CEQ GARRICK OSTP GERGEN USTR HARPER ROGERS URSOMARSO Remarks: Attached for your information is a general explanation of the Conable-Hance bill introduced today. Richard G. Darman Deputy Assistant to the President and Staff Secretary (x-2702) ECONOMIC RECOVERY TAX ACT OF 1981 GENERAL EXPLANATION June 9, 1981 TITLE I --INDIVIDUAL TAX RATE REDUCTIONS Sec. 101--25 Percent Phased Rate Reduction Under each of the four present law tax rate schedules -- married filing jointly, single, married filing separately, and head of household -- individuals pay tax at marginal rates ranging from 14 to 70 percent. For earned income, there is a separate provision in the law that provides for a "maximum tax" rate of 50 percent. Section 101 of the bill would reduce marginal tax rates for individuals across-the-board by 25 percent. This would lower marginal tax rates from a range of 14 percent to 70 percent under present law to a range of 11 percent to 50 percent. The new top marginal tax rate of 50 percent represents a reduction slightly more than 25 percent. Without the slight additional reduction in this top rate, however, the complexities associated with computing the maximum tax on earned income could not be eliminated. The provision would phase in the 25 percent rate reduction by 5 percent on October 1, 1981, by an additional 10 percent on July 1, 1982, and by a final 10 percent on July 1, 1983. The top marginal tax rate would be reduced to 50 percent on January 1, 1982, in order to achieve simplification associated with the maximum tax on earned income as soon as practicable. Moreover, any delay could induce taxpayers with marginal tax rates currently greater than 50 percent to put off realizing income and making new productive investments until later years. TITLE --INCENTIVES FOR PLANT, EQUIPMENT AND REAL PROPERTY Accelerated Cost Recovery System The Accelerated Cost Recovery System will provide for faster write-off of capital expenditures by means of simplified and standardized rules. The system will replace the present complex provisions for determination of depreciation allowances. It substitutes easily identified classes, each with a standard schedule of deductions to be taken over a fixed recovery period. The proposed legislation assigns machinery and equipment used in business and depreciable real estate to classes with recovery periods of 3, 5, 10, or 15 years and provides accelerated recovery over those periods. Classes. Brief descriptions of the classes summarize the essentials of the system. 3-year property. This class consists of autos, light trucks, machinery and equipment used in research and development activities, and assets (such as special tools) with a guideline life under ADR of four years or less. Expenditures for these assets will be written-off in three years according to an accelerated schedule. An investment credit of 6 percent will also apply to this class, an increase of 2-2/3 percentage points over the present law for property written-off in three years. 5-year property. All other outlays for machinery and equipment, including public utility property with present guidelines lives of 18 years or less, are assigned to a 5-year class. Additions to this class will be written-off according to an accelerated 5-year schedule. The full 10 percent investment credit will be allowed for this class. 10-year property. Public utility property for which present guidelines exceed 18 years and real estate covered by the ADR system with a lower limit of 10 years or less will be written-off on an accelerated basis over 10 years. As under present law, the 10 percent investment credit applies to public utility property in this class, but is not generally available for real property. 15-year property. Depreciable real estate (which is not 10-year property) will be assigned an audit-proof life of 15 years and will be written off on a composite basis according to an -2- accelerated schedule. As under present law, no investment credit is allowed for property in this class. Rates. The recovery percentages for 3, 5 and 10-year property will be based on use of the 150 percent declining balance method for the early years and the straight-line method for the remainder of the recovery period. The recovery for 15-year (real) property will be based on use of the 200 percent declining balance method (switching to straight line). The applicable rates are as follows: Accelerated Cost Recovery Ownership Year Class of Investment 3-year 5-year 10-year 15-year 1 25% 15% 8% 7% 2 38 22 14 12 3 37 21 12 11 4 21 10 9 5 21 10 8 6 10 7 7 9 6 8 y 5 9 9 5 10 9 5 11 5 12 5 13 5 14 5 15 5 100% 100% 100% 100% Accounting rules. Unlike present law, all of the cost recovery rules apply alike to new and used property, and no estimate of salvage value is required. An asset acquired at any time in the tax year is added to the "vintage" account for its class and is kept in that account until fully written-off or retired. A "half-year convention" for the year of acquisition is built-in to the recovery schedule. Flexibility. Taxpayers may use, instead of the prescribed rates, rates based on use of the straight-line method over either the otherwise applicable recovery period or the longer period used for earnings and profits purposes. In addition, the net operating loss and investment credit carryover periods are extended from 7 to 10 years. Dispositions. Gain or loss is generally recognized on disposition of an asset. Gains on property in the 3, 5, and -3- 10-year classes will be recognized as ordinary income to the extent of prior allowances (section 1245 rules). Similarly, for property in the 15-year class (unless a straight-line recovery is elected) other than residential real estate and low income housing, section 1245 recapture will apply. For these latter types of property, section 1250 recapture will apply. Special rules. Earnings and profits. Cost recovery for earnings and profits purposes will be, for property in the 3, 5, 10, and 15-year classes, based on periods of 5, 12, 25, and 35 years respectively. Additionally, the straight-line method will be used. Foreign assets. The recovery period for foreign assets will be the ADR guideline period as of January 1, 1981. The rate of recovery will be based on use of the 200 percent declining balance method in the early years and the straight line method in the later years of the recovery period. For foreign real property, recovery will be over 35 years under the 150 percent declining balance method (switching to straight line). Flexibility similar to that provided for domestic assets is provided with respect to foreign property. Minimum tax. For noncorporate lessors of machinery and equipment in the 3, 5, and 10-year classes the excess of the recovery deduction over the deduction based on use of the straight-line method over 5, 8, and 15 years, respectively, will be a preference item for purposes of the minimum tax. For real estate, the excess of the recovery deduction over the deduction based on a 15-year straight-line recovery will be a preference item. Leasing. A safe harbor is provided for leasing transactions involving new personal recovery property for corporate lessors. In general, these transactions will not be denied treatment as a lease merely because the tax benefits of ownership are taken into account as part of the economic substance of the transaction or if the minimum investment is not greater than 10 percent of the cost of the property. Investment tax credit Recapture. Taxpayers must pay back, or "recapture," a portion of the investment credit in the case of early retirements up to the fifth year -4- that an asset is held. In these cases, the taxpayer may keep a credit of 2 percent for each full year the property is held, up to the amount of credit originally claimed. At risk. The proposal extends the at risk rules to the investment credit allowed under ACRS. However, an exception is provided for amounts borrowed from third party banks, savings and loan associations and insurance companies. Effective date The Accelerated Cost Recovery System will be effective for property acquired or placed in service after December 31, 1980. However, for machinery and equipment, ACRS does not apply to property in use before January 1, 1981 unless acquired after December 31, 1980 in a transaction in which both the owner and user change. For real property, ACRS does not apply to property in use before 1981 transferred in a transaction in which the owner does not change, or to property acquired for pre-1981 property in certain substituted basis transactions. Increase in Recovery Rates after 1984 The recovery percentages for 3, 5 and 10-year property will be increased for property placed in service after 1984. For Property placed in service in 1985 the percentages will be based on the use of 175 percent declining balance method for the first year and switching to the sum-of-the-years digits method for the remaining years. For property placed in service after 1985, the rates will be based on the use of 200 percent declining balance method for the first year and switching to sum-of-the-years digits method for the remaining years. TITLE ITI--MISCELLANEOUS TAX PROVISIONS SUBTITLE -INCENTIVES FOR RESEARCH AND EXPERIMENTATION Under section 301 of the bill, a nonrefundable income tax credit would be allowed for research and experimental wage expenditures paid or incurred by a taxpayer during the taxable year in carrying on a trade or business of the taxpayer, but only to the extent such expenditures exceed the average amount of the taxpayer's research wage expenditures in a base period. The rate of the credit would be 25 percent of the incremental research wage expenditures for the year. Eligible wages would be those paid or incurred for services performed in conducting research and experimentation. In computing the credit, only wage expenditures for research conducted within the United States would be taken into account. Research funded by government and research in the social sciences or humanities would not qualify. The provision adopts the definition of research and experimentation now used for purposes of deduction of research expenditures under Code section 174. However, it is intended that the Internal Revenue Service may, over time, provide further guidance as to the definition, consistent with the existing approach. In the case of contract research, the person on whose behalf the research is done would be entitled to the credit. Accordingly, wages paid or incurred by the person doing the work would be attributable to the person making reimbursement therefor. For individuals, the credit could only offset tax attributable to income from the trade or business with respect to which the research and experimental wage expenditure was incurred. For the taxpayer's first taxable year to which the credit applies, the base period would be the first preceding taxable year. For the second credit year, the base period would be the preceding two taxable years. For the third credit year and thereafter, the base period would consist of the three preceding taxable years. The provision would be effective for wages paid or incurred after June 30, 1981, in taxable years ending after such date. SUBTITLE B--INVESTMENT TAX CREDIT FOR QUALIFIED REHABILITATION EXPENDITURES Under section 311 of the bill, the current law 10 percent investment credit for rehabilitation expenditures incurred in connection with existing nonresidential commercial and industrial buildings would be replaced by a three-tier credit. A credit of 15 percent would be available in the case of rehabilitation expenditures incurred for buildings that have been in use at least 30 years and a credit of 20 percent would be available with respect to the rehabilitation of buildings that are at least 40 years old. In addition, a 25 percent credit would be provided for certified rehabilitation expenditures incurred in connection with certified historic buildings. The 25 percent credit would be available with respect to all income-producing certified historic buildings, including those used for residential purposes; the 15 and 20 percent credit would be limited, like the credit under current law, to nonresidential buildings. In order to qualify for the credit, expenditures must be incurred after December 31, 1981. In addition, they must be expenditures of the type that must be capitalized and they must be for property (or additions or improvements to property) which have a recovery period of 15 years under the new ACRS system. The provision would simplify the requirement of current law that a credit may be taken only once every 20 years with respect to a building, or a major portion of a building, by requiring only that a rehabilitation be substantial. To qualify as a substantial rehabilitation, rehabilitation expenditures must exceed the greater of the taxpayer's adjusted basis in the building before the rehabilitation or $5,000. Lessees would be eligible for the credit with respect to rehabilitation expenditures incurred by the lessee, provided that, on the date of completion of the rehabilitation, the remaining term of the lease is at least 15 years. Rehabilitation expenditures incurred in connection with a certified historic building or a building in a registered historic district would not qualify for the credit, unless the rehabilitation is certified by the Secretary of Interior as being consistent with the historic character of the building or the district in which such building is located. This rule would not apply to a building in a registered historic district, if the building is not a certified historic building and the Secretary of Interior certifies that the building is not of historic significance to the district. Expenditures for property eligible for the rehabilitation investment credit would not be eligible for the regular 10 percent investment credit. In addition the energy credit would not be allowed with respect to property which is eligible for the rehabilitation credit. Finally a taxpayer would not be permitted to use accelerated methods of depreciation in conjunction with the credit. SUBTITLE C--MARRIAGE PENALTY DEDUCTION Present law generally imposes a greater tax on a two-earner married couple than would be imposed if each spouse were single. Section 321 of the bill would reduce the current discrimination against two-earner families by providing a marriage penalty deduction equal to a specified percent of the lower earning spouse's earnings up to $30,000. The specified percentage would be 5 percent in 1982 and 10 percent in subsequent years. This deduction would be allowable whether or not the taxpayer itemizes deductions. The marriage penalty deduction would not increase taxes paid by single persons and one-earner couples. Thus, it would not change the amount of tax savings achieved by a single worker who marries a non-employed spouse. SUBTITLE D--SAVINGS PROVISIONS Individual Retirement Accounts Under present law, an individual generally is entitled to deduct the amount contributed to an individual retirement account, annuity or bond (referred to collectively as "IRAS"). The limitation on the deduction for a year is generally the lesser of 15 percent of compensation for the year or $1,500. The $1,500 contribution limit is increased to $1,750 for a year if (1) the contribution is equally divided between an employee and the spouse of the employee and (2) the spouse has no compensation for the year. However, no IRA deduction is allowed for a taxable year to an individual who is an active participant during any part of the year in a qualified plan, a tax-sheltered annuity, or a governmental plan. Section 331 of the bill would both increase the deductible limits of IRAs and extend their availability. In the case of an employee who is not an active participant in a qualified plan (i.e., one who is currently eligible to make IRA contributions) , the current limit would be raised to $2,000, and the percentage limitation would be 100 percent of compensation. In the case of an employee who is an active participant in an employer-sponsored plan (i.e., one who is not currently eligible for an IRA), a deduction would be allowed for contributions by the employee to an IRA. The annual deduction by an active participant would be limited to the smaller of $1,000 or 100 percent of the participant's compensation. The current spousal IRA provisions would be deleted but the IRA limits would be increased to a total of $2,250 ($1,125 in the case of an active participant) where an IRA is established for a non-employee spouse. EXAMPLES An employee with $10,000 of compensation for a year who does not participate in an employer-sponsored plan could, under current law, contribute and deduct up to $1,500 to an IRA. Under the proposal, this employee would be entitled to a deduction for IRA contributions up to $2,000. An employee with $10,000 of compensation for a year who is an active participant in an employer-sponsored plan is not allowed to make any deductible contributions to an IRA under current law. The proposal would allow this employee to contribute and deduct up to $1,000 to an IRA. Retirement Savings for the Self-Employed Under present law, a qualified retirement plan generally must be established by an employer for the benefit of employees and their beneficiaries. For plan qualification purposes, a sole proprietor is considered both an employee and his or her own employer, and a partnership is considered the employer of each partner. Thus, a sole proprietorship or a partnership may adopt a tax-favored retirement plan, referred to as an H.R. 10 plan or Keogh plan, for both common law employees and for the proprietor or partners. The maximum deductible contribution to an H.R. 10 plan on behalf of a self-employed individual is the lesser of $7,500 or 15 percent of the individual's net earnings from self employment. Although sole proprietors and partners with more than a 10 percent interest in the capital or profits of a partnership are prohibited from borrowing from an H.R. 10 plan, common law employees and partners with less than a 10 percent interest may borrow from the plan if certain loan conditions are met. Section 332 of the bill would both increase the H.R. 10 plan deduction limits and change the rules regarding loans from the plan to certain participants. The maximum deductible contribution to an H.R. 10 plan would be increased to $15,000. The percentage limit (15 percent of net earnings from self employment) would be retained. However, if the proposals to expand the availability of deductible employee contributions to an IRA are adopted, the effective maximum deductible contribution to an H.R. 10 plan would be increased to $16,000, with no antidiscrimination or percentage limits applied to the additional $1,000. The prohibition against borrowing by sole proprietors and more than 10 percent partners would be expanded to all partners. Permanent Exclusion of a Portion of Dividends and Interest Under present law, individuals may exclude from gross income up to $200 ($400 on a joint return) of dividends and interest income received from domestic sources. However, the provision is effective only for taxable years beginning after December 31, 1980, and before January 1, 1983 (generally 1981 and 1982 calendar years). Section 333 of the bill would make the partial exclusion of dividends and interest by individuals permanent. SUBTITLE E--EXCLUSIONS OF FOREIGN EARNED INCOME AND FOREIGN HOUSING COSTS Section 341 of the bill would provide simpler and more generous tax relief for foreign earned income to facilitate the employment of Americans abroad. Under the provision, individuals who satisfy either a foreign residence or foreign presence test could exclude the first $50,000 of foreign earned income per year plus 50 percent of the next $50,000. In addition, the provision would exclude from income expenses incurred for reasonable housing in excess of a base amount. The base amount would be 16 percent of the salary of a U.S. Government employee at civil service grade GS-14, step 1. These amounts would be pro-rated on a daily basis for individuals eligible during only part of a tax year. Deductions attributable to excluded income would not be allowed and foreign taxes paid on the excluded income could not be claimed as a foreign tax credit. The exclusions provided would be elective. Qualifying individuals could choose to be taxable on their full foreign earnings and claim the ordinary foreign tax credit. The provision would also shorten the required period of physical presence in a foreign country to 11 out of 12 months rather than 17 out of 18 months. It would retain the present rules allowing pro rata benefits in certain cases where civil unrest or similar adverse conditions required an individual to leave the foreign country before meeting the time requirements. The benefits of the exclusions would be extended to include individuals whose foreign earned income is paid by the U.S. Government but who do not qualify for the benefits provided under section 912 of the Internal Revenue Code. The provision would clarify the conditions under which a camp located in a foreign country qualifies as part of the employer's business premises for purposes of the exclusion provided under section 119. The provision would take effect as of January 1, 1982. It would replace the exclusion allowed under section BII and the deductions allowed under section 913 of present law. SUBTITLE F -- ESTATE AND GIFT PROVISIONS Increase in the Unified Credit Section 351 of the bill would increase the unified credit from $47,000 to $192,800 over a 4-year period. The amount of the credit would be $70,800 in 1982, $96,300 in 1983, $121,800 in 1984, and $192,800 in 1985. These levels of the unified credit are equivalent to exemption levels of $250,000, $325,000, $400,000 and $600,000, respectively. This provision would also change the estate tax filing requirements to conform to the increase in the unified credit in terms of an exemption equivalent. When fully phased-in in 1985, an estate tax return would be required only if the decedent's gross estate exceeds $600,000, rather than $175,000 as provided by current law. During the phase-in period, the filing requirements would be $250,000 in 1982, $325,000 in 1983, $400,000 in 1984 and $600,000 in 1985. Finally, this section provides a special rule for property received by a decedent by gift within three years of the date of his death. In such a case the gift would not receive a stepped-up basis. This rule is necessary to prevent individuals from giving property in contemplation of the donee's death merely to obtain a tax-free step-up in Unlimited Marital Deduction Section 352 of the bill provides an unlimited marital deduction for both estate and gift tax purposes. This would permit an individual to make lifetime and deathtime transfers to his spouse, no matter how large, without the imposition of a transfer tax. It would not change present law with respect to transfers of terminable interests: these interests would not qualify for the marital deduction. Gifts of community property, however, would qualify for the deduction. Increase in the Annual Gift Tax Exclusion Section 353 of the bill would increase the annual gift tax exclusion from $3,000 to $10,000 per donee. This would permit a husband and wife to transfer jointly $20,000 per donee each year without being subject to the gift tax. These amendments would apply to gifts made, and decedents dying after December 31, 1981. SUBTITLE G--EXTENSION OF AND INCREASE IN CREDIT AGAINST CRUDE OIL WINDFALL PROFIT TAX FOR ROYALTY OWNERS. Under current law royalty owners receive a credit (or refund) of up to $1,000 against the windfall profit tax imposed on the removal of their royalty oil during calendar year 1980. The credit is available only to individuals, estates and family farm corporations and not to other corporations or trusts. The credit may be claimed in 1981 either as a credit against income tax or as a refund of excise tax. Section 361 of the bill would provide royalty owners with a credit (or refund) against the windfall profit tax imposed on the removal of their royalty oil during each calendar year. The credit would not exceed $2,500. The proposal generally would retain the present law rules relating to eligibility for the credit and would make adjustments to accommodate the increase in the credit. Under present law, both percentage depletion and the special windfall profit tax rates for independent producers generally are denied in case of properties transferred from one person to another. The current law credit does not contain a provision denying the credit in cases of the transfer of royalty interests in proven properties. This is because the Congress believed that no transfer limitation was required since the loss of percentage depletion on transferred properties will generally outweigh the benefits of a one year credit. However, since the proposal extends and increases the amount of credit there will be a significant incentive for royalty owners to transfer interests which do not qualify for the applicable credit. Accordingly, in order to prevent evasion of the credit limit and preclude proliferation of the credit, the provison contains a rule that denies the credit to royalty interests in proven properties transferred after June 9, 1981. The royalty owner credit would apply to oil produced in calendar years beginning after December 31, 1980, in taxable years ending after such date. THE WALL STREET JOURNAL, Wednesday. June 10. 1981 Reagan's Tax Plan Makes Sense By PAUL W. McCracken activity that enlarges the output of goods running $50 billion per year above current Would a tax reduction along the lines of and services. This process shows up in the levels. if it is to get back on the track. the President's proposal be a fiscally re- federal goverment's budget. If projections these are not extravagant figures. sponsible action in this session of the Con- in President Carter's January Budget Mes- Moreover. if the National Income Ac- gress? It is this part of the President's pro- sage (adjusted for the usual initial under- counts estimates are reasonably correct - gram that has produced the most skepti- estimates) were to be realized for fiscal that we are underestmating the cost of 1S82, the rise in total public spending at all capital currently expiring by $17 billion per cism. In the static sense. those skeptical of levels of government would have been year-it is not until fiscal 1953 that the ad- the President's tax program would have a equal to half or more of the projected in- ministration's tax program would get be case for at least two reasons. The fact is crease in the total national income. yond eliminating this tax on phantom prof- its. It's a tax which we should never have that economists simply do not know for The tandem strategy that says we must sure to what extent movements in the first hold down spending until a budget sur- been collecting in the first place. ilt has economy are caused by fiscal policy. by been the most clear-cut case of a penalty monetary policy. by "external shocks" or Board of Contributors tax on economic progress.) by destabilizing forces internal to the pri- Incorrect Image vate economy itself. The idea that a budget Clearly the most controversial part of On these matters the profession has the President's tax program is the pro- been all over the map during the last sev- surplus should be achieved posal pertaining to individual income eral decades. At one time it was assumed taxes. The administration has been talking that the task of those managing monetary before cutting taxes has a to conservative "House Democrats about and budget policies was to counter the ten- dency for the private sector "on its own" major flaw: It doesn't work. the possibility of fashioning a three-year cut with figures different than its original to ricochet from boom to bust. Then we de- It makes sense, then, to try proposal of a 10% reduction in three suc- cided that the private economy was rea- cessive years. Whatever three-year pack- sonably stable except when drawn off the opposite strategy. age results from this process. it is here course by erratic economic policies of gov- that the image emerges of revenues going emment. plus is achieved before considering tax re- down. - At one time we were sure that mone- duction is in a sense unexceptionable. We For the sake of argument, we will work tary policy did not matter much. and fiscal would thereby have won the right to a with the administration's original 10-10-10 policy would deliver sustained prosperity. lower tax burden. proposal and address the opposition's 25- By a decade ago monetary policy occupied It also has a major. flaw. It does not sumption that revenues will go down a like center stage. and the old conventional work. amount. or 30%. This is not correct. The Keynesian fiscal policy wisdom (as usually Experience shows that this strategy administration projected revenues from in- happens to old conventional wisdoms) was leads not to a budget in the black. but to a dividual income taxes at 5311 billion in fis- on the defensive. In recent years, however. budget with outlays and revenues both cal 1983. 27% above the Sit billion realized the relationship between the money stock higher than would otherwise occur. It is a in fiscal 19S0. (however defined) and the pace of business strategy that, particularly in recent years. What the President's proposal here does activity began to blur-encouraging the ag- nostic view that what we know for sure has produced a public sector absorbing a is little more than to neutralize the ten- about these matters remains limited. large proportion of increases in the na- dency for a progressive tax rate structure tional income. It is the ineluctable end re- With uncertainty about the relative in- over time to increase the proportion of the sult because it is a strategy which in es- national income going for taxes as the na- fluence on the economy of the Federal Re- sence says that government has first claim tional income rises (either because of infla- serve's monetary and credit policies and on earnings. and those earning these in- tion or rising real incomes). the government's fiscal policies. prudence comes must make do with the remainder. would seem to dictate caution about sharp We see this clearly by comparing the It makes sense. therefore. to try the op- projections for future years by President changes in any policy. posite strategy. The thrust of public policy Carter in his January Budget Message and Dangerously Low Savings should be shifted toward giving higher President Reagan's projections. In fact. Moreover, in our low savings economy priority to those doing the earning and pro- with the President's tax package the pro- large budget deficits do crowd markets. ducing and saving. with the public sector portion. of aggregate personal incomes The U.S. is now a dangerously low-savings being required to accommodate to that going for individual income taxes in the part of their earnings that people are will- economy. not only relative to such coun- next fisca! year would be about a half of ing to have spent collectively. If that is to tries as Japan and the Federal Republic of one percent only below that in 1950. and be the strategy. the trail should be blazed Germany but relative to our own historical with full implementation of the program by far enough ahead so that the private sector performance. fiscal 1953 the proportion would be only one can have enough confidence to alter its The problems with which economic pol- percentage point lower. long-range plans. Individual Income Tar Reccipts icy must come to grips, however. are far This is the real significance of a three- As Percent Projected Personal Incomes more fundamental and dynamic than lean- year tax proposal. The effort to limit the FY Carter ing against the zigs and zags of the normal Reagan tax program to one year. if it were to be 1980 11.7% 11.7% business cycle. successful would be 2 major victory in the 1981 12.1 11.9 The American economy seems to have effort to avoid that fundamental change in 1982 12.6 11.1 lost its vigor. operating for years with the direction of national policy so essential 1983 13.1 10.7 rates of unemployment. inflation. and par- to star. the process of economic revitaliza- 1934 13.8 10.6 ticularly gains in productivity and real in- tion. SOURCES: Basic data from: come that compare unfavorably with our This the "big spenders" understand "Budget Message of the President. C/WTI history and with other economics of well enough. If they can hold the tax struc- January 1951" and Fiscal Year 1952 the industrial world. ture essentially intact. they win. In the Budget Revisions." The causes of this deteriorating eco- years ahead more money would then be What 10-10-10 essentially does. in short. nomic performance are numerous and spent on more public programs than if gov- is to avoid an unlegistated increase in the deep. but two are clearly related to the fis- emunent commits itself to 2 :ax reduction preportion of people's earnings which cal operations of government. One is that program with a multi-year time horizon- would accrue to government from inaction. because of inflation and our archaic ac- long enough so that people and businesses This is clearly evident in the Carter bud- counting conventions. the federal govern- can start to make the basic plans that this get which projected a persistent rise in the ment is collecting corporate taxes on ficti- arthritic economy needs. This is why con- share of incomes going to the tax collector. tious profits. thereby contributing 10 the services genuinely concerned about bud- The President's tax program. in short. low-investment tendencies of the economy. Ett deficits find that they are joined by the is an essential element in the strategy to National income data surgest that we are spenders in trying 10 limit the scope of tax regain control of spending as well as to in understating the cost of capital currently reduction-the spenders also. of course. vitalize the economy. The spenders under- expiring by about $17 billion per year. If voicing concerns about deficits. which have stand this. Hopefully the conservatives will the prohis taxes paid on these nonexistent caused them little loss of sleep for decades also. prohts were instead going into more capi- before this year. tal formation. the economy would be liss In lact the President's program might Mr. McCrocken is Edmind Ecra Dav afflicted with a productive plant that is to entired for Its modesty. As for laves University Professor ni Business Adminis- now 100 small and 100 old. on corporate income. the administration tration at the Unit crstin of Michigan. for. Another basic source of our troubles is print 0.0 is recommendations at a 52.5 MET charman of the Council of Economic that we have gone 100 far in making in- billion 131 reduction for this fiscal year Advisers under President Nizon and n come available without regard to whether 2.3 then for fiscal 1000. Fo: an coon- member of the Journal's Seard of the recipient earned it through productive cay where capital formation 02231 10 :- Contributors. THE BIPARTISAN TAX PLAN On June 1, President Reagan announced a bipartisan tax reduction plan with individual cuts to begin on October 1, 1981. He rejected the Democratic leadership's alternative plan. On June 9, the bipartisan plan was introduced by Congressman Barber Conable (R-NY) and Kent Hance (D-TX). This package is designed to provide tax relief to working Americans and to stimulate the economy by encouraging saving and job-creating investment. --It is real tax relief. Individual rates will be cut 25 percent in three years, enough to offset the 22 percent increase that bracket creep and social security hikes would induce without the plan. The Democratic leader- ship's 2 year, 15 percent plan would not fully compensate for the increase. --It is fair, cutting rates on earned income across the board for all Americans. The President would have preferred to compromise with the House Democratic leadership. But their 2-year, 15 percent proposal, with numerous special-interest "sweeteners" attached was, in President Reagan's words, "not good enough." An additional third year, 10 percent rate cut is necessary: --so the overall cut will be big enough to offset inflation and social security tax rise --to provide longer-range predictability for individuals and businesses to keep pressure on Congress to hold the line on spending by holding the line on revenues The plan has bipartisan support, reflecting a consensus that the economy needs substantial, multi-year rate cuts to improve. incentives to work, save and invest. Together with the budget cuts, the tax reductions will help restore a sound economy with more growth and jobs, and less inflation and government spending. --The budget will be balanced by 1984 and deficits between now and then will be $40 billion lower than planned. WHAT THE PLAN PROVIDES Individual Tax Relief --Across-the-board tax rate reductions of 5 percent on October 1, 1981 and additional reductions of 10 percent on July 1, 1982 and 10 percent on July 1, 1983 -Relief from the marriage tax by allowing lower paid spouse to deduct 5 percent of income (up to $1500) in 1982 and 10 percent (up to $3000) in 1983 and after. Savings, Investment and Productivity Incentives -Accelerated cost recovery for business. --A reduction in the top rate on investment income from 70 to 50 percent. --Expansion of individual retirement accounts, from $1500 to $2000 per year. -Permanent extension of the interest and dividend exclusions of $200 for individual and $400 for joint returns. --A 25 percent tax credit for R&D costs. --Relief for Americans working abroad, allowing an exclusion of up to $75,000 in income. -Expansion to $2500 of the credit for royalty owners against the wind-fall profits tax. An investment tax credit for rehabilitation. --Exemption from estate taxes of first $600,000 and an increase in the gift tax exemption to $10,000. THE LARGEST TAX CUTS IN HISTORY For individuals -Under the plan, tax rates will be cut 25 percent across the board. -A family of four that earned $25,000 in 1980 and gets cost of living increases for four years will pay $1056 less on its 1984 income of $33,674 with these cuts than it would under present law. -In 1980, this family paid 11.6 percent of income in federal taxes. In 1984, the percentage would fall to 10.9 percent. Relief from the marriage tax penalty will substantially ease situation in which married couple with two incomes pays more taxes than two single people with same incomes. For business The accelerated cost recovery plan will no longer be phased-in gradually. It will take effect, as of January 1, 1981, as soon as it is enacted. -will save business $122.6 billion by 1986 -will streamline, simplify, and speed-up procedures for writing-off investment costs. TIME-TABLE FOR CONSIDERATION The House Ways and Means Committee began mark-up during the week of June 8; the Senate Finance Committee began general discussions and mark-up the same week. Speaker O'Neill has reiterated his intentions to have a tax bill on the President's desk by August lst. KEY POINTS ON THE BIPARTISAN TAX PROGRAM The restoration of economic growth is primary objective --It is designed to strengthen incentives to work, save, invest --Not intended to redistribute income or stimulate demand Under the plan, inflation will decline as savings increase --will stimulate supply of goods, not demand --marginal rate cuts will increase incentives --under Kennedy cuts, savings increased by one-third --higher savings will make it possible to finance the deficit privately without inflationary practice of "printing more money" Tax rates higher than ever for most Americans --one out of three in 25 percent bracket or above --average worker today taxed at rates applied to affluent fifteen years ago --11.6 percent of personal income goes to income tax --21 percent of GNP goes to federal government in taxes --creates growing disincentive for productive effort Taxes will get worse automatically without marginal rate cuts --inflation, bracket creep, push workers to higher tax rates for each 10 percent income rise, taxes rise 15 percent -without cuts, percent of personal income going to taxes will hit 14.7 by 1984 and percent of GNP to federal government will near 25 percent Equal tax rate cut for all is only fair policy --all marginal rates will be cut same percentage --all taxpayers will pay less income taxes than under current law --without cuts, virtually all individual taxpayers will hit the 50 percent bracket in 1990s Even liberal Democrats have accepted marginal rate cut approach --two year, 5-10 concept is too little however --their argument that two year test of "untried" marginal cuts is necessary is a false argument because -marginal cuts were tried in 60s and they worked -5-10 is just not enough of a cut, over a long enough period to provide improvement in incentives necessary. -3 years needed to keep pressure on Congress to hold line on spending by holding the line on revenues. Table 1 Summary of the Reduction in Fiscal Year Receipts under the Economic Recovery Act of 1981 and under the Administration's Original Tax Reduction Program Fiscal Years 1981-86 ($ billions) : Fiscal Years Program : 1981 : 1982 : 1983 : 1984 : 1985 : 1986 Economic Recovery Act of 1981: Personal tax reductions * 28.3 74.8 119.8 138.7 159.9 Business tax reductions 2.1 9.7 18.6 29.8 43.5 65.6 Total 2.1 38.0 93.4 149.6 182.2 225.6 Administration's Original Bill: Personal tax reductions 6.4 44.5 81.9 118.9 142.5 163.5 Business tax reductions 2.5 10.5 20.9 32.7 46.1 60.2 Total 8.9 55.0 102.8 151.5 188.6 223.7 Reduced deficit or increased surplus resulting from substituting the Economic Recovery Act of 1981 for the Administration's original Bill 6.8 17.0 9.4 2.0 6.4 -1.8 Office of the Secretary of the Treasury June 10, 1981 Office of Tax Analysis Note: Details may not add to totals due to rounding. *Less than $50 million. Table 2 Reduction in Fiscal Year Receipts Resulting from the Personal Tax Provisions of the Economic Recovery Act of 1981 Fiscal Years 1981-86 (S billions) : Fiscal Years : 1981 : 1982 : 1983 : 1984 : 1985 : 1986 Across-the-board tax rate reduction of 5 percent on October 1, 1981 with additional reductions of 10 percent on July 1, 1982 and 10 percent on July 1, 1983 -- 25.7 64.4 104.3 121.1 139.0 Lower top rate to 50 percent on January 1, 1982 and thereafter -- 1.1 2.2 1.1 0.8 1.0 Marriage penalty relief (5 percent exclusion up to $1,500 in 1982, 10 percent exclusion up to $3,000 in 1983 and thereafter) (January 1, 1982) -- 0.4 3.8 7.0 7.8 8.7 Phase-in increase in the unified estate and gift tax credit to $192,800, allow an unlimited marital deduction, and increase the annual gift tax exclusion to $10,000 (January 1, 1982) -- 0.1 1.9 3.0 4.0 5.8 Increase IRA limit to $2,000 ($2,250 spousal) and increase the percentage limit to 100 percent (January 1, 1982) -- 0.1 0.2 0.2 0.2 0.3 Extend IRA eligibility to covered persons with a $1,000 (S1,125 spousal) limit (January 1, 1982) . -- 0.1 0.7 1.0 1.3 1.4 Increase Keogh plan limit to $15,000 (January 1, 1982) -- * 0.1 0.2 0.2 0.2 Make permanent the $200/$400 interest and dividend exclusion I -- 0.8 2.5 2.7 3.0 Table 3 Reduction in Fiscal Year Receipts Resulting from the Business Tax Provisions of the Economic Recovery Act of 1981 Fiscal Years 1981-86 (S billions) : Fiscal Years : 1981 : 1982 : 1983 : 1984 : 1985 : 1986 Accelerated cost recovery system 2.1 8.9 17.3 28.3 41.9 63.9 25 percent incremental credit for direct wages for research and development (July 1, 1981) * 0.4 0.6 0.7 0.7 0.7 Allow an exclusion of $50,000 plus 50 percent of the next $50,000 of foreign earned income, with a housing allowance (January 1, 1982) -- 0.3 0.5 0.5 0.6 0.6 Investment tax credit for rehabilitation expenditures (15 percent for 30 years, 20 percent for 40 years, and 25 percent for historic structures) (January 1, 1982) -- 0.1 0.2 0.2 0.3 0.4 Total 2.1 9.7 18.6 29.8 43.5 65.6 Business tax reductions under the original Administration Bill 2.5 10.5 20.9 32.7 46.1 60.2 Cost of business tax reductions under the original Administration Bill in excess of the business tax reductions under the Economic Recovery Act of 1981 0.4 0.8 2.3 2.9 2.6 -5.4 Office of the Secretary of the Treasury June 10, 1981 Office of Tax Analysis Note: Details may not add to totals due to rounding. *Less than $50 million. Table 4 Effect on Fiscal Year Receipts Resulting from the Accelerated Cost Recovery System under the Economic Recovery Act of 1981 ($ billions) : Fiscal Years : 1981 : 1982 : 1983 : 1984 : 1985 : 1986 Accelerated cost recovery system under the original Administration Bill -2.5 -10.5 -20.9 -32.7 -46.1 -60.2 Modifications to the original Administration Bill: All structures at 15 years under 200 percent declining balance -0.2 -0.8 -1.4 -1.7 -1.9 -2.2 Limit the 10-year, 5-year, and 3-year class to 150 percent declining balance through 1984, 175 percent declining balance in 1985, and 200 percent declining balance in 1986 and thereafter; allow taxpayers to elect the straight-line method 0.6 2.9 5.0 7.1 8.8 3.3 Eliminate the deduction for qualified progress expenditures 0.5 2.2 3.8 4.4 4.6 4.6 Liberalize leasing requirements -0.5 -2.7 -3.8 -5.4 -7.3 -9.4 Accelerated cost recovery system under the Economic Recovery Act of 1981 -2.1 -8.9 -17.3 -28.3 -41.9 -63.9 Cost of the accelerated cost recovery system under the original Administration Bill in excess of the accelerated cost recovery system under the Economic Recovery Act of 1981 0.4 1.6 3.6 4.3 4.2 -3.7 Office of the Secretary of the Treasury June 10, 1981 Office of Tax Analysis Note: Details may not add to totals due to rounding. Table 5 Personal Tax Reductions Resulting from Key Elemento of the Economic Recovery Act of 1981 Distributed by Adjusted Gross Income Class ($ millions) $ I I I Increase IRA I $200 ($400 for I 1 Current 1984 I Tax : 10 percent 1 and 8 joint returns) 1 Total change I law tax I rate I second-earner I Keogh limits; : Interest and 1 in tax Adjusted 8 liability $ reductions 1 Income exclusion 1 liberalize IRA I dividend s liability gross : I I : eligibility 21 I exclusion I Income I :Percentage: 1Percentage: :Percentage: :Percentage: :Percentage: :Percentage:Percent class s Amount : distri- I Amount 8 distri- : Amount : distri- : Amount $ distri- I Amount : distri- 8 Amount I diatri- $ of : : butlon I Irn 1 : button : : butlon : 1 button 1 $ butlon : tax ($000) 1 percent) 1 l' lient) 1 percent) ( percent) ( percent) (... percent ....) Less than 5 $ 5 n -117 0.1% $ n * $ * A $ -20 1.1% $ -137 0.2% 21 5 - 10 6,591 2.3% -1,906 2.8 -16 0.4% -5 0.4% -114 6.0 -2,041 2.7 -31.0% 10 - 15 16,752 5.8 -4,139 6.2 -78 1.7 -21 1.8 -159 8.4 -4,397 3.9 -26.2 15 - 20 23,404 8.1 -5,702 8.5 -201 4.5 -44 3.8 -168 8.8 -6,115 8.2 -26.1 20 - 30 59,935 20.7 -14,110 21.0 -1,070 23.9 -304 26.1 -436 22.9 -15,920 21.3 -26.6 30 0 50 87,552 30.3 -20,553 30.5 -2,250 50.4 -342 29.3 -647 34.0 -23,792 31.8 -27.2 50 100 52,547 18.2 -12,307 18.3 -657 14.7 -315 27.0 -289 15.2 -13,568 18.1 -25.8 100 200 23,840 8.2 -4,987 7.4 -157 3.5 -113 9.7 -57 1.0 -5,314 7.1 -22.3 200 & over 18,538 6.4 -3,470 5.2 -38 0.9 -23 2.0 -12 0.6 -3,543 4.7 -19.1 Total $289,183 100.0% 111"." $-4,468 100.02 $-1,166 100.0% $-1,902 100.0% $-74,827 100.0% -25.9% Office of the Secretary of the Treasury, Office of Tax Analysis June 10, 1981 1/ Includes outlay portion of the earned Income credit. 21 Increase IRA limit to $2,000 and increase the percentage limit to 100 percent. Extend IRA eligibility to covered persons with a $1,000 11:=1t, Increase Keagh plan limit to $15,000. 11 This to the refundsbility feature of the earned Income credit the net tax liability for this Income class is negative under the proposal. Calculation of a percentage reduction is not meaningful. Note: Details mAy not add to totals due to rounding. *lenn than $500 thousand or ,05 percent. RU Budget The Washington Times WEDNESDAY, JULY 7, 1982 / PAGE 7A Of course, the Senate Finance Com- Dole's new idea mittee did worry about the banks' costs - especially, the large, well-represented The Republicans on the Senate 'ones. So they decided to let the banks Finance Committee (and mainly Sen. use the money they withdraw (for the Robert J. Dole, as I understand) have government) from your bank account. come up with a slick new tax gimmick The banks will take the money to pay, that must gladden the Keynsian hearts your new tax bill only they won't! of all the Super-Liberals in the land! It Not right away. The government is going should even please Sen. Ted Kennedy, to let them invest your money for a promoter-in-chief of the idea of while to earn enough to cover their reducing what he calls "tax expendi- costs. How about that, fellow taxpayers! tures." It places Dole and his minions about as far to the left of their natural The Dole folks will let the banks earn constituency as Madalyn Murray interest on your earnings - but deny O'Hair is from the College of Cardinals. you the same right! The person who works to earn the money, pays income Their new idea is to have the Internal taxes on it, and then chooses to save Revenue Service dip into interest and what is left can't earn interest on the dividend income before the real owners money his savings earn. But the banks of those earnings get them. The gov- will and the government will. Heads ernment guys think they gave first right they win, tails you lose! to all earnings. The person who worked What ever happened to the idea that for those earnings is second in line. one had the right to his own property? That is in tune with so much of the If the IRS is having difficulty collecting socialistic thinking that seems to per- vade government. But the bureaucratic boon-doggling and government empire- building possibilities in interest and taxes on dividend and interest income, dividend withholding stagger the mind. it is not for a lack of forms and reports about what people earn. Interest/divi- Can you picture the army of clerks dend income is already reported to the they will hire to process the tax on the IRS in full on Form 1099. We are the 51/4 percent interest you and millions most reported-on people in history. of others earn on the five hundred bucks you have in the local savings and loan? As a Republican (so far) and a con- And imagine the potential for computer tributor to that party (so far) I can't foulups! help wondering how Sen. Dole et al ended up playing on Tip O'Neill's team! Let's say your bank credits interest daily. Your $500 will earn $26.25 a year G.T. Urquhart - which works out to $.0729166 a day Washington, D.C on a 360-day year. The bank will have to notify the government money- gatherers that it is sending over a check for 10 percent (the proposed withholding rate) which comes to exactly $.0072916. This colossal bookkeeping chore will add another government-ordered cost to banks' overhead, many of which are already losing money faster than they can buy red ink. Quite naturally, the proposed with- holding rate of 10 percent is likely to skyrocket, just like the original income tax rate of 1 percent climbed to a mar- ginal rate of 90 percent (now "reduced" to 50%). Hasn't the Senate Finance Committee heard about the growing sentiment for less government interference in our lives? Don't the committee members understand the importance of ending government's wrecking-ball actions in financial markets? Can't they realize that most older people need every penny of the earnings their savings produce and not at the end of the tax-year when the IRS is good and ready to return their excess withholding? Can't they realize that many retirees will suffer if the IRS takes another cut off the top? And has anyone figured out that by dipping into people's savings, the amount that one can earn will be reduced? The Senate Finance Com- mittee would prevent much of one's interest from accumulating and compounding. The most serious ques- tion of all is, when are government people going figure out that it isn't only "the rich" who depend on interest and dividends. packet Talking Points Senate Budget Committee Package VS. Jones Package Excessive Tax Increase $151 billion over three years compared to $95 billion in SBC package. Jones tax increase is three times greater than President's February Budget. Cancels 37 percent of three year tax reduction ($407 billion) voted by Congress last year. Results in $263 billion total tax increase over FY 83-85 when added to scheduled Social Security tax rises. Jones revenue target can not be achieved without repeal of third year rate cut and major scale-back of business tax incentives for investment, productivity and jobs. Eliminates Most of Essential National Security Buildup Jones package includes $46 billion in defense program savings and $17 billion in pay and retirement savings. This $63 billion total DOD cut eliminates 71 percent of the Administration's increase over the last Carter defense budget. Jones defense outlay target would require at least $100 billion in budget authority cuts over three years -- resulting in major damage to strategic modernization, readiness, and upgrading of conventional land, air and naval forces. Jones defense program cut is $24 billion larger or 210 percent of SBC defense program savings. Minimal Domestic Spending Cuts Jones provides three-year savings of $41 billion in discretionary spending and targeted entitlements. This represents only 40 percent of the President's February Budget savings and falls far short of $72 billion in SBC package. Jones three year entitlements savings of $22 billion amount to only 1.8 percent of current law (automatic) entitlement spending baseline of $1.2 trillion. Old Priorities The Jones package represents a relapse to the failed fiscal policies of the 1970's: Excessive tax increases, inadequate defense funding and over-spending for domestic programs. Jones tax increases and defense cuts total $214 billion or 51 percent of deficit reduction package. By contrast, SBC package contains only $138 billion in defense savings and revenue increases, or 33 percent of deficit reduction package. Superiority of Senate Budget Committee Package Unlike the Jones plan, the SBC package provides a balanced approach to reducing the deficit that is consistent with the President's basic priorities: SBC outlay savings total $281 billion or 68 percent of total deficit reduction package. SBC tax increases preserves 87 percent ($312 billion) of net three-year tax cut contained in President's February Budget. SBC entitlement savings total $49 billion or more than double Jones package. May 11, 1982 May 11, 1982 JONES PACKAGE Three Year Total 1983 1984 1985 Jones SBC 1) Baseline Deficit (adjusted) 181.4 215.3 232.2 628.9 630.5 Deficit Reduction Measures: 2) Management 12.9 16.0 14.6 43.5 33.1 3) User Fees 0.7 1.1 1.1 2.9 6.0 4) Federal Pay and Retirement 5.1 10.6 15.7 31.4 27.3 5) COLAs - - - - 15.0 6) Non-Defense Discretionary Savings (4.9) (10.6) (17.2) (32.7) - O Discretionary Add-Back (+1.0) (+2.2) (+2.9) (+6.1) - O Net Discretionary Savings 3.9 8.4 14.3 26.6 38.3 7) Targeted Entitlements 3.0 4.7 6.7 14.4 33.6 8) Social Security Commission Solvency Recommendations - - - - 40.0 9) Defense (Excluding Pay/Retirement) 8.6 15.2 22.4 46.2 22.0 10) Other Policy Savings 0.6 1.1 1.2 2.9 - 11) Revenue 31.0 52.0 68.0 151.0 95.0 12) Interest Rates 8.0 19.0 28.0 55.0 54.9 13) Debt Service 4.7 16.4 29.4 50.5 50.7 14) Total Deficit Reduction 78.5 144.5 201.1 424.4 415.9 15) Remaining Deficit 102.9 70.8 31.1 - - POLICY CHANGES: SENATE BUDGET COMMITTEE Totals 1983-85 Senate President's Budget 1983 1984 1985 Budget 1/ Committee 1) Baseline Deficit 182.0 216.0 232.5 630.5 630.5 Deficit Reduction Measures: 2) Management 8.9 12.1 12.1 33.9 33.1 3) User Fees 2.0 2.0 2.0 9.0 6.0 4) Civilian Pay 3.9 6.3 8.5 9.8 18.7 5) Military Pay 1.6 3.0 4.0 0.4 8.6 6) COLA's 2.7 5.1 7.2 4.7 15.0 7) Non-defense Discretionary 5.7 12.5 20.1 53.3 38.3 8) Targeted Entitlements 7.2 11.4 15.0 48.5 33.6 9) Social Security Commission Solvency Recommendations 6.0 17.0 17.0 --- 40.0 10) Defense (excluding pay/ retirement) 5.0 7.0 10.0 1.2 22.0 11) Revenue 20.0 35.0 40.0 45.2 95.0 12) Interest rates 8.0 19.1 27.8 --- 54.9 13) Debt Service 4.9 16.5 29.3 47.5 2/ 50.7 2/ 14) Total Deficit Reduction 75.9 147.0 193.0 260.5 415.9 15) Remaining Deficit 106.1 69.0 39.5 370.0 214.6 1/ CBO estimates. The $260.5 billion total includes $7.0 billion of savings for certain social services programs, employer share employee retirement, and several mandatory programs that are not shown on the table. 2/ Debt service savings for the President's budget are estimated by CBO using CBO pre-policy interest rates. Debt service savings for the Senate Budget Committee are estimated using post-policy rates, which are 2 1/2 percentage points lower. AbP102:96 May 10, 1982 Budget 1984 THE HOUSE DEMOCRATIC BUDGET PLAN: A RADICAL ATTACK ON TWO YEARS OF PROGRESS I Democratic budget plan is a blueprint for repealing two years of progress on every element of national policy. Restores failed pump-priming approach with $58 billion in 1983-84 add-ons for anti-recession and social spending programs. (Tab A) Repeals essential welfare, food stamp, medicaid and other entitlement reforms enacted in 1981-82 -- throwing away savings of nearly $10 billion. (Tab B) Rejects all new medical, pension and other entitlement reforms proposed in President's FY 1984 budget -- thereby raising spending by $6 billion in FY 1984 and $71 billion over five years. (Tab C) Starts ten major new spending programs with six year price-tag of $52 billion --- despite $200 billion plus annual baseline deficits resulting from existing programs. (Tab D) Restores funding levels for two-dozen domestic spending programs nearly to the bloated Carter 1981 levels -- thereby wiping out two years of spending restraint and adding $32 billion to the President's FY 1984 budget. (Tab E) Resorts to drastic underfunding of defense and over-burdening of taxpayers to finance this spending splurge. Compared to CBO baseline for 1984-88: Taxes up $315 billion Defense cut by $206 billion (budget authority) This amounts to a one-half trillion dollar retreat over five years straight back to failed Carter policies and priorities. EI For the near-term, the Democratic budget plan causes everything to go the wrong way --all at the same time. Compared to the President's budget for 1983-84: Domestic spending up by $45 billion Taxes up by $27 billion National security down by $10 billion Deficit up by $8 billion III Over 1984-88 the Democratic plan cancels 42 percent of the net tax reduction enacted over last two years and increases and middle income tax burdens by a staggering $203 billion. The Democratic "tax, tax and tax" plan cancels 38 percent of the 1984 tax cut and nearly 52 percent by 1988: 1984 1985 1986 1987 1988 Total Net tax cut enacted 1981-82 -93 -121 -154 -178 -207 -753 O Democratic tax increase +35 +48 +58 +74 +100 +315 Percent of tax cut cancelled 38% 40% 38% 42% 48% 42% IV The so-called Democratic "Fairness" Budget amounts to downright cruelty to lower and middle income taxpayers. Nearly two thirds of the massive $319 billion proposed tax increase would fall on lower and middle income taxpayers as a result of cancelling the third year and indexing. Impact of Cancelling Third-year and Indexing 1983 1984 1985 1986 1987 1988 Total Under $20,000 +1.2 +4.7 +6.6 +9.6 +13.1 +17.2 +52.4 $20 - 40,000 +3.6 +15.6 +20.2 +27.7 +36.5 +46.7 +150.3 Total +4.8 +20.3 +26.8 +37.3 +49.6 +63.9 +202.7 Percent of Democratic tax increase -- 58% 56% 64% 67% 64% 64% V Democratic budget plan shatters two-year Administration-Con- gressional consensus for domestic spending restraint and restoration of national defense strength by turning the President's FY 1984 budget priorities upside down. O Rather than proposing constructive moderate adjustments to the President's defense request, the Democratic plan guts the entire defense build-up and re-allocates the entire sum to massive increases in domestic spending. - Compared to the President's FY 1984 budget, the Democratic plan 1984 1985 1986 1987 1988 Total 0 Increases non- defense spending by +29 +33 +35 +40 +44 +181 O Slashes national security spending (outlays) by -9 -26 -37 -44 -47 -163 VII The Democratic claim that their big defense cuts and major tax increases are needed to cut the deficit is phony. Two out of every three dollars of combined revenue increases and defense reductions in the proposed plan are allocated to increase domestic spending -- not lower deficits. Compared to the President's budget: Combined tax increases and defense cuts $277 billion Higher domestic spending +181 billion Percent allocated to higher domestic spending 65%