    [Budget Supplement]
    [Creating Opportunity and Encouraging Responsibility]
    [12. Promoting Tax Fairness]
    [From the U.S. Government Printing Office, www.gpo.gov]

      ----------------------------------------------------------------------

      The spotlight should shine on those who make the right choice for themselves, their families, and their
    communities. I have proposed the Middle Class Bill of Rights [to] give needed tax relief and raise incomes in
    both the short run and the long run in a way that benefits all of us.

                                          President Clinton
                                          January 1995

      ----------------------------------------------------------------------
      The budget proposes tax reforms that would promote tax fairness and
    encourage activities that foster economic growth. It calls for tax cuts
    that would benefit middle-class families with children, encourage
    investment in higher education, and promote long-term saving. It helps
    small business with more favorable treatment of investment, estate tax
    relief, pension simplification, and health insurance for the self-
    employed. And it contains targeted tax relief to promote the renewal and
    environmental cleanup of distressed communities.
      ----------------------------------------------------------------------

                                          Table 12-1.  THE PRESIDENT'S TAX PLAN
                                                (In billions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                            Estimate                          Total
                                                    --------------------------------------------------------  1996-
                                                      1996    1997    1998    1999    2000    2001    2002     2002
    ----------------------------------------------------------------------------------------------------------------
    Middle Class Bill of Rights tax cuts:
      Provide tax credit for dependent children....    -1.1    -9.7    -7.0    -8.9   -10.7   -10.7   -10.6    -58.6
       Expand individual retirement accounts.......  ......    -1.4    -0.4    -0.7    -1.1    -1.6    -2.5     -7.7
      Provide incentive for education and training.    -0.2    -5.8    -5.6    -6.2    -7.5    -7.8    -8.0    -41.2
                                                    ----------------------------------------------------------------
        Subtotal, Middle Class Bill of Rights tax
         cut.......................................    -1.3   -17.0   -13.0   -15.8   -19.3   -20.0   -21.1   -107.5

    Additional targeted tax relief:
      Tax relief for small business:
        Increase expensing for small business......  ......    -0.6    -0.5    -0.6    -0.7    -0.9    -0.8     -4.1
        Provide estate tax relief for small
         business..................................  ......  ......    -0.2    -0.2    -0.2    -0.2    -0.2     -1.0
        Simplify pension plan rules\1\.............       *      -*    -0.1    -0.3    -0.3    -0.3    -0.3     -1.4
        Increase self-employed health deduction....      -*    -0.1    -0.1    -0.2    -0.4    -0.5    -0.5     -1.9
      Other targeted tax relief:
        Provide tax incentives for distressed areas      -*      -*    -0.3    -0.6    -0.8    -0.9    -0.8     -3.4
        Provide tax relief to troops in Bosnia.....      -*      -*  ......  ......  ......  ......  ......       -*
                                                    ----------------------------------------------------------------
          Subtotal, Additional targeted tax relief.      -*    -0.7    -1.2    -1.9    -2.4    -2.8    -2.6    -11.8

    Restrict corporate loopholes and other
     proposals.....................................    -0.3     5.7     7.4     9.5    10.3    10.9    12.6     56.2

    Modify earned income tax credit\2\.............       *     0.3     0.4     0.4     0.4     0.4     0.4      2.3

    ----------------------------------------------------------------------------------------------------------------
    *Less than $50 million.

    \1\Net of income offsets.

    \2\This proposal reduces outlays by less than $50 million in 1996, and by $0.6 billion in every year from 1997
      to 2002.

      ----------------------------------------------------------------------
      The President's tax plan is fiscally responsible. The budget funds the
    tax relief through cuts in spending and in unnecessary corporate
    subsidies and other unwarranted tax breaks. In addition, the budget
    includes a ``trigger'' mechanism to ensure fiscal discipline by
    guaranteeing that most of the tax cuts would remain in effect beyond the
    year 2000 only if the Government is meeting deficit reduction
    targets.\1\
      \1\The trigger applies to all of the tax relief provisions except
    pension simplification, estate and gift tax relief, expanded Empowerment
    Zones and Enterprise Communities, and tax relief for the troops in
    Bosnia.
    ---------------------------------------------------------------------------
      This chapter provides an overview of the President's tax proposals.
    For additional details, see Chapter 3 of Analytical Perspectives.
    [[Page 112]]
    A Middle Class Tax Cut

      The President continues to view tax cuts for middle-income families as
    an important priority. In 1993, the President worked with the last
    Congress to enact policies that not only reversed the Nation's trend of
    steadily rising rising deficits, but also cut taxes for 15 million
    working families. Building on that progress, the budget proposes to
    balance the Federal books by the year 2002, but also to ensure that
    middle-income Americans share the benefits of economic growth.
      Specifically, the President again calls for enactment of the Middle
    Class Bill of Rights that he proposed last year. It would immediately
    and significantly benefit families with young children, encourage
    investment in post-secondary education, and promote long-term saving.

      The Tax Credit for Dependent Children: Today, most American families
    with children face significant challenges. Many have two working
    spouses; others are headed by single parents. All, however, confront
    their children's economic, educational, and emotional needs.
      Economic growth in the last two decades has not generated big gains in
    after-tax income for most families. In fact, the bottom 60 percent
    ranked by income lost ground from 1979 to 1992. For more on how
    Americans at different income levels have fared, see Chapter 2.
      The President proposes a non-refundable income tax credit for each
    dependent child under age 13, a credit that would benefit about 19
    million families with 36.6 million dependent children. The credit would
    be phased in, starting at $300 per child in tax years 1996, 1997, and
    1998, and rising to $500 per child in 1999 and beyond. It would be
    phased out for taxpayers with adjusted gross incomes (AGI) between
    $60,000 and $75,000. Starting in 2000, the credit and the phase-out
    range would be indexed for inflation. Working families would first
    deduct the child credit from their income taxes before deducting the
    refundable Earned Income Tax Credit--making it easier for them to get
    the benefit of both credits.
      For a two-parent, two-child family with $50,000 of income and $12,500
    of itemized deductions, the credit would cut taxes by 25 percent, from
    $4,005 to $3,005, when fully in place in 1999. Overall, the credit would
    cut families' taxes by an estimated $58.6 billion from 1996 to 2002.

      The Education and Job Training Tax Deduction: Education is vital to
    making and keeping American workers the world's most productive, but
    tuition remains a daunting barrier to families of modest means. The
    President believes that the tax system should better encourage higher
    education.
      The President proposes a deduction of up to $5,000 a year for
    qualifying education and training expenses in 1996, 1997, and 1998.
    Beginning in 1999, it rises to $10,000. Qualifying expenses include
    tuition and fees directly related to a student's enrollment in degree
    programs and courses to improve job skills. The deduction would be
    available for the education of a taxpayer, his or her spouse, or
    dependents.
      The deduction would be available whether or not a person itemizes
    deductions. For taxpayers filing jointly, the deduction would be phased
    out for returns with modified AGI\2\ of $100,000 to $120,000. The phase-
    out range is $70,000 to $90,000 for other taxpayers. Starting in 2000,
    these ranges would be indexed for inflation.
      \2\Modified AGI includes taxable Social Security benefits and certain
    income earned abroad.
    ---------------------------------------------------------------------------
      Once fully implemented, this tax deduction would cut the taxes of
    eligible families by up to $2,800. Overall, it would give eligible
    families $41.2 billion in tax relief from 1996 to 2002, and increase
    enrollment in higher education and training programs.

      Expanded Individual Retirement Accounts (IRAs): The President proposes
    to expand IRAs in order to provide greater incentives for saving for
    retirement and other important purposes. Currently, for taxpayers who
    participate in employer-sponsored retirement plans and file joint
    returns, the tax code phases out the availability of deductible IRAs
    between $40,000 and $50,000 of AGI. The President's plan would double
    this range over time, to $80,000 to $100,000 (and double the range for
    single taxpayers to between $50,000 and $70,000). The plan also would
    index for
    [[Page 113]]
     inflation these income limits and the current maximum
    contribution of $2,000.
      Also under this budget, eligible taxpayers could contribute to a
    ``Special IRA'' as an alternative to a deductible IRA. Contributions to
    Special IRAs would not be tax deductible, but distributions of the
    contributions would be tax-free and--if contributors kept their funds in
    the account for at least five years--earnings on the contributions would
    be distributed tax-free as well. Many taxpayers would be eligible to
    convert existing deductible IRAs to Special IRAs. Also, contributors to
    both of the IRAs could, at any time, withdraw the funds without penalty
    to pay for higher education, first-time home purchases, expenses during
    a period of unemployment, or medical care and nursing home costs.
      The expanded eligibility of IRAs would enable many two-earner families
    to reduce their taxes by as much as $1,120 a year if they make the
    maximum allowable IRA contributions. From 1996 to 2002, this provision
    would cut taxes by an estimated $7.7 billion.

    Tax Relief for Small Business

      Increased Expensing for Small Business: In 1993, the President worked
    with the last Congress to increase the amount of investment eligible for
    expensing, which gives needed funds to small businesses that have
    limited access to capital markets. Expensing also simplifies tax
    reporting and record-keeping, which are more burdensome for small
    business. As a result, businesses that invest less than $200,000 a year
    may deduct $17,500 of investment in the year they place an asset in
    service, rather than depreciating it over several years. Now, the
    President proposes to raise this amount to $19,000 in 1996 and continue
    raising the level so that it reaches $25,000 by the year 2002.
      Estate Tax Benefits for Closely-Held Businesses: The budget would cut
    the burden of estate taxes on farms and other small businesses. It would
    allow owners of closely-held businesses to defer taxes on $2.5 million
    of value (up from $1 million under current law), and pay the taxes at a
    favorable interest rate over 14 years. In addition, the budget would
    expand the types of businesses eligible for this treatment by making the
    form of business ownership irrelevant. The budget proposes other changes
    to cut the administrative burden on taxpayers electing deferral.
      Pension Simplification: The President proposes measures to simplify
    the design and administration of employer-provided pension plans. These
    measures not only would simplify the tax laws, but would expand pension
    coverage and stimulate private saving, particularly for employees of
    small firms.
      The President proposes a new plan for small business--the National
    Employee Savings Trust (NEST). It would replace a series of provisions
    that limit the contributions of highly-compensated personnel with a
    simple ``safe-harbor'' formula, thus removing hurdles that discourage
    small employers from creating retirement plans for employees. NEST
    combines the most attractive features of IRA and 401(k) plans, minimizes
    administrative and compliance costs, and eliminates the need for
    employer involvement with the Government. NEST is designed to encourage
    workers of all incomes to save for retirement without complicated forms
    or calculations.
      The budget includes other provisions to simplify pension plans
    sponsored by businesses of all sizes, as well as tax-exempt employers,
    multi-employer groups, and the self-employed. These reforms would allow
    employers to cut administrative costs, and direct more dollars to
    providing retirement benefits and stimulating retirement savings.

      Increased Health Insurance Deduction for the Self-Employed: The
    Administration has worked hard to expand access to affordable health
    insurance. One group that faces considerable hurdles is the self-
    employed. Only 30 percent of their contributions for health insurance
    are deductible; by contrast, employer-provided insurance is fully exempt
    from taxes for the employee, and tax deductible for the employer. This
    budget would increase the deductible share of self-employed health
    insurance premiums, over time, to 50 percent, benefitting at least three
    million self-employed people.
    [[Page 114]]

    Other Targeted Tax Relief

      Expanded Empowerment Zones and Enterprise Communities: The President
    proposes a second round of competition to designate Empowerment Zones
    and Enterprise Communities, providing over $1 billion in tax benefits
    through 2002 to these areas. The program promises to mobilize
    communities to promote business development and create jobs. (For more
    details, see Chapter 5.)
       Brownfields Cleanup: The budget would provide accelerated write-offs
    of the costs of cleaning up and developing ``brownfields''--abandoned,
    contaminated industrial sites in economically distressed urban and rural
    areas. (For more details, see Chapter 9.)
       Benefits for Troops in Bosnia: The President proposes to extend tax
    relief that is now available to those in combat operations to U.S.
    troops involved in the Bosnia peacekeeping operations. While their role
    is peacekeeping, not combat, the risks and problems of this mission
    argue for providing a series of benefits, including tax exemptions for
    certain amounts of pay, the relaxing of filing deadlines, and similar
    administrative requirements.

    Earned Income Tax Credit Targeting and Compliance

      The Earned Income Tax Credit (EITC) is a cornerstone of the
    President's efforts to promote work and self-sufficiency. The budget
    would maintain the positive work incentives while better targeting the
    credit and improving compliance. People who are not citizens or not
    legally authorized to work in this country would no longer be eligible
    for the EITC.
      The budget proposes expedited procedures for handling the failure to
    provide a correct social security number for the EITC and other tax
    purposes. It also would restrict eligibility for families with sizable
    amounts of capital gains and other passive income, and disregard certain
    losses in computing the EITC phase out. These changes would raise about
    $2.3 billion from 1996 to 2002.

    Loopholes, Corporate Preferences, and Compliance

      The budget would reduce or eliminate a series of corporate tax
    loopholes and preferences that are no longer warranted. Some involve
    highly specialized financial and accounting techniques. Restricting them
    would help balance the budget, increase the equity and efficiency of the
    tax system, and keep corporations focused on productivity and profits,
    rather than on reducing their taxes.
      For example, the plan would:
      Close the loophole that lets individuals accrue gains as
              Americans and then renounce their citizenship to avoid taxes.
              The proposal also tightens rules governing foreign trusts with
              a package of information-reporting and anti-abuse rules
              directed at sophisticated tax-planning techniques.
      Reform depreciation deductions to better account for expected
              future income.
      Capture, over time, the indefinite deferrals of income by some
              large farm corporations.
      Restrict interest deductions for loans taken against
              corporate-owned life insurance policies, preventing the
              policies from serving as inappropriate tax-free savings
              accounts for corporations.
      Require corporations to recognize gains under certain stock
              sales, rather than treat them as ``extraordinary dividends''
              to avoid corporate taxes.
      Require thrift institutions to account for bad debts in the
              same way as banks.
      Increase the requirements for corporate tax shelters to
              register with the Internal Revenue Service (IRS), to help the
              IRS make more-informed judgments about the merits of the
              proposed tax treatment.
      Repeal percentage depletion for non-fuel minerals mined on
              Federal lands that were acquired for nominal amounts under the
              1872 Mining Act.
    [[Page 115]]
      Deny or defer interest deductions on certain financial
              instruments that have substantial equity features.
      Restrict interest deductions for corporations that invest in
              tax-exempt bonds.
      Reform inventory accounting, to reflect costs more accurately.
      Improve compliance by requiring Federal agencies to file
              information returns for their payments to corporations for
              services rendered, and by increasing the penalties for not
              filing correct information.
      Reform the section 936 tax credit (benefiting activities in
              Puerto Rico and other U.S. possessions), so that it promotes
              economic activity rather than merely encouraging firms to
              attribute profits there.

    Additional Tax Measures

      Finally, the Administration supports revenue-neutral extensions of a
    range of tax provisions that have recently expired. It also supports
    revenue-neutral initiatives to promote sensible and equitable
    administration of the tax laws, including tax simplification initiatives
    and technical corrections.