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


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  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                                                              
                                                                                                                

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  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.
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                                      Table 12-1.  THE PRESIDENT'S TAX PLAN                                     
                                            (In billions of dollars)                                            
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                                                                        Estimate                          Total 
                                                --------------------------------------------------------  1996- 
                                                  1996    1997    1998    1999    2000    2001    2002     2002 
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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
                                                                                                                
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*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.                                                                                                      

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  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.
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  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.
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  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.