[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
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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..... -* -* ...... ...... ...... ...... ...... -*
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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.