    [Analytical Perspectives]
    [Federal Receipts and Collections]
    [3. Federal Receipts]
    [From the U.S. Government Printing Office, www.gpo.gov]

    ========================================================================

                        FEDERAL RECEIPTS AND COLLECTIONS

    ========================================================================

    [[Page 35]]

                              3.  FEDERAL RECEIPTS

      Receipts (budget and off-budget) are taxes and other collections from
    the public that result from the exercise of the Government's sovereign
    or governmental powers. The difference between receipts and outlays
    determines the surplus or deficit.

      Growth in receipts.--Total receipts in 1997 are estimated to be
    $1,495.2 billion, an increase of $68.5 billion or 4.8 percent relative
    to 1996. This increase is largely due to assumed increases in incomes
    resulting from both real economic growth and inflation. Receipts are
    projected to grow at an average annual rate of 5.0 percent between 1997
    and 2002, rising to $1912.2 billion.
      As a share of GDP, receipts are projected to remain fairly constant,
    declining from 19.0 percent in 1996 to 18.9 percent in 2002.

                                                             Table 3-1.  RECEIPTS BY SOURCE--SUMMARY
                                                                    (In billions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                        Estimate
                     Source                    1995 actual -------------------------------------------------------------------------------------------------
                                                                1996          1997          1998          1999          2000          2001          2002
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Individual income taxes.................      590.2         630.9         645.1         683.4         714.2         748.7         790.0         834.5
    Corporation income taxes................      157.0         167.1         185.0         201.7         212.7         225.4         236.7         245.8
    Social insurance taxes and contributions      484.5         507.5         536.2         560.9         589.4         618.8         647.0         679.5
      (On-budget)...........................     (133.4)       (140.1)       (148.2)       (154.6)       (161.6)       (168.8)       (175.8)       (184.8)
      (Off-budget)..........................     (351.1)       (367.4)       (388.0)       (406.3)       (427.8)       (450.0)       (471.2)       (494.6)
    Excise taxes............................       57.5          53.9          59.6          60.4          61.7          62.8          64.2          65.6
    Estate and gift taxes...................       14.8          15.9          17.1          18.1          19.5          20.9          22.5          24.1
    Customs duties..........................       19.3          19.3          20.5          20.8          20.9          21.9          22.4          24.3
    Miscellaneous receipts..................       31.9          32.1          31.8          32.7          34.2          35.3          37.1          38.4
                                             ---------------------------------------------------------------------------------------------------------------
      Total receipts........................    1,355.2       1,426.8       1,495.2       1,577.9       1,652.5       1,733.8       1,819.8       1,912.2
        (On-budget).........................   (1,004.1)     (1,059.3)     (1,107.2)     (1,171.6)    ( 1,224.8)     (1,283.9)     (1,348.6)     (1,417.6)
        (Off-budget)........................     (351.1)       (367.4)      ( 388.0)       (406.3)       (427.8)       (450.0)       (471.2)       (494.6)
    --------------------------------------------------------------------------------------------------------------------------------------------------------

                                             Table 3-2.  CHANGES IN RECEIPTS
                                                (In billions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                           Estimate
                                        ----------------------------------------------------------------------------
                                            1996       1997       1998       1999       2000       2001       2002
    ----------------------------------------------------------------------------------------------------------------
    Receipts under tax rates and
     structure in effect January 1,
     1996\1\...........................    1,423.6    1,495.8    1,569.0    1,640.2    1,719.4    1,800.3    1,886.0
    Telecommunications Act of 1996.....        4.3        4.7        5.5        6.3        7.0        7.7        7.9
    Social security (OASDI) taxable
     earnings base increases:..........
      $62,700 to $65,100 on Jan. 1,
       1997............................  .........        1.0        2.8        3.1        3.5        3.9        4.3
      $65,100 to $68,100 on Jan. 1,
       1998............................  .........  .........        1.3        3.5        3.9        4.3        4.9
      $68,100 to $71,100 on Jan. 1,
       1999............................  .........  .........  .........        1.3        3.5        3.9        4.3
      $71,100 to $74,100 on Jan. 1,
       2000............................  .........  .........  .........  .........        1.3        3.5        3.9
      $74,100 to $76,800 on Jan. 1,
       2001............................  .........  .........  .........  .........  .........        1.2        3.2
      $76,800 to $80,100 on Jan. 1,
       2002............................  .........  .........  .........  .........  .........  .........        1.4
    Proposals\2\.......................       -1.6      -11.7       -6.3       -7.8      -11.0      -11.6      -10.7
    Extension of expired trust fund
     excise taxes\2\...................        0.5        5.5        5.7        6.0        6.3        6.7        7.0
                                        ----------------------------------------------------------------------------
      Total, receipts under existing
       and proposed legislation........    1,426.8    1,495.2    1,577.9    1,652.5    1,733.8    1,819.8   1,912.2
    ----------------------------------------------------------------------------------------------------------------
    \1\These estimates assume a social security taxable earnings base of $62,700 through 2002.
    \2\Net of income offsets.
    [[Page 36]]
                               ENACTED LEGISLATION

      Self-Employed Health Insurance Act.--This Act restored the 25 percent
    health insurance deduction for the self-employed for 1994 and increased
    it to 30 percent thereafter. The associated revenue losses were more
    than offset by other revenue and outlay provisions. The major provisions
    of the Act that affected receipts are described below.
      Restore and increase deduction for health insurance costs of self-
    employed individuals.--The 25 percent health insurance deduction for
    self-employed individuals and their dependents, which had expired for
    taxable years beginning after December 31, 1993, was retroactively
    reinstated. In addition, the deduction was permanently increased to 30
    percent for taxable years beginning after December 31, 1994.
      Repeal special rules applicable to Federal Communications Commission
    (FCC) certified sales of broadcast property.--Under prior law, sellers
    of FCC-licensed broadcast facilities were allowed to defer taxes on
    gains realized in the sale or exchange of FCC-licensed broadcast
    properties to minority owners. Such deferrals were executed through FCC-
    issued tax certificates. Under this Act, deferral was repealed effective
    for all sales and exchanges on or after January 17, 1995 and for all
    sales and exchanges occuring before that date for which the FCC tax
    certificate was issued on or after January 17, 1995. The repeal did not
    apply to binding written contracts for which the seller had applied to
    the FCC for a certificate of deferral before January 17, 1995.
      Modify earned income tax credit (EITC) eligibility.--Effective for
    taxable years beginning after December 31, 1995, taxpayers with annual
    aggregate interest, dividend, tax-exempt interest and net rental and
    royalty income exceeding $2,350 would no longer be eligible for the
    EITC.
      Prohibit nonrecognition of gain on involuntary conversions in certain
    related-party transactions.--Section 1033 of the Internal Revenue Code
    allows certain taxpayers to defer a gain realized from certain
    involuntary conversions of property if the taxpayer purchases similar or
    related property within a specified period. Under this Act, taxpayers
    would no longer be allowed to defer gain on involuntary conversions
    occurring on or after February 6, 1995 if the replacement property or
    stock were purchased from a related person.
      Extend New York State hospital surcharge provision.--Under the Omnibus
    Budget Reconciliation Act of 1993, certain employers were prohibited
    from receiving a Federal tax deduction for health insurance expenses if
    they failed to comply with New York State's hospital rate-setting/
    surcharge laws. This provision, which expired on May 12, 1995, was
    extended through December 31, 1995.

      Telecommunications Act of 1996.--This Act, which provided for a major
    restructuring of the Nation's communications laws, fulfilled this
    Administration's promise to reform telecommunications laws in a manner
    that leads to competition and private investment, promotes universal
    service and open access to information networks, and provides for
    flexible government regulation. Under the Act, all interstate
    telecommunications carriers would be required to contribute funds, as
    prescribed by the FCC, to the preservation and advancement of universal
    service. The contributions would be used to provide and upgrade
    facilities and services, as prescribed by the FCC. Telecommunications
    carriers would receive credit toward their contribution by providing
    discount service to schools, libraries, and health care providers in
    rural areas. Because the amounts collected would be spent, the net
    budget effect would be zero.
                            ADMINISTRATION PROPOSALS
                               Provide Tax Relief
      The President's plan targets tax relief to middle-income Americans
    through his Middle Class Bill of Rights, which was originally proposed
    in last year's budget. His plan also includes estate tax relief for
    small businesses and family farms, expanded expensing for small
    businesses, pension simplification, and initiatives for economically
    distressed areas.

      Middle Class Bill of Rights.--The Administration is again proposing
    the three features of its Middle Class Bill of Rights designed to give
    middle-income families the tax relief they need to help them raise their
    children, save for the future and pay for postsecondary education. These
    provisions would be subject to trigger-off (that is, would cease to be
    effective) on January 1, 2001 in the event that the Federal budget
    deficit is not at least $20 billion below the Congressional Budget
    Office's (CBO's) estimate for the year 2000.
      Provide tax credit for dependent children.--A non-refundable credit
    would be allowed for each dependent child under the age of 13. The
    credit would equal $300 for 1996, 1997 and 1998, and would rise to $500
    for 1999 and subsequent years. The credit would be phased out for
    taxpayers with adjusted gross income (AGI) between $60,000 and $75,000.
    Both the credit amount and the phase-out range would be indexed for
    inflation beginning in 2000. The credit would be applied before the
    earned income tax credit but could not be used to offset alternative
    minimum tax liability.
      Expand Individual Retirement Accounts (IRAs).--Under present law,
    eligibility for deductible IRAs is phased out for single taxpayers with
    AGI between $25,000 and $35,000 and for couples filing a joint return
    with AGI between $40,000 and $50,000, if the
    [[Page 37]]
    individual (or the
    individual's spouse) is an active participant in an employer-sponsored
    retirement plan. Under the Administration's proposal, the AGI thresholds
    and phase-out ranges would be doubled over time. For 1996 through 1998,
    eligibility would be phased out for single taxpayers with AGI between
    $45,000 and $65,000, and for couples filing a joint return with AGI
    between $70,000 and $90,000. For 1999 and later years, eligibility would
    be phased out for single taxpayers with AGI between $50,000 and $70,000
    and for couples filing a joint return with AGI between $80,000 and
    $100,000. These thresholds and the present law annual contribution limit
    of $2,000 would be indexed for inflation. Withdrawals from IRAs would
    not be subject to the 10 percent early withdrawal tax if the proceeds
    were used to pay post-secondary education costs, to buy or build a first
    home, to cover living expenses if unemployed for at least 12 consecutive
    weeks, or to pay catastrophic medical expenses (including nursing home
    or other costs associated with caring for an incapacitated parent or
    grandparent). In addition, each individual eligible for a deductible IRA
    would have the option of contributing an amount up to the contribution
    limit to a traditional deductible IRA or to a new back-loaded special
    IRA. Contributions to this special IRA would not be tax deductible, but
    distributions of the contributions would be tax-free. If the
    contributions remained in the account for at least five years, earnings
    on the contributions also would be tax-free when withdrawn. Withdrawals
    of account balances from special IRAs during the five-year period would
    be subject to ordinary income tax and a 10 percent early withdrawal tax.
    However, withdrawals during the five-year period for the purposes
    described above (or upon death or disability of the taxpayer) would not
    be subject to the early withdrawal tax. Individuals whose AGI for a year
    fell within the eligibility thresholds would be allowed to convert an
    existing IRA into a special IRA, and for conversions before 1998, income
    inclusion would be spread over four years.
      Provide tax incentive for education and training.--Effective January
    1, 1996, a deduction would be permitted for up to $5,000 in expenditures
    on post-secondary school education and training for the taxpayer, the
    taxpayer's spouse and dependents. The maximum allowable deduction would
    increase to $10,000 effective January 1, 1999. The maximum allowable
    deduction would be phased out for taxpayers filing a joint return with
    AGI (before the proposed deduction) between $100,000 and $120,000. For
    taxpayers filing a head-of-household or single return, the maximum
    allowable deduction would be phased out for those with AGI between
    $70,000 and $90,000. The phase-out ranges would be indexed for inflation
    beginning in 2000. Qualifying education expenses are those related to
    post-secondary education paid to institutions and programs eligible for
    Federal assistance. Deductible expenses would include tuition and fees,
    but would not include meals, lodging, books or transportation.

      Increase deduction for self-employed health insurance.--For a
    discussion of this proposal, see ``Other Provisions'' category below.
      Increase expensing for small business.--In lieu of depreciation, a
    taxpayer with a sufficiently small amount of annual investment may elect
    to deduct up to $17,500 of the cost of qualifying property placed in
    service during the taxable year. The amount of tangible depreciable
    property that small businesses can expense each year would be increased
    to $25,000 under the Administration's proposal. The increase would be
    effective for property placed in service in taxable years beginning
    after December 31, 1995 and would be phased in, starting at $19,000 in
    1996, and then increasing over a six-year period in annual increments of
    $1,000. This provision would be subject to trigger-off (that is, the
    amount of tangible depreciable property that small businesses can
    expense each year would revert to $17,500) on January 1, 2001 in the
    event that the Federal budget deficit is not at least $20 billion below
    CBO's estimate for the year 2000.
      Provide estate tax relief for small business.--Estate tax attributable
    to certain interests in closely held businesses may be paid in
    installments over a period of up to 14 years. A special four percent
    interest rate is provided for the tax deferred on the first $1 million
    of value. The $1 million cap has been in effect since 1976. To address
    the liquidity problems that may arise upon the death of a farmer or
    small business owner, and to adjust for inflation, the Administration
    proposes to increase the amount of property eligible for the special
    interest rate from $1 million to $2.5 million. The proposal also
    simplifies current law by eliminating distinctions based on the form of
    ownership, providing alternatives to the estate tax lien, and reducing
    the interest rate by 50 percent or more in exchange for making the
    interest payments nondeductible. The proposal would be effective for
    decedents who die after December 31, 1996.
      Simplify pension plan rules.--The Administration proposes to simplify
    the design and administration of retirement plans sponsored by
    businesses of all sizes, nonprofit organizations, and State and local
    governments, as well as for multiemployer plans. These measures not only
    would simplify the rules governing these plans, but also would
    potentially expand pension coverage and stimulate private savings,
    particularly for employees of small firms. These measures include, a
    new, simple retirement savings plan (the National Employee Savings Trust
    or the NEST) for small businesses. It combines the most attractive
    features of the IRA and the 401(k) plan, minimizes administrative and
    compliance costs, and eliminates the need for employer involvement with
    the Government. The NEST is designed to encourage retirement savings by
    middle- and low-income workers, not only the highly paid, without
    complicated forms or calculations.
    [[Page 38]]
      Provide tax incentives for distressed areas.--The Administration is
    proposing tax incentives for the cleanup of polluted urban and rural
    areas and is proposing an expansion of the empowerment zone and
    enterprise community program, as described below. The proposal would be
    subject to trigger-off for qualified expenses incurred after December
    31, 2000 in the event that the Federal budget deficit is not at least
    $20 billion below CBO's estimate for the year 2000.
      Provide tax incentives to clean up environmentally contaminated areas
    known as brownfields in distressed communities.--To encourage the
    cleanup of polluted urban and rural areas known as brownfields, the
    Administration proposes to allow certain nondeductible costs incurred by
    businesses to remediate environmentally contaminated land in certain
    areas to be capitalized and amortized over a 60-month period. Qualified
    sites generally would be limited to those properties located in high-
    poverty areas, Federal empowerment zones and enterprise communities, and
    areas subject to current Environmental Protection Agency (EPA)
    Brownfields Pilots. To claim this incentive, taxpayers would be required
    to obtain from the appropriate State or local agency, or the EPA in
    certain circumstances, verification that the site satisfies the
    geographic requirement. The proposal would be effective for qualified
    expenses incurred after the date of enactment.
      Expand Empowerment Zone and Enterprise Community program.--Under the
    Omnibus Budget Reconciliation Act of 1993, certain tax incentives were
    provided for nine empowerment zones and 95 enterprise communities. The
    tax incentives were a 20-percent employer wage credit, increased Section
    179 expensing, and a new category of tax-exempt financing. Qualifying
    businesses in empowerment zones were eligible for all three incentives,
    while businesses in enterprise communities were eligible for the tax-
    exempt financing. Over 500 communities submitted applications for these
    104 designations that were announced in December 1994. The
    Administration proposes a three-part expansion of this program. First,
    the designation of two additional urban empowerment zones would be
    authorized, to be made within 180 days of enactment. Second, the
    restrictions on the tax-exempt financing would be loosened to make this
    incentive more accessible. Third, the designation of 40 additional
    empowerment zones and 65 additional enterprise communities would be
    authorized. Businesses in the new enterprise communities would be
    eligible for the current-law tax-exempt financing, as revised, as well
    as the brownfields tax incentive described above on an additional 500
    acres. Businesses in the new empowerment zones would be eligible for the
    current-law section 179 expensing, the brownfields tax incentive on an
    additional 1,000 acres, and tax-exempt financing that would not be
    subject to the current-law State volume caps, but rather would only be
    subject to zone-by-zone volume caps. The current-law wage credit would
    not be applicable in any of the new zones and communities. The
    designations of these new zones and communities would be required to
    occur before 1998, and the designations would generally be effective for
    10 years.

      Provide tax relief for troops involved in the Bosnian peacekeeping
    operations.--For a discussion of this proposal, see ``Other Provisions''
    category below.
         Eliminate Unwarranted Benefits and Adopt Other Revenue Measures
      The President's plan cuts unwarranted corporate tax subsidies, closes
    tax loopholes, improves tax compliance and adopts other revenue
    measures. These reforms, which are estimated to save $43.6 billion
    during the 7-year period, 1996-2002, are described below.

      Disallow interest deduction for corporate-owned life insurance (COLI)
    policy loans.--Under existing law, a company that sets up a COLI program
    may borrow against the cash value of the life insurance contracts on the
    lives of its employees. The interest paid on such loans generally is
    deductible by the company, subject to certain limitations. However, the
    earnings credited to the COLI policies are not subject to current tax.
    In addition, benefits that the company receives upon the deaths of
    insured employees are not taxed, ensuring that the income credited under
    the contracts is never subject to tax. To restrict further this tax-
    arbitrage opportunity, the Administration proposes to phase out the
    deduction of interest on COLI contracts. The proposal generally would be
    effective with respect to interest paid or accrued after December 31,
    1995.
      Deny interest deduction on certain debt instruments.--If an instrument
    qualifies as equity, the issuer generally does not receive a deduction
    for dividends paid. If an instrument qualifies as debt, the issuer may
    receive a deduction for accrued interest and the holder generally
    includes interest in income, subject to certain limitations. The line
    between debt and equity is uncertain and it has proven difficult to
    formulate general rules of classification. Taxpayers have exploited this
    lack of guidance by issuing instruments that have substantial equity
    features, but for which they claim interest deductions. Generally
    effective for instruments issued on or after December 7, 1995, subject
    to certain transition rules, the Administration proposes that no
    deduction be allowed for interest or original issue discount (OID) on an
    instrument issued by a corporation that has a maximum term of more than
    40 years, or is payable in stock of the issuer or a related party. The
    proposal also modifies the rules for indebtedness that is reflected as
    equity on the issuer's financial statements.
      Defer original issue discount deduction on convertible debt.--If a
    debt instrument is convertible into stock and provides no payment of, or
    adjustment for, accrued interest on conversion, no deduction is allowed
    for accrued but unpaid stated interest. In contrast, the accrued but
    unpaid discount on a convertible debt instrument with OID generally is
    deductible, even if the
    [[Page 39]]
    instrument is converted before the issuer pays
    any OID. The Administration proposal would defer the deduction for OID
    on convertible debt until payment and would be effective for convertible
    debt issued on or after December 7, 1995, subject to certain transition
    rules.
      Reduce dividends-received deduction to 50 percent.--A corporate holder
    of stock generally is entitled to a deduction for dividends received on
    stock in the following amounts: 70 percent if the recipient owns less
    than 20 percent of the stock of the payor, 80 percent if the recipient
    owns 20 percent or more of the stock, and 100 percent if the recipient
    owns 80 percent or more of the stock. The Administration proposes to
    reduce the deduction to 50 percent for corporations owning less than 20
    percent of the stock of a U.S. corporation because the existing 70-
    percent deduction is too generous for corporations that do not have a
    sufficient ownership interest in the issuing corporation. The proposal
    would be effective for dividends paid or accrued more than 30 days after
    the date of enactment.
      Modify holding period for dividends-received deduction.--The
    dividends-received deduction is allowed to a corporate shareholder only
    if the shareholder satisfies a 46-day holding period for the dividend-
    paying stock or a 91-day period for certain dividends on preferred
    stock. The 46- or 91-day holding period generally does not include any
    time in which the shareholder is protected from the risk of loss
    otherwise inherent in the ownership of an equity interest. However, the
    holding period requirement does not have to be proximate to the time the
    dividend distribution is made. Effective for dividends paid or accrued
    more than 30 days after the date of enactment, the Administration
    proposes that in order for a dividend to be eligible for the dividends-
    received deduction, the holding period requirement must be satisfied
    with respect to that dividend over a period immediately before or
    immediately after the taxpayer becomes entitled to receive the dividend.
      Extend pro rata disallowance of tax-exempt interest expense to all
    corporations.--No income tax deduction is allowed for interest on debt
    used directly or indirectly to acquire or hold investments the income on
    which is tax-exempt. The determination of whether debt is used to
    acquire or hold tax-exempt investments depends on the holder of the
    instrument. For financial institutions and dealers in tax-exempt
    investments, debt generally is treated as financing all of the
    taxpayer's assets proportionately. For corporations, other than
    financial institutions and dealers, and for individuals, deductions are
    disallowed only when indebtedness is incurred or continued for the
    purpose of purchasing or carrying tax-exempt investments. These
    corporations are therefore able to reduce their tax liabilities
    inappropriately through the double Federal tax benefits of interest
    expense deductions and tax-exempt interest income. Effective for taxable
    years beginning after the date of enactment, with respect to obligations
    acquired after December 7, 1995, the Administration proposes that all
    corporations other than insurance companies be treated the same as
    financial institutions are treated under current law with regard to
    deductions for interest on debt used directly or indirectly to acquire
    or hold tax-exempt obligations. The proposal also would expressly apply
    these rules to related parties, by treating all members of a
    consolidated group (other than members that are insurance companies) as
    a single entity and by tracing debt and tax-exempt holdings among other
    related parties.
      Require average-cost basis for stocks, securities, etc.--A taxpayer
    who sells stock or other securities is allowed to account for the
    transaction by specifically identifying the stock or securities or by
    using an accounting system such as first-in, first-out or last-in,
    first-out. The Administration proposes to require taxpayers to determine
    their basis in substantially identical securities using the average of
    all their holdings in the securities. Holding period would be determined
    on a first-in, first-out basis. The method of determining basis and
    holding period would apply to all securities, including stocks, notes,
    bonds, and derivative financial instruments. A special rule would allow
    the Treasury to treat securities that are substantially identical as not
    subject to the average-cost rule if they have a special status under a
    provision of the Code (such as built-in gain with respect to a
    partnership). Securities not subject to average cost under this rule
    would be treated as sold on a first-in, first-out basis. The proposal
    would be effective 30 days after the date of enactment.
      Require recognition of gain on certain stocks, indebtedness and
    partnership interests.--Gain and loss are generally taken into account
    for tax purposes when realized. Gain or loss is usually realized with
    respect to a capital asset at the time the asset is sold. Many
    transactions designed to reduce or eliminate risk of loss and
    opportunity for gain on financial assets generally do not cause
    realization. For example, taxpayers may lock in gain on securities by
    entering into a ``short against the box,'' that is, the taxpayer owns
    securities that are the same as or substantially identical to the
    securities borrowed and sold short. It is inappropriate for taxpayers to
    be able to dispose of the economic risks and rewards of owning
    appreciated property without realizing income for tax purposes.
    Therefore, the Administration proposes to require a taxpayer to
    recognize gain (but not loss) upon entering into a constructive sale of
    any appreciated position in stock, a debt instrument, or a partnership
    interest. A taxpayer would be treated as making a constructive sale of
    an appreciated position when the taxpayer (or in certain limited
    circumstances, a person related to the taxpayer) substantially
    eliminates risk of loss and opportunity for gain by entering into one or
    more positions with respect to the same or substantially identical
    property. The proposal would generally be effective for constructive
    sales entered into after the date of enactment.
    [[Page 40]]
      Change the treatment of gains and losses on extinguishment.--The tax
    law distinguishes between the sale of a right or obligation to a third
    party and the extinguishment or retirement of the right or obligation. A
    sale to a third party can give rise to capital treatment while an
    extinguishment is ordinary. Extinguishment treatment has been eliminated
    for all debt instruments except those issued by natural persons and for
    most options and other positions in actively traded property. The
    application of the extinguishment doctrine in other contexts is unclear.
    The extinguishment doctrine allows taxpayers to control whether gain or
    loss is capital or ordinary by deciding whether to sell or extinguish a
    contract. The Administration proposes to eliminate the remaining
    portions of the extinguishment doctrine so that gain or loss
    attributable to the cancellation, lapse, expiration, or other
    termination of any right or obligation with respect to property that is
    or would be a capital asset in the hands of the taxpayer would be
    treated as gain or loss from the sale or exchange of a capital asset. In
    addition, the proposal would repeal the natural person exception for
    debt instruments. The proposal would be effective 30 days after the date
    of enactment.
      Require reasonable payment assumptions for interest accruals on
    certain debt instruments.--The original issue discount (OID) rules do
    not measure income appropriately for certain debt instruments that are
    prepayable. If the instruments are held in large pools, it can be
    statistically predicted that a certain portion will prepay. Prepayment
    assumptions are used to account for certain debt instruments with
    payments based on mortgages, but the OID rules otherwise ignore these
    probabilities. The proposal would require taxpayers that hold prepayable
    debt instruments in large pools to use prepayment assumptions similar to
    the rules that apply for debt instruments with payments based on
    mortgages. The proposal would be effective for taxable years beginning
    after the date of enactment.
      Require gain recognition for certain extraordinary dividends.--A
    corporate shareholder is generally allowed to deduct a percentage of
    dividends received from another domestic corporation. Certain dividends
    and dividend equivalent transactions are treated as ``extraordinary''
    dividends. If a corporate shareholder receives an extraordinary
    dividend, the corporate shareholder must reduce the basis of the stock
    to which the distribution relates by the amount of the nontaxed portion
    of the dividend (generally the amount of the dividend that was
    deducted). If the nontaxed portion of the dividend exceeds the basis of
    the stock, the excess is deferred and recognized on a later disposition
    of the stock. If a shareholder's stock is redeemed, the redemption may
    be treated as a dividend if the shareholder's interest in the
    corporation has not been meaningfully reduced. In determining if a
    shareholder's interest has been meaningfully reduced, the ownership of
    options to purchase stock may be treated as actual stock ownership. The
    exclusion of a substantial portion of the amount received by a corporate
    shareholder on the redemption of its stock is inappropriate in certain
    cases when options are used to create stock ownership. Also, it is
    inappropriate to defer gain recognition when the portion of the
    distribution that is excluded due to the dividends received deduction
    exceeds the basis of the stock with respect to which the extraordinary
    dividend is received. The Administration proposes that corporate
    shareholders will recognize gain on redemptions of stock that are
    treated as dividends because of options when the nontaxed portion of the
    dividend exceeds the basis of the shares surrendered. In addition,
    immediate gain recognition would be required whenever the basis of stock
    with respect to which any extraordinary dividend was received was
    reduced below zero. The proposed change generally would be effective for
    distributions after May 3, 1995.
      Repeal percentage depletion for non-fuel minerals mined on Federal and
    formerly Federal lands.--Taxpayers are allowed to deduct a reasonable
    allowance for depletion relating to certain mineral deposits. The
    depletion deduction for any taxable year is calculated under either the
    cost depletion method or the percentage depletion method, whichever
    results in the greater allowance for depletion for the year. The
    percentage depletion method is viewed as an incentive for mineral
    production rather than as a normative rule for recovering the taxpayer's
    investment in the property. This incentive is excessive with respect to
    minerals mined on Federal and formerly Federal lands under the 1872
    mining act, in light of the minimal costs of acquiring the mining rights
    ($5.00 or less per acre). Effective for taxable years beginning after
    the date of enactment, the Administration proposes to repeal percentage
    depletion for non-fuel minerals mined on lands where the mining rights
    were originally acquired under the 1872 law.
      Modify loss carryback and carryforward rules.--Net operating losses
    (NOLs) generally can be used to offset taxable income from the prior
    three taxable years (carrybacks) and the succeeding 15 taxable years
    (carryforwards). Because of the increased complexity and administrative
    burden associated with carrybacks, the carryback period should be
    shortened. The carryforward period could be lengthened, however, to
    allow taxpayers more time to utilize their NOLs without increasing
    either complexity or administrative burdens. The Administration proposes
    to limit carrybacks of NOLs to one year and to extend carryforwards to
    20 years, effective for NOLs arising in taxable years beginning after
    the date of enactment.
      Treat certain preferred stock as ``boot.''--In reorganization
    transactions, no gain or loss is recognized except to the extent ``other
    property'' (boot) is received; that is, property other than certain
    stock, including preferred stock. Upon the receipt of ``other
    property,'' gain but not loss can be recognized. Because preferred stock
    has an enhanced likelihood of recovery of principal
    [[Page 41]]
    or of maintaining a
    dividend or both, such tax-free treatment is inappropriate. The
    Administration therefore proposes to treat certain preferred stock as
    ``other property,'' subject to certain exceptions. The proposal
    generally would be effective for transactions after December 7, 1995.
      Repeal tax-free conversions of large C corporations to S
    corporations.--A corporation can avoid the existing two-tier tax by
    electing to be treated as an S corporation or by converting to a
    partnership. Converting to a partnership is a taxable event that
    generally requires the corporation to recognize any built-in gain on its
    assets and requires the shareholders to recognize any built-in gain on
    their stock. By contrast, the conversion to an S corporation is
    generally tax-free, except that the S corporation generally must
    recognize the built-in gain on assets held at the time of conversion if
    the assets are sold within 10 years. Under the Administration's
    proposal, the conversion of a C corporation with a value of more than $5
    million into an S corporation would be treated as a liquidation of the C
    corporation followed by a contribution of the assets to an S corporation
    by the recipient shareholders. Thus, the proposal would require
    immediate gain recognition by both the corporation (with respect to its
    appreciated assets) and its shareholders (with respect to their stock).
    This proposal makes the tax treatment of conversions to an S corporation
    generally consistent with conversions to a partnership. The proposal
    would apply to elections that are first effective for a taxable year
    beginning after January 1, 1997 and to acquisitions of a C corporation
    by an S corporation made after December 31, 1996.
      Require gain recognition on certain distributions of controlled
    corporation stock.--A corporation is generally required to recognize
    gain on a distribution of property (including stock of a controlled
    corporation) unless the distribution meets certain requirements. If
    various requirements are met, including restrictions relating to
    acquisitions and dispositions of stock of the distributing corporation
    or the controlled corporation, a distribution of the stock of a
    controlled corporation will be tax-free to the distributing corporation.
    Certain distributions may effectively be dispositions of a business, in
    which case tax-free treatment for the distributing corporation is
    inappropriate. Accordingly, the Administration proposes to adopt
    additional restrictions on acquisitions and dispositions of the stock of
    a distributing corporation or controlled corporation that are related to
    the distribution. Under this proposal, the distributing corporation
    would recognize gain on the distribution of the stock of the controlled
    corporation if the shareholders of the distributing corporation do not
    retain a sufficient stock interest (generally 50 percent) in the
    distributing and controlled corporations during the four-year period
    commencing two years prior to the distribution. For this purpose,
    unrelated transactions (such as public trading on the stock market)
    would be disregarded. This proposal would be effective generally for
    distributions occurring after the date of announcement.
      Reform the treatment of certain stock transfers.--Certain sales of
    stock to a related corporation are treated as the payment of a dividend
    by the purchaser. In cases where the seller is a corporation that does
    not actually own stock in the purchaser, taxpayers may take the position
    that the transaction produces tax benefits that would be unavailable if
    the purchaser distributed a dividend to its actual shareholders. For
    example, if a foreign-controlled domestic corporation sells the stock of
    a subsidiary to a foreign sister corporation, the domestic corporation
    may take the position that it is entitled to credit foreign taxes that
    were paid by the foreign sister corporation. In such cases, the
    Administration proposes to limit the amount treated as a dividend (and
    the associated foreign tax credits) from the purchaser to the amount of
    the purchaser's earnings and profits attributable to stock owned by U.S.
    persons related to the seller. If the purchaser is a domestic
    corporation, taxpayers may take the position that stock basis need not
    be reduced by the nontaxed portion of the dividend. The proposal would
    also clarify that a deemed dividend from a purchaser that is a domestic
    corporation should generally be treated as an extraordinary dividend
    requiring a basis reduction. The proposal would further require gain
    recognition to the extent that the nontaxed portion exceeds the basis of
    the shares transferred. The proposal generally would be effective for
    transactions after the date of announcement.
      Reformulate Puerto Rico and possessions tax credit.--Domestic
    corporations with business operations in U.S. possessions may elect the
    Section 936 credit, which generally eliminates the U.S. tax on certain
    income that is related to their possession-based operations. Income
    exempt from U.S. tax under this provision falls into two broad
    categories: (1) possession business income derived from the active
    conduct of a trade or business within a possession or from the sale or
    exchange of substantially all of the assets used in such a trade or
    business; and (2) possession source investment income (QPSII), which is
    attributable to investment in the possession or in certain Caribbean
    Basin countries. The amount of the credit attributable to possession
    business income is subject to limitations enacted under the Omnibus
    Budget Reconciliation Act of 1993; Section 936 companies may elect
    either a reduced percentage of the profits-based credit as allowed under
    prior law (60 percent in 1994, phasing down to 40 percent beginning in
    1998), or a limitation based on the company's economic activity in the
    possessions (measured by wages and other compensation, depreciation, and
    certain taxes paid). To provide a more efficient tax incentive for the
    economic development of Puerto Rico and other U.S. possessions, and to
    continue the effort toward this goal that was begun in the 1993 Act, the
    Administration proposes to (1) phase out the profits-based branch of the
    active-business portion of
    [[Page 42]]
    the credit over five years, beginning in
    1997, and (2) allow excess amounts of economic-activity limitation to be
    carried foward for up to five years. The proposal would retain the
    economic-activity limitation on the active-business portion of the
    credit, as well as the passive-income portion of the credit for taxes
    otherwise payable on QPSII, as under present law. Revenues raised would
    be made available to Puerto Rico for programs under the Social Security
    Act and to promote job creation.
      Expand Subpart F provisions regarding income from notional principal
    contracts and stock lending transactions.--Subpart F income includes
    income from notional principal contracts referenced to foreign currency,
    commodities, or interest rates, or to indices based thereon. It also
    includes income with respect to the lending of debt securities. Subpart
    F income does not include income from equity swaps or other types of
    notional principal contracts or income from transfers of equities.
    Subpart F income should include income from all types of notional
    principal contracts and from stock-lending transactions, because such
    income is indistinguishable on policy grounds from other types of highly
    mobile income already targeted by Subpart F. The Administration is
    proposing to include in Subpart F income the net income from equity
    swaps and certain categories of notional principal contracts that are
    not reached by current law, as well as income from stock lending
    transactions. An ordinary-course-of-business exception would be provided
    for regular dealers in property, forwards, options, notional principal
    contracts, and similar financial instruments. The proposal would be
    effective for taxable years beginning after the date of enactment.
      Modify taxation of captive ``insurance'' companies.--For tax purposes,
    ``insurance'' has been defined by the courts to require ``risk
    shifting'' or ``risk distribution.'' In the case of a ``captive''
    insurance company, one court has held that risk-shifting and risk-
    distribution requirements are satisfied even if the captive's ``related
    person insurance income'' accounts for nearly 70 percent of its total
    business. The Administration proposes that an insurance arrangement
    between a captive insurer and a large shareholder of the captive
    generally would not be respected as a valid insurance arrangement if
    more than 50 percent of the captive's net written premiums were
    attributable to the insurance or reinsurance of large-shareholder risks.
    In addition, such a captive would not be considered an insurance company
    for tax purposes. The proposal would be effective generally for the
    first taxable year beginning after the date of enactment.
      Reform foreign tax credit.--The Administration proposes the following
    foreign tax credit reforms.
      Eliminate interest allocation exception for certain non-financial
    corporation.--For foreign tax credit purposes, taxpayers generally are
    required to allocate and apportion interest expense between U.S. and
    foreign source income based on the proportion of the taxpayer's total
    assets in each location. Such allocation and apportionment is required
    to be made for affiliated groups as a whole rather than on a subsidiary-
    by-subsidiary basis. However, certain types of financial institutions
    that are members of an affiliated group are treated as members of a
    separate affiliated group for purposes of the allocation and
    apportionment of interest expense. The Tax Reform Act of 1986 included a
    targeted rule that treats a certain corporation as a financial
    institution for this purpose. The Administration believes that this
    relief should not be provided. The proposal would repeal the targeted
    exception provided by the Tax Reform Act of 1986, effective for taxable
    years beginning after the date of enactment.
      Modify foreign tax credit carryback and carryforward rules.--The
    United States permits taxpayers to credit income taxes paid to a foreign
    government against U.S. tax on foreign source income. Through the
    foreign tax credit limitations, the Code prevents the use of foreign tax
    credits to reduce U.S. tax on U.S. source income. Under the foreign tax
    credit mechanism, current foreign income taxes in excess of the relevant
    current-year foreign tax credit limitation are not creditable against
    current U.S. tax liabilities. However, such excess foreign tax credits
    generally may be carried back for two years and carried forward for five
    years, and used as a credit to the extent there is excess foreign tax
    credit limitation (that is, an excess of the foreign tax credit
    limitation over creditable foreign taxes) in any of those years.
    Experience over the years has shown, however, that carrybacks are
    associated with increased complexity and administrative burdens as
    compared to carryforwards. Therefore, to reduce such complexity and
    burdens, the proposal would limit foreign tax credit carrybacks to one
    year and extend foreign tax credit carryforwards to seven years. The
    proposal would be effective for foreign taxes paid or accrued or deemed
    paid or accrued in taxable years beginning after December 31, 1996.

      Modify rules relating to foreign oil and gas extraction income.--To be
    eligible for the U.S. foreign tax credit, a foreign levy must be the
    substantial equivalent of an income tax in the U.S. sense, regardless of
    the label the foreign government attaches to it. Under regulations, a
    foreign levy is a tax if it is a compulsory payment under the authority
    of a foreign government to levy taxes and is not compensation for a
    specific economic benefit provided by the foreign country. Taxpayers
    that are subject to a foreign levy and that also receive (directly or
    indirectly) a specific economic benefit from the levying country are
    referred to as ``dual capacity'' taxpayers and may not claim a credit
    for that portion of the foreign levy paid as compensation for the
    specific economic benefit received. The proposal would treat as taxes
    payments by a dual-capacity taxpayer to a foreign country that would
    otherwise qualify as income taxes or ``in lieu of'' taxes, only if there
    is a ``generally applicable income tax'' in that country. For this
    purpose, a generally applicable income tax is
    [[Page 43]]
    an income tax (or a series
    of income taxes) that applies to trade or business income from sources
    in that country, so long as the levy has substantial application both to
    non-dual-capacity taxpayers and to persons who are citizens or residents
    of that country. Where the foreign country does generally impose an
    income tax, as under present law, credits would be allowed up to the
    level of taxation that would be imposed under that general tax, so long
    as the tax satisfies the new statutory definition of a ``generally
    applicable income tax.'' The proposal would treat foreign oil and gas
    income as Subpart F income. It also would create a new foreign tax
    credit basket within Section 904 for foreign oil and gas income. The
    proposal would be effective for taxable years beginning after the date
    of enactment. The proposal would yield to U.S. treaty obligations that
    allow a credit for taxes paid or accrued on certain oil or gas income.
      Require thrifts to account for bad debts in the same manner as
    banks.--A thrift institution that holds at least 60 percent of its
    portfolio in home mortgages, cash, and government obligations is
    permitted to maintain a reserve for bad debts. Annual additions to its
    bad debt reserve may be calculated under either the ``percentage of
    taxable income'' method or the ``experience'' method. These methods can
    be more generous than the rules applicable to commercial banks. As a
    result of the increasing convergence of the banking and thrift
    industries, the special rules applicable to thrifts are no longer
    warranted. The Administration proposes that effective for taxable years
    beginning after the date of enactment, thrifts must account for bad
    debts in the same manner as banks. Specifically, the percentage-of-
    taxable-income method of computing bad debt reserves would no longer be
    available; thrifts with $500 million or less of adjusted bases in their
    assets would be permitted to use the experience method and thrifts with
    greater than $500 million in adjusted bases in their assets would be
    required to use the specific charge-off method. Post-1987 reserves would
    be recaptured over six years, unless the former thrift meets mortgage
    loan requirements, in which case recapture would be delayed up to two
    years.
      Reform depreciation under the income forecast method.--All estimated
    income from the use of property or the sale of merchandise would be
    taken into account in determining depreciation under the income forecast
    method. This change, which would generally be effective for property
    placed in service after September 13, 1995, would eliminate the
    inappropriate acceleration of depreciation of the cost of motion picture
    films, video tapes, sound recordings, and other similar property that
    occurs under current law. Interest would be charged or credited to
    compensate for errors in estimates.
      Phase out preferential tax deferral for certain large farm
    corporations required to use accrual accounting.--Under the Revenue Act
    of 1987, family farm corporations were required to change to the accrual
    method of accounting if their gross receipts exceeded $25 million in any
    taxable year beginning after 1985. However, in lieu of including in
    gross income the entire amount of the adjustment attributable to the
    change in accounting method, a family farm corporation could establish a
    suspense account. The amount of the suspense account was to be included
    in gross income if the corporation ceased to be a family corporation or
    to the extent the gross receipts of the corporation from farming
    declined. To eliminate the potential indefinite deferral of the
    adjustment, the Administration proposes to repeal the ability of family
    farm corporations to establish such suspense accounts. Any taxpayer
    subsequently required to change to the accrual method of accounting
    would be required to take the adjustment into account generally over a
    ten-year period. Any existing suspense accounts would be restored to
    income ratably over a ten-year period, or sooner to the extent provided
    under existing law. This provision would be effective for taxable years
    beginning after September 13, 1995.
      Repeal lower of cost or market inventory accounting method.--Taxpayers
    required to maintain inventories are permitted to use a variety of
    methods to determine the cost of their ending inventories, including the
    last-in, first-out (LIFO) method, the first-in, first-out (FIFO) method,
    and the retail method. Taxpayers not using a LIFO method may determine
    the carrying values of their inventories by applying the lower of cost
    or market (LCM) method and by writing down the cost of goods that are
    unsalable at normal prices or unusable in the normal way because of
    damage, imperfection or other causes (subnormal goods method). The
    allowance of write-downs under the LCM and subnormal goods methods is
    essentially a one-way mark-to-market method that understates taxable
    income. The Administration proposes to repeal the LCM and subnormal
    goods methods, effective for taxable years beginning after the date of
    enactment.
      Repeal components of cost inventory accounting method.--Taxpayers that
    use the LIFO method to determine the cost of their ending inventories
    may use a variety of dollar-value methods, including double extension,
    link-chain and other index methods, in order to determine whether an
    increment has occurred and the cost of that increment. Certain taxpayers
    are permitted to use simplified LIFO methods based on externally
    developed price indexes. Some taxpayers that use a dollar-value, double-
    extension method make their computations with respect to the three
    components of cost (materials, labor and overhead) of their finished
    goods and work-in-process inventories (the COC method), rather than the
    aggregate cost of these goods (the total product cost method). The COC
    method, in many cases, does not adequately account for technological
    efficiencies in which skilled labor is substituted for less-skilled
    labor or where overhead costs replace direct labor costs. The
    Administration is proposing to repeal
    [[Page 44]]
    the COC method effective for
    taxable years beginning after the date of enactment.
      Modify basis adjustment rules under Section 1033.--The Administration
    proposes that when a taxpayer acquires a controlling interest in the
    stock of a corporation as replacement property after an involuntary
    conversion, the corporation must be required to reduce its adjusted
    bases in its assets by the same amount as the taxpayer is required to
    reduce its basis in the acquired stock. The corporation's adjusted bases
    in its assets would not be reduced, in the aggregate, below the
    taxpayer's basis in its stock. In addition, the basis of any individual
    asset would not be reduced below zero. This proposal, which would allow
    deferral of gain recognition, but not the avoidance of that gain, would
    generally be effective for involuntary conversions occurring after
    September 13, 1995.
      Expand requirement that involuntarily converted property be replaced
    with property acquired from an unrelated party.--Gain realized by
    taxpayers from certain involuntary conversions is deferred to the extent
    the taxpayer purchases property similar or related in service or use to
    the converted property within a specified period of time. C corporations
    (and partnerships with one or more corporate partners that own more than
    50 percent of the capital or profits interest in the partnership)
    generally are not entitled to defer gain if the replacement property is
    purchased from a related person. The Administration proposes to extend
    this rule to any other taxpayer, including an individual, that acquires
    replacement property from a related person, unless the taxpayer has an
    aggregate realized gain of $100,000 or less during the year as a result
    of involuntary conversions. In the case of a partnership or S
    corporation, the $100,000 annual limitation would apply to the entity
    and each partner or shareholder. The proposal would generally be
    effective for involuntary conversions occurring after September 13,
    1995.
      Place further restrictions on like-kind exchanges involving personal
    property.--An exchange of property, like a sale, is generally a taxable
    transaction. However, no gain or loss is recognized if property held for
    productive use in a trade or business or for investment is exchanged for
    property of a like kind that is to be held for productive use in a trade
    or business or for investment. In general, any kind of real estate is
    treated as of a like kind with other real property; however real
    property located in the United States and real property located outside
    the United State are not of a like kind. For personal property, property
    of a ``like class'' is treated as being of a like kind; no restrictions
    apply with regard to location in or outside the United States. To
    conform the limitations on exchanges of personal property to the
    limitations on exchanges of real property, the Administration proposes
    that effective generally for exchanges after December 6, 1995, personal
    property located in the United States and personal property located
    outside the United States would not be treated as like kind.
      Disallow rollover and one-time exclusion on sale of residence to the
    extent of previously claimed depreciation.--Generally, under Section
    1034, no gain is recognized on the sale or exchange of a principal
    residence to the extent that the amount of the sales price is reinvested
    in a new residence within a specified period. In addition, Section 121
    generally provides a taxpayer with a one-time election to exclude from
    gross income up to $125,000 of gain from the sale of a principal
    residence if the taxpayer has attained the age of 55 before the sale and
    has used the residence as a principal residence for three or more of the
    five years preceding the sale. Because depreciation is allowed with
    respect to a portion of a residence when that portion is used for
    business purposes and those deductions reduce the owner's basis in the
    residence, the Administration is proposing to require gain recognition
    on the sale of a principal residence to the extent of any depreciation
    allowable after December 31, 1995. Similarly, the amount of otherwise
    allowable one-time exclusion would be reduced to the extent of
    depreciation allowable after December 31, 1995.
      Require registration of certain confidential corporate tax shelters.--
    Many corporate tax shelters are not registered with the Internal Revenue
    Service (IRS). Requiring registration of corporate tax shelters would
    allow the IRS to make better informed judgments regarding the audit of
    corporate tax returns and to monitor whether legislation or
    administrative action is necessary regarding the type of transactions
    being registered. The Administration is therefore proposing the
    registration of any investment, plan, arrangement or transaction: (1) a
    significant purpose of the structure of which is tax avoidance or
    evasion by a corporate participant, (2) that is offered to any potential
    participant under conditions of confidentiality, and (3) for which the
    tax shelter promoter may receive total fees in excess of $100,000. The
    proposal would be effective for any tax shelter offered to potential
    participants after the date the Secretary of the Treasury prescribes
    guidance regarding the filing requirements.
      Require reporting of payments to corporations rendering services to
    Federal agencies.--All persons engaged in a trade or business and making
    payments of $600 or more to another person in remuneration for services
    generally must report those payments to the IRS and to the recipient. No
    reporting is required if the recipient is a corporation, permitting
    significant amounts of income to escape the tax system. To ensure that
    corporations that do business with the Federal Government appropriately
    report as income their payments from the Federal Government, the
    Administration proposes to require executive agencies to report payments
    of $600 or more made to corporations for services rendered. The proposal
    would be effective for
    [[Page 45]]
    returns the due date of which is more than 90
    days after the date of enactment.
      Increase penalties for failure to file correct information returns.--
    All persons engaged in a trade or business and making payments of $600
    or more to another person in remuneration for services generally must
    report those payments to the IRS. Any person who fails to report such
    payments in a timely manner or incorrectly reports such payments is
    subject to penalties. For taxpayers filing large volumes of information
    returns or reporting significant payments, existing penalties ($15 per
    return, not to exceed $75,000 if corrected within 30 days; $30 per
    return not to exceed $150,000 if corrected by August 1; and $50 per
    return if not corrected at all) may not be sufficient to encourage
    timely and accurate reporting. The Administration proposes to increase
    the general penalty amount to the greater of $50 per return or five
    percent of the total amount required to be reported. The increased
    penalty would not apply if the aggregate amount actually reported by the
    taxpayer on all returns filed for that calendar year was at least 97
    percent of the amount required to be reported. The increased penalty
    would be effective for returns the due date for which is more than 90
    days after the date of enactment.
      Extend Internal Revenue Service (IRS) user fees.--The IRS provides
    written responses to questions of individuals, corporations, and
    organizations relating to their tax status or the effects of particular
    transactions for tax purposes. The IRS responds to these inquiries
    through the issuance of letter rulings, determination letters, and
    opinion letters. The authority to charge fees for these requests, which
    is scheduled to expire effective with requests made after September 30,
    2000, is proposed to be extended for two years through September 30,
    2002.
      Apply failure-to-pay penalty to substitute returns.--The failure-to-
    pay penalty, which is a percentage of the tax due, generally runs from
    the due date of a return until the tax is paid. If, however, a taxpayer
    fails to file a return, and the Commissioner prepares a substitute
    return for the taxpayer, then the tax on which the penalty is measured
    is considered a deficiency and the penalty begins to run only ten days
    after the IRS sends the taxpayer notice and demand for payment of the
    tax. There is no reason to treat a taxpayer for whom the Commissioner
    prepares a substitute return more favorably than taxpayers who pay late
    but nevertheless file their own returns. Therefore, the proposal would
    require that the failure-to-pay penalty apply to taxpayers for whom the
    Commissioner prepares substitute returns, in the same manner as it
    applies to delinquent taxpayers (that is, that the penalty commences
    running from the due date of the return). The proposal would be
    effective for returns due after the date of enactment.
      Repeal exemption for withholding on gambling winnings from bingo and
    keno in excess of $5,000.--Proceeds of most wagers with odds of less
    than 300 to 1 are exempt from withholding, as are all bingo and keno
    winnings. The proposal would impose withholding on proceeds of bingo or
    keno in excess of $5,000 at a rate of 28 percent, regardless of the odds
    of the wager, effective for payments made after the date of enactment.
      Require tax reporting for payments to attorneys.--Tax information
    reporting is required for persons engaged in a trade or business making
    payments in the course of the trade or business of rent, salaries,
    wages, or other fixed or determinable income. Treasury regulations
    require a payor to report payments of attorney's fees if the payments
    are made in the course of a trade or business, although generally a
    payor is not required to report payments made to corporations. If a
    payment to an attorney is a gross amount, and it cannot be determined
    what portion is the attorney's fee (as in the case of lump-sum judgments
    or settlements made jointly payable to a lawyer and a plaintiff), then
    no reporting is required. The Administration proposes requiring that any
    person making a payment in the course of a trade or business to a lawyer
    or a law firm, whether as sole or joint payee, report the payment to the
    IRS. When the portion that constitutes fees cannot be determined, the
    amount paid would be reported as gross proceeds. A lawyer receiving a
    payment would be required to provide his or her taxpayer identification
    number to the payor or be subject to applicable penalties and backup
    withholding. The exception for payments to corporations would not apply
    to payments of attorney's fees. The proposal would be effective for
    payments made after December 31, 1996.
      Repeal advance refunds of diesel fuel tax for diesel cars and light
    trucks.--The first purchaser of a diesel-powered automobile or light
    truck is entitled to a payment in the nature of an advance refund of the
    difference between the diesel fuel excise tax and the gasoline excise
    tax. The amount of the refund typically is small, not warranting the
    resources required to effectively administer the procedure. Accordingly,
    the Administration proposes to repeal the provision allowing these
    payments, effective for vehicles purchased after the date of enactment.
      Extend oil spill excise tax.--Before January 1, 1995, a five-cents-
    per-barrel excise tax was imposed on domestic crude oil and imported
    petroleum products. The tax was dedicated to the Oil Spill Liability
    Trust Fund to finance the cleanup of oil spills and was not imposed for
    a calendar quarter if the unobligated balance in the Trust Fund exceeded
    $1 billion at the close of the preceding quarter. The Administration
    proposes to reinstate this tax for the period after the date of
    enactment and before October 1, 2006. The tax would be suspended for a
    given calendar quarter if the unobligated
    [[Page 46]]
    Trust Fund balances at the end
    of the preceding quarter exceeded $2.5 billion.
      Impose excise taxes on kerosene as diesel fuel.--A 24.3-cents-per-
    gallon excise tax is imposed on diesel fuel upon removal from a
    registered terminal facility unless the fuel is indelibly dyed and is
    destined for a nontaxable use. Treasury regulations provide that
    kerosene is not treated as a diesel fuel for this purpose; thus, undyed
    kerosene is not subject to the diesel fuel excise tax when it is removed
    from a terminal. Undyed kerosene is subject to tax, however, when it is
    blended with diesel fuel. Distributors of this blended fuel frequently
    do not pay the tax, thereby placing complying taxpayers at a competitive
    disadvantage and resulting in revenue losses to the Federal government.
    Effective July 1, 1997, the Administration proposes to tax kerosene as
    diesel fuel when it is removed from a terminal, unless the kerosene
    qualifies as aviation fuel. Exceptions would be provided for aviation
    fuel and, to the extent provided in regulations, for feedstock uses. In
    addition, special refund rules would apply in certain cases of kerosene
    used for heating purposes.
      Permanently extend luxury excise tax on passenger vehicles.--A 10
    percent luxury excise tax is levied on the retail price of passenger
    vehicles in excess of an inflation-adjusted threshold ($34,000 in 1996).
    The Administration proposes to permanently extend this tax, which is
    scheduled to expire after December 31, 1999.
      Extend and modify Federal Unemployment Act (FUTA) provisions.--The
    temporary unemployment surtax of 0.2 percent imposed on employers, which
    is scheduled to expire with respect to wages paid after December 31,
    1998, is proposed to be extended through December 31, 2006. Beginning in
    2002, the Administration proposes to require an employer to pay Federal
    and State unemployment taxes monthly (instead of quarterly) in a given
    year, if the employer's FUTA tax liability in the immediately prior year
    was $1,100 or more.
                      Other Provisions That Affect Receipts

      Assess fees for examination of FDIC-insured banks and bank holding
    companies (receipt effect).--The Administration proposes to require the
    Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve to
    assess fees for examination of FDIC-insured banks and bank holding
    companies. The Federal Reserve currently funds the costs of such
    examinations from earnings; therefore, deposits of earnings by the
    Federal Reserve, which are classified as governmental receipts, will
    increase by the amount of the fees.
      Expand fees collected under the securities laws.--The Administration
    proposes to expand certain fees collected under the securities laws as
    part of a legislative package to provide the Securities and Exchange
    Commission with a sound and stable long term funding structure. The
    Administration intends to work with Congress to secure early enactment
    of such a legislative proposal.
      Establish IRS continuous levy.--The Administration seeks to strengthen
    the enforcement tools available to the IRS to recover delinquent tax
    debt. New authority is proposed for the IRS to effect a continuous levy
    on non-means tested Federal payments, such as Federal salaries and
    pensions, received by individuals who owe delinquent tax debt.
      Extend the Generalized System of Preferences (GSP) and modify other
    trade provisions.--Under GSP duty-free access is provided to over 4,000
    items from about 142 eligible developing countries that meet certain
    worker rights and other criteria. This program is proposed to apply
    retroactively to July 31, 1995, when it expired, and to be extended
    through September 30, 2000. The Administration also proposes to provide
    expanded trade benefits mainly on textiles and apparel to Caribbean
    Basin countries who meet new eligibility criteria needed to prepare for
    a future free trade agreement with the U.S. The program is proposed to
    expire on September 30, 2001.
      Increase deduction for self-employed health insurance.--The
    Administration proposes to increase the 30 percent deduction for health
    insurance expenses of self-employed individuals and their dependents to
    35 percent for 1996 and 1997, 40 percent for 1998, 45 percent for 1999,
    and 50 percent for 2000 and subsequent years. The increased deduction
    would be subject to trigger-off (that is, the deductible percentage
    would revert to 30 percent) on January 1, 2001 in the event that the
    Federal budget deficit is not at least $20 billion below CBO's estimate
    for the year 2000.
      Increase employee contributions to the Civil Service Retirement System
    (CSRS) and the Federal Employees Retirement System (FERS).--The
    Administration proposes to increase employee contributions to CSRS and
    FERS by 0.5 percent of base pay in three steps. Contributions would
    increase by 0.25 percent of base pay on April 1, 1996, another 0.15
    percent on January 1, 1997 and a final 0.10 percent on January 1, 1998.
    These higher contribution rates would be effective through 2002; on
    January 1, 2003, contribution rates would return to the levels in effect
    on March 31, 1996.
      Deter expatriation tax avoidance.--The United States requires U.S.
    citizens and residents to pay tax on their worldwide income. However,
    some U.S. taxpayers relinquish their U.S. citizenship or residence and
    thereby avoid future U.S. tax on unrealized gains. To ensure that these
    individuals pay their fair share of U.S. tax, when a U.S. citizen
    renounces U.S. citizenship or when a noncitizen who has been a lawful
    permanent resident of the United States for at least 10
    [[Page 47]]
    years becomes a
    nonresident of the United States, the Administration is proposing that
    such individual's assets be deemed to be disposed of and reacquired at
    their fair market value in a transaction in which gain or loss is
    recognized. There would be an exemption for up to $600,000 of gain and
    for U.S. real property interests. The provision would apply to any
    expatriation after February 6, 1995.
      Tighten rules for taxing foreign trusts.--Some U.S. taxpayers avoid
    paying applicable U.S. tax on their share of income earned by foreign
    trusts. To ensure that U.S. tax is collected on this income, the
    Administration is proposing enhanced information reporting requirements
    for assets transferred to foreign trusts, effective generally for
    taxable years beginning after the date of enactment. In addition, under
    current law, distributions received by U.S. taxpayers from certain
    foreign trusts may be treated as nontaxable gifts. The Administration is
    proposing that, effective generally on the date of enactment, U.S.
    taxpayers who receive such distributions pay U.S. tax on the
    distributions that represent trust income, unless U.S. law treats a U.S
    taxpayer as owning the trust assets.
      Extend environmental tax on corporate taxable income deposited in the
    Hazardous Substance Superfund Trust Fund.--A tax equal to 0.12 percent
    of alternative minimum taxable income in excess of $2 million is levied
    on all corporations and deposited in the Hazardous Substance Superfund
    Trust Fund. The Administration proposes to reinstate this tax, which
    expired on December 31, 1995, for taxable years beginning after December
    31, 1995 and before January 1, 2007.
      Improve compliance by tax-exempt entities through intermediate
    sanctions and other measures.--The Administration proposes to add new
    excise taxes on parties that use their control over charitable and
    nonprofit organizations to extract benefits without providing property
    or services of at least equal value in return (effective generally for
    transactions occurring on or after September 14, 1995). In addition, the
    Administration is proposing to expand the reporting and disclosure
    requirements that relate to information returns filed by tax-exempt
    organizations and to increase the penalties for failure to comply with
    these requirements, generally effective 90 days after the date of
    enactment.
      Modify Federal pay raise (receipt effect).--The Administration is
    proposing a pay raise of 3 percent for 1997, less than the raise that
    would take effect under normal operation of the law. This 3 percent
    raise would cover both the national schedule and the locality pay
    adjustments. The lower proposed pay raise affects Federal employees'
    contributions to CSRS and FERS.
      Provide tax relief for troops involved in the Bosnia peacekeeping
    operations.--The Administration is proposing tax relief for troops
    involved in the Bosnia peacekeeping operations. All of the military pay
    of enlisted personnel and part of the pay of officers would be exempt
    from income tax, and filing deadlines would be extended, similar to the
    relief afforded personnel in the Persian Gulf. The Bosnia peacekeeping
    operation involves the dangers of combat situations; this benefit is
    proposed in recognition of our troops' sacrifice. The Administration
    will work with Congress to ensure early enactment of tax relief for
    these troops.
                         Modify Earned Income Tax Credit

      Modify earned income tax credit (EITC).--The Administration is
    proposing the following modifications designed to target the EITC to
    intended recipients: (1) Individuals who are living in the U.S.
    illegally or who do not have proper documentation for employment
    purposes would not be eligible to claim the EITC. (2) The IRS would be
    allowed to use mathematical error procedures to deny claims for the EITC
    and the dependency exemption. (3) The definition of adjusted gross
    income used for phasing out the credit would be modified to disregard
    net capital losses, net losses from nonbusiness rents and royalties, net
    losses from trusts and estates, and 50 percent of net losses from sole
    proprietorships, partnerships and S corporations. (4) The definition of
    disqualified income for purposes of determining eligibility for the EITC
    would be expanded to include net passive income that is not included in
    self-employment income and net capital gain; in addition, the
    disqualified income threshold would be lowered to $2,200 in 1996 and
    indexed for inflation in subsequent years. (5) Demonstration projects in
    up to four states would be authorized to test the provision of advance
    payment of the EITC through State agencies, generally effective 90 days
    after the date of enactment.
                     Extend Expired Trust Fund Excise Taxes
      The President's plan includes extension of the following excise taxes
    that have been previously reflected in the baseline.

      Extend excise taxes deposited in the Hazardous Substance Superfund
    Trust Fund.--The excise taxes that are levied on petroleum, chemicals,
    and imported substances and deposited in the Hazardous Substance
    Superfund Trust Fund, are proposed to be reinstated for the period after
    the date of enactment and before October 1, 2006. These taxes expired on
    December 31, 1995.
      Extend excise taxes deposited in the Airport and Airway Trust Fund.--
    The excise taxes that are levied on domestic air passenger tickets,
    international departures, domestic air cargo and non-commercial aviation
    fuels and deposited in the Airport and Airway Trust Fund, are proposed
    to be reinstated for the period after the date of enactment and before
    October 1, 2006. These taxes (except for 14 cents per gallon of the tax
    [[Page 48]]
    on gasoline used in non-commercial aviation, which is being deposited in
    the Highway Trust Fund absent authority to transfer the tax to the
    Airport and Airway Trust Fund) expired on December 31, 1995.
      Extend excise taxes deposited in the Leaking Underground Storage Tank
    (LUST) Trust Fund.--The excise taxes that are levied on gasoline, other
    motor fuels, methanol and ethanol fuels, and on fuels used in inland
    waterways and deposited in the LUST Trust Fund, expired on December 31,
    1995. The Administration proposes to reinstate these taxes for the
    period after the date of enactment and before October 1, 2006.
                            Other Expired Provisions
      A number of tax provisions have expired. The Administration supports
    the revenue-neutral extension of these provisions as discussed below and
    looks forward to working with the Congress to achieve that goal. These
    provisions include the following:
      Exclusion for employer-provided educational assistance.--Certain
    amounts paid by an employer for educational assistance provided to an
    employee are excluded from the employee's gross income for income and
    payroll tax purposes. This exclusion expired with respect to amounts
    paid after December 31, 1994. The Administration has previously proposed
    permanent extension of this provision.
      Targeted jobs tax credit.--A tax credit, generally equal to 40 percent
    of up to $6,000 of qualified first year wages, is provided to employers
    who hire individuals from several targeted groups. The credit expired
    with respect to individuals hired after December 31, 1994. The
    Administration strongly supports the goals of this program but has
    serious concerns over the cost-effectiveness of its current design. The
    Administration would support extension if the problems undermining the
    credit's effectiveness are addressed.
      Research and experimentation (R&E) tax credit.--The 20 percent tax
    credit provided for certain research and experimentation expenditures
    expired with respect to expenditures made after June 30, 1995. The
    Administration has previously proposed permanent extension of this
    provision.
      Tax credit for orphan drug clinical testing expenses.--A 50 percent
    non-refundable tax credit is allowed for a taxpayer's qualified clinical
    testing expenses paid or incurred in the testing of certain drugs,
    generally referred to as orphan drugs, for rare diseases or conditions.
    This credit expired with respect to expenses incurred after December 31,
    1994.
      Tax deduction for contributions to private foundations.--The deduction
    for a contribution to a private foundation is generally limited to the
    adjusted basis of the contributed property. However, a taxpayer who
    contributed qualified appreciated stock to a private foundation before
    January 1, 1995 was allowed to deduct the full fair market value of the
    stock, rather than the adjusted basis of the contributed stock.
                    Tax Simplification and Taxpayers' Rights
      The Administration continues to support revenue-neutral initiatives
    designed to promote sensible and equitable administration of the tax
    laws. These include simplification, technical corrections, and taxpayer
    compliance measures. In addition to legislative initiatives, such as the
    pension simplification proposals described above, the Administration is
    committed to taking appropriate administrative action to simplify tax
    laws and enhance procedural safeguards for taxpayers. For instance, the
    Administration recently has announced its intent to simplify the current
    complex rules for classifying business organizations as either
    corporations or partnerships for Federal income tax purposes. In
    addition, the Administration recently has adopted administratively a
    number of measures included in pending Taxpayer Bill of Rights
    legislation.

                                       Table 3-3.  EFFECT OF PROPOSALS ON RECEIPTS
                                                (In billions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                         Estimate
                                    --------------------------------------------------------------------------------
                                       1996      1997      1998      1999      2000      2001      2002    1996-2002
    ----------------------------------------------------------------------------------------------------------------
    Provide tax relief:
      Middle Class Bill of Rights:
        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 (IRAs)  ........     -1.4      -0.4      -0.7      -1.1      -1.6      -2.5       -7.7
        Provide tax 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..........     -1.3     -17.0     -13.0     -15.8     -19.3     -20.0     -21.1     -107.5

      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
      Provide tax incentives for
       distressed areas............       -*        -*      -0.3      -0.6      -0.8      -0.9      -0.8       -3.4
                                    --------------------------------------------------------------------------------
        Subtotal, Provide tax
         relief....................     -1.3     -17.6     -14.1     -17.5     -21.4     -22.4     -23.2     -117.4

    Eliminate unwarranted benefits
     and adopt other revenue
     measures:
      Disallow interest deduction
       for corporate-owned life
       insurance policy loans......  ........      0.6       0.5       0.6       0.7       0.7       0.8        3.9
    [[Page 49]]
      Deny interest deduction on
       certain debt instruments....  ........      0.1       0.1       0.2       0.2       0.3       0.4        1.3
      Defer original issue discount
       deduction on convertible
       debt........................  ........        *         *         *         *         *       0.1        0.2
      Limit dividends-received
       deduction (DRD):
        Reduce DRD to 50 percent...  ........      0.2       0.4       0.4       0.4       0.4       0.4        2.0
        Modify holding period for
         DRD.......................  ........        *         *         *         *         *         *        0.2
        Interaction................  ........       -*        -*        -*        -*        -*        -*         -*
      Extend pro rata disallowance
       of tax-exempt interest
       expense to all corporations.  ........        *       0.1       0.1       0.1       0.1       0.1        0.5
      Require average-cost basis
       for stocks, securities, etc.  ........      0.6       0.7       0.6       0.7       0.7       0.7        4.1
      Require recognition of gain
       on certain stocks,
       indebtedness and partnership
       interests...................  ........      0.2        -*       0.1       0.1       0.1       0.1        0.4
      Change the treatment of gains
       and losses on extinguishment  ........        *         *         *         *         *         *          *
      Require reasonable payment
       assumptions for interest
       accruals on certain debt
       instruments.................  ........      0.1       0.2       0.3       0.3       0.2       0.1        1.1
      Require gain recognition for
       certain extraordinary
       dividends...................  ........     -0.1       0.1       0.1       0.1       0.1       0.1        0.3
      Repeal percentage depletion
       for non-fuel minerals mined
       on Federal and formerly
       Federal lands...............  ........      0.1       0.1       0.1       0.1       0.1       0.1        0.5
      Modify loss carryback and
       carryforward rules..........       -*         *       0.7       0.8       0.7       0.6       0.6        3.4
      Treat certain preferred stock
       as ``boot''.................  ........      0.2       0.2       0.2       0.2       0.1         *        0.9
      Repeal tax-free conversions
       of large C corporations to S
       corporations................  ........        *         *         *         *         *       0.1        0.2
      Require gain recognition in
       certain distributions of
       controlled corporation stock  ........      0.1       0.1       0.1       0.1       0.1       0.1        0.5
      Reform treatment of certain
       stock transfers.............  ........      0.1       0.1       0.1       0.1       0.1       0.2        0.8
      Reformulate Puerto Rico and
       possessions tax credit......  ........      0.1       0.2       0.5       0.8       1.0       1.1        3.7
      Expand Subpart F provisions
       regarding certain income....  ........        *         *         *         *         *         *        0.2
      Modify taxation of captive
       ``insurance'' companies.....  ........        *         *         *         *         *         *        0.1
      Reform foreign tax credit....  ........      0.2       0.9       1.1       1.0       0.9       0.9        4.9
      Modify rules relating to
       foreign oil and gas
       extraction income...........  ........        *         *       0.1       0.1       0.1       0.1        0.4
      Require thrifts to account
       for bad debts in same manner
       as banks....................  ........      0.2       0.2       0.3       0.3       0.3       0.3        1.6
      Reform depreciation under the
       income forecast method......  ........      0.1       0.1       0.1         *         *         *        0.3
      Phase out preferential tax
       deferral for certain large
       farm corporations required
       to use accrual accounting...      0.1       0.1       0.1       0.1       0.1       0.1       0.1        0.8
      Initiate inventory reform:
        Repeal lower of cost or
         market method.............  ........      0.2       0.3       0.3       0.3       0.1         *        1.2
        Repeal components of cost
         method....................  ........      0.2       0.2       0.2       0.2       0.2       0.2        1.1
      Modify basis adjustment rules
       under Section 1033..........        *         *         *         *         *         *         *        0.1
      Expand requirement that
       involuntarily converted
       property be replaced with
       property acquired from an
       unrelated party.............  ........        *         *         *         *         *         *          *
      Place further restrictions on
       like-kind exchanges
       involving personal property.  ........        *         *         *         *         *         *        0.1
      Disallow rollover and one-
       time exclusion on sale of
       residence to the extent of
       previously claimed
       depreciation................  ........        *         *         *         *         *         *          *
      Require registration of
       certain corporate tax
       shelters....................  ........  ........        *         *         *         *         *          *
      Require reporting of payments
       to corporations rendering
       services to Federal agencies  ........        *         *         *         *       0.1       0.1        0.3
      Increase penalties for
       failure to file correct
       information returns.........  ........        *         *         *         *         *         *        0.1
      Extend IRS user fees.........  ........  ........  ........  ........  ........        *         *        0.1
      Apply failure-to-pay penalty
       to substitute returns.......        *         *         *         *         *         *         *        0.1
      Repeal exemption for
       withholding on gambling
       winnings from bingo and keno
       in excess of $5,000.........        *         *         *         *         *         *         *          *
      Require tax reporting for
       payments to attorneys.......  ........  ........        *         *         *         *         *          *
      Repeal advance refunds of
       diesel fuel tax for diesel
       cars and light trucks\1\....        *         *         *         *         *         *         *        0.1
      Extend oil spill excise
       tax\1\......................        *       0.2       0.2       0.2       0.2       0.2       0.2        1.4
      Impose excise taxes on
       kerosene as diesel fuel\1\..  ........        *         *         *         *         *         *        0.2
      Permanently extend luxury
       excise tax on passenger
       vehicles\1\.................  ........  ........  ........  ........      0.2       0.3       0.3        0.7
      Extend and modify FUTA
       provisions:
        Extend FUTA surtax\1\......  ........  ........  ........      0.8       1.2       1.2       1.2        4.4
        Accelerate deposit of
         unemployment insurance
         taxes.....................  ........  ........  ........  ........  ........  ........      1.3        1.3
                                    --------------------------------------------------------------------------------
          Subtotal, Eliminate
           unwarranted benefits....      0.1       3.8       5.6       7.5       8.3       8.5       9.9       43.6

    Other provisions that affect
     receipts:
      Assess fees for examination
       of FDIC-insured banks and
       bank holding companies
       (receipt effect)\1\.........  ........      0.1       0.1       0.1       0.1       0.1       0.1        0.5
      Expand fees collected under
       the securities laws.........  ........      0.3       0.3       0.3       0.3       0.4       0.4        2.0
      Establish IRS continuous levy  ........      0.4       0.4       0.4       0.3       0.2       0.1        1.8
      Extend GSP and modify other
       trade provisions\1\.........     -0.6      -0.6      -0.5      -0.6      -0.6      -0.3   ........      -3.2
      Increase deduction for self-
       employed health insurance...       -*      -0.1      -0.1      -0.2      -0.4      -0.5      -0.5       -1.9
      Increase employee
       contributions to CSRS and
       FERS........................      0.1       0.4       0.5       0.6       0.6       0.6       0.6        3.4
      Deter expatriation tax
       avoidance...................        *       0.2       0.2       0.4       0.4       0.5       0.5        2.3
      Tighten rules for taxing
       foreign trusts..............      0.1       0.3       0.3       0.3       0.3       0.3       0.3        2.1
      Extend corporate
       environmental tax\2\........  ........      1.0       0.6       0.7       0.7       0.7       0.8        4.5
      Improve compliance by tax-
       exempt entities through
       intermediate sanctions and
       other measures..............        *         *         *         *         *         *         *          *
    [[Page 50]]
      Modify Federal pay raise
       (receipt effect)............  ........     -0.1      -0.1      -0.1      -0.1      -0.1      -0.1       -0.8
      Provide tax relief to troops
       in Bosnia...................       -*        -*   ........  ........  ........  ........  ........        -*
                                    --------------------------------------------------------------------------------
          Subtotal, Other..........     -0.4       1.8       1.8       1.8       1.7       1.9       2.2       10.7
                                    --------------------------------------------------------------------------------
            Subtotal, Eliminate
             unwarranted benefits
             and other provisions
             that affect receipts..     -0.3       5.6       7.3       9.3      10.0      10.3      12.1       54.3
                                    --------------------------------------------------------------------------------
    Modify earned income tax credit
     (EITC)........................        *       0.3       0.4       0.4       0.4       0.4       0.4        2.3
                                    ================================================================================
    Total effect of proposals\1\...     -1.6     -11.7      -6.3      -7.8     -11.0     -11.6     -10.7      -60.8

    Extend expired trust fund
     excise taxes:
      Extend superfund trust fund
       excise taxes\1\.............      0.1       0.7       0.7       0.7       0.7       0.7       0.7        4.2
      Extend airport and airway
       trust fund taxes\1\.........      0.4       4.7       4.9       5.2       5.5       5.9       6.2       32.8
      Extend LUST trust fund
       taxes\1\....................        *       0.1       0.1       0.1       0.1       0.1       0.1        0.8
                                    --------------------------------------------------------------------------------
        Total effect of extending
         expired trust fund excise
         taxes\1\..................      0.5       5.5       5.7       6.0       6.3       6.7       7.0       37.7
    ----------------------------------------------------------------------------------------------------------------
    *$50 million or less.
    \1\Net of income offsets.
    \2\Net of deductibility for income tax purposes.

    [[Page 51]]

    3.  FEDERAL RECEIPTS
    ---------------------------------------------------------------------------
    Table 3-4.  RECEIPTS BY SOURCE------------------------------------------

    (In millions of dollars)

    ------------------------------------------------------------------------
                                             1995        1996        1997
                   Source                   actual     estimate    estimate
    ------------------------------------------------------------------------
    Individual income taxes (federal
     funds):
      Withheld..........................     499,927     535,566     567,153
      Proposed Legislation (PAYGO)......  ..........      -1,285     -17,201
      Other.............................     175,855     186,071     187,818
      Refunds...........................     -85,538     -89,479     -92,668
                                         -----------------------------------
    Total net individual income taxes...     590,244     630,873     645,102
                                         ===================================
    Corporation income taxes:
      Federal funds:
        Gross Collections...............     173,810     184,632     200,143
        Proposed Legislation (PAYGO)....  ..........         136       2,113
        Refunds.........................     -17,418     -18,019     -18,510
                                         -----------------------------------
      Total Federal funds net
       corporation income taxes.........     156,392     166,749     183,746
                                         -----------------------------------
      Trust funds:
        Gross Collections (Hazardous
         substance superfund)...........         612         359          10
        Proposed Legislation (PAYGO)....  ..........  ..........       1,222
                                         -----------------------------------
    Total net corporation income taxes..     157,004     167,108     184,978
                                         ===================================
    Social insurance taxes and
     contributions (trust funds):
      Employment taxes and
       contributions:
        Old-age and survivors insurance
         (Off-budget)...................     284,091     311,713     333,335
        Disability insurance (Off-
         budget)........................      66,988      55,728      54,680
        Hospital insurance..............      96,024     101,848     108,770
        Railroad retirement:
          Social Security equivalent
           account......................       1,518       1,498       1,508
          Rail pension and supplemental
           annuity......................       2,424       2,399       2,451
                                         -----------------------------------
      Total employment taxes and
       contributions....................     451,045     473,186     500,744
                                         -----------------------------------
        On-budget.......................      99,966     105,745     112,729
        Off-budget......................     351,079     367,441     388,015
                                         -----------------------------------
      Unemployment insurance:
        State taxes deposited in
         Treasury\1\....................      23,158      24,047      25,006
        Federal unemployment tax
         receipts\1\....................       5,696       5,739       5,806
        Railroad unemployment tax
         receipts\1\....................          24          24          29
                                         -----------------------------------
      Total unemployment insurance......      28,878      29,810      30,841
                                         -----------------------------------
      Other retirement contributions:
        Federal employees' retirement--
         employee contributions.........       4,461       4,359       4,144
          Proposed Legislation (PAYGO)..  ..........          90         356
        Contributions for non-Federal
         employees\2\...................          89          89          88
          Proposed Legislation (PAYGO)..  ..........           1           2
                                         -----------------------------------
      Total other retirement
       contributions....................       4,550       4,539       4,590
                                         -----------------------------------
    Total social insurance taxes and
     contributions......................     484,473     507,535     536,175
                                         ===================================
      On-budget.........................     133,394     140,094     148,160
      Off-budget........................     351,079     367,441     388,015
                                         ===================================
    Excise taxes:
      Federal funds:
        Alcohol taxes...................       7,216       7,189       7,173
        Tobacco taxes...................       5,878       5,872       5,796
        Transportation fuels tax........       8,491       6,920       7,162
        Telephone and teletype services.       3,794       4,010       4,241
        Ozone depleting chemicals and
         products.......................         616         205          13
        Other Federal fund excise taxes.         946       1,598       1,520
          Proposed Legislation (PAYGO)..  ..........        -382           5
                                         -----------------------------------
      Total Federal fund excise taxes...      26,941      25,412      25,910
                                         -----------------------------------
      Trust funds:
        Highway.........................      22,611      24,564      24,900
          Proposed Legislation (PAYGO)..  ..........         -10           4
        Airport and airway..............       5,534       1,383  ..........
          Proposed Legislation (PAYGO)..  ..........         898       6,251
        Aquatic resources...............         306         320         325
        Black lung disability insurance.         608         620         633
        Inland waterway.................         103         125         131
        Hazardous substance superfund...         867         261  ..........
          Proposed Legislation (PAYGO)..  ..........         102         883
        Oil spill liability.............         211  ..........  ..........
          Proposed Legislation (PAYGO)..  ..........          34         294
        Vaccine injury compensation.....         138         123         123
        Leaking underground storage tank         165          41  ..........
          Proposed Legislation (PAYGO)..  ..........          13         174
                                         -----------------------------------
      Total trust funds excise taxes....      30,543      28,474      33,718
                                         -----------------------------------
    Total excise taxes..................      57,484      53,886      59,628
                                         ===================================
    Estate and gift taxes...............      14,763      15,924      17,067
      Proposed Legislation (PAYGO)......  ..........  ..........          10
                                         -----------------------------------
    Total estate and gift taxes.........      14,763      15,924      17,077
                                         ===================================
    Customs duties:
      Federal funds.....................      18,573      19,231      20,253
        Proposed Legislation (PAYGO)....  ..........        -706        -675
      Trust funds.......................         728         788         876
                                         -----------------------------------
    Total customs duties................      19,301      19,313      20,454
                                         ===================================
    MISCELLANEOUS RECEIPTS:\3\
      Miscellaneous taxes...............         138         149         153
      United Mine Workers of America
       combined benefit fund............         336         281         251
      Deposit of earnings, Federal
       Reserve System...................      23,378      23,752      22,580
        Proposed Legislation (PAYGO)....  ..........  ..........          92
      Fees for permits and regulatory
       and judicial services............       6,180       6,233       6,690
        Proposed Legislation (PAYGO)....  ..........  ..........         307
      Fines, penalties, and forfeitures.       1,781       1,580       1,598
      Restitutions, reparations, and
       recoveries under military
       occupation.......................  ..........           7           7
      Gifts and contributions...........         131         139         151
      Refunds and recoveries............  ..........          -5          -5
                                         -----------------------------------
    Total miscellaneous receipts........      31,944      32,136      31,824
                                         ===================================
    Total budget receipts...............   1,355,213   1,426,775   1,495,238
      On-budget.........................   1,004,134   1,059,334   1,107,223
      Off-budget........................     351,079     367,441     388,015
                                         -----------------------------------
                 MEMORANDUM
      Federal funds.....................     842,214     893,132     926,831
      Trust funds.......................     326,739     355,579     377,918
      Interfund transactions............    -164,819    -189,377    -197,526
                                         -----------------------------------
    Total on-budget.....................   1,004,134   1,059,334   1,107,223
                                         -----------------------------------
    Off-budget (trust funds)............     351,079     367,441     388,015
    [[Page 52]]
                                         ===================================
    Total...............................   1,355,213   1,426,775   1,495,238
    ------------------------------------------------------------------------
    \1\Deposits by States are State payroll taxes that cover the benefit
      part of the program. Federal unemployment tax receipts cover
      administrative costs at both the Federal and State level. Railroad
      unemployment tax receipts cover both the benefits and adminstrative
      costs of the program for the railroads.
    \2\Represents employer and employee contributions to the civil service
      retirement and disability fund for covered employees of Government-
      sponsored, privately owned enterprises and the District of Columbia
      municipal government.
    \3\Includes both Federal and trust funds. Trust fund amounts in
      miscellaneous receipts are 1995: $619 million; 1996: $575 million; and
      1997: $571 million.