[Budget of the U.S. Government]
[V. Creating Opportunity, Demanding Responsibility, and Strengthening Community]
[8. Promoting Tax Fairness]
[From the U.S. Government Publishing Office, www.gpo.gov]
8. PROMOTING TAX FAIRNESS
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We should cut taxes for the family sending a child to college, for the worker returning to college, for the
family saving to buy a home or for long-term health care, and [provide] a $500 per-child credit for middle-
income families raising their children . . . . That is the right way to cut taxes--pro-family, pro-education,
pro-economic growth.
President Clinton
August 29, 1996
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The President proposes a tax plan that would promote a fairer tax
system and encourage activities that contribute to economic growth--in
short, a plan focused on fairness and America's future.
The plan calls for tax cuts that would benefit middle-class families
with children, encourage investment in higher education, and promote
long-term saving. It would benefit millions of homeowners by ensuring
that over 99 percent of home sales are exempt from capital gains taxes.
It would provide incentives for employers to hire economically
disadvantaged Americans, so they would benefit from wages rather than
welfare. It would provide targeted relief to promote economic
development and environmental cleanup in distressed areas. It would give
estate tax relief to small businesses and farmers. And it would make the
tax system more equitable for people with disabilities who are seeking
refunds.
The proposal is also fiscally responsible. The budget fully offsets
the costs of these tax cuts by making cuts in spending and in
unnecessary corporate subsidies and other unwarranted tax breaks.
This chapter provides an overview of the President's tax plan. (See
Table 8-1 for a summary of the plan.) Chapter 3 of Analytical
Perspectives provides further details.
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Table 8-1. THE PRESIDENT'S TAX PLAN
(In billions of dollars)
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Estimate Total,
------------------------------------------------ 1998-
1997 1998 1999 2000 2001 2002 2002
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Provide tax relief:
Middle Class Bill of Rights:
Tax credit for dependent children.................. -0.7 -9.9 -6.8 -8.6 -10.4 -10.4 -46.0
Expand individual retirement accounts............. ...... -1.5 -0.5 -0.8 -1.2 -1.7 -5.5
Incentives for education and training.............. -0.1 -4.0 -6.2 -7.8 -8.6 -9.4 -36.1
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Subtotal, Middle Class Bill of Rights............ -0.8 -15.4 -13.5 -17.2 -20.2 -21.4 -87.6
Additional targeted tax relief:
Capital gains exclusion on sale of principal
residence........................................... -0.1 -0.3 -0.3 -0.3 -0.3 -0.2 -1.4
Extend the work opportunity tax credit for one year.. ...... -0.1 -0.2 -0.1 -* -* -0.4
Targeted welfare-to-work tax credit.................. ...... -0.1 -0.1 -0.2 -0.1 -0.1 -0.6
Tax incentives for distressed areas.................. -* -0.4 -0.5 -0.5 -0.5 -0.4 -2.3
Tax credit for investment in community development
institutions and venture capital funds.............. ...... -* -* -* -* -* -*
Extend the R&E tax credit for one year............... -0.4 -0.8 -0.5 -0.2 -0.1 -* -1.7
Extend the orphan drug credit for one year........... -* -* -* -* -* -* -*
Extend the income exclusion for employer-provided
educational assistance through 2000................. -0.1 -0.6 -0.7 -0.8 -0.2 ...... -2.3
Extend and modify credit for corporations in U.S.
possessions......................................... ...... -* -0.1 -0.1 -0.1 -0.1 -0.4
District of Columbia tax incentive................... ...... -* -* -0.1 -0.1 -0.1 -0.3
Estate tax relief for small business................. ...... -* -0.2 -0.2 -0.2 -0.2 -0.7
Equitable tolling.................................... ...... ...... ...... ...... -* -* -0.1
Tax benefits to Foreign Sales Corporations for
software licenses................................... -* -0.1 -0.1 -0.1 -0.1 -0.1 -0.6
Extend the deduction for contributions of appreciated
stock to private foundations for one year........... ...... -* -* ...... ...... ...... -0.1
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Total, Provide tax relief.......................... -1.4 -17.9 -16.2 -19.6 -21.9 -22.8 -98.4
Eliminate unwarranted benefits......................... 0.6 4.1 6.3 7.3 7.6 8.9 34.3
Other changes affecting receipts....................... ...... 1.0 1.1 1.1 1.2 1.1 5.5
Extension of expired excise tax provisions............. 2.4 5.8 7.5 7.5 7.7 7.8 36.2
Total proposals........................................ 1.6 -7.0 -1.4 -3.7 -5.5 -4.9 -22.4
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* Less than $50 million.
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The Middle-Class Tax Cut
The President has long considered tax cuts for middle-income Americans
and small businesses a top priority. In 1993, he worked with Congress to
cut taxes for 15 million working families by expanding the Earned Income
Tax Credit (EITC), and to help small business by increasing
``expensing'' \1\ of investment and capital gains incentives. A year
later, he proposed his Middle Class Bill of Rights, including child tax
credits, deductions for higher education, and expanded Individual
Retirement Accounts. Then in 1996, he signed into law a number of other
tax benefits for small businesses and their employees--including even
more expensing for small-business investments, greater deductibility of
health insurance premiums for the self-employed, and expanded and
simplified opportunities for retirement savings. Also in 1996, the
President signed into law a $5,000 tax credit for adoption expenses
($6,000 for adopting children with special needs) and higher limits for
tax-deductible contributions by spouses to Individual Retirement
Accounts.
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\1\ That is, up-front deductions.
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This year, the budget again proposes the President's Middle Class Bill
of Rights. It would immediately and significantly benefit families with
young children, encourage investment in post-secondary education and
training, and promote long-term saving. This year's tax plan also goes
further--it includes more tax incentives and relief with regard to
education and training, work opportunities, capital gains on home sales,
and the legal limits faced by people with disabilities who seek tax
refunds.
Tax Credit for Dependent Children: The budget proposes an income tax
credit for each dependent child under age 13, as the President first
proposed in 1994. The credit would bene-
[[Page 112]]
fit about 18 million families with 34 million dependent children. It would be phased in, starting at $300 per child in tax years 1997 through 1999, and rising to $500 in 2000 and beyond. It would be phased out for taxpayers with adjusted gross incomes between $60,000 and $75,000. Starting in the year 2001,
the credit and the phase-out range would be indexed for inflation. The
credit would be non-refundable, but working families would first deduct
the child credit from their income taxes before deducting the refundable
EITC--making it easier for them to get the benefit of both credits.
This tax cut would benefit middle-income families; they have not
enjoyed large gains in their incomes over the past 25 years. For a two-
parent, two-child family with $50,000 of income and $12,500 of itemized
deductions, the credit would cut taxes by 25 percent when fully in place
in 2000. In total, the credit would lower families' taxes by $46 billion
from 1998 to 2002.
HOPE Scholarships and the Education and Job Training Tax Deduction:
The President believes that the tax system should better encourage
investment in college edu-
[[Page 113]]
cation and job training. Therefore, the budget proposes:
HOPE scholarships, which are tuition tax credits of up to
$1,500 per year, available for the first two years of post-
secondary education. To receive the credit in the second year,
the student must maintain at least a B average. The $1,500
amount (for each of two years) is a per student cap.\2\ HOPE
scholarships are modeled after a successful program in
Georgia.
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\2\ The budget also would increase Pell Grant college scholarships for
low-income families who lack the tax liability to benefit from the tax
cuts.
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The education and job training deduction, which would be
available to families for tuition and fees for any college,
graduate school, or qualified lifelong learning program. The
deduction, which the President first proposed in 1994, would
phase up from an annual cap of $5,000 per family in 1997 and
1998 to $10,000 in 1999 and beyond. It would cover tuition at
any education or training program that is at least half-time
or related to a worker's career. Students who use the HOPE
scholarships in their first two years of schooling could claim
the tax deduction in their remaining years of qualified
education or training (although families could not claim both
the credit and the deduction for the same student at the same
time).
Both the credit and the deduction would be phased out for joint filers
with incomes between $80,000 and $100,000. For single filers, the
benefits would phase out between $50,000 and $70,000. From 1998 through
2002, these two provisions would save taxpayers $36.1 billion.
Expanded Individual Retirement Accounts (IRAs): The budget also
repeats another proposal from 1994--to expand IRAs to provide greater
incentives for long-term savings for retirement and other important
purposes. Currently, for taxpayers who participate in employer-sponsored
retirement plans and file joint returns, the tax code phases out the
availability of deductible IRAs between $40,000 and $50,000 of adjusted
gross income. The President's plan would double this range over time, to
$80,000 and $100,000, and double the range for single taxpayers to
between $50,000 and $70,000. The plan also would index for inflation
both of these limits and the current maximum contribution of $2,000.
In addition, the budget proposes that eligible taxpayers be able to
contribute to a ``Special IRA'' as an alternative to a deductible IRA.
Contributions to Special IRAs would not be tax deductible, but
distributions of the contributions would be tax-free. If contributors
kept their funds in the account for at least five years, earnings on the
contributions would be available tax-free, too. Many taxpayers would be
eligible to convert deductible IRAs to Special IRAs. Also, contributors
to both types of IRAs could, under this proposal, withdraw funds without
penalty at any time to pay for higher education, first-time home
purchases, or expenses during a long period of unemployment.
The greater availability of IRAs would enable many two-earner families
to cut their taxes by up to $1,120 a year, if they make the maximum
allowable IRA contributions. From 1998 to 2002, it would cut taxes by an
estimated $5.5 billion.
Additional Targeted Tax Incentives and Relief
Targeted Homeownership Tax Cut: The budget proposes to allow married
taxpayers to exclude from capital gains taxes up to $500,000 in gains
from selling a home; single taxpayers could exclude up to $250,000. The
exclusion would replace both the one-time exclusion of $125,000, now
available for taxpayers over age 55, and the deferral of capital gains,
now available when purchasing a more expensive home.
This change would exempt over 99 percent of home sales from capital
gains taxes, and dramatically simplify taxes and record-keeping for over
60 million homeowners. It would benefit, in particular, older Americans
moving to smaller homes and families moving to lower-cost areas.
Taxpayers could use the exclusion every two years.
Work Opportunity Tax Credit: The President wants to replace welfare
with work, and to promote the hiring of the economically disadvantaged.
The President and Congress last year enacted the Work Opportunity Tax
Credit
[[Page 114]]
(WOTC) to replace the Targeted Jobs Tax Credit. Employers can
claim a tax credit of 35 percent of the first $6,000 that they pay to
members of target groups during their first year of employment.
In August, the President also unveiled a Welfare-to-Work initiative,
with two proposals that would build on the WOTC:
A new Welfare-to-Work Credit, targeted to long-term welfare
recipients. It would let employers claim a 50-percent credit
on the first $10,000 of annual wages that they pay to long-
term welfare recipients for up to two years. It would treat
education and training, health care, and dependent care
benefits as wages eligible for the credit.
An expansion of the WOTC to include able-bodied childless
adults aged 18 to 50 who, under the Administration's Food
Stamp proposal, would face a more rigorous work requirement in
order to continue receiving Food Stamps.
Tax Incentives to Boost Investment in Distressed Areas: The budget
proposes a three-part strategy to increase investment in disadvantaged
areas:
Expanded Empowerment Zones (EZs) and Enterprise Communities
(ECs): The budget proposes a second round of competition to
designate additional EZs and ECs and provides over $1 billion
in tax incentives to these areas through 2002. Among other
things, the plan would create 20 new EZs and 80 new ECs. The
plan promises to mobilize communities to promote business
development and create jobs. (For more information on EZs and
ECs, see Chapter 6.)
Brownfields Cleanup: The budget proposes to allow businesses
to deduct, in the year incurred, certain costs associated with
cleaning up ``brownfields''--contaminated, and often
abandoned, industrial sites--in economically distressed urban
and rural areas. (For more information on brownfields, see
Chapter 3.)
Community Development Financial Institution (CDFI) Tax
Credits: The budget proposes non-refundable tax credits for
equity investments in qualified CDFIs. (For more information
on CDFIs, see Chapter 6.)
Research and Experimentation Tax Credit (R&E): The budget proposes to
extend the R&E tax credit for one year, from its current expiration date
of May 31, 1997 to May 31, 1998. \3\ It provides a credit against 20
percent of a business's qualified research spending above a base level.
Research and experimentation contribute greatly to the Nation's growth
in productivity, and the private sector may under-invest in this
activity in the absence of this Federal incentive.
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\3\ The credit, which was first enacted in 1981, expired in mid-1995.
The Small Business Job Protection Act of 1996, however, reinstated the
credit for the period from July 1, 1996 to May 31, 1997.
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Employer-Provided Education: The budget proposes to extend, through
December 31, 2000, the income exclusion for employer-provided
educational assistance that Congress recently extended through mid-1997,
and to expand the exclusion to cover graduate education. The exclusion
enables employees to get additional forms of training and education
benefits without facing income taxes on those benefits. Small businesses
also would be able to claim a 10-percent tax credit for providing such
benefits to their employees.
Economic Incentives for U.S. Businesses in Puerto Rico: The budget
proposes to modify Section 936 of the tax code, which allows U.S.
companies to claim a credit against the tax they pay for income that
they derive in Puerto Rico--specifically, to extend the availability of
the economic activity credit and to allow new firms to claim it.
Estate Tax Benefits for Closely Held Businesses: The budget proposes
to ease the burden of estate taxes on farms and other small businesses,
allowing their owners to defer taxes on $2.5 million of value, up from
$1 million under current law. The deferred taxes could be paid over 14
years, at a favorable interest rate. In addition, the budget would
expand the types of businesses eligible for such treatment by making the
form of business organization irrelevant. It also would cut the
administrative burden on taxpayers who elected deferral.
[[Page 115]]
Equitable Tolling: The budget proposes to extend the period during
which taxpayers with serious disabilities can file claims for refunds,
helping to ensure that such taxpayers are not unfairly disadvantaged by
the tax system.
Unwarranted Benefits and Other Measures
The budget eliminates or shrinks a wide range of tax loopholes and
preferences that are no longer warranted. Some involve highly
specialized financial and accounting techniques. Restricting them would
help balance the budget, increase the equity and efficiency of the tax
system, and keep corporations focused on productivity and profits,
rather than on tax minimization.
For example, the plan:
Prevents certain tax-motivated financial manipulations, used
to avoid capital gains taxes.
Clarifies the treatment of new financial instruments that aim
to exploit the different tax treatment of equity and debt, by
denying or deferring interest deductions on certain
instruments that have substantial equity features.
Limits the ability of some corporations to deduct the cost of
interest associated with purchasing tax-exempt debt.
Increases the penalty for substantial understatement of taxes,
to reduce incentives for excessively aggressive tax planning
by corporations with tax liabilities of $100 million or more.
Finally, the plan extends the Airport and Airway excise taxes, the
Leaking Underground Storage Tank excise tax, and the Hazardous Substance
Superfund excise and corporate income taxes, through 2007. The
Administration, however, will propose legislation to replace the Airport
and Airway excise taxes with fees for services that the Federal Aviation
Adminstration provides.