[Congressional Record Volume 143, Number 87 (Friday, June 20, 1997)]
[Senate]
[Pages S6028-S6030]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
PRINCIPLES FOR TAX LEGISLATION
Mr. FORD. Mr. President, when we start debating tax legislation on
the floor, I hope our debate will be governed by a few basic
principles. Let me state those questions which are most important to me
personally. Each of these questions needs a satisfactory answer.
Are the tax benefits spread evenly across all income levels?
Is the tax legislation consistent with the budget agreement?
Does the tax package undermine a balanced budget after 10 years?
We need answers which meet basic standards of fairness and sound
public policy. These are the standards I think we should use to judge
any tax bill that comes to this floor.
Today, I would like to talk a little more about the first concern I
have mentioned how evenly the benefits of the proposed tax bills will
fall across income levels.
A distribution table put out by the Senate Finance Committee claims
that 74 percent of the tax benefits in the proposal pending before that
Committee go to those making under $75,000; 74 percent. That sounds
pretty good.
On the other hand, our analysis shows that 43 percent of the benefits
go to the wealthiest 10 percent, and two-thirds of the benefits go to
the top 20 percent.
How can the two analysis be so different? Well, let's look at some of
the differences.
First, the Republican claims about who gets the tax cuts are based
only on 5-year projections--before many of the backloaded tax breaks
are fully implemented. Our analysis looks at the tax cuts when fully
implemented. Let me repeat that. They cut their analysis off after 5
years, before many of the tax breaks are fully implemented. You can
play a lot of games by cutting off the analysis after 5 years. What
happens after 10 years? Under the Republican income distribution, they
will never tell you. But why not?
Our income distribution looks at these new tax breaks when they are
fully implemented. What a difference it makes. Apparently the most
backloaded tax breaks provide very little benefit for low and middle
income workers.
Second, because the Republican claims are only based on 5 years, they
treat capital gains cut as hardly any tax cuts at all. In fact, the
Republican analysis of the House tax package claims that the capital
gains tax cut is actually a tax increase for upper income taxpayers
during the first 5 years. Imagine that--a capital gains cut that counts
as a tax increase.
Third, the Republican claims about who gets the tax cuts ignore the
impact that estate tax cuts will have in individual taxpayers. It
simply ignores them. They don't count estate tax benefits at all.
The Republican claims about who gets the tax cuts ignore the fact
that many of the proposed tax cuts are backloaded--meaning that the
full impact is not felt until well after the first 5 years, and in some
cases not until well after 10 years. This means they have essentially
ignored not only the impact of capital gains cuts, but also the
backloaded IRA's, and the phase-in of estates taxes.
Mr. President, the Center on Budget and Policy Priorities has
produced a more detailed analysis of the distribution tables prepared
by the Joint Committee on Taxation on the House tax bill. That analysis
contains essentially the same flaws as the Senate analysis. I ask
unanimous consent that this document, entitled ``Joint Tax Committee
Distribution Tables Produce Misleading Results,'' be printed in the
Record.
There being no objection, the material was ordered to be printed in
the Record, as follows:
Center on Budget and Policy Priorities--Joint Tax Committee
Distribution Tables Produce Misleading Results
tables fail to account for any of the benefits from the tax cuts worth
the most to high-income taxpayers
According to distribution tables the Joint Committee on
Taxation has prepared the tax cuts proposed by Rep. Bill
Archer, chairman of the House Ways and Means Committee, would
concentrate their benefits among middle-class Americans. This
finding is sharply at odds with the content of the
legislation. Four of the largest tax cuts--the capital gains,
Individual Retirement Account, estate, and corporate
alternative minimum tax provisions--provide the large
majority of their benefits to households with high incomes.
The Joint Committee's handling of these four provisions is
fundamentally flawed. In effect, its distribution tables do
not reflect any of the benefits that taxpayers would receive
from the four provisions.
The Joint Tax Committee distribution tables ignore the
effects of reductions in estate and corporate taxes. The
Joint Committee did not examine the distributional effects of
these tax changes.
The Joint Tax Committee distribution tables do consider the
effects of the changes in the capital gains tax and the IRA
provisions. The distribution tables, however, go only through
2002. Because the capital gains tax cuts and the IRA
provisions are heavily backloaded, they do not result in net
reductions in revenue collections during the time period the
Joint Tax Committee examined. (For example, taxpayers would
not begin to receive tax cuts from capital gains indexing
until 2004). And because they do not result in net revenue
reductions, the Joint Tax Committee assumes these provisions
produce no net tax cut benefits in these years.
In fact, the Joint Tax Committee estimates that during the
period through 2002, net capital gains tax payments would
rise $1 billion due to the Archer capital gains tax
provisions. In its distributions tables, the Joint Tax
Committee treats this $1 billion as a tax increase, primarily
on taxpayers at high income levels. As a result, under the
Joint Tax Committee tables, high-income taxpayers appear to
be the victims of a tax increase imposed by the Archer
capital gains tax cuts.
By considering a time period in which the capital gains
provisions cause a short-term increase in revenue collections
and the IRA provisions result in no significant net change in
revenue collections (the IRA provisions lose only $33 million
cumulatively in the years through 2002), the Joint Tax
Committee's distribution tables dramatically understate the
benefits of the tax package to high-income taxpayers.
While the capital gains and IRA proposals produce no net
revenue loss in the years through 2002, the combined revenue
loss from these provisions is $51 billion from 2003 through
2007, years the Joint Tax Committee distribution tables do
not examine. The large cost of these provisions during this
second five-year period stands in sharp contrast to the $1
billion net gain in revenue from the capital gains and IRA
provisions from 1998 to 2002, years the Committee's
distribution tables do examine.
By 2007, the combined cost of the capital gains and IRA
provisions exceeds $15 billion a year and is growing at a
rate of nearly $3 billion a year.
If the Joint Tax Committee had examined the capital gains
and estate tax provisions when they were fully in effect--and
if it also had distributed the effects of the reductions in
the estate and corporate alternative minimum taxes--the
degree to which the tax benefits of the Archer plan accrue to
high-income taxpayers would be shown to be vastly larger than
the Joint Committee on Taxation tables indicate.
Like the capital gains and IRA tax cuts, the estate tax
provisions of the Archer plan are heavily backloaded. (The
corporate alternative minimum tax provisions are the only
provisions principally benefitting high-income taxpayers that
are not heavily backloaded.)
As a consequence of the backloading, the four upper-income
tax cut provisions account for a growing proportion of the
tax package over time. Specifically, in 2003, the capital
gains, IRA, estate and corporate alternative minimum tax
provisions account for 30 percent of the gross cost of the
tax package. By 2005, they account for 35 percent of the
gross tax cuts in the tax package. By 2007, the figure is 42
percent. By about 2010, the upper-income provisions, which
concentrate the bulk of their benefits among a small fraction
of the population, would account for a majority of the gross
tax cuts in the package.
Furthermore, these percentage figures do not reflect
several other major tax cuts in the package that would confer
a sizable share of their tax cut benefits on high-income
taxpayers--such as the provision weakening the individual
alternative minimum tax and the $10,000-a-year education
tax deduction, which includes no income limit on the
taxpayers who can claim it. Eventually, the Archer plan
becomes a piece of legislation whose predominant effect is
to provide upper-income tax relief and enlarge the after-
tax incomes of those in the wealthiest strata of society.
changes in joint tax committee methodology skew the distribution tables
Also of significance, the methodology the Joint Tax
Committee has used in preparing the distribution tables on
the Archer plan differs in important ways from the
methodology the Joint Committee employed until late 1994.
Tax bills have been introduced on numerous previous
occasions that phase in the tax cuts they contain.
Accordingly, the Joint Tax Committee had to address on many
prior occasions the question of how to estimate the
distributional effects of tax provisions whose full effects
would not be felt for more
[[Page S6029]]
than five years. Until the end of the 103rd Congress, the
Joint Tax Committee traditionally addressed this issue by
examining the distributional effects of the proposed tax
changes when the changes were fully in effect. This also is
the approach most tax analysts endorse and the approach the
Treasury Department continues to use. But the Joint Tax
Committee did not use this approach in analyzing the
distributional effects of the Archer tax package. It thereby
has significantly understated the effects of the backloaded
tax cuts in the Archer plan that primarily benefit high-
income taxpayers.
The Joint Tax Committee also has changed its methodology in
another key respect. The capital gains and IRA provisions of
the Archer tax package are designed so they increase tax
collections in the period from 1998 to 2002. This increase in
collections does not reflect an increase in tax rates or a
change in tax law under which previously exempt income is
made subject to taxation. Rather, the increased collections
reflect voluntary changes in behavior by taxpayers who choose
to make tax payments in the next five years that they would
have made in later years in return for very generous tax cuts
for years to come.
For example, the Joint Tax Committee estimates that the
Archer capital gains provisions would produce a net increase
in revenues in the years through 2002. In the first two
years, these provisions would raise revenues because some
investors would decide to take advantage of the new, lower
capital gains tax rate to sell more assets than they
otherwise would have sold in those years. The increased tax
collections that result from the sale of an increased volume
of assets in these two years do not represent a tax
increase the government has required investors to pay. To
the contrary, the increase in tax collections would occur
because some investors would elect to sell in the next two
years some assets they otherwise would have sold at a
later date. The investors would sell these assets because
they concluded it was in their interest to do so.
Similarly, the capital gains indexing proposal offers
investors the option of paying capital gains tax in 2001 and
2002 on the increase in the value of various assets they hold
between the time the assets were purchased and January 1,
2001, in return for large capital gains tax cuts when they
sell these assets in later years. Because this offers such a
sweet deal to investors, many would use it. They would pay
capital gains taxes in 2001 and 2002 that they would
otherwise have paid in future years when the assets are
actually sold, and they would reap large tax cut benefits as
a result. Here, too, the additional revenue collections in
2001 and 2002 do not represent tax increases the government
has imposed on these individuals. To the contrary, these
investors are securing large tax cuts for themselves.
The Archer IRA proposals also have this characteristic.
They are engineered so taxpayers can opt to pay taxes during
1999 through 2002 that they otherwise would pay in future
years in return for very generous tax breaks for years to
come. Here, also, taxpayers would choose to accelerate some
tax payments into the next several years because it would be
in their interest to do so.
Under the traditional methodology the Joint Tax Committee
used in the past, these accelerated tax payments that
individuals would elect to make in the next few years, in
return for large future tax breaks, would not be treated as
tax increases imposed upon these individuals. Under the new
methodology it adopted in late 1994, however, the Joint Tax
Committee treats these additional revenue collections as tax
increases. As a result, the Joint Tax Committee's
distribution tables reflect the incongruous assumption that
the net effect of the Archer capital gains and IRA proposals
on wealthy individuals is to saddle them with a tax increase.
leading analysts reject new joint tax methodology on the distribution
of capital gains tax benefits
Many of the leading analysts in the field reject the new
Joint Tax Committee method as producing severe distortions in
the distribution of the benefits that a capital gains tax cut
produces. Among those rejecting the new Joint Tax Committee
approach are: Robert Reischauer, former director of the
Congressional Budget Office; Henry Aaron, senior fellow at
the Brookings Institution; and Jane Gravelle, the
Congressional Research Service's leading tax expert and
analyst. In addition, several years ago Gravelle co-authored
an article on this matter with Lawrence Lindsey, a noted
conservative economist who served until recently on the
Federal Reserve Board and who supports a capital gains tax
cut. In their article, Lindsey and Gravelle explicitly
rejected the methodology the Joint Tax Committee has now
adopted.
As Aaron has observed, investors who respond to a capital
gains tax cut by selling more assets are people who face one
set of opportunities under the current capital gains tax
rates--and find it financially advantageous not to make
additional asset sales--but face a more generous set of
opportunities when capital gains tax rates are reduced and
choose to follow a different course. ``Since they have the
option of doing what they did before (i.e., not selling
additional assets), but the new, more favorable tax rates
induce them to do something else, they must be better off,''
Aaron explains. ``It is logically absurd to count them as
worse off in any way whatsoever.''
Aaron's view is supported by an article Gravelle and
Lindsey co-authored in 1988 before Lindsey joined the Fed. In
the article they stated:
``* * * suppose a reduction in the capital gains tax rate
led to substantially more capital gains realizations [i.e.,
more sales of assets] and actually increased the tax revenue
paid by upper-income groups. * * * it would be totally
inappropriate to say that their tax burden had increased.
After all, with a lower tax rate, these upper-income
taxpayers are less burdened than they were before, even
though they pay more taxes.'' \1\
---------------------------------------------------------------------------
\1\ This quote is from Jane G. Gravelle and Lawrence B.
Lindsey, ``Capital Gains,'' Tax Notes, January 25, 1988, p.
399. Gravelle included this quote in Jane G. Gravelle,
``Distributional Effects of Tax Provisions in the Contract
with America as reported by the Ways and Means Committee,''
CRS Report for Congress, April 3, 1995.
---------------------------------------------------------------------------
In addition, in a more recent analysis examining the new
Joint Tax Committee methodology, Gravelle notes that the
standard methodology, if anything, understates the benefits
that investors would secure from a capital gains tax cut
because it does not reflect the tax benefits they would
receive when they voluntarily sell more assets to take
advantage of a lower capital gains tax rate. She also
observes that economists generally would reject the new
methodology.
Mr. FORD. Mr. President, let's not cook the books. Let's have a
straightforward debate about who is getting the tax breaks that have
been proposed, and whether we can do better. We hear a lot about income
tax, but what about payroll tax?
Let's not ignore payroll taxes when we talk about who is carrying the
tax burden today. Workers in this country pay a 7.65-percent payroll
tax to finance the Social Security Program. They pay an additional 1.45
percent payroll tax to finance the Medicare Program. Social Security
taxes are collected on the first dollar earned--up to $62,700. Medicare
taxes are collected on all earned income.
The majority of workers in this country pay more in payroll taxes
than they do in income taxes. So it is insulting for many of these
workers to hear some around here talk about low income workers as if
they pay no taxes. You will actually hear some Members come to this
floor and argue that lower income workers do not get much of a tax
break because they do not pay many taxes. They will say lower income
workers do not get a full $500 per child tax credit because they do not
pay enough in taxes.
This is just not true. A tax is a tax for most folks--whether they
are income taxes or payroll taxes or estate taxes or something else.
But by counting only income taxes and ignoring payroll taxes, it means
that upper income taxpayers get more of the tax breaks, while lower and
middle income workers get less.
So we have to do better.
Now, we will also hear that the top 10 or 20 percent get most of the
tax benefit because they generate most of the income. Well, let's put
that in perspective as well. According to the Congressional Budget
Office, in 1994 the wealthiest 20 percent of families made about 48.1
percent of family income in this country. Yet under the Senate Finance
Committee bill, they get 67 percent of the tax breaks.
Or let me put it another way--from a middle class perspective. Again
according to CBO, in 1994 the bottom 60 percent of families made 27.3
percent of the income. Yet under the Senate Finance Committee bill,
they get only 12 percent of the tax benefit. So I think we are a little
out of balance. When the bill reaches the floor, I hope we can do
better. I hope we can make it a little more fair. It is the least we
can do.
Last, Mr. President, when we talk about the fairness of this package,
we need to talk about how the revenue raisers in the Senate Finance
Committee tax package affect different income groups.
Last night, the Finance Committee voted to increase excise taxes on
cigarettes by 20 cents per pack. I understand that it's politically
correct to attack the tobacco industry. And we're going to see plenty
of piling on over the next few months regarding tobacco.
But let's talk for a minute about how this cigarette tax affects
various income groups. It's well documented that cigarette excise taxes
are the most regressive of all taxes--meaning they hit poor folks a lot
harder than they hit upper income folks. According to a 1997 KPMG Peat
Marwick study, U.S. families earning about $30,000 or less earned
[[Page S6030]]
about 16 percent of all income generated, but paid 47 percent of all
tobacco taxes. Let me say it again. Families earning less than $30,000
pay 47 percent of all cigarette excise taxes.
The changes in the tax bill made last night will make the disparity
among poor families even greater.
On average, low income persons pay 15 times more in tobacco taxes
than upper income individuals.
And what was this tax increase on low income people going to be used
for? To accelerate the increase in estate tax relief, which goes
primarily to upper income individuals. This is a reverse-Robin Hood
amendment. We are taxing the poor to help the wealthy.
The amendment will also reportedly be used to provide $8 billion in
additional spending for health insurance. Just a couple of weeks ago we
heard how this would violate the budget agreement. We voted 55 to 45
against an amendment that would raise taxes in order to raise spending
on health insurance. Phone calls were made to the President of the
United States to tell him how this would violate the budget agreement
and how he better announce he was opposed to the amendment. Yet last
night, some of the very same Senators who made those arguments on the
floor a few weeks ago apparently voted in favor of a very similar
amendment. How could it violate the budget agreement a few weeks ago
and not now?
Last, Mr. President, the timing of this tax increase is most
interesting. Later today we may hear an announcement of a ``global
settlement'' of tobacco litigation. The agreement will require
congressional action. As I understand it, this agreement completely
fails to address the interests of tobacco farmers and factory workers,
nearly all of whom are low to moderate income workers. But we will have
that debate on another day.
What is interesting today, however, is the impact of that agreement
on all these proposed cigarette tax increases. The tobacco settlement,
if implemented, will have an immediate impact on prices, raising the
price of a pack of cigarettes by somewhere in the neighborhood of a
dollar. This, of course, will depress consumption--which in turn will
reduce revenues by about 20 to 25 percent, or maybe even higher. So any
proposals in the reconciliation bill to raise revenues by raising
cigarette taxes will prove to be overly optimistic as soon as any
global settlement is implemented. This means less revenue will actually
be raised, and our deficit problems will be worse--particularly in the
out years. So there is a great ripple effect as work here if these tax
increase proposals succeed.
But last, Mr. President, let me return to my initial point. The tax
package considered by the Finance Committee benefits upper income
individuals too heavily. The cigarette tax adopted last night makes
matters even worse, because it is primarily a tax on low income
individuals. So not only do low income folks get virtually none of the
tax breaks--but they will now get a tax increase.
I hope my colleagues who claim great concern for low income people
will keep this in mind as they prepare to vote on the tax
reconciliation bill. As for this Senator, I think a bad bill was made
worse by the Finance Committee last night, and it is simply not a
package I can support in its current form.
I yield the floor.
Mr. SPECTER addressed the Chair.
The PRESIDING OFFICER. The Senator from Pennsylvania.
____________________