July 24, 1997

Roth Offer to Administration Is More Backloaded And at Least as Skewed
to Upper-income Taxpayers as House or Senate Tax Bills

by Iris J. Lav


As Congressional tax writers seek a tax deal with the Administration that will be acceptable to both the House and Senate, proposals may surface that appear to move toward Administration priorities but in fact only postpone costs of high-income tax cuts instead of paring them back. What appears to be a compromise may, in fact, be more costly when fully effective — and more tilted toward providing benefits to high-income taxpayers — than either of the Congressional bills. The offer that Senate Finance Committee Chairman William Roth presented to the Administration this past weekend, dated July 18, 1997, is a case in point.

The Roth offer combines tax cuts geared primarily to upper-income households that were present in the House bill but not the Senate bill with upper-income tax cuts that were part of the Senate bill but not the House bill. Most of the additional cost of including all of these provisions is accommodated, under the Roth offer, through increased reliance upon backloading devices that push the effective dates of various provisions farther toward the end of the initial 10-year period. As a result, the tax package that Mr. Roth offered would be more costly when fully in effect — and would explode in cost more sharply after 2007 — than either the House or Senate bills. The Roth offer is significant as it provides what is likely to be the basic structure of the tax offer the Republican leadership presents to the Administration in the next day or two.

Because the Roth package combines House tax cut provisions primarily benefitting high-income taxpayers that the Senate bill omitted with upper-income tax cuts included only in the Senate bill, the Roth offer would direct as large or larger a proportion of its benefits to upper-income taxpayers than even the House bill would.


Major High-Income Provisions In House and Senate Bills and Roth Offer

CAPITAL GAINS Rate Cut Rate Cut Rate Cut
Indexing (first revenue loss in 2004)   Indexing
(first revenue loss in 2006)
ESTATE TAX Exemption increase Exemption increase Exemption increase
  Add'l $1 million exemption for family farms/businesses (effective 1998) Add'l $900,000 exemption for family farms/businesses
(phased in 1998-2004)


Backloaded IRA Backloaded IRA Backloaded IRA
  Increased income limits for deductible IRAs from $50,000 in 1997 to $100,000 in 2004 Increased income limits for deductible IRAs from $50,000 in 1997 to $60,000 in 1998 and by $1,000 each subsequent year
for individuals
Exemption increase
for individuals
Exemption increase
for individuals
  Corporate AMT cut


The House bill is heavily skewed toward upper-income taxpayers; according to Treasury estimates, 67 percent of its tax benefits would go to the highest-income 20 percent of families. In addition, the one percent of families with the highest incomes would receive nearly one and one-half times as much in tax cuts under the House bill as the bottom 60 percent of the population.

As negotiations continue, Congressional negotiators may seek to make room for some Administration priorities within the package by increasing the degree to which upper-income tax cuts favored by the House or Senate are backloaded. For example, Congressional negotiators could find funds to provide a child tax credit to more moderate-income working families or increase the education tax credit by gradually phasing in the proposed reduction in the capital gains tax rate, phasing in the increase in the estate tax exemption over a longer period, or creating additional gimmicks to accelerate revenue collections into the budget window. Such moves would increase the degree to which the tax cuts are backloaded and grow in cost beyond 2007, and thus increase the ultimate cost of the bill. Depending on the extent to which the backloaded tax cuts are those that favor wealthy taxpayers, the tax package could become still further skewed toward providing the bulk of its benefits to the highest-income Americans.


Additional Backloading in Roth Offer Accommodates Indexing and Corporate AMT Break

The Roth offer makes few trade-offs among the tax cut provisions that are included in either the House or the Senate bill but not in both bills. The Roth proposal shoehorns additional tax cuts into the 1997-2007 period largely by postponing effective dates and lengthening phase-in periods, rather than by making substantial reductions in any specific tax cut provisions.

In fact, the Roth offer can be characterized as being very similar to the Senate bill with the addition of capital gains indexing and reductions in the corporate Alternative Minimum Tax that were included in the House bill but not the Senate bill. The Roth offer includes essentially all of the provisions benefiting higher-income taxpayers that were passed by either the House or the Senate.

The addition of capital gains indexing is particularly noteworthy. The Roth offer takes the already highly backloaded House indexing provision and makes it more backloaded. Under the House bill, indexing would raise money in 2001 and 2002 and not start losing significant revenue until 2004. Under the Roth offer, indexing would not start losing significant revenue until 2006. The indexing provision in the Roth offer is so heavily backloaded that it raises $4 billion over the 10 year period ending in 2007, even though indexing ultimately loses tens of billions of dollars. Furthermore, this $4 billion is then used to help pay for the addition to the Senate bill of yet another House tax break — the House corporate AMT provision.

The inclusion of the House corporate AMT tax break adds nearly $20 billion over 10 years to the cost of the Senate bill. This additional cost is "paid for" in the Roth offer in three ways:


Degree of Backloading Increased

The Roth offer is more backloaded than either the House or Senate bills, which themselves are heavily backloaded.

In these three areas — capital gains, estate taxes, and IRA provisions — the Roth offer increases the degree to which costs are backloaded relative to the House and Senate bills. Since there are no provisions for which backloading is reduced under the Roth offer, the effect is to create an overall proposal that is more backloaded — and explodes in cost more severely in years outside the budget window — than either the House or Senate bill.

Inclusion of Capital Gains Indexing Appears to Lower Costs

The Roth offer shows a lower cost over 10 years for a capital gains tax rate cut with indexing than for the same capital gains tax rate cut without indexing. This anomalous result stems from a gimmick connected to indexing that accelerates several billion dollars of future revenue collections into fiscal year 2002.

Under both the House bill and the Roth offer, taxpayers would be induced to pay capital gains taxes on the gain in the value of their assets holdings between the date an asset was purchased and the date on which indexing would become effective (January 1, 2001) in exchange for the right to adjust the value of those assets for inflation in subsequent years. Assets held for five years would be eligible to use the indexing adjustment under the Roth offer. As a result, the first revenue loss from assets held or purchased in 2001 would not occur until 2006.

In subsequent years, the revenue loss from the indexing provision would rise steeply as the number of years for which the value of assets may be adjusted for inflation grows. Since most of the costs of indexing are pushed outside the initial 10-year period, while some revenues that otherwise would be collected in later years are pushed inside the budget window as taxpayers act in 2001 to qualify assets for indexing, the Roth plan's addition of the indexing provision to the Senate bill lowers the revenue loss by $4 billion over the first 10 years.


Distribution of Tax Cut Benefits Under Roth Offer
Likely to be at least as Skewed as Under the House Bill

The provisions that primarily benefit higher-income taxpayers are at least as generous in the Roth offer as in the House bill. The capital gains provisions are similar to the capital gains provisions in the House bill. The IRA provisions and estate tax cuts are significantly more generous than those in the House bill and closer to those in the Senate bill

As a result, when the tax plans are fully in effect, the distribution of the benefits under the Roth offer is likely to be slightly more tilted to high-income individuals than the distribution of the benefits of the House tax bill, which itself is heavily tilted toward the well-to-do.

End Note

1. Over 10 years, the "savings" relative to the Senate bill from these changes are: $12 billion from the stretched-out phase-ins, $4 billion from the capital gains indexing gimmick, and $12 billion from the child tax credit reductions, for a total of $28 billion. Of that amount, $20 billion is used to pay for inclusion of the corporate Alternative Minimum Tax reduction. The other $8 billion reduces the total cost of the Roth offer relative to the Senate bill over the next 10 years, although the total gross cost of the Roth offer is $5.7 billion above that of the House bill.