Senate Leadership
Tax Proposals:
Mushrooming Tax Cuts For
High-Income Taxpayers
Would Jeopardize Long-Term Budget Integrity
Appendix:
Comparing the Administration and Senate Leadership Tax Proposals
The Administration's proposed federal budget for fiscal year 1998 includes a package of tax cut proposals. The Clinton tax cut proposals are less costly and more targeted on middle-income families than those in the Senate Republican Leadership plan. Like the Leadership plan, however, the Clinton proposals grow rapidly in cost over time.
Over the first five years, the Administration tax cuts have a gross cost of $117 billion as compared to the $201 billion estimate of the cost of the Leadership package. 20 Over ten years, the gross cost of the Administration plan would be $281 billion, as compared to the $526 billion cost for the Leadership plan. While the gross cost of the Aministration's proposals averages $23 billion a year over the first five years, the cost exceeds $37 billion a year in 2007, the tenth year. The costs would likely continue to grow in subsequent years.
The Administration budget includes provisions to raise revenues, as well as provisions to reduce them, and these Administration revenue-raising proposals lower the overall cost of the Administration's tax package. The revenue-raising provisions the Administration is proposing include both extensions of expired excise taxes and "loophole" closings.
Over the first five years, the net cost of the Administration tax proposals i.e., the overall cost when the Administration's tax cuts, extensions of expired taxes, and loophole-closers all are taken into account would be $43 billion.
If the Senate Leadership also agreed to extend the expired excise taxes, as it may do, the net cost of its tax plan would be $163 billion over the first five years. That is nearly four times the net cost of the Administration's plan during this period.
Over 10 years, the net cost of the Leadership plan would be $440 billion, still more than three times the $131 billion net cost of the Administration plan.
The net cost of the Administration plan, however, grows somewhat faster than the net cost of the Leadership plan. By 2007, the net cost of the Leadership plan would be $63 billion, three times the cost of the $21 billion Clinton plan.
The Administration's proposals, net of offsets, would cost twice as much in 2007 as they would in 2002, $20.6 billion in 2007 as compared to $10.4 billion in 2002.
The Administration proposals are better targeted than those in the Leadership plan. As described below, the Administration's child tax credit is fully phased out for families with incomes over $75,000. Other tax relief mechanisms are fully phased out for individuals with incomes over $70,000 and families with incomes exceeding $100,000. This contrasts with the IRA, capital gains, and estate tax breaks in the Leadership proposal, the vast majority of which would benefit households with incomes above these ranges.
Although the Administration tax proposals are more modest in scope and more targeted to the middle-class than the Senate Leadership proposals, the Administration's proposals do, as noted, grow substantially in cost over time. As a result, the Administration's tax cuts, like the Leadership proposals, would increase the difficulty of budgeting prudently for the approaching retirement of the baby boom generation.
Child Credit
The Administration and the Senate Leadership each are proposing a child tax credit. The proposals differ from each other in a number of ways.
The Administration credit would be available only to families with incomes below $75,000. (The credit would be phased out for taxpayers with incomes between $60,000 and $75,000.) By contrast, families with incomes up to $150,000 could claim the Leadership version of the credit.
The Administration credit would be available to families for children under age 13, while the Leadership credit would extend to children under age 18.
The Administration credit would be $300 in the first three years and rise to $500 in 2000. The Republican credit would be $500 from the outset. On the other hand, the Administration credit would be larger than the Leadership credit in years after 2000 because the Administration would index the $500 credit for inflation in subsequent years while the Leadership version would not index it.
The Administration credit is better targeted on moderate- and middle-income families and maintains its value for those families over time. While still very costly, the Administration credit is less expensive than the Leadership credit. From 1997 through 2002, the Administration child credit would cost approximately $47 billion, while the Leadership credit would cost $109 billion. Over ten years, the relative costs are $102 billion for the Administration version and $199 billion for the Leadership credit.
Capital Gains
In contrast to the Leadership's proposal for deep cuts in capital gains taxes at a cost of $33 billion over five years and $129 billion over 10 years, the Administration has no proposal for a broad reduction in capital gains taxes. The Administration's proposal to replace the complex set of rules regarding taxes on the sale of a taxpayer's home with a $500,000 exemption for capital gains realized on the sale of a home has a comparatively modest cost of $2.7 billion over five years and 5.8 billion over 10 years.
Individual Retirement Accounts
Both the Administration and the Senate Leadership would lift the income limits for deductible IRA contributions by taxpayers who are covered by an employer-sponsored retirement plan.
The Administration proposal would gradually raise the current income limits from $50,000 to $100,000 for couples and from $35,000 to $70,000 for individuals.
The Leadership proposal would abolish the limits; it would allow any taxpayer, regardless of income or pension coverage, to make deductible IRA contributions.
The Administration also would establish a backloaded "Special IRA" similar to the Leadership's "IRA Plus." Contributions to the Special IRA would not be deductible; interest earned on funds in the account would be permanently free of tax.
Unlike the Leadership plan, however, which allows any taxpayer to make deposits in an IRA Plus, the Administration's Special IRA would be available only to taxpayers with incomes below the proposed limits for deductible IRAs (i.e., below $100,000 for couples and $70,000 for individuals). In addition, while the Leadership proposal would allow any taxpayer to roll over funds from a deductible IRA to an IRA Plus including high-income taxpayers holding funds in pre-1986 IRAs the Administration proposal would allow only taxpayers with incomes below $70,000 and $100,000 limits to make such rollovers.
The Administration would index for inflation both the $2,000 maximum IRA contribution and the income thresholds that determine who is eligible to make contributions. The Leadership proposal would not index the $2,000 contribution limit (and has no income limits). Because of these provisions, the Administration's proposal is more favorable for middle-income households than the Leadership proposal. Needless to say, it is much less favorable for high-income households.
Both plans would allow withdrawals to be made from IRAs, free of tax and the 10 percent penalty usually applied to early withdrawals, for a variety of circumstances other than those allowed under current law. Both proposals would allow withdrawals for post-secondary education expenses and in the event of long-term unemployment. The Administration proposal also would allow withdrawals for first-time home purchases, while the Leadership proposal would allow withdrawals for business start-up expenses.
The Administration's concentration of new IRA benefits on families with incomes below $100,000 reduces somewhat the cost of its IRA proposal relative to the Senate Leadership's proposal, although the cost still is significant and grows substantially over time (because of the inclusion of both backloaded IRAs and the rollover gimmick in the Administration's IRA provision). The Administration's IRA proposal would cost $16 billion over the first five years, as compared to the $33 billion cost of the Leadership proposal. Over 10 years, the Administration proposal would cost $67 billion while the Leadership proposal would cost $112 billion. By 2007, however, the differential in the annual cost of the IRA proposal is narrower; the Administration's IRA would cost $14 billion in 2007, while the Senate Leadership's proposal would cost $19 billion.
Education Incentives
The Administration and the Leadership each include a package of education tax incentives in their proposals. The two approaches to aiding education differ substantially.
The Administration would allow taxpayers to take either a tax credit or a deduction for the cost of post-secondary education and training (but not both). A non-refundable tax credit would be available for the cost of the first two years of post-secondary education, up to $1,500 per student each year. Alternatively, up to $10,000 of higher education expenses, including expenses of some skill training programs, could be deducted from gross income. The maximum deduction would not vary with the number of students in a family. These education benefits would be available only to middle-income families; they are phased out for joint filers with incomes between $80,000 and $100,000 and individuals with incomes between $50,000 and $70,000. The income limits would be indexed for inflation beginning in 2001.
The Administration proposal also includes a new 10 percent tax credit for small businesses that provide educational assistance to employees. The credit would be available for the calendar years from 1998 through 2000. In addition, the proposal expands the circumstances under which the forgiveness of a student loan is not considered income to the former student. Finally, the exclusion under current law for employer-provided educational assistance is extended through calendar year 2000.
The Leadership plan takes a different approach to education incentives. It would allow taxpayers to save funds (up to $1,000 per child per year) in education investment accounts that operate in a manner similar to how the IRA Plus accounts would function that is, contributions to these accounts would not be deductible but interest would be permanently free of tax. All taxpayers, regardless of income or use of other types of tax-advantaged savings accounts, would be eligible to make such contributions.
In addition, the Leadership proposal would allow moderate-income taxpayers to deduct interest paid on qualified education loans during the first five years that interest payments are required on the loans. This deduction would be phased out for joint filers with incomes between $65,000 and $85,000 and individuals with incomes between $45,000 and $65,000.
The Leadership proposal also would eliminate taxes on withdrawals from qualified state tuition programs that are used for education expenses and would exclude from taxation the payments students receive under federal work-study programs. Finally, the Leadership proposal would make permanent the exclusion under current law for employer-provided educational assistance; the Administration would extend this exclusion only through 2000.
The Administration's tax initiatives for education are much more costly than the Leadership proposals, despite the fact that both the deduction for employer-provided educational assistance and the credit for educational assistance provided by small businesses would expire after 2000. The Administration proposals would cost $44 billion during the first five-year period, compared to the $7.1 billion cost of the Leadership provisions. Over 10 years, the Administration's education proposals would cost $87 billion, as compared to the $18 billion cost of the education proposals contained in S. 1.
Appendix Table 1
Comparison of Cost of Administration and Senate Leadership Tax
Plans, 1997-2002
(billions of dollars)
1997-2002 |
1997-2002 |
|||
Administration | Senate Leadership |
Administration | Senate Leadership |
|
Child Tax Credit | $47.4 | $109.0 | $101.7 | $198.9 |
Capital Gains | 2.7 | 33.1 | 5.8 | 129.3 |
IRA | 15.9 | 32.6 | 67.4 | 112.6 |
Estate Tax | n/a | 18.4 | n/a | 66.6 |
Education | 43.9 | 7.1 | 87.1 | 18.0 |
Other | 7.5 | n/a | 19.3 | n/a |
Total Cost | $116.7 | $200.5 | 281.2 | 525.8 |
Offsets (potential offsets) | 73.3 | 38.0 | 150.6 | 85.6 |
Net Cost | $43.4 | $162.5 | 130.6 | 440.2 |
Sources: Joint Committee on Taxation, January 21, 1997 and February 27, 1997. The Administration's tax proposal makes the continuation of some of the tax cut provisions contingent on meeting certain deficit reduction targets. Because of this contingency, the Joint Committee on Taxation estimated the Administration's tax proposal in two ways with and without the continuation of the affected cuts. This analysis, and other references to the Clinton plan in this report, uses the estimate that assumes deficit targets are met and the tax cuts are continued. In the alternative estimate, the net cost of the Administration's plan would be $18 billion over the first five years. Over the first ten years, the Administration plan would raise $23 billion if the tax cuts sunset. |
Senate Leadership Tax Proposals:
Mushrooming Tax Cuts For High-Income Taxpayers Would
Jeopardize Long-Term Budget Integrity, by Iris
J. Lav