Senate Leadership Tax Proposals:
Mushrooming Tax Cuts For High-Income Taxpayers
Would Jeopardize Long-Term Budget Integrity

Endnotes

1. Most of the Leadership's tax proposals are included in S.2, the "American Family Tax Relief Act." Tax breaks for higher education expenses are included in S.1.

2. Joint Committee on Taxation, January 21, 1997. The five-year and ten-year costs cited here include small amounts shown for fiscal year 1997. If the legislation were to be enacted in late summer or early fall of 1997, the costs the Joint Tax Committee shows for fiscal year 1997 would likely become additional costs in fiscal year 1998.

3. In this comparison, the cost of the new Leadership tax cuts from 1997 through 2006 is compared to the cost of the conference agreement tax cuts for the years from 1996 through 2005. The cost of the 1995 conference agreement is adjusted for inflation so it can be compared with the current proposal. (The costs of the Leadership plan for 2007 are not included in this comparison because comparable costs for the tax cuts in the 1995 conference agreement -- i.e., costs for 2006 -- are not available.) Cost estimates are from Joint Committee on Taxation, January 21, 1997 and November 16, 1995.

4. Joint Committee on Taxation, 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.

5. Microsimulation models utilize a large sample of taxpayers to study the revenue and distributional effects of potential tax changes. The ITEP model is similar to the models used for this purpose by the Joint Committee on Taxation and the Treasury Department.

6. Estimates for S. 1 and S. 2 are from Joint Committee on Taxation, January 21, 1997. The "five-year" estimates include the costs in fiscal years 1997 through 2002, while the "ten-year" estimates are for the years 1997 through 2007. Costs in fiscal year 1997 are modest, amounting to $5 billion.

7. The analysis of the effects of the proposed child tax credit was done by the Center on Budget and Policy Priorities using unpublished data from the Congressional Budget Office.

8. For simplicity, the entirety of S. 1 is considered here as "middle-class" tax relief. Some portions of S. 1, however, would more likely be used by higher-income families; that would probably be true of the Bob Dole education investment accounts, for example, which are similar to backloaded IRAs. A description of the Bob Dole accounts can be found in the section of this paper on IRAs.

9. Some of the resulting taxes might be paid as estimated taxes during calendar year 1997. The bulk would be paid when final tax returns for the year 1997 were filed in early 1998. For a principal residence, indexing would apply to periods after January 1, 1997 without the payment of tax on the increase in the value of a residence between the time of its purchase and January 1, 1997.

10. Joint Committee on Taxation, Distributional Effects of the Administration's Capital Gains Proposal, February 3, 1992 and Joint Committee on Taxation, Distributional Effect of Indexing the Cost Basis of Certain Capital Assets, February 18, 1992.

11. Senators Roth and Breaux have introduced a separate IRA plan that goes one step further. The Roth-Breaux plan allows all taxpayers, including those already making maximum contributions to a 401(k) or a similar plan, to make deductible contributions to a regular IRA account on top of their contributions to their other pension or retirement plans.

12. Under the 1995 legislation, there would not have been income limits on contributions to backloaded IRAs, but the income limits on deductible IRAs were retained.

13. The Bob Dole education accounts cost an additional $1.8 billion over the first five years, rising to $3.8 billion in the second five-year period.

14. Joint Committee on Taxation, Description and Analysis of Tax Proposals Relating to Individual Savings, February 8, 1995, p. 38.

15. These data are based on Joint Committee on Taxation estimates from 1989. The Joint Committee has not provided similar data since then. The data are based on 1990 income levels and tax laws and on a proposal to make IRA's 50 percent deductible for taxpayers who lost deductibility under the Tax Reform Act of 1986. These estimates are likely to understate the share of benefits received by high-income taxpayers, because the 1993 budget reconciliation act raised the marginal tax rates on the highest-income Americans and therefore increased the tax benefits of IRA contributions for this group.

16. Under current law, the estate tax on some qualified closely-held businesses can be paid in installments over a 14-year period, and a special low interest rate may apply to the deferred tax attributable to the first $1 million of the business valuation.

17. Statement of Leslie B. Samuels, Assistant Secretary for Tax Policy, before the Committee on Ways and Means, U.S. House of Representatives, January 10, 1995. In testifying on the Contract with America proposal to exempt the first $750,000 of an estate, the Treasury Department noted that only one percent of estates exceed $600,000 in value and that only half of one percent of all estates would be taxable under the proposed increase in the exemption to $750,000. Thus, it is reasonable to assume that significantly less than one-half of one percent of all estates would be taxable under the current proposal to raise the exemption to $1 million.

18. Under current law, the value of the credit $600,000 exemption as well as the benefit of a graduated rate schedule for estate taxes is phased out fully for estates valued at more than $21 million. The phase-out range would extend to a somewhat higher estate valuation under the proposed provision that would raise the exemption to $1 million.

19. The 1995 bill also included a reduction in the so-called marriage penalty, incentives for adoption and home care for the elderly, reductions in the Alternative Minimum Tax, a variety of health care related incentives, and tax breaks for small businesses. Non of these provisions is in the current proposal.

20. 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. The five-year and ten-year costs cited here include small amounts shown for fiscal year 1997. If the legislation were to be enacted in late summer or early fall of 1997, the costs shown for fiscal year 1997 would likely become additional costs in fiscal year 1998.

Senate Leadership Tax Proposals: Mushrooming Tax Cuts For High-Income Taxpayers Would
Jeopardize Long-Term Budget Integrity, by Iris J. Lav

Appendix