Citizens for Tax Justice, June 27, 1997
1. Capital Gains:
a. Individuals: The proposal would cut the top nominal capital gains tax rate from the current 28% to 20%. Taxpayers in the 15% regular tax bracket would pay a 10% rate on capital gains. In addition, starting in 2001, capital gains would be indexed for inflation (with a 3-year holding period). When indexing is fully phased in, the typical capital gains rate on upper-income taxpayers would be reduced to about 15%.
Ignoring any increased asset sales or new tax shelters, the individual capital gains tax cuts would cut revenues by about $86 billion over the fiscal 1997-2002 period, and by about $232 billion over the fiscal 1997-2007 period.
According to Ways and Means Chairman Archer's figures, however, the individual capital gains tax cuts will increase revenues by $10.4 billion over the 1997-2002 period! In addition, Archer's figures show a ten-year, fiscal 1997-2007 cost from the individual capital gains tax cuts of only $16 billion.(1)
The $216 billion difference between Archer's ten-year capital gains cost figures and the apparent revenue loss over the fiscal 1997-2002 period reflects the fact that Archer's figures assume a $1.4 trillion increase in capital gains realizations in response to the tax cuts--a permanent increase of about 50% compared to expected realizations under current law! Such an increase would be unprecedented based on the historical record.
b. Corporations: In addition to the individual capital gains tax cuts, the proposal would cut the corporate capital gains tax rate from the current 35% to 30% (32% in 1998 and 31% in 1999). Chairman Archer's figures indicate that the corporate capital gains tax cut would cost about $8 billion from fiscal 1997-2002, and another $11 billion over the next five years. Actual costs are likely to be considerably higher, however, because of unrealistic increased realizations assumed in the Archer estimates.
Table Showing Estimates of Capital Gains Realizations
2. The Alternative Minimum Tax: The corporate Alternative Minimum Tax, now paid by large, profitable companies that otherwise would owe little or no income tax, would be gutted. Likewise, the minimum tax would be weakened as it applies to individuals whose income is sheltered by business tax preferences. Archer had originally proposed completely repealing the corporate Alternative Minimum Tax, but scaled back his proposal slightly after an outcry from GOP leaders who wanted more money devoted to estate tax cuts instead.
3. Child credits: The plan offers a $500, unindexed tax credit ($400 in 1998) for children age 16 or under. The credit would not be allowed to the vast majority of families earning under $30,000 (in part because it is generally denied to working families who receive the earned-income tax credit). The credit also would be gradually phased out above $110,000 in income for couples (above $75,000 for single parents). The credit would be reduced by half of any dependent care credit claimed by single working parents and two-earner couples (this rule is phased in between $33,000 and $38,000 for single parents and between $60,000 and $70,000 for couples). In addition, the dependent care credit would be phased out under the same income phase-out rules as the child credit. The child credits are expected to cost $70.4 billion over the first four years and $80.5 billion over the next five years. Because the child credit and its phase-out are not indexed, its annual cost declines by about 3% a year after calendar 1999.
4. Education tax credits: Families would be allowed a non-refundable tax credit equal to half of college expenses up to $3,000 a year in expenses ($1,500 in credit) per eligible child, for up to two years of college per child. The credit would generally be unavailable to lower-income families, and would also be phased out between $80,000 and $100,000 in income for couples ($40,000 to $50,000 for others). The credit is estimated to cost $22.3 billion over five years, and $27.5 billion over ten years (with little or no growth thereafter).
5. Education savings accounts: Families with the means to do so would be allowed to set up education savings accounts in which accumulated earnings up to $40,000 per child would be tax-free if used to pay college expenses. There are no income limits on these accounts. The tax exemption for earnings on education savings accounts is estimated to cost $7.9 billion over five years and $24.9 billion over ten years, with an annual growth rate of about 15% thereafter.
6. Backloaded IRAs: Better-off taxpayers now ineligible for Individual Retirement Accounts would be allowed to set up a new kind of "Backloaded IRA." Contributions to the accounts (up to $2,000 a year) would not be tax-deductible, but the income earned on the money invested would be permanently tax-exempt if held until retirement. The new IRAs are "officially" estimated to be essentially cost-free over the first five years (!), and to cost $13 billion over the next five years. The cost will continue to grow rapidly thereafter (by 30-40% a year).
7. Estate Taxes: The $600,000 estate tax exemption would be gradually increased to $1 million (over 10 years), and there would be a number of other revenue-losing changes in estate taxes. When fully phased in, the estate tax cuts will slash taxes by more than $12 billion annually on the less than 2% of estates big enough to be subject to estate taxes.
8. Airline Ticket Taxes: The expiring excise tax on airline tickets would be modified and made permanent. The ticket tax and a few other small excise tax increases are expected to raise about $35 billion over five years and $85 billion over 10 years.
1. Archer's 5-year revenue gain from the proposed capital gains tax cuts, including the proposed reduction in corporate capital gains taxes, totals $2.7 billion. The individual capital gains tax cut figures reported here exclude the approximate cost of the corporate capital gains tax cuts, based on more detailed estimates by the Joint Committee on Taxation of previous capital gains tax cut proposals.
