Citizens for Tax Justice
FOR RELEASE ON Friday, November 17, 1995
Congressional "Tax Cut" Plan Unfair and Busts the Budget
Plan Hopelessly Tilted to Best-Off Americans
The House-Senate Conference Agreement tax bill would leave most families paying the same or
more in federal taxes, while cutting taxes for only a minority of all families, according to an
analysis of the plan by Citizens for Tax Justice. The analysis shows that wealthy families benefit
far more than those middle-income families who do get some reduction in their taxes.
"Congressional leaders are telling the public that their tax plan is fair because a portion of the tax
cut goes to those making under $100,000," said Michael Ettlinger, CTJ's Tax Policy Director.
"But the fact that a minority of middle- and low-income families are getting small tax cuts, while
most wealthy families are getting tax breaks averaging over $15,000 per-year is nothing to brag
about."
According to the analysis
- 64% of families would pay the same or more in federal taxes under the plan. Seventy million
families would see no tax change at all. Another 9.2 million would face tax increases, averaging
$258 a year per family, mostly because of cutbacks in the earned-income tax credit for low- and
moderate-income working families.
- Under the conference plan, the average tax cut for the wealthiest one-percent of all
families--with average 1996 incomes of $606,000--would be $10,475. The average tax cut for
middle-income families would be only $114.
- The best-off five-percent of all families would receive 44% of the total tax cut. In contrast the
bottom 80% would get only 28% of the net tax reduction.
"The congressional leaders have a strange concept of fairness," said Ettlinger. "Giving the vast
majority of the people well less than half the total tax cut is grossly inequitable."
Time Bombs Leave Balanced Budget in Doubt
The conference agreement contains several provisions that cost little over the seven-year
budget-balancing period but will cost billions of dollars in revenue beyond 2002.
These provisions include:
- Capital gains indexing. This very expensive provision goes into effect in 2002 with its costs
deferred to 2003 and after.
- Backloaded IRAs. These IRAs will gradually shelter more-and-more investment income over
time, leading to ballooning revenue losses.
- Phased in increase in married standard deduction. This deduction doesn't reach its full value until
2005.
"Even if we get to a balanced budget by 2002," said Ettlinger, "it won't last long if this tax plan
becomes law."
Creative Accounting
Nor is it clear that the legislation does actually balance the budget. Even within the budget
window, the cost of several of the tax cut provisions are significantly understated. One notable
example of this is the first year capital gains estimate which grossly understates the cost of
making the capital gains cut retroactive to January 1, 1995. The estimate used by the
Congressional leadership is only slightly lower than the estimate used for the Senate bill passed
earlier this year (+2.9 billion versus +4.2 billion). The Senate bill was not, however, retroactive
to January 1. With annual capital gains of about $150 billion it is clear that retroactivity must
cost far more than the $1.3 billion estimated--$10 to $15 billion would be a conservative
estimate.
The apparent underestimation makes worse an already indefensible provision. "There is
absolutely no justification for making a capital gains tax cut retroactive," said John O'Hare,
Director of Economic Policy for CTJ. "The evidence that capital gains tax cuts ever help the
economy is weak at best and it is obviously impossible that a retroactive capital gains cut would
spur investment. It merely gives a windfall for those who have already realized capital gains."
Tax Complication for 1996
In contrast to the retroactive capital gains tax cut for the well-off, the child credit for
middle-income families is only partially provided in 1995 (at $125 instead of $500) and to
receive it a family must file two tax returns. In addition to filing a regular tax return by April
1996, taxpayers will have to file an additional form between June 1 and August 15 to receive a
check in the amount of the credit sometime in October.
"Once again tax simplification takes a back seat to political expediency," said Ettlinger. "The
wealthy get their capital gains tax cut immediately, with no complication. middle-income
families get more forms and less money."
CTJ's analysis of the effects of the Conference Agreement was performed using the Institute on
Taxation and Economic Policy's tax microsimulation model.
Citizens for Tax Justice is a nonpartisan Washington-based research and advocacy group.
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