Citizens for Tax Justice, June 18, 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.
Ignoring any increased asset sales or new tax shelters, Roth's capital gains tax cuts would cut revenues by about $83 billion over the fiscal 1997-2002 period, and by about $201 billion over the fiscal 1997-2007 period.
According to Chairman Roth's figures, however, his capital gains tax cuts will cost a mere $1.7 billion over the 1997-2002 period! In addition, Roth's figures show a ten-year, fiscal 1997-2007 cost from his proposed capital gains tax cuts of only $22.8 billion.
The $178 billion difference between Roth's ten-year capital gains cost figures and the
apparent revenue loss over the fiscal 1997-2002 period reflects the fact that Roth's figures
assume a $1 trillion increase in capital gains realizations in response to the tax cuts--an
increase of about 35% compared to expected realizations under current law! Such an
increase would be unprecedented based on the historical record.
2. Child credits: The plan offers a $500, unindexed tax credit ($250 in 1997) 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 child credits are expected to
cost $81.2 billion over five years and $86.3 billion over the next five years. Because the
child credit and its phase-out are not indexed, its annual cost declines by about 1% a year
after calendar 1998.
3. 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 $20.4 billion over
five years, and $24.9 billion over ten years (with little or no growth thereafter).
4. Education savings accounts: Families with the means to do so would be allowed to set
up education savings accounts and contribute up to $2,000 a year to them. Accumulated
earnings 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 $5 billion over five years and $18.1 billion over ten years, with an annual growth rate
of about 14% thereafter.
5. 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. In addition, the
current income limits on deductible IRAs would be doubled. The IRA changes are estimated
by Roth to cost $3.3 billion over the first five years, and to cost $20.6 billion over the next
five years. The cost will continue to grow rapidly thereafter.
6. Estate Taxes: The $600,000 estate tax exemption would be gradually increased to $1
million (over 11 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 $13.5
billion annually on the less than 2% of estates that are big enough to be subject to estate
taxes.
7. Airline Ticket Taxes: The expiring excise tax on airline tickets would be made permanent (with modifications), and there would be a number of other, smaller excise tax changes. The total excise tax hike is about $7 billion a year in 1997 dollars.