Citizens for Tax Justice, July 7, 1997
1. Capital Gains: Top-bracket individual taxpayers (who have most of the capital gains) would get the equivalent of a 50% capital gains exclusion (a 20% capital gains tax rate instead of the regular 39.6% tax rate). The effective percentage exclusion would gradually decline to about 30% for less well-off taxpayers.
Ignoring any increased asset sales or new tax shelters, the Senate capital gains tax cuts would cut revenues by about $87 billion over the fiscal 1997-2002 period, and by about $213 billion over the fiscal 1997-2007 period.
According to Finance Committee Chairman Roth's figures, however, the Senate capital gains tax cuts will cost a mere $2.7 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 $25.1 billion.
The $188 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 $1.1 trillion increase in capital gains realizations in response to the tax cuts--an increase of about 39% compared to expected realizations under current law! Such an increase would be unprecedented based on the historical record.
Table Showing Estimates of Capital Gains Realizations
2. Child Credits: The bill offers a $500, unindexed tax credit ($250 in 1997) for children age 16 or under (17 or under after 2002). The credit would not be allowed to the vast majority of families earning under $30,000 because it can only be used to offset income taxes, not payroll taxes, which are the main tax paid be less well-off families. The credit 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 $83.4 billion over five years and $172.1 billion over ten 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. Tax-Free Investment Income:
A. 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 school expenses (elementary, secondary, college and graduate school). There are no income limits on these accounts. The tax exemption for earnings on education savings accounts is estimated to cost $7.5 billion over five years and $25.5 billion over ten years, with an annual growth rate of about 12% thereafter.
B. Expanded retirement savings accounts: 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, $4,000 four couples) 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 officially estimated to cost $3.4 billion over the first five years, and to cost $20.5 billion over the next five years. The cost will continue to grow rapidly (by 11% a year) thereafter.
5. Estate Taxes: The $600,000 estate tax exemption would be gradually increased to $1 million (over 8 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 $10 billion annually on the less than 2% of estates that are big enough to be subject to estate taxes.
6. Excise Taxes: The expiring excise tax on airline tickets would be made permanent (with modifications). The cigarette tax would be increased by 83% (from 24-cents per pack to 44 cents). There also would be a number of other, smaller excise tax changes. The total excise tax hike is estimated to be $40.8 billion over five years and $87.6 billion over ten years. -000-
