LC I5/Z » Pgggzgw - __1___ /. .R.AR*{ B ?“?OC/5 “ "‘ '=m+:~:?r~3§t*s£3'”ff;":"‘ U"NerSm"' N ‘ _ ,3, T/‘.,;¢-:1 V :.7w‘B.'f‘?."!.3 U 3%: :;:..,. i“;a.l:‘.;;> a E ‘if Issue Brief Nov 17 1989 3.: .“"’ .»;f‘V H r*"-=; .. E ‘ _,; ,¥.! 1:‘, Y~;.~,__.. ~g -an x.‘ Lfifi _f£,,;_-3‘ ,1‘ "1'; rd 5;1..n*h:D —v ...-no-..-.. .. nag ~- as w . . _1,. ’ \ . L...‘ \ ~‘ CONGRESSIONAL RESEARCH SERVICE LIBRARY OF CONGRESS TAX CUT PROPOSALS IN THE 96TH CONGRESS ISSUE BRIEF NUMBER IB79095 AUTHOR: Newton, Cheryl Savage Economics Division THE LIBRARY OF CONGRESS CONGRESSIONAL RESEARCH SERVICE MAJOR ISSUES SYSTEM DATE ORIGINATED ggzgggzg DATE UPDATED Q1g1§g§Q FOR ADDITIONAL INFORMATION CALL 287-5700‘ 0718 CRS- 1 IB79095 UPDATE-O7/15/80 l§§Q§-2EElElIIQE Tax reductions are often advocated to help resolve a number of current economic problems. The current recession, long-term trends in productivity and capital formation, a rising aggregate tax burden due to inflation and payroll increases, and concern over incentiyes to work, save, and invest have given rise to a broad range of tax cut proposals. And, while tax legislation has frequently been a major topic on the agenda of recent sessions of Congress, the current debate signifies a shift in congressional priorities i tax policy. Stimulating investment has taken precedence over more traditional tax reform measures and tax relief for low income individuals. §A§E§EQQ!2-AEQ-£QLl§Z.AEALl§l§ The major reasons advanced -for a tax cut (short-term macroeconomic stimulus, longer-term investment incentive, etc.) are assessed in the first section of this issue brief. The second section presents the tax cut proposals that have gained the most prominence in this session of Congress. The final section reviews recent tax cuts already passed by Congress. 1 TEX CUT AS A SHORT-TERM MACROECONOMIC STIMULUS §2§s-£9r-a-:az-92: It is argued that a tax cut is necessary to offset the effects of an economic downturn. The moderate recession originally predicted to arrive in 1979 is upon us at last. June 1980's 7.7% unemployment rate, continuing doldrums in the housing and auto industries and the much-anticipated decline of the prime interest rate after its unprecedented climb to 20% all combine to indicate that the economy is in a slump. It would be difficult for consumers, generally credited with delaying a recession until this time, to spend the Nation out of the recession. Consumer saving rates are already at low levels; inflation and the Administration's credit controls (now in the process of being eased) all serve to cut consumer purchasing power. Furthermore, the University of Michigan Survey Research Center survey of consumer attitudes reports that in March 1980, the consumer sentiment index fell to 56.5, the lowest point ever recorded by the survey. Fiscal policy, based on current law, will become tighter over the next two years and thus will contribute to slower growth in total demand. This can be seen by examining the trend of the full employment deficit, which adjusts the actual deficit for automatic changes in Federal spending and tax revenues due to decreases in unemployment. In its report on the 1981 budget, CBO estimated that in FY78 and FY79, the full employment deficit amounted to 3 ‘.9 and $0.9 billion respectively. For FY80 and FY81, CBO estimated that full employment surpluses will run to $7.0 and $51.9 billion, respectively, if there are no changes in current Federal policy. Slower spending growth and faster increases in personal income taxes account forxthe swing in fiscal policy towards restraint. Many economists are speaking out with increasing urgency on the necessity of reducing fiscal drag caused by inflation-induced tax increases. cns- 2 IB79095 UPDATE-O7/15/80 Of all the possible macroeconomic policy tools, tax reductions are often advocated as the appropriate selection. Expanding the money supply and increasing government expenditures can also be used as countercyclical policies. Although monetary policy is favored by some, the Federal yReserve Board is not thought to have much discretion in responding to a recession. constraining their policy moves is the necessity of restraining growth in the money supply to control inflation and maintaining high interest rates to support the dollar in foreign exchange*markets:r—SomerincreaserinrrGovernment expenditures will take place automatically (for example, unemployment compensation), but discretionary changes in response to Athe recession are ruled out by some observers and policy makers. A general desire to reduce the share of GNP devoted to the Federal Government is sometimes cited as a reason, as is the perceived ineffectiveness of some stimulative spending programs. Also, reducing the higher level of expenditures, once the need for them has passed, is thought to be difficult. Thus, the goal of balancing the budget is threatened, and the higher level of spending may lead to greater inflation. some targeted countercyclical spending programs have received support, however, and some studies have found them to be better countercyclical stimulants. In contrast to these options, tax policy is seen by many as less constrained. Also, taxes are viewed as contributing to the expected drag on the economy. Inflation, by increasing nominal incomes, leads to heavier tax burdens. Payroll taxes are rising moderately in 1980 and are scheduled to rise more substantially in 1981. Finally, some tax cut proponents suggest that a properly designed tax cut can be anti—inflationary. §e§e-292i2§L.e-:e;.92: Opponents of a tax cut have urged that there be no macroeconomic stimulus, or that Congress wait for further indications of a more severe recession. Most economists have predicted that the recession would be more moderate than the 197u-75 recession. Unlike that period, the current economy is not characterized by an abnormally excessive buildup of inventories that would lead to sharp cutbacks in orders from producers. some now predict that the recession will be longer and more severe in light of the effects of recent high interest rates and the imposition of credit controls. Tax cut opponents nevertheless insist that the recession should be allowed to run itsi full course to break inflationary expectations. Indeed, it is very commonly claimed that the current recession is needed and was deliberately induced by the Administration in an effort to halt the inflationary spiral. Rather than offset the decline in demand through a tax cut, opponents of a itax cut would prefer to use the weakening of demand to dampen inflation and inflation expectations. Even with the stalled economy, CBO forecasts the CPI to increase 8.6 to 10.6% from the nth quarter of 1979 to the nth guarter of 1980, and 8.3 to 10.3% during 1981. Compared with other recessions, neither inflation nor anticipated inflation has been as high. Thus, past macroeconomic policies are not viewed as a guide to appropriate policies in the current situation. Foregoing a tax cut would allow the achievement of a balanced budget sooner than would otherwise be possible. This goal is sought as part of anti—inflation and capital formation policies. Uncertainty over economic forecasts adds to the reluctance to enact a tax cut. Unless enacted substantially before the low point of the recession, which may well already have passed, any tax cut may take effect in the upswing of the business cycle and thus fioverhead" the recovery. luflerieu eseesz CR5’ 3 IB79095 UPDATE—07/15/80 The relationship between budget deficits and inflation is an important i *ue in the tax cut debate. some tax cut advocates claim that current inflation is not due to excess demand in the economy but rather to cost-push factors. As a result, increasing aggregate demand by increasing the deficit would not be inflationary particularly when unemployed resources would otherwise exist. other tax cut supporters claim that specially designed tax cuts may evoke expansions in supply that would prevent increased inflation, although the size and speed of such supply expansions are questioned. Opponents of a tax cut cite some gains that could be made in reducing inflation by slack demand. Moreover, by indicating that it will not always act to maintain output and employment at high levels regardless of wage and price levels, the federal government may change expectations and moderate private wage and price setting. Finally, some economists argue that deficits are inflationary because of their impact on monetary policy decision making. Q2§;9e§_£2r-e.292n§er21slisel-:22-22: If Congress determines that a countercyciical tax cut is necessary, a wide variety of options is available. The most effective tax cut is one that increases aggregate demand quickly. For this reason, tax cuts for individuals are often preferred over business tax reductions because the latter influence demand with a much longer lag than tax cuts aimed at consumer spending. There is debate over the relative effectiveness of temporary and permanent tax reductions. Business tax cuts may be more appropriate in long run economic policies. In sum, many unresolved issues surround the case for a tax cut to s imulate the economy. The near-term outlook for the economy, the effect of budget deficits and a recession on inflation, and the ability of Congress to design an effective tax cut are considerations that have prevented a consensus from developing on this issue. ‘ TAX CUT AS AN INVESTMENT INCENTIVE §ea§9n__£2r-22re-inVestzent Tax reductions have also been advocated to stimulate capital formation. This section discusses the various reasons given for increasing business investment and the appropriateness of tax policy as a method of accomplishing this goal. The rate of growth of real business spending for plant and equipment slowed sharply in 1979, growing only 1.7% from the nth quarter of 1978 to the nth quarter of 1979. In contrast, growth in 1978 was 10.5%. Other arguments for investment incentives focus on future needs for more capitall formation. A major reason advanced for greater investment is improved productivity growth. Growth in labor productivity has slowed considrably in the 1970s. According to the 1980 Economic Report of the President, from 1973 to 1978, the rate of growth in output per manhour in the private business sector was only 0.8%. This figure compares with 1.6% from 1965 to 1973, 2.4% from 1955 t’ 1965, and 2.5% from 1908 to 1955. Although there ,is controversy among ey4D0IiStS over the role of investment spending in this decline, it is hoped that by increasing the amount of capital per worker, a higher rate of capital formation could improve labor productivity. By increasing productivity growth, the prospects for growth in real incomes and lower rates of inflation are enhanced. CRS- 4 IB79095 UPDATE-07/15/80 More business investment is thought to be necessary to accomplish various social goals. These goals include a cleaner environment, greater worker safety and health, a more secure energy position, and high levels of employment. Reaching these goals may require a greater share of GNP devoted to investment, at least in the next few years. The need to enhance the productive capacity of the economy is also offered as a"féason’for“m6ré”buSinéSs ifivésfient. “such a poIiEf”E6fiIJ%avo1H"capacity bottlenecks that contribute to inflation and prevent the attainment of full employment, it is claimed. some analysts contend that the current tax system discourages investment, thus inhibiting the supply side of the economy. other analysts take issue with these arguments, claiming they ignore the ability of the economy to adjust to various shortages. Also, the tax code contains many important investment incentives that push the effective tax rate on new investments below the statutory tax rates. Citing one or more of these reasons, many economists and members of Congress have accepted the need for additional capital formation, although the perceived magnitude of the problem varies. Much controversy exists over the most effective means to stimulate business investment. An important issue is a determination of what might be inhibiting business investment. Generally, investment may be low because of an inadequate supply of savings or an insufficient demand for investment. Different policies can be designed to accommodate either problem. §222l1-2:-§ezi29§ A sufficient amount of total savings in the economy is necessary for business to finance the acquisition of real assets. The decline in the savings rate of individuals is often cited as a factor in the inadequate rate of capital formation. As a percent of personal disposable income, personal savings declined sharply in the mid-1970s. That many forms of savings yield low or negative real after-tax rates of return is cited as la major cause. Skeptics of this argument note that most business investment is financed by business savings, not individual savings. Thus, it is not surprising that indications of a general shortage of savings, such as high or rising_ inflation-adjusted interest rates, are not present. There are several ways to attempt to raise total savings. One method is to maintain full employment of resources in the economy. Operating at less than full capacity reduces national income, which is one of the most important determinants of savings. Another method often suggested is to exempt from taxation the return to saving. It is alleged that personal income taxation reduces savings by lowering the after-tax return on savings. The sensitivity of personal savings to higher rates of return is a source of controversy among economists, so the impact of such a policy change is not easily* predicted. Moreover, if the exemption is only for certain types of savings, the effect may be to redirect savings to favorably treated assets but not to increase total savings. Finally, government could increase savings directly- by running a surplus. The demand for funds to finance business investment is the other factor that may be inhibiting growth in the capital stock. The willingness to invest depends on the profitability of new investment, so expected economic growth and taxes are important determinants. The effect of inflation on the measurement of taxable business income is said to result in the overtaxing of CBS- 5 IB79095 UPDATE—O7/15/80 iinvestment when both corporate income taxes and personal income taxes paid on investment income are considered. Focusing only on the corporate income tax, L Jever, the inflation-adjusted tax liability of many corporations is lower than statutory tax rates. This happens because inflation lowers the real cost of corporate debt, but corporations are allowed to deduct the full nominal cost. Therefore, taxable income is understated and corporations pay less taxes as a result of inflation. Also, special investment incentives, such as the investment tax credit, lower the effective tax rate on corporations. For many firms, these factors offset higher taxes due to the effect of inflation on the measurement of depreciation and inventories. Thus, the effect of inflation and taxes on the willingness of businesses to invest is not clear. Increased risk involved with investment spending may also have reduced the willingness to.invest. Many sources of greater risk in the 1970s have been cited, such as uncertainty over future output and price levels, the price and availability of energy, government regulations and the heavy debt load that businesses are carrying. ' Several opportunities exist for government to attempt to increase the desire of businesses to invest. Because a firm's investment demand is strongly influenced by the expected demand for the additional good or service produced by the investment, maintaining full employment and economic growth enhances the prospects for new investment. In addition, several types of business tax reductions could lower the effective tax rate on new investments. Corporate tax rate reductions, accelerated depreciation, adjustment of depreciation allowances for inflation, and increases in the 1 /estment tax credit are often proposed. Increases in the profitability of new investments do not automatically translate to more investment, however. For example, if the supply of loanable funds (total savings) is not affected by the policy change, then an increased demand for investment may only increase interest rates. Einan.i29.in1e§t-e2t-insen:izes The method of financing tax reductions designed to stimulate‘ capital formation may be an important factor in the effectiveness of the policies. Host discussions of tax cuts assume that expanded deficits would be used to finance any tax reduction. Rather than run a deficit, the Federal Government could reduce expenditures or raise other taxes. A higher deficit is often thought appropriate for countercyclical tax cuts but may not be appropriate for investment incentives, as the deficit may reduce total savings available for private investment. This is the case if the economy is at or near full employment. In this situation, an offsetting reduction in expenditures or an increase in other taxes may be a better way to finance investment incentives. A value—added tax is sometimes suggested in this context. If, however, the economy is operating at less than full employment, many economists believe that excess savings exist, so a deficit would not necessarily crowd out investment. OTHER REASONS GIVEN FOR A TAX CUT Two other reasons have been advanced for enacting a major tax cut in the 96th Congress. one is to restore effective tax rates to levels» consistent with historical trends. The other is to provide additional work incentives. Each of these reasons will be discussed briefly. ghigh rates of tax 7 highe inflation-induced so the overall level of personal income taxation has remained roghly constant. Because of recent inflation, the level of taxation has risen more rapidly than in the past, so another tax cut is thought necessary to maintain historical levels of taxation. Another factor that tended‘ to purchasing power is the payroll tax, ' increases scheduled over the next several years. If concern over the aggregate tax burden motivates a tax cut, the macroeconomic outlook should influence the method of financing the tax reduction. For example, if some macroeconomic stimulus is needed, then lowering taxes could be financed by a deficit to stimulate the economy. If, however, the existing economic situation does not call for stimulative policies, a deficit would be inflationary and a reduction in expenditures may be more appropriate. economy is not viewed as the primary reason for a tax cut, it should be considered when ietermining how the tax cut will be financed. Restoring work incentives is also viewed as a reason for a tax cut. ?roponents of such a tax cut Existing rates ire thought to be too high and thus deter workers from expanding their total rork effort. Some adherents of this view claim that reductions in marginal ates would not increase the deficit because the greater work effort would uestion both hough the after-tax wage earned ax rates are lower, workers also have more after-tax income. Increases in ncome are often thought to lead to reductions in work effort. Even if axpayers would work more, skeptics suggest the additional work will not enerate significantly greater tax revenues. ‘ w FORMS OF TAX CUTS Several types of tax reductions have received support in the 96th wngress. A few of the more prominent proposals are reviewed here. 222r9ll-Iez_B2Q29:;9n§ Payroll tax recei ts in recent years have been the fastest growing mponent of Federal revenues. The Social Security Amendments ~of 1977 stituted nigher payroll tax liabilities on both employers and employees to ' ' In 1980, ' taxable base In 1981, the maximum taxable base will rise to $29,700 1 the tax rate will rise from 6.13 to 6.65% (to 13.3% for employer-employee ' ' ' ' have taken many :ms, including a rollback to previous levels, postponements or cancellation scheduled increases (with possible general revenue financing of some ial security benefits), and income tax credits for a portion of «payroll es. A major stated advantage of reducing the payroll taxes paid by employers the reduction in inflationary pressures in the economy. Believing that t firms set prices according to a standard mark-up over costs, proponents Opponents of such a tax cuti \. .A\~ / CRS- 7 IB79095 UPDATE-07/15/80 of payroll tax cuts cite the contribution of payroll taxes to labor costs and t 5 to inflation. Preventing further increases or reducing current levels would remove an inflationary force in the economy. Lowering employees‘ contributions is thought to be a means of offsetting the decline in consumer purchasing power. Therefore, a payroll tax reduction could be an effective countercyclical stimulus. Because the payroll tax falls most heavily on moderate and lower income people, a reduction would be targeted to those groups most adversely affected by higher energy prices. Also, increasing the after-tax incomes of workers may moderate demand for wage increases, thus slowing the wage-price spiral. A potential drawback to a change in the payroll tax system is the threat to the solvency of the Social Security System. Payroll tax increases were scheduled so that future social security obligations could be met. As a recent CBO report noted, even the planned revenue flow may not be sufficient. The possibility of insolvency has prompted many alternatives by payroll tax cut advocates. Some, believing that contributions to the trust fund based on existing tax rate and wage base would be sufficient over the next few years, propose only potponing planned increases until later. Others suggest financing some benefits, such as the health insurance component, through general revenues. Another alternative is indirect general revenue financing that would be accomplished by income tax credits for part or all of payroll tax payments. — §§EiE§l-§9§$.B§§9!§£1 Proposals to simplify and speed the process of capital cost recovery in the tax system have received support in Congress. Capital cost recovery refers to the procedure through which businesses deduct the cost of equipment and machinery in determining taxable income. Currently, the annual deductions, referred to as depreciation allowances, are determined by allowable rates of depreciation and the useful life of the asset. In addition to straight-line depreciation, which providesi equal annual deductions, current law allows various forms of accelerated depreciation, which allows businesses to deduct more of the asset's cost earlier in the asset's life. Useful lives for different asset types are specified in the tax code, although taxpayers may elect the class life asset depreciation rage (ADR), which allows them to deduct the cost of the asset over a life 20% greater or less than the useful lives listed in the tax code. A number of alternatives to this system have been proposed. One would iincrease the ADR to 30% or fl0% from 20%. The primary effects of this provision would be to allow businesses to recover the cost of investment and to increase their cash flow, so it is hoped that expanded ADR would stimulate business investment. A drawback of this proposal, according to its critics, is that it retains the undesirable features of ADR, which include administrative complexities that are especially burdensome for, small businesses. Also, opponents question the magnitude of the additional investment that might result. Another proposed change in the tax life of an asset would abandon the useful life concept and in its place establish three or four categories of assets. within these categories all assets would be depreciated overt the same life. These proposals are often called the "1025-3" or’ ”10—5-3-1" plans, referring to the tax lives attached to each category. Assets are usually grouped into structures, machines and equipment, and cars and light—duty trucks. Some plans establish a fourth category for CRS- 8 IB79095 UPDATE-07/15/80 I government-mandated investments. In addition to providing faster recovery for more assets, an advantage of the plan is its simplification yr‘ depreciation policy, according to its proponents. Although the initia_ revenue loss is moderate, critics point to the substantial revenue losses that will result in the near future and to the possibility that investment will not be stimulated significantly by the proposal. Indexing depreciation allowances is also suggested. Existing allowances are based on original cost, but with rising price levels it is charged that the deductions do not adequately reflect the costmoflcapitalfland donnot_allow for replacement of assets. Because deductions are understated, taxable income and thus tQtal taxes are higher. This may be discouraging investment, although it is noted that various investment incentives, such as the investment credit and accelerated depreciation, have largely offset the failure to index. Also, it is argued that depreciation should not be indexed without consideration of other aspects of business and individual taxation affected by inflation. ‘ Taz-§elie£-£9r-§ezer§ A number of bills have been introduced in the 96th Congress to provide tax breaks for savers. The bills range from a substantial exclusion for returns from all forms of saving (e.g., dividends, interest, capital gains) to tax relief for interest from savings accounts only. Many variations on these proposals exist. The general purpose is to stimulate capital formation through increased savings. Another justification, usually used for proposals restricting benefits to savings account interest, is that the combination \ inflation, regulations on the interest rate paid on these accounts, and taxation have produced negative rates of return, after taxes and inflation. Individuals with such accounts are thought to deserve tax relief. Opponents of some of these proposals voice considerable skepticism over the ability of government to increase savings through tax breaks. Further, inadequate personal saving is not viewed as inhibiting business investment by some of these critics. ;nfla2;9m-Ta§.§edu2:i9n§ Various schemes to use the tax system to reward moderate wage and price increases or to penalize excessive increases have been advocated. Because much of the recent inflation has been ,in food and fuel products, it is thought that incentives are necessary to prevent these price increases from influencing demands for higher wages and thus escalating the wage-price spiral. A form of the Real Wage Insurance Program, which was proposed by the Administration earlier in the year, has been suggested. This program offered tax cuts for workers who accepted wage increases below the Administration's wage guideline. Other plans, collectively referred to as taxébased incomes policies, include tax incentives or penalties, on either firms or workers, to encourage anti-inflation behavior. Opponents of such plans cite possible revenue losses and distortions in the economy as potential drawbacks. Lnéezasiem Inflation has been shown to increase effective tax rates on both individual and business income, although for very different reasons. Higher individual income tax burdens arise because many items in the tax code, such cns- 9 1379095 UPDATE-07/15/so as the tax bracket boundaries and various deductions and credits, are fixed i’ nominal terms. with inflation, the real value of these items declines, resulting in higher tax liabilities. Many members of Congress have submitted bills to adjust these items annually to the rate of inflation to avoid overtaxation. Opponents of indexing the personal income tax argue that Congress has always acted to reduce higher tax burdens due to inflation through periodic tax cuts. Further, the tax code would no longer act as an automatic stabilizer in the economy when excess demand inflation arose. whether or not Congress would pass the necessary _tax increases in such situations is doubted by opponents of indexation. It is also argued that Congress may have a weakened resolve to fight inflation if the tax code were indexed. The primary problem created by inflation in business income taxation is the measurement of taxable income. Measuring depreciation allowances, inventories, capital gains, and financial assets and liabilities is difficult with inflation. Most distortions tend to raise tax liabilities, except in the adjustment for interest payments, where inflation tends to lower tax payments. No consensus exists on the proper adjustments for complete correction for inflation, and partial adjustments are often opposed. Yet many proposals for indexing depreciation, capital gains, and inventories have received wide endorsement. !ar9i2e;-:az.§a:e-Beéus:i92§ Major tax cut legislation in recent years has focused on raising the s indard deduction and personal exemptions and instituting various forms of general tax relief. The marginal tax rates.generally remained intact from 1964 until they were changed in the Revenue Act of 1978. Proposals to reduce marginal rates by 10% annually for three years gained considerable support in the 95th Congress, and similar efforts are underway in the current session. Structuring a tax cut in such a way is argued to provide substantially greater work incentives and, through feedback effects, not incur loss in federal revenues. Opponents of the proposal voice skepticism over these claims and express concern over the potential inflationary impact of relying on such feedback effects. A §arria9e-£emelt2 Another topic that has received attention in the 96th Congress is the marriage penalty. This refers to the features in the tax system that produce tax liabilities for two working individuals that are higher when they marry than if they were to remain single. This result is objected to on social and economic grounds, although it is consistent. with certain goals of ,income taxation. A frequent proposal is to allow married couples to file separately as singles if they desire. Another alternative would be a special credit or deduction for working couples. ‘ 9229;.§2§ims§§_Ia§.Be§u-:i92§ Various business tax reductions have been proposed by members of Congress and economists. Among these proposals are further, reductions in the corporate tax rates, tax credits for research and development expenditures, energy production incentives, and various tax relief measures targeted at small businesses. cn s-10 11379095 UPDATE-0 7/ 15/80 HAJOR TAX BILLS IN THE 19705 Congress has enacted several major tax bills in the 1970s, often for countercyclical purposes. Host followed the pattern set by the Tax Reform Act of 1969, which combined tax relief aimed primarily at low income taxpayers with significant tax reform measures. Recently, however, the focus of tax policy debate has shiftedtfrom these:goalstttotstimulatingtteconomic growth and capital formation. The first major act of the 1970s was the Revenue Act of 1971. Chief among its provisions were changes in the standard deduction and personal exemption, reinstatement of the investment tax credit, and enactment of a credit for hiring work Incentive Program participants. Revenue losses for FY72, FY73 and FY74 were, in order, $4.4, $6.9, and $6.1 billion. Two major tax bills were passed in 1975. The first was the Tax Reduction Act of 1975, intended to stimulate the economy during the 1974-75 recession. Revenue losses for FY75 and FY76 were $10.5 and $10.7 billion, respectively, and were mostly concentracted in individual tax reductions. The Act included a rebate on 1974 income taxes, increases in the standard deduction and general tax credit, creation of the earned income credit, and a home purchase credit. Business tax changes included an increase in the investment credit, changes in corporate tax rates, and repeal of percentage depletion for major oil companies. The Revenue Adjustment Act of 1975 was passed late in t‘ year, accounting for a revenue loss of $6.1 billion in FY76. Again, most 6; the tax cut went for an extension of previous individual tax cuts. Cogress enacted sweeping changes in the tax code in the Tax Reform Act of 1976. The changes resulted in a net tax cut of $15.7 billion in FY77, with $17.3 billion in revenue losses from extensions of previous tax cuts and $1.6 billion in revenue gains from tax reform provisions. Two major pieces of tax legislation were passed in 51977. The Tax Reduction and Simplification Act of 1977 lowered taxes by $17.8 billion in the 1978 fiscal year. Individuals received $14.2 billion and businesses $3.6 billion. The Social Security Amendments of 1977 instituted higher tax ‘rates and taxable wage bases to finance future benefit payments. The Revenue Act of 1978 marked a change in Congressional tax policy priorities. Although it was partly a countercyclical measure and individuals received roughly two—thirds of the benefits, capital formation became a more prominent goal through enactment of a significant capital gains tax cut. In addition, the top corporate rate was reduced from 48% to 46%, and a progressive rate structure was instituted for corporate income less than $100,000. On the individual side, the zero bracket amount (the standard deduction as incorporated into the tax tables) and the personal exemption were raised and the tax brackers were widened. The distribution of benefits over different income classes was more skewed towards middle and upper income groups relative to other tax cuts in recent years. Total revenue loss in 1979 is expected to be $18.9 billion. H.R. 365 (Gradison, et al.) Amends the Internal Revenue Code to reguire an annual cost-of-living cns—11 0 1379095 UPDATE-07/15/80 adjustment, based on the Consumer Price Index, to the individual income tax r es and personal exemption. H.R. 785 (Weiss, et al.) Amends the Internal Revenue Code to exclude from gross income up to $1,000 ($1,500 for joint returns, $750 for married individuals filing separately) of the interest earned from savings accounts. Reduces the amount of such exclusion, dollar for dollar, by the amount the taxpayre's adjusted gross income exceeds $10,000 ($15,000 for joint returns, $7,500) for married individuals filing separately). 0 H.R. 1u29 (fioore, et al.) Amends the Internal Revenue Code to exclude from gross income up to $100 of the interest earned on a savings account. ‘ H.R. 3609 (Fenwick, et al.) Amends the Internal Revenue Code to tax income of married individuals filing tax returns separate from their spouses at the same rates applicable to unmarried individuals- A H.R. #606 (Jones, J., et al,) Capital Cost Recovery Act of 1979 - Amends the Internal Revenue Code to rctise the method for determining useful. lives of business assets for purposes of computing allowable depreciation deductions. Replaces the asset depreciation range (ADR) method with a schedule of capital cost recovery periods for three classes of business property. Establishes capital cost recovery periods for the following classes of business property: (1). buildings and their structual componenets, ten years; (2) tangible property, five years; and (3) automobiles, taxis, and light—duty trucks (up to $100,000), three years. Allows a ten percent investment tax credit for buildings and tangible property, and a six percent credit for automobiles, taxis, and light duty trucks. Requires the recapture of depreciation amounts and investment tax credit amounts applicable to assets which are sold or otherwise disposed of prior to the expiration of the capital cost recovery period. Permits taxpayer to deduct less than the full allowance for capital cost recovery in any taxable year. Permits a carryover to succeeding taxable years of any unused depreciation amounts. Disgualifies capital cost recovery property from the allowance for first year depreciation. Treats amounts claimed as the capital cost recovery of nonporporate lessors as an item of tax preference for purposes of the minimum tax. ' Adopts as an accounting practice the "half year convention" under which i ‘estments eligible for capital cost recovery treatment or the investment tax credit which are made at any time during the taxable year are deemed to be made in the middle of such year. H.R. fl87fl (Gephardt, et al.) Amends the Internal Revenue Code of 195a to provide an income tax credit cns-12 13790 95 UPDATE—0 7/ 15/30 for Federal Insurance Contributions Act taxes paid in 1980 and 198’ Provides a 20% credit against income taxes for payroll tax payments in 190a and 1981. H.R. 5050 (Conable, et al.) Amends the Internal Revenue Code of 1954 to provide for individual income tax reductions, to provide a system of capital recovery to encourage *investmentWand*economic*growth,Wand to reduce social security taxes. Reduces individual income tax rates, indexes personal income tax, freezes payroll taxes, and provides for more accelerated inspection. H.R. 6707 (Archer) Amends the Internal Revenue Code to exclude from gros income interest or dividends earned on savings deposits which are used by the deposit institution for residential mortgage lending purposes. H.R. 7015 (Ullman) Amends the Internal Revenue Code to (1) lower individual and corporate income tax rates and social security tax rates; (2) provide tax incentives for investment in the common stock of domestic corporations; (3) revise tax rules for computing depreciation; and (H) impose a value added tax on sales of property and services. Amends the Congressional Budget Act of 1970 to limit Federal expenditure- to specified percentages of the gross national product for fiscal years after 1980. H.R. 7006 (Gephardt) Social Security Payroll Credit Act of 1980 — Amends the Internal Revenue Code to allow employers, employees, and self-employed individuals an income tax credit equal to ten percent of the amount of social security taxes paid by such individuals in 1981 or 1982. H.R. 7655 (Conable et al.) Amends the Internal Revenue Code to provide for permanent tax rate reductions for individuals and incentives for new plant and equipment. 5. 12 (Dole, et al.) Tax Equalization Act - Amends the Internal Revenue Code to require annual cost-of-living adjustments to personal income tax brackets and the personal exemption. S. 231 (Bentsen, et al.) Amends the Internal Revenue Code, with regard to income tax deductions f depreciation, to increase,i in any reasonable allowance, the permissible variance from a particular class life from 20 percent to 30 percent. Permits the taxpayer to disregard salvage value in computing such allowance. Establishes, for any small business whose adjusted tax basis in assets (other than real estate) is $250,000 or less, a straight line depreciation table of specific depreciation lives for specified assets. CBS’13 IB79095 UPDATE-07/15/80 S. 206 (Bentsen, et al.) Amends the Internal Revenue Code to exclude from gross income up to $500 of interest income earned from a savings account. 8. 336 (Mathias, et al.) Amends the Internal Revenue Code to allow certain married individuals, who do not file a single joint return with their spouses, to elect the same tax rates currently applicable to unmarried individuals (other than surviving spouses and heads of households), without regard to any community property laws. Entitles any married individual making such an election to claim the income tax credit for dependent care services paid for under specified circumstances, even though such individual did not contribute over half of the support of the dependent concerned. 5. 1597 (Danforth et al.) Amends the Internal Revenue Code of 1954 to provide for the economic stimulation of the economy through increased savings and investment. Allows more rapid depreciation of business plant and equipment, provides tax relief for interest from savings, and offers 10% credit for R8D expenses. 5. 2878 (Dole et al.) Tax Reduction-Job Creation Act. Amends the Internal Revenue Code to 1 rvide for permanent tax rate reductions fbr individuals and incentives for new plant and equipment. EEBQEQ LQ§X..Q13..§!§fl.T.'§ - Former Federal Reserve Board Chairman Arthur Burns, in a statement before delegates gathered to draft the 1980 Republican Platform, urged Congress to delay major tax-cut legislation until after the November election. 07/07/80 07/01/80 —— President Carter and Congressional Democrats agreed to draft a joint tax-cut plan to take effect in 1981. 06/30/80 -- The Senate rejected 56 to 38 a Republican amendment to a bill extending certain airway taxes. The amendment would have attached the Reagan tax cut proposal to the bill. A 06/29/80 -— Treasury Secretary G. William Miller, on ABC's "Issues and Answers,“ stated that the Carter Administration preferred to delay tax cut legislation until next year. 06/26/80 -— The Senate rejected 58 to 38 a Republican move to amend a measure to raise the public debt ceiling, by attaching the Reagan tax cut proposal to the bill. Senate Democrats promised to produce their own tax cut bill by September 3rd. { w 06/25/80 -- Republican Presidential candidate Ronald Reagan publicly 06/23/80 06/18/80 05/15/30 06/12/80 05/28/80 05/15/80 05/06/80 00/22/80 0%/10/80 03/25/80 cns-1n IB79095 UPDATE-07/15/80 proposed a personal income tax cut of 10% across the board, effective Jan. 1, 1981, plus a "10-5-3" business depreciation schedule. Legislation embodying the proposals was introduced by Republicans in the House and Senate. Chief White House inflation fighter Alfred Kahn stated that a tax cut is inevitable in the near future. Treasury Secretary G. William Miller said today that the Administration “has made no decision yet on tax proposals which might be considered for implementation after 1980.“ Commerce Secretary Philip Klutznick, on ABC's "Issues and Answers," said that "sometime next year it may be very desirable to have a tax cut." He ruled out a cut for this year. President Carter, in a statement to the Platform Committee of the Democratic National Committee, said he favors tax cuts for individuals and businesses, but not before inflation is controlled and federal spending reduced. “The cuts should be anti-inflationary and oriented toward increasing productivity and investment," he said. Treasury Secretary G. William Miller testified before the Joint Ecnomic Committee that "it is far too soon to be talking of tax cuts" and that the recession is probably close to its trough. "There aren't going to be any tax cuts this year," House Ways and Means Chairman Al Ullman told a breakfast meeting of the Chamber of Commerce today. Both Houses of Congress voted down budget resolution amendments that would have cut taxes. The House amendment would have cut taxes by $32 billion; the Senate, by $30 billion. Treasury Secretary G. William Miller said that the Administration may seriously consider tax cut proposals, but only if Congress ensures a balanced FY81 budget before the Sept. 15 deadline for approval of the Second Concurrent Resolution. Secretary Miller added that liberalized depreciation and payroll tax reduction were the most likely forms of tax relief. President Carter threatened to veto any tax cut legislation passed this year if the FY81 budget is not balanced. . Senate Budget Committee Chairman Edmund Muskie said lthat an $11 billion to $14 billion budget surplus resulting from new oil import fees would fund a tax cut in FY81. v 03/20/80 03/19/80 02/28/80 02/01/80 01/21/80 12/06/79 12/05/79 09/19/79 08/15/79 “ CBS-15 IB79095 UPDATE-07/15/80 Federal Reserve Board Chairman Paul Volcker encouraged the Senate Budget Committee to trim the FY81 budget, but warned that Congress should not consider tax cuts without first being sure that the budget would really be balanced. House Budget Committee Chairman Robert Giaimo proposed using revenues from new fees on imported oil for "a possible future productivity tax cut.fl The Joint Economic Committee released its 1980 economic report calling for a $25 billion tax cut targeted largely toward business investment. The tax cut is not recommended to take effect immediately, but by the summer of 1981. Treasury Secretary William Miller and Federal Reserve Board Chairman Paul Volcker, in testimony before the Joint Economic Committee, repeated Administration arguments that cutting taxes at this time would be too likely to add to inflation. President Carter, in his Stat of the Union message to Congress, reveals that his FY81 proposed budget contains no tax cut... "Restraining inflation" remains “highest domestic priority." k ' By a vote of 42 to #6, the Senate rejected a proposal to index the personal income tax to inflation. The proposal, if passed, would have been attached to the windfall profits tax bill. ‘ In debating the windfall profits tax, the Senate defeated an attempt to limit total federal revenues to a fixed percentage of GNP. The limit would have been 20.5% in 1981, 20% in 1982, and 19.5% in future years. Adoption of the proposal would have required a waiver of budget process rules. The Senate voted an to 49 against waiving the rules. In their debates over the second budget resolution, both the House and the Senate turned down proposals that would have reduced taxes in 1980. In the House, a Republican proposal that would have cut taxes and spending by $20 billion was defeated by a vote of 283 to 187. In the Senate, two measures that would have provided net tax reductions by cutting taxes more than spending were defeated by votes of 62 to 36 and 61 to 38. Two former presidential economic advisers, Alan Greenspan and Otto Eckstein, differed in their economic policy advice before a meeting of statistical groups. Greenspan favored an $18 to $20 billion tax cut, effective Jan. 1, 1980, with at least one third going to business. He opposed payroll tax cuts. Eckstein suggested riding out the recession with no tax cut, with a possible tax cut in 1981 to offset the large social security tax increases that will 03/06/79 03/03/79 08/01/79 07/30/79 -- O7/27/79 07/2Q/79 o7/19/79 -- 07/17/79 -- CRS’16 IB79095 UPDATE-07/15/80 take place. The House Budget Committee's Inflation Task Force, in a series of recommendations on controlling inflation, advised against a tax cut in 1980. If a tax cut is inevitable, a reduction in payroll taxes is preferred by the Task Force because of its potential to relieve pressure on prices. I tIn debating the second budget resolution for fiscal 1980, the Senate Budget Committee rejected tax cuts of $13.6 billion in FY80 and $33.1 billion in FY81. The vote was 11-5. The Committee approved a resolution with no room for tax cuts and calling for a deficit of $27.8 billion. House Republican leaders introduced legislation calling for a $36 billion tax cut in 1980. Included in the package are a $28 billion reduction in and indexation of individual income taxes, a freeze on payroll taxes, and more rapid capital cost recovery. All 41 Republican Senators cosponsored a bill that would reduce federal taxes by $10 billion in 1980. Hore generous depreciation allowances, tax relief for savings, and a credit for research and development spending are the components of the proposed tax cut. At his confirmation hearings before the Senate Finance Committee, Treasury Secretary-designate G. William Miller reiterated the Administration's opposition to a tax cut at this time. If economic conditions mandate a tax reduction, Miller cited depreciation policy changes and payroll tax cuts as possible options. Emil Sunley, Deputy Assistant Secretary for Tax Policy in the Treasury Department, repeated the Administration's opposition to indexing the tax code to inflation before the House Budget Committee's Inflation Task Force. He cited the success of periodic tax cuts, the threat to fiscal stabilization policies posed by indexation, and the difficulty of designing a proper indexation scheme as reasons for opposition. Stanford economist John Shoven, at the same hearing, took the opposite view and advanced a system for indexation. Lyle Gramley, a member of the Council of Economic Advisers told the House Budget Committee of the Administration's opposition to any current plans for a tax cut. If a cut is necessary, payroll tax reductions may be the best option, Gramley stated. Rep. Gephardt introduced legislation that would provide a 20% tax credit for payroll tax payments in 1980 and 1981. I ' Walter Heller, who headed the Council of Economic 07/16/79 - 07/11/79 - 05/25/79 -- 04/30/79 ” CBS-17 Advisers under President Kennedy, urged the House Budget Committee to include room for a $30 billion tax cut be in the form of payroll tax reductions, a revised real wage insurance, and more generous depreciation allowances. President Carter said that he opposes a tax cut at this time. If a tax cut is needed, Carter stated he would prefer a payroll tax reduction. CBO’s mid-year report forecast a mild recession in 1979 and a weak recovery in 1980. CBO Director Alice Rivlin stated that in spite of the pessimistic forecast, it may be best if Congress waits for further evidence of a serious economic decline or establishes a contingency plan. If stimulus is needed, payroll tax cuts and revised real wage insurance may be desirable. Accelerated depreciation or a higher investment credit would not be effective stimulants, although they may help with long-run problems, Rivlin said. Two leaders of the Joint Economic Committee, Sen. Lloyd Benston and Rep. Clarence Brown, called for a $20 billion tax cut in 1980, with individuals and businesses sharing equally in the benefits. Rep. Ullman, Chairman of the House Ways and Means Committee, and Sen. Long, Chairman of the Senate Finance Committee, suggested that Congress forego a tax cut in FY81 and achieve a balanced budget as soon as possible. Both chairmen said that declining ‘ economic conditions could change this policy, and that enactment of a value-added tax would allow reductions in other taxes without threatening a balanced budget. 1379095 UPDATE-O7/15/80 LIBRARY OF WASHl.NG;TON UNIVERSETY ST. 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