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EFFE i   n '
CTIVE TAX RATES IN THE WAYS AND MEANS COMMITTEE TAX PROPOSALS:

UPDATED TABLES

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Gravelle
Specialist in Industry Analysis and Finance
Economics Division , 
December 2, 1985 i

Jane C.
Govefnmehf ' P.ubIica7fions

unni 
Aug 04 3994

Washmgton Umversity Libranes

St. Louis, MO 63130

ABSTRACT

On November 22, 19855 Zfua Ways euui Means Committee completed ea new-tax

in its May 28, 1985, tax reform, including the elimination of indexing of in-

reform proposal proposal.» The Administration has also proposed some changes

ventories. This report updates effective tax rates in ’€Efects of Business:

Tax Provisions in the Administration’s Tax Proposal," June 6, 1985 and "Effec-

2!

tive Tax Rates in the Administration and~Ways and Means Tax Proposals, October‘

17, 1985, Congressional Research Service Reports No. 85-783 E and No. 85-1006

E, to incorporate these proposals.

EFFECTIVE TAX SKATES El‘-I TIE WAYS ANT? MEANS COMMITTEE TAX PROPOSALS:
UPDATED TABLES

In Novemberl98!1: the Treasury Department released a proposal for major

tax revision. This proposal was compared to present law and to a number of

congressional tax proposals in a Congressional Research Service Report, 

Comparative Analysis of Five Tax Proposals: Effects of Business Income Tax
Provisions," (by Jane G. Gravelle, Report No. 84-832 E, December 27, 1984).
These effective tax rates were subsequently updated to include the revised
tax proposals announced by the Administration on May 28, l985 ("Effects
of Business Tax Provisions in the Administration’s, ‘Tax’ Proposal: Updated
Tables, Congressional Research Service Report No. 85-783 E, June 6, 1985).

The Administration has since proposed to alter its proposal by, among

other changes, eliminating provisions for indexing inventories. In addition,

the Ways and Means Committee staff provided a proposal which was used as a
basis for mark up. These proposals were compared in "Effective Tax Rates in
the Administration and Ways and Means Tax Proposals: Updated Tables," Con-
gressional Research Service Report 85-lOO6 E, October 17, 1985. On November
22, 1985, the Ways and Means Committee completed consideration of the proposal.
The Ways and Means Committee proposal is similar to the Administration proposal
in some respects. Both proposals would repeal the investment tax credit. The
corporate tax rate in the Ways and Means proposal is 36 percent, similar to
the 33 percent level in the Administration proposal. Both proposals would
allow a deduction for ten percent of dividends paid, although the deduction

would be phased in over a ten-year period in the Ways and Means proposal. The

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administration proposal would exclude half cm: long ‘term <:apital gains from
income: the Ways and Means proposal would exclude forty—two percent.

The major differences betweenthe proposals in the business tax area are
in the treatment. of depreciation. ’fiu3 A”ministration proposal. would assign
assets a) six classes based on the types of assets. The Ways and Means plan
would assign assets to ten classes based cn1 a combination.<nf asset type and
industry, based on lives in the Asset Depreciation Range (ADR) classification
system which ‘was used ‘before 1981. The .Administratitu1 proposal would, also
index depreciation, while the Ways and Means proposal would not. The deprecia-
tion methods are also somewhat different.

The May 28, 1985, Administration proposal would have indexed both depreci-
ation and inventories, while dropping the indexing of interest contained in the
original Treasury proposals. The amended Administration proposal would drop
the indexing of inventories, while the Ways and Means proposal contains no
indexing. The Admininstration proposal retained tflua expensing <1f intangible
drilling costs in oil and gas exploration; the Ways and Means proposal would
require a small portion to be capitalized over 26 months.

Table l is an update of table 1 in Report No. 85-1006 E. This table shows
the differentials in effective tax rates across asset types arising from depre-
ciation and investment credit rules. Note that because the effects of dividend
deductions, debt finance, and personal taxes are not taken into account, tax
burdens cannot be compared across proposals.

Current law is characterized by considerable unevenness in the treatment
of different assets, with equipment favored over structures, in general. All
of the reform proposals produce a much more even system with relatively
little variation inieffective tax rate, although in all cases oil and gas

exploration are favored. The Treasury proposal appears to produce the most

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TABLE 1; Effective Tax Rates by asset Type
admini~ ’Ways S Means

Current Treasury stration ?roposa1s
Asset Type Law Eroposal Proposal Staff Current
autos 2 31 22 34 43
Office/Computing Equipment 3 33 22 40 3
Trucks, Buses and Trailers 2 32 21 34 37
Aircraft 2 31 21 47 43
Construction fiacninery 2 IO 20 32 30
Mining and Oilfield Machinery 2 3O 19 39 39
Service Industry Machinery 2 30 19 37 36
Tractors 2 29 19 35 39
Instruments 8 28 18 39 40
Other Equipment 2 35 22 37 40
General Industrial Equipment 7 29 19 38 38
Metal Working Machinery 2 28 18 37 36
Electric Transmission Equipment 20 35 21 42 43
Communications Equipment 1 31 1 41 27
Other Electrical Equipment 1 31 19 38 36.
Furniture and Fixtures 1 30 19 31 35
Special Industrial Equipment 1 29 18 36 34
Agricultural Equipment 1 29 18 35 33
Fabricated Metal Products 14 28 17 36 32
Engines and Turbines 28 32 20 41 42
Ships and Boats 1 31 19 40 37
Railroad Equipment 23 30 18 31 32
Structures
Mining Exploration 11 19 2 28 13
Other 44 31 30 42 42
Industrial Structures 4 34 28 39 39
Public Utility Structures 24 28 14  31 34
Commercial Structures 37 31 25 36 36
Farm Structures 38 31 25 ‘36 36

Source: Congressional Research Service. See text for methodology and assump-
tions. Please note that comparisons cannot be made across proposals.

C4

55

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even tax: rates across assets. Zhn: all proposals bring effective ixnr rates
closer togetheréi (Note ifiun: tax‘ rates are based an: empirical :astimates of

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economic depreciation which are subject" to some nncertaintyai lfle Treasury
proposal was larger? designed around those rates; hence tflua tax rates pro-
duced are even.and close to the statutory rate.)

Table 2-is an update of table 2, also from the October study- This table
allows comparisons across proposals because :H: takes into account znfiun: fea-
tures of capital income taxation including capital gains treatment and. the
treatment of interest payments and deductions. The exception is personal tax
rate reductions which are only incorporated in the last line, because of the
uncertainty about these rate reductions. (The Ways auui Means proposal is

assumed to produce the same rate reductions as the Administration proposal.)

The upper part of the table shows estimates for broad asset classifica-

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tions ijuiluding inventories.i The lower’ part shows effective. tax rates for

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major industries. Differential treatment of assets is mirrored in the differ-
ential treatment of industries depending on the mix of assets used. The
Treasury proposal virtually eliminated the differentials between industries
and between depreciabhe assets and inventories. The Administration proposal
maintains considerable differences, because penalties (lack of indexing) apply
to inventory taxation, and subsidies (accelerated depreciation) apply to depre-
ciable assets. The May 28, 1985, Administration proposal (tax rates shown in
parentheses when they differ from the current proposal) produced rates which
were closer' Uogether ‘because inventories were indexed. The ‘Ways and ‘Means
proposals also produce some discrepancies between depreciable assets and
inventories, but less than the Administration proposal because «depreciation

approximates economic depreciation in the Ways and Means plans.

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TABLE 2: «ffective Tax Rates by Broad asset Type and
y industry: Corporate and Individual Taxes

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Hays & Means

Current Treasury A administration Proposals
Law Eroposal Eroposalu Staff Committee

BY ASSET TYRE:

Equipment & Structures 41 39 34 44 43
Equipment 14 39 32 45 44
Structures 39 39 34 L 43 43

Inventories 60 41 3 51 (43) 51 52

BY MAJOR INDUSTRY:

Agriculture 44 40 41 (38) 47 47
Mining/Oil and Gas 26 33 25 41 33
Extraction _ ‘ .
Construction 35 39 38 (36) 45 46
Manufacturing 45 40 42 (38) 48 48
Transportation 27 39 33 45 44
Communication 23 39 30 3 44 40
Electric/Gas Utilities 31 38 28 41 42
Trade 50 40 44 (39) 47 48
Services 36 39 36 44 45
TOTAL 41 39 38 (36) 46 45
TOTAL WITH PERSONAL 41 37 31 (29) 41 40

RATE REDUCTIONS

Source: Congressional Research Service. Note that personal rate reductions
are only included in the last line, for comparability to previous studies.
Rates in parentheses are for the May 28 Administration proposal where it dif-I
fers from the current proposal.

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The Ways and Means proposal would keep overall tax burdens on new invest-
ment at the approximate rate of present law, while.:he Administration proposal

would reduce effective tax burdens.

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