HOUSE WAYS AND MEANS COMMITTEE
HISTORY PROVES TAX RELIEF WORKS
ALTERNATIVE MINIMUM TAX
INDIVIDUAL RETIREMENT ACCOUNTS (IRA's)
EDUCATIONAL SAVINGS ACCOUNTS
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does America need tax cuts? The answer is simple. Taxes are just too
high. Federal tax revenue as a percentage of the economy reached a historic
peak - 20.4 percent of the gross domestic product (GDP) in 1999. (1)
Federal income taxes, which increased to 9.9 percent of the GDP in 1999
from 7.8 percent in 1994 comprised a significant portion of the increasing
federal revenue. In 1999, the average federal income tax rate on all
taxable returns was 15.3 percent - the highest level since the mid-1980s.
(This latest statistics on the federal income tax rate was from 1997,
the most recent data available.)
can also benefit from tax cuts because workers are losing their jobs
as the economy continues to slow. Factory activity, in particular, has
declined to 43.7 percent from 47.7 percent in November according to
the National Association of Purchasing Management (NAPM) report on January
2, 2001. This latest statistic marks the lowest level of activity since
1991 when the nation was emerging from a recession. (2) Tragically,
a deepening malaise in the manufacturing sector, which has been hardest
hit by an economic slowdown in the past six months, was demonstrated
by the NAPM report. From increases in interest rates last year, to high
energy prices and a slowdown in auto sales manufacturing, which accounts
for about 20 percent of U.S. economic activity and jobs, manufacturing
has suffered more than other sectors.
cuts will help personal budgets that are strained by an increased cost
of living. Since 1999, natural gas prices have almost quadrupled and
heating oil prices have increased 29 percent nationwide compared to
last year. (3) Two years ago a barrel of oil was between $10 to $20.
For the last 11 months, a barrel has sold for $30. To add to the crisis,
for the past two years, Congress has spent the surplus created by tax
overpayments. According to Stephen Sliviski of the Cato Institute, nondefense,
discretionary spending will increase almost 13 percent this fiscal year.
the United States (US) to remain the number one economy globally, it
must keep its tax rates lower than other competitor nations. Savings
and investment will be attracted from around the world to those nations
that promote pro-growth tax policies. For example, France has been suffering
from a general economic malaise, high unemployment and a loss of talented
entrepreneurs as a result of its excessive tax burden. On the other
hand, nations such as Germany and Japan have growing economies due to
reduced tax rates, and others are looking to follow their example. (5)
to two decades ago the global economy has become more competitive. The
US has prospered as a result of lower tax rates when compared to its
competitor nations. To ensure a strong economy and to provide fiscal
discipline in Washington, broad-based tax relief would be a good strategy.
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to many economists, targeted tax cuts do little or nothing to energize
the economy. (6) On the other hand, a recession can be forestalled or
mitigated by reducing the marginal tax rate. (7)
individual's marginal tax rate is the rate of tax being paid on the
highest income of dollars. An increased marginal tax rate can discourage
workers from investing more time in labor because their added income
will be subject to a higher tax. On the other hand, a lower marginal
tax rate may result in increased economic activity for the taxpayer
who benefits from a reduced rate of tax.
income tax is a graduated tax, designed so that people pay an increasing
percentage rate as their income rises through various tax brackets."
(8) Current tax law taxes income at five graduated rates-15 percent,
28 percent, 31 percent, 36 percent and 39.6 percent. A new, lower 10
percent bracket would be created by the President's proposal while the
other rates would be reduced. (9) The proposal would establish tax rates
of 10 percent, 15 percent, 25 percent and 33 percent when fully phased
in by 2006. Tax cuts enacted during the course of this year should be
retroactive to January 1, 2001. By subjecting the first portion of taxable
income to a rate of 14 percent in 2002 and 13 percent in 2003, declining
eventually to 10 percent in 2006 the President envisions gradually creating
a new lowest rate bracket. The President's tax relief package would
provide $1.6 trillion in tax relief over ten years. The rate cuts would
provide more than $810 billion in tax relief while elimination of the
estate tax would provide $266 billion in tax relief, the increase in
child tax credit would provide $192 billion, and the reduction in the
so called marriage penalty would provide another $112 billion in relief.
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WAYS AND MEANS COMMITTEE
accelerated version of President Bush's across-the board reduction in
income rates was passed by the Committee on Ways and Means on a party-line
vote (Economic Growth and Tax Relief Act of 2001; H.R. 3; To view the
markup of H.R. 3, visit http://waysandmeans.house.gov/
measure was adopted by a 23 to 15 vote with all Republicans in favor
and all the Democrats opposed. It will provide $960 billion over 10
years in tax relief. The Democratic alternative that offered less tax
relief was rejected. This year the Republican bill would provide $360
for a couple and $180 for an individual.
Bill Thomas (Republican-California), the chief House tax writer, offered
legislation that would accelerate a cut in the lowest tax rate ahead
of the President's timetable and made it retroactive to January 1, 2001,
just a day after the President outlined his plan before Congress. As
early as Thursday, March 8, 2001, a vote is expected by the full House
on this bill. The measure would provide $960 billion in tax relief over
ten years. Other elements of Bush's $1.6 trillion tax cut would come
later said Thomas.
percent bracket would be created for 2001 and 2002 declining to 11 percent
from 2003-2005 and 10 percent in 2006 under the legislation drafted
by Representative Thomas. About $65 billion would be added to the President's
plan over 10 years in tax relief by including the provision making the
lower rate reduction retroactive to January 1, 2001.
taxpayers with incomes of between $30,000 and $50,000 and three or more
children, the measure would include an adjustment in the alternative
exceeding the President's overall proposal for $1.6 trillion in reductions,
Representative Thomas said Republicans would act later on other elements
of the President's legislation.
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PROVES TAX RELIEF WORKS
to President John F. Kennedy's initiative to reduce the top marginal
rate a full 26 percent points, growth rates averaged only two percent.
After the initiative was put into place, growth rates soared into the
four percent to six percent range. (11)
it became clear in 1978 that capital gains tax rates would be reduced
from 49 percent to 28 percent, once again investments in venture funds
increased tenfold as capital again flowed. (12)
original Reagan tax program's percentages of 15-28-33 percent were modified
to 15-28-31-36-39.6 percent by former President Clinton's tax increase
in 1993. Robust economic growth accompanied President's Ronald Reagan's
rate reduction, which was phased in from 1981 to 1983. (13) In 1986,
President Reagan reduced marginal income tax rates down to an unprecedented
28 percent. In the following years this resulted in Gross Domestic Growth
(GDP) averaging four percent.
the top personal income tax rate was lowered, tax reductions spurred
economic growth and accelerated returns on equities-with growth averaging
0.6 percentage points higher during periods since 1926 (excluding the
Second World War), (14)
when the top marginal tax rates were lower than in years when rates
were higher, the Standard & Poor's 500 posted an average annual total
return 4.3 percentage points higher.
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working married couples have their income added together for tax purposes,
they often face a penalty in the tax code. If, for example, one earner
makes $38,000, his income falls under the upper limit of the 15 percent
bracket ($42,350). His spouse earns $23,000. Instead of both incomes
being place into the 15 percent tax bracket, the $23,000 income is divided
into two parts. The first part ($4,350) is added to the other income
to reach the 15 percent bracket limit. The remaining amount ($18,750)
is taxed in the next tax bracket at a higher 28 percent marginal tax
rate. Simply because two-income couples are married, about 25 million
pay more income tax when compared with singles at the same income level.
(15) This results in an average additional income tax of $1,400 annually.
"Marriage Tax Penalty Relief Reconciliation Act of 2000," (H.R. 4810;
To view the bill visit: http://thomas.loc.gov/cgi-bin/bdquery/z?d106:H.R.4810:)
was a measure that would have reduced taxes for married couples by approximately
$89.9 billion over five years. Both the House (To see how your representative
voted see: http://184.108.40.206/cgi-bin/vote.exe?year=2000&
rollnumber=392 ) and Senate (To see how your senators voted see:
legislative/vote1062/vote_00215.html) in 2000 passed the bill by
less than a two-third majority required to override a Presidential veto.
On August 5, 2000, former President Clinton vetoed the Republican-sponsored
tax relief for married couples. (16) On September 13, 2000, the veto
override was rejected 270-158 (To see how your representative voted
220.127.116.11/cgi-bin/vote.exe?year= 2000&rollnumber=466) (17)
This measure would have gradually expanded the bottom 15 percent income
tax bracket for married couples to twice the current corresponding bracket
for single taxpayers. The standard deduction for married couples who
do not itemize would have been increased to equal that of two single
people. For low-income families, the earned-income tax credit limit
would have been increased annually by $2,000. For married couples who
claim personal credits, such as the $500 per-child tax credit, a current
exemption from the alternative minimum tax would have been extended
almost all married couples, particularly the 25 million with two incomes
who pay more than they would if single, the marriage penalty bill would
have provided tax relief. Such tax relief must be enacted during the
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Death Tax Elimination Act (H.R. 8: To view bill see http://thomas.loc.gov/cgi-bin/bdquery/z?d106:h.r.00008:),
a bill that would amend the Internal Revenue Code of 1986 to reduce
and ultimately repeal the estate and gift tax by 2010, was passed in
the House (To see how your representative voted see: http://
18.104.22.168/cgi-bin/vote.exe?year=2000& rollnumber=254) in June
2000, with enough votes to override a veto. The measure passed 59-39
in July 2000, in the Senate (To see how your senators voted see http://www.senate.gov/
legislative/vote1062/vote_00197.html) but was far short of the 67
votes required to overcome a veto. (18) On August 31, the former President
vetoed the bill. President Clinton's veto override was rejected on September
7, by a vote of 274-157. (To see how your representative voted see http://22.214.171.124/cgi-bin/vote.exe?year=2000&rollnumber=458)
after a taxpayer's dies, the Internal Revenue Service can take up to
60 percent of his possessions and investments in taxes. This has proven
to be a tremendous loss to families of these individuals that had spent
a lifetime working and investing in a small business to provide a good
economic foundation for their offspring. (19)
the estate tax revenue yield is negligible, its only purpose is to redistribute
income. Most often, death taxes burden the very people they are intended
to help such as women and minorities, farmers, workers, and low-income
people. Furthermore, death taxes undermine savings and investments,
are the most expensive taxes to pay, and are costly for the government
to collect. (20) According to National Bureau of Economic Research economists
Steven Venti and David Wise, the estate tax punishes people for their
virtues. (21) It propagates the philosophy, "Spend it before you die
if you have it because if you do not, the government will get it." Simply
fools whose heirs will suffer are wealthy individuals who are inclined
to be frugal and invest in profitable businesses. The majority of the
burden of the estate tax falls not on those who have been lucky throughout
their lives but instead on those who have been frugal.
107th Congress should eliminate the death tax as they tried to do last
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Alternative Minimum Tax (AMT) was developed by the government to reduce
the ability of individuals to escape payment of tax on income by using
tax preferences (e.g., items excluded from income subject to tax) available
under the regular tax system. Following congressional testimony by the
Secretary of the Treasury reporting that 155 high-income individuals
paid no federal income tax in 1966, Congress enacted an add-on minimum
tax that served as the predecessor to the current AMT in 1969. The minimum
tax, since 1969 has been amended a number of times, most notably in
1976, 1978, 1982, 1986, 1990, and 1993. The minimum tax was changed
from essentially a surcharge on certain tax preference items (i.e.,
items excluded from taxable income under the regular tax but taxable
under the minimum tax) to a separate tax system, paralleling the regular
income tax. With its own definition of income subject to tax and its
own tax rates through these amendments, AMT has affected relatively
few, mostly higher-income taxpayers, and has generated a relatively
small amount of tax liability in addition to the regular income tax
according to recent research at the Joint Committee on Taxation (JCT)
(22). AMT, for example, is expected to affect about 1.3 million-about
1.3 percent of all taxable returns-and generate a projected $5.8 billion
in additional tax liability in 2000 according to the research at Treasury.
the number of taxpayers affected by AMT and the corresponding tax liability
generated are expected to increase substantially over the next 10 years,
according to the research at JCT and Treasury. Unfortunately, the AMT
now affects far more Americans than Congress envisioned or intended
as a result of inflation and real income growth. For example, the number
of taxpayers affected financially by AMT is expected to increase from
about 1.3 million in 2000 to 17 million in 2010-almost 16 percent of
all taxable returns-and the additional tax liability generated by AMT
is projected to grow from $5.8 billion to $38.2 billion during the same
period according to the research at Treasury. (23)
adding to the overall compliance burden on taxpayers and the administrative
burden on the Internal Revenue Service (IRS) is the projected increase
in AMT coverage and the complexity of the system. Among individuals,
AMT's projected increase would also affect the distribution of taxes.
Between 2000 and 2010, AMT is projected to shift from affecting mostly
higher-income individuals to more middle-income taxpayers. Also, certain
economic incentives created by the regular tax system may be affected.
1993, many of the credits Congress enacted to help middle-class families
resulted in new AMT liabilities, particularly the child tax credit.
Many deductions and exemptions are not allowed under the AMT. Under
both the normal tax system and the AMT, taxpayers subject to the ATM
must calculate their tax liability. They are liable for whatever yields
a higher amount. In 1999, legislation was passed to repeal the ATM by
Congress. However, it was vetoed by former President Clinton. (24) The
ATM was never meant to impact middle-income families.
Taxpayer Relief Act of 1997, was the last major round of tax legislation,
that reduced tax rates on long-term capital gains, provided some death
tax relief, and created the Roth Individual Retirement Account (Roth
IRA). The 107th Congress should expand on these three initiatives and
repeal the AMT and exempt the family credits immediately.
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capital gains tax rates are higher than average among industrial nations.
Compared to the US only the United Kingdom and Australia have higher
rates but unlike the US, they both index their rates for inflation.
in the capital gains tax rate would have strong political appeal because
more than one-third of American adults who own stocks earn less than
$30,000 annually. It is projected that the 1997 law which would reduce
the rate for long-term capital gains from 28 percent to 20 percent would
increase US household incomes by an average of $309 (in 1999 dollars-annually)
starting in 2005. And the average worker's wage would increase by $250
annually according to a study undertaken for the American Council for
Capital Formation. (25)
capital gains, two tax rates were established by the Taxpayer Relief
Act of 1997. Taxpayers in the 15 percent marginal tax bracket would
pay the 10 percent tax rate and all other taxpayers would pay at a tax
rate of 20 percent on capital gains.
take the opportunity to sell their less productive investments in order
to acquire new ones with higher rates of return when tax rates for the
appreciated value on long-term assets go down. Unexpected revenues are
yielded for the federal government by these unlocked transactions. In
the long-term this improves productivity and wages. Two tax rates for
capital gains were established by the Taxpayer Relief Act of 1997. Taxpayers
in the 15 percent marginal tax bracket would pay the 10 percent tax
rate and all others would pay 20 percent. However, these lower rates
will not take effect until 2005. The 107th Congress should make these
rates effective on January 1, 2002 and reduce these two tax rates to
18 percent from 20 percent and from ten percent to eight percent. They
should also simplify the law relating to long-term gains.
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RETIREMENT ACCOUNTS (IRAs)
with a growing number of taxpayers concerned about their future retirement
income are tax-preferred savings plans.
forgotten by many is that IRAs are tax deferred, not tax free. Qualified
employees can deduct the full amount from their taxable income when
they make deposits to IRAs. This results in an immediate tax saving
of $560 for an individual in the 28 percent tax bracket. (26)
contributions are withdrawn, what the government can lose up front from
IRA deductions, it makes up at the back-end. Therefore, while IRAs reduce
federal revenues by $16 billion, the long term cost (in present term
value) is only $6 billion demonstrates the Treasury Department's tax
expenditures budget. (27)
according to a study by economists Brianna Dussealt and Jonathan Skinner
of Dartmouth University, published in Tax Notes that IRAs do
not reduce revenues at all in the long-term and actually increase revenue
for the government. This is because generally investors earn a higher
return on their IRAs than the government pays on its bonds. Thus they
are withdrawing a much larger amount than they put in when they withdraw
their funds and pay taxes. To compensate the government for the lost
revenue plus interest, taxes on the withdrawals are more than enough.
1982 and 1997, the federal government made at least $14 billion in net
revenue on all IRA contributions and perhaps as much as $54 billion.
Also, by assuming that IRAs did not increase the rate of saving or capital
formation, these are conservative estimates.
House passed its version of the Comprehensive Retirement Security and
Pension Reform Act (H.R. 1102; To view the bill visit http://thomas.loc.gov/cgi-bin/bdquery/z?d106:h.r.01102:)
[To see how your representative voted visit http://126.96.36.199/cgi-bin/vote.exe?year=2000&
rollnumber=412) in the summer of 2000 that would have increased
contribution limits for IRA and 401(k) retirement plans. (28) The annual
contribution cap would have increased from $10,500 to $15,000 for 401(k)'s,
in which an estimated 36 million people now participate. For people
over 50, particularly women whose retirement savings lags behind since
they left the work force temporarily to raise children, both bills contain
special IRA "catch-up" caps of $7,500 in annual contributions. Also,
with the creation of a Roth 401 (k), similar to a Roth IRA, in which
contributions are made with after-tax dollars, withdrawals are tax-free.
Tax credits encourage businesses to offer pensions, accelerated pension
vesting for employees and rules making it easier for workers to carry
assets from job to job.
annual IRA contribution limit would have been increased to $5,000 by
the legislation approved by the house.
1981, the annual 2,000 contribution limit for traditional individual
retirement accounts has not changed.
107th Congress should pass legislation similar to H.R. 1102. It should
increase the yearly contribution to IRAs for qualified taxpayers from
$2,000 to $5,000 annually. In order to build up their retirement savings
more rapidly, taxpayers age 50 or above should be allowed to contribute
slightly more annually to an IRA than a younger taxpayer. Also, for
determining the income limits for converting traditional IRAs to Roth
IRAs and the income limits for determining whether a taxpayer may purchase
a Roth IRA (created with after-tax dollars; account withdrawals are
not subjected to taxation) increase both the income limits.
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enhance the taxpayer's ability to save for educational expenses, the
Affordable Education Act of 2000 (S. 1134; To view the bill visit: http://thomas.loc.gov/cgi-bin/bdquery/z?d106:s.01134:)
would have made a number of tax law modifications. S. 1134 was a measure
that would have allowed families to deposit up to $2,000 per child annually
into tax-free Educational Saving Accounts (ESA) for elementary, secondary
and higher education in private or public schools. The accounts' annual
limit would have increased from $500 to $2,000. Full contributions to
accounts would be allowed for married couples with combined income of
up to $190,000. Also, the measure would have made permanent a tax exemption
for employer-provided higher education expenses, and would extend the
exemption to graduate courses. On March 2, 200, the bill passed 61-37
(To see how your senators voted see: http://
www.senate.gov/legislative/ vote1062/vote_00033.html) which was
short of the two-thirds margin required to override former President
Clinton's threatened veto.
107th Congress should enact ESA legislation to provide tax relief for
taxpayers with educational expenses.
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Editorial, "The Bush Tax Cut," The Wall Street Journal, December 19,
Marjorie Olster, "Manufacturing Slump Deepened in December," Reuters,
January 2, 2001; David Leonhardt, "Factory Index Fell Sharply Last Month,"
The New York Times, January 3, 2001.
Brian Melley, "Energy Sows Internal Turmoil, The Associated Press, December
Editorial, "The Bush Tax Cut," The Wall Street Journal, December 19,
Joel Baglote, Marc Champion and David Woodruff, "Tax Cuts Loom Globally
as Economies Grow, The Wall Street Journal, May 18, 2001.
Editorial, "Tax Cuts for Growth," The Wall Street Journal, October 16,
"Your Marginal Tax Rate" Quicken.com, 2001.
David Espo, "House GOP To Expand Bush Tax cuts, The Associated Press,
February 28, 2001.
John Godfrey, "House panel Oks tax-rate reductions," The Washington
Times, March 2, 2001.
Joint Economic Committee, "The Mellon and Kennedy Tax Cuts: A Review
and Analysis," June 18, 1962.
Editorial," Tax Cuts for Growth," The Wall Street Journal , October
Editorial," Tax Cuts for Growth," The Wall Street Journal , October
George Melloan, "What About Those Sound Economic Fundamentals?," The
Wall Street Journal, April 18, 2000.
Curt Anderson, "Bill would Ease Marriage Penalty Tax," The Associated
Press, March 28, 2000.
Anne Gearan, "Clinton Vetoes GOP Marriage Tax Cut, The Associated Press,
August 5, 2000.
Curt Anderson, "House Upholds Marriage Tax Cut Veto, The Associated
Press, September 13, 2000.
John Godfrey, "Switched votes help Clinton with veto," The Washington
Times, September 8, 2000.
Bruce Bartlett, "Estate Tax History Versus Myth," National Center For
Policy Analysis, July 19, 2000.
William W. Beach, "Time To Eliminate The Costly Death Tax, The Heritage
Foundation Executive Memorandum No. 679, June 8, 2000.
Steven Venti and David Wise, "Choice, Chance, and Wealth Dispersion
at Retirement," National Bureau of Economic Research Working Paper No.
7521, February 2000.
United States General Accounting Office, Report to the Chairman, Committee
on Finance, US Senate, Alternative Minimum Tax, An Overview of Its Rationale
and Impact on Individual Taxpayers, GAO/GGD-00-180, August 2000.
Bruce Bartlett, "Repeal the Alternative Minimum Tax," National Center
for Policy Analysis, January 31, 2000.
Editorial, "The People's Tax Cut," Investor's Business Daily, July 2,
Bruce Bartlett, "Tax Deferred IRAs May Raise Federal Revenues," National
Center for Policy Analysis, March 20, 2000.
Curt Anderson, "IRA, 401(k) Bills Gains Momentum, The Associated Press,
September 11, 2000) In September the Senate Finance Committee unanimously
approved a somewhat different package.
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