President Clinton’s 1996 tax proposal draws significantly from Congress’ 1995 legislation which he vetoed, especially with respect to individuals and pension reform. Mr. Clinton will likely resist long-standing Republicans efforts to enact a capital gains tax cut to 14%, citing concern that such a cut would primarily benefit the affluent, and would sharply reduce tax revenues.
In a second term, Mr. Clinton, together with a Republican-controlled Congress, would likely press for immediate pension reform:
Both the President and Congress propose to (1) eliminate the rule which prevents one spouse from making a deductible IRA contribution if the other participates in an employer-sponsored plan, (2) raise the AGI threshold for phasing out deductible IRA contributions occurs, and (3) permit penalty-free distributions to (a) purchase or remodel a first home, (b) pay for certain medical or educational expenses, or (c) supplement unemployment compensation.
Mr. Clinton and Congress have both proposed “back loaded” IRAs. Nondeducitble contributions would be in lieu of amounts contributed to a traditional IRA. Earnings and principal could be withdrawn tax-free for one of the purposes listed in item (3)(c) at any time under Mr. Clinton’s plan and after 5 years under the Republican plan. Both proposals contain measures to:
¶ Require recognition of gain on the sale of a residence if depreciation deductions were previously taken for business or home office use. Neither a rollover nor an exclusion would defeat the imposition of this new tax.
¶ Allow a $500 tax credit for dependent children.
¶ Increase the deductible portion of self-employed health insurance payments from 30% to 50%.
¶ Require the registration of corporate tax shelters.
¶ Increase the Sec. 179 deduction to $25,000 by 2000.
¶ Deter tax-motivated expatriation by imposing objective (i.e., non-motive based) taxes and penalties.
¶ Extend the current rule allowing a full FMV deduction for charitable contributions of appreciated stock.
¶ Reinstate the exclusion for employer-provided educational assistance.
¶ Strengthen taxpayer rights vis-á-vis the IRS through a “Taxpayer Bill of Rights 2.”
Mr. Clinton alone champions tax proposals which would:
¶ Allow a $10,000 deduction ($5,000 until 1999) for post-secondary education and training for the taxpayer and family members.
¶ Prevent investors from selling high basis stock first (where multiple purchases were made) by requiring an average-cost basis.
¶ Require recognition of gain on short sales “against the box” by imposing a constructive sale.
¶ Reduce the corporate dividends received deduction to 50% from 80%.
¶ Shorten the NOL carryback period to 1 year, but extend the carryforward period to 20 years.
¶ Repeal tax-free conversions of large C to S corporations.
¶ Restrict like-kind exchanges involving personal property situated abroad.
¶ Increase penalties for failing to report business payments over $600.
¶ Permanently extend luxury excise tax on automobiles.
¶ Tighten rules for taxing foreign trusts.