President Bush on February 8 formally proposed to Congress a $1.6 trillion tax cut over 10 years, to be financed from the current budget surplus. To stimulate the economy, Mr. Bush also appears to favor making some of the tax cuts retroactive to January 1, 2000. Indications are that tax legislation could be enacted by early summer.
Mr. Bush appears comfortably positioned between Republicans, such as House Majority Leader Dick Armey (R-Texas), who has called for a $2.6 trillion tax reduction, and Democrats, who are seeking to keep the tax cuts to under $1 billion. Warning against “fiscal recklessness,” the President recently stated that he would not support a tax cut above $1.6 trillion.
Under the Bush administration proposal, the current five-tier rate structure would be replaced with four tax rates of 10, 15, 25, and 33 percent. Also proposed is the phase out of the estate tax in eight years, which Mr. Bush feels is unfair and devastating to small businesses and farms. (see Estate Planning in 2001). Senate Majority Leader Trent Lott (R-Miss) has also recently proposed cutting the capital gains tax rate for net capital gains from 20 percent to 15 fifteen.
With the Senate Finance Committee now evenly divided at 10 Democrats and 10 Republicans, and with moderate Republican Senators such as Olympia Snowe of Maine leaning toward moderate tax cuts, President Bush may be forced to compromise in order to gain approval of his income tax plan. Repeal of the estate tax now appears remote; a phase out appears much more likely.
Incoming Treasury Secretary Paul O’Neill has downplayed the benefit of tax reductions in stimulating the economy, stating that monetary policy is the “first line of action” in a faltering economy. Still, Federal Reserve Board Chairman Alan Greenspan in testimony before the Senate Budget Committee on January 25 endorsed an across-the-board tax cut to stimulate the economy, though not necessarily that proposed by President Bush.
The Bush Administration plan includes the following specific tax proposals for individuals (items in bold are considered to have broad bipartisan support):
- Elimination or phaseout of the estate tax by 2009;
- Reduction of the marriage penalty by restoring the 10 percent deduction which would create an additional $3,000 deduction;
- Doubling the child care credit to $1,000 and expanding its applicability to families with up to $200,000 of income;
- Offering a 100 percent above-the-line deduction for long-term health care insurance premiums;
- Expanding Education Savings Accounts from $500 to $5,000;
- Raising the threshold for phaseout of the child tax credit from $110,000 to $200,000;
- Expanding Medical Savings Accounts (MSAs) and making them permanent; and
- Creating an above-the-line charitable contribution deduction for taxpayers who do not itemize.
Although President Bush has signaled that he would veto any increase in corporate tax this year, so too it appears that despite intense lobbying by corporations, no action elimination of the corporate income tax will not occur this year. Mr. Bush also supports the following tax proposals, which may not be considered by Congress in 2001:
- Extending the Internet tax moratorium;
- Making the research and development tax credit permanent;
- Raising the limit on corporate charitable deductions to 15 percent from 10 percent;
- Providing liability protection for corporate in-kind donations;
- Offering tax credits for developers who construct or rebuild homes for low-income families;
- Creating a one-time capital gains tax exemption for the sale of farms; and
- Offering tax incentives for energy production, and expanding tax credits for renewable energy sources.
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Democrats opposed to the President’s tax proposals have stated that although wealthy taxpayers would benefit substantially, poor families would garner only “illusory” savings, since a family of four with income of $25,000 currently pays little or no tax, and would still be required pay $3,800 of Social Security and Medicare payroll taxes under the proposal.
For their part, Democrats advanced a tax plan on January 22, 2001 which would (i) provide increased aid for college; (ii) eliminate the marriage penalty tax; (iii) increase retirement savings; (iv) reduce the incidence of estate tax; and (v) expand the earned income credit and child care credits. Senate Minority Leader Tom Daschle (D-S.D.) has stated that Democrats will negotiate the tax plan with the Bush administration provided the tax relief primarily benefits middle-class families and is fiscally responsible.
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Congress has proposed its own tax cuts, the cost of which are estimated at $459 billion over ten years. The 107th Congress can be expected to enact legislation that would (i) promote pension reform at a cost of $52 billion; (ii) enact alternative minimum tax relief ($112 billion); (iii) legislate a small business tax package ($123 billion); (iv) enact a telephone excise tax repeal ($55 billion); and (v) repeal the 85 percent second tier tax on social security benefits.
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The following tax legislation was enacted in late 2000:
- On December 26, 2000, Congress enacted a repeal of the unpopular ban on installment sale reporting by accrual method taxpayers which was signed by President Clinton. (See Installment Sales in Real Estate Transactions);
- A new provision effective January 1, 2001, permits taxpayers to elect to make a deemed sale of capital assets and pay only an 18 percent capital gains tax for sales made after 2006. In light of the possibility of capital gains tax reduction and also the modest benefit of the provision, few taxpayers would likely benefit from this election; and
- Minimum distribution rules for pension plans and IRA accounts have undergone a sea change. The new rules substantially reduce minimum required distributions after the participant reaches the required beginning date, which is generally age 70 ½. (See IRS Matters)