Order Code RL31907
CRS Report for Congress
Received through the CRS Web
The 2003 Tax Cut: Proposals and Issues
Updated July 16, 2004
David L. Brumbaugh
Specialist in Public Finance
Government and Finance Division
Don C. Richards
Analyst in Public Finance
Government and Finance Division
Congressional Research Service ˜
The Library of Congress
The 2003 Tax Cut: Proposals and Issues
Summary
Tax cuts were a major focus of the tax policy debate in the first part of 2003.
Initially President Bush proposed a set of tax cuts for economic stimulus and
released budget proposals calling for tax cuts totaling an estimated $1.57 trillion over
fiscal years (FY) 2003-2013. The Administration characterized $726 billion of the
cuts as “economic growth” measures, designed to stimulate the economy and
improve its performance. On May 9, the House approved H.R. 2, the Jobs and
Growth Tax Act. The bill proposed cutting taxes by an estimated $550 billion over
FY2003-FY2013. Previously on May 8, the Senate Finance Committee approved its
own tax bill (S. 2, later replaced by S. 1054). The bill included tax cuts estimated at
$422 billion over FY2003-FY2013, fiscal assistance for the states of $20 billion, and
revenue increases of $90 billion for a net revenue reduction/outlay increase of $350
billion. The full Senate approved a modified version of the bill on May 15 as H.R.
2 (amended). The House and Senate approved a conference committee report
reconciling the differences between the two legislative versions on May 23. The final
Act, (Jobs and Growth Tax Relief and Reconciliation Act of 2003, JGTRRA, P.L.
108-27), contained $350 billion in tax cuts (and spending increases) over FY2003-
FY2013, as estimated by the Joint Committee on Taxation.
All four versions (the President’s proposal, the House and Senate bills, and P.L.
108-27) proposed to accelerate the tax cuts for individuals scheduled for gradual
phase-in by the 2001 tax cut act (Economic Growth and Tax Relief Reconciliation
Act of 2001, or EGTRRA; P.L. 107-16), including a gradual reduction of tax rates,
an increase in the child tax credit, tax cuts for married couples, and expansion of the
lowest (10%) tax bracket.
The Senate, House and final version differed from the Administration proposal
on the provisions for dividends and capital gains tax cuts. The Administration plan
would have generally eliminated individual income taxes investors pay on dividends
received from corporations and capital gains from the sale of corporate stock; the
plan would have implemented a form of corporate “tax integration,” and would have
eliminated the double-taxation of corporate-sector equity income. The House
proposal would have reduced (but not eliminated) taxes on corporate dividends and
capital gains generally; the Senate bill would have temporarily eliminated the
taxation of all dividends, without including the administrative features of the
President’s proposal designed to identify the portion of the dividends upon which
taxes had already been paid. The final law was similar to the House version and
expires in 2008.
The business expensing and depreciation provisions of the plans also contained
several differences. In addition, the Senate’s version included several revenue
increasing provisions, which offset some of the tax cuts (and outlays). The final
version did not include these measures. Finally, both the Senate version and the final
version included a fund of $20 billion in outlays designed to assist state governments.
This report is no longer being maintained but remains available to Congress as
a record of the progression of the tax reduction proposals in 2003.
Contents
The President’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The House Bill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The Senate Bill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
The Final Bill, P.L. 108-27 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Other Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
The Daschle Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
The House Democratic Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Economic Stimulus and Growth Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Distributional Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
List of Tables
Table 1. Distributional Effects of H.R. 2, as Passed by the House,
Calendar Year 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Table 2. Distributional Effects of H.R. 2, as Passed by the House,
Calendar Year 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Table 3. Comparison of the Percentage Change in After-Tax Income from
H.R. 2: Joint Committee on Taxation for House Proposal and
Urban-Brookings Tax Policy Center Analysis of Administration,
House, Senate, and P.L. 108-27, Calendar Year 2003 . . . . . . . . . . . . . . . . 17
Table 4. Percentage Change in After-Tax Income by Percentiles, 2003 . . . . . . 18
Table 5. Comparison of the Distribution of Total Individual Income Taxes,
2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Table 6. Average Tax Change by Income Percentile, 2003 . . . . . . . . . . . . . . . . 20
Table 7. Dividends and Capital Gains as a Percentage of Adjusted Gross
Income, 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Table 8. Comparison of Principal Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
The 2003 Tax Cut: Proposals and Issues
Tax cuts were a major focus of the tax policy debate in the first part of 2003.
In January, President Bush proposed a set of tax cuts for economic stimulus and in
February he released budget proposals calling for tax cuts totaling an estimated $1.57
trillion over fiscal years (FY) 2003-2013. The Administration characterized $726
billion of the tax cuts as “economic growth” measures, designed to provide economic
stimulus and improve economic performance. On May 6, the House Committee on
Ways and Means approved H.R. 2, the Jobs and Growth Tax Act of 2002. The
Committee bill proposed cutting taxes by an estimated $550 billion over FY2003-
FY2013. The full House approved the measure on May 9. On May 8, the Senate
Finance Committee approved its own tax bill (S. 2). The bill included tax cuts
amounting to an estimated $422 billion over FY2003-FY2013, fiscal assistance for
the states of $20 billion, and revenue-raising measures offsetting the amounts in
excess of $350 billion. On May 15, the full Senate approved a modified version of
the Committee bill as H.R. 2 (amended). The final compromise version was agreed
to by both the House and Senate on May 23. The Joint Committee on Taxation
estimated the final law would reduce revenues (and increase outlays) by $350 billion.
This report provides a brief description of each proposal, including major
proposals offered by the Democrats in both the House and the Senate. A discussion
of the distributional affects of the proposals and potential effects on short and long
term economic growth follows. A side-by-side detailed description of the various
major proposals concludes the report as an appendix.
The President’s Proposal
The President’s tax cut plan released with his FY2004 budget proposal
contained three broad elements: a set of tax cuts designed to provide economic
stimulus and promote economic growth; a group of narrowly targeted tax incentives
generally designed to encourage particular types of investment or activities; and
extension of a number of expiring tax provisions. (Principal among these last
provisions was a proposal to extend the tax cuts enacted by the Economic Growth
and Tax Relief Reconciliation Act of 2001, or EGTRRA, whose broad tax cuts are
scheduled to expire after 2010.) Neither of the tax cut bills approved by the
congressional tax-writing committees included the last two elements of the
President’s plan. Accordingly, the discussion here focuses on the “economic
stimulus” part of the President’s plan.1
1 For information on the President’s full tax proposal, see CRS Report RS21420,
President Bush’s 2003 Tax Cut Proposal: A Brief Overview, by David L.
Brumbaugh.
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The stimulus portion of the President’s proposal consisted of the following
elements.
! Acceleration, to 2003, of tax cuts phased in gradually under
EGTRRA. The specific reductions were cuts in individual income
tax rates (scheduled to be fully effective under EGTRRA in 2006);
tax cuts for married couples (scheduled to be phased in over 2005-
2010); and an increase in the child tax credit (also previously
scheduled for 2005-2010).
! “Tax integration,” or elimination of individual income tax on
corporate-source equity income (dividends and capital gains). Under
then existing law, corporate equity income was taxed twice: once
under the corporate income tax and once when received by
stockholders as dividends or capital gains. According to economic
theory, the double taxation reduces economic efficiency by diverting
capital from the corporate sector to other sectors of the economy
(e.g., housing). The Administration proposed excluding dividends
from individuals’ taxable income, and eliminating (in effect) tax on
capital gains by permitting stockholders to increase their “basis”
deduction when calculating their capital gains tax.
! Expansion of the “expensing” allowance for business investment.
Under prior law, firms were permitted to deduct in the year of
purchase (“expense”) up to $25,000 of equipment acquisitions. The
proposal reduced the allowance for amounts for which investment
exceeds $200,000, thus restricting its use to relatively small
businesses. Expensing confers a tax benefit by speeding up tax
deductions that firms would ordinarily have to spread over the life
of the equipment as depreciation. The Administration proposed to
increase the annual allowance to $75,000 and the beginning of the
phase-out threshold to $325,000.
! A $4,000 increase in the individual alternative minimum tax (AMT)
exemption for individuals. The increase would have expired after
2005.
Taken alone, the economic stimulus portion of the President’s proposed tax cut
was estimated by the Joint Committee on Taxation to reduce revenue by $726 billion
over FY2003-FY2013.
The House Bill
On May 6, the House Committee on Ways and Means approved H.R. 2, the Jobs
and Growth Tax Act of 2003 (H.Rept. 108-94); the full House approved the measure
on May 9. The bill proposed a tax cut estimated at $550 billion over 10 years. It
incorporated — with some differences — the principal elements of the economic
stimulus tax-cut package proposed by President Bush in February. H.R. 2's principal
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provisions were to cut the tax rates applicable to dividends and capital gains;
temporarily increase the “expensing” allowance for small business; temporarily
provide a depreciation “bonus” for investment in machines and equipment;
accelerate, to 2003, several phased-in tax cuts enacted under the Economic Growth
and Tax Relief Reconciliation Act of 2001 (EGTRRA; P.L. 107-16); and temporarily
increase the alternative minimum tax (AMT) exemption for individuals.
A major difference between H.R. 2 and President’s proposal was the treatment
of capital gains and dividends. As described above, the President proposed complete
elimination of individual income taxes on corporate-source capital gains and
dividends; H.R. 2 proposed a reduction of rates rather than complete elimination of
tax, and would have applied the reduced rates to most capital gains, not just those on
corporate stock. Another difference between H.R. 2 and the President’s proposal was
that several of H.R. 2's accelerations of tax cuts were temporary and would have
expired at the end of 2005, reverting to the phase-in schedule enacted by EGTRRA.
These temporary provisions included widening of the 10% rate bracket, increasing
the child credit, and doubling the standard deduction for married couples. Largely
as a result of these differences, the proposed size of H.R. 2's tax cut was smaller over
10 years than the President’s plan: $550 billion compared to the $726 billion
proposed by the President.2 In contrast, the bill’s proposed tax cut was larger than
either the total of $422 billion of tax cuts approved by the Senate Finance Committee
on a gross basis, or the Finance bill’s net tax cut of $350 billion, after subtracting the
bill’s revenue-raising offsets.
The bill’s principal provisions were as follows.
! Acceleration, to 2003, of individual income tax cuts enacted but
phased in under EGTRRA, including expansion of the 10% rate
bracket, reduction of marginal tax rates, an increase in the child tax
credit to $1,000, and the expanded standard deduction and 15% rate
bracket for married couples. With the exception of the reduction in
tax rates the House version of H.R. 2 proposed that each of these
provisions would have expired at the end of 2005. The proposal
reverted to the phase-in rules scheduled by EGTRRA after 2005.
! An increase in the exemption amount under the individual
alternative minimum tax (AMT). Under temporary rules enacted by
EGTRRA, the AMT exemption is $49,000 for couples and $35,750
for singles, but was scheduled to fall to $45,000 and $33,750,
respectively, for tax years beginning in 2005 and thereafter. H.R. 2
proposed to increase the AMT exemption to $64,000 for couples and
2 Along with tax cuts aimed at providing economic growth and stimulus, the President’s
budget proposal contained tax cuts targeted at specific activities and investments (tax
“incentives”) and would have made the 2001 tax cuts — which are scheduled to expire in
2010 — permanent. According to Joint Tax Committee estimates, the President’s $726
billion growth package, his proposed tax incentives, and elimination of the 2010 expiration
would together have reduced revenue by an estimated $1,575 billion over 10 years. Neither
the proposed tax incentives nor provisions making the 2001 tax cut permanent were
contained in H.R. 2.
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$43,250 for singles. The increased exemption would have applied
to 2003, 2004, and 2005, but the amounts reverted to those
scheduled under prior law in 2006 and thereafter.
! Reduced rates for dividends and capital gains. Rather than
eliminating individual taxes on corporate-source income, H.R. 2
proposed to reduce tax on corporate dividends as well as corporate
and non-corporate capital gains. Under then existing law, capital
gains were generally taxed at a maximum rate of 20% (10% for
taxpayers in the 15% ordinary-income rate bracket). For capital
gains, H.R. 2 proposed to reduce these rates to 15% and 5%
respectively. The proposal treated dividends received from domestic
corporations as capital gains for purposes of applying the rates.
! A temporary increase in the expensing benefit for small business
investment to $100,000 from prior law’s $25,000 and an increase in
the provision’s phase-out threshold to $400,000 from prior law’s
$200,000. The provision would have expired after 2007.
! A temporary depreciation “bonus” deduction equal to 50% of an
asset’s cost in its first year of service. The provision would have
expired after 2005.
! Temporary extension of the net operating loss (NOL) carryback
period for business losses as defined by the tax code to five years
from then existing law’s two years. The provision would have
applied for losses incurred in 2003-2005.
The Senate Bill
On May 8, the Senate Committee on Finance approved S. 2 (later replaced by
S. 1040), a bill containing a set of tax cuts broadly similar to those of the President
and the House. Like the other two proposals, for example, the Committee bill
proposed to accelerate many of the 2001 tax cuts including rate reductions, tax cuts
for married couples, child credits, and expanded rate brackets. The bill also
contained a tax cut for dividends, although it differed from the Administration and
House proposals. Also in contrast to the other two proposals, the Finance bill
contained a number of revenue-raising proposals, offsetting part of the revenue loss
from the bill’s tax cuts. According to estimates by the Joint Committee on Taxation
for FY2003-FY2013, the bill contained $422 billion in tax cuts and other revenue
reductions, $20 billion in fiscal relief to state and local governments and $90 billion
of revenue-raising items. Its net revenue reduction/outlay increase was estimated at
$350 billion over the period. On May 15, the full Senate approved a modified
version of the bill as H.R. 2 (amended).
The bill’s principal tax cut provisions were as follows.
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! Acceleration of EGTRRA’s phased-in tax cuts for individuals to
2003. As with the President’s and the House proposal, these
included the reduction in marginal tax rates, increase in the child
credit, expansion of the 10% tax bracket, and expanded standard
deduction and 15% bracket for married couples.
! An increase in the expensing benefit for small business investment
from prior law’s $25,000 to $100,000 and an increase in the
provision’s phase-out threshold to $400,000 from $200,000. The
increases would have expired after 2007.
! An increase in the AMT exemption to $60,500 for couples and
$41,500 for singles. The proposed amounts would have applied for
2003 - 2005. Under existing law during the debates, the exemptions
were $49,000 and $35,750, but were scheduled to fall to $45,000
and $33,750 for 2005 and thereafter.
! A 50% reduction in taxes on dividends received by individuals from
both foreign and domestic corporations in 2003. In 2004, 2005, and
2006, the proposal excluded 100% of the tax on dividends. The tax
reduction would have expired in 2007.
The bill’s principal revenue-raising items included a set of provisions aimed at
restricting tax shelters generally, including a provision clarifying the “economic
substance” doctrine that courts have applied to tax shelters. (This doctrine generally
denies tax benefits with respect to transactions that do not change a taxpayer’s
economic position in a substantive way.) The bill’s largest single revenue-raising
item was a proposed repeal of the foreign earned income exclusion provided by
section 911 of the tax code. Under existing law at the time of consideration, U.S.
citizens residing abroad were permitted to exclude up to $80,000 of non-government
source income from foreign employment along with a certain amount of housing
costs. The Senate bill proposed to repeal the exclusion.
The Final Bill, P.L. 108-27
On May 23, the House and Senate agreed to the conference report for H.R. 2,
reconciling the differences between the House and Senate versions of the Jobs and
Growth Tax Act. According to the Joint Committee on Taxation, the package was
estimated to result in $350 billion in reduced revenues (and increased outlays) from
FY2003 through FY2013. In contrast to the Senate provision, which had the same
net cost, the final bill did not include revenue raising measures or “offsets.” The
principal outlay in the package established a $20 billion fund to provide relief to state
governments. The principal components of the tax package included:
! acceleration, to 2003, of the individual income tax cuts enacted and
phased-in under EGTRRA. Specifically, income tax rates above
15%, scheduled to decline in 2004 and 2006, were accelerated to
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their 2006 levels in 2003. The application of the 10% tax bracket,
scheduled to increase in 2008, was accelerated to 2003 and 2004;
! increase in the child tax credit previously scheduled to be $600 for
2003 and 2004 to $1,000 and for 2003 and 2004. For 2003, the
increase will be paid in advance to qualifying taxpayers;
! for 2003 and 2004 only, expansion of the standard deduction and
15% tax bracket for married taxpayers to twice that of singles.
Beginning in 2005, these provisions will revert to prior law, which
provides for a phased-in increase to the levels of twice that of singles
over several years;
! increase of alternative minimum tax exemption amount by $9,000
for married couples and $4,500 for singles for 2003 and 2004;
! temporary increase in maximum allowable business expensing from
$25,000 to $100,000 for 2003, 2004, and 2005 for small businesses.
The provision’s phase-out threshold was increased from $200,000
to $400,000 over the same time period;
! temporary increase in “bonus” depreciation allowance. Originally
passed in March of 2002, this bonus depreciation was increased and
extended to allow for a 50% first year deduction (up from 30%) for
the period between May 5, 2003 and December 31, 2004; and
! reduction of rate on both dividends and capital gains to 15% for
taxpayers in the higher tax brackets and 5% for those in the lower
tax brackets for 2003 through 2008. (The tax rate for those in the
lower tax brackets will be 0% in 2008.) The dividend provision
applies to both domestic and foreign corporations.
Other Proposals
The Daschle Proposal. On May 6, Senate Minority Leader Daschle
announced a tax cut proposal as an update to a plan he proposed in January. The
anticipated total cost of the plan was $125 billion in 2003 and $152 billion over 11
years. The proposal included the following:
! an immediate $300 tax cut for each adult and up to two children per
family;
! expanded standard deduction for married couples and earned income
tax credit;
! an increase in the child tax credit (an additional $100 in 2003, for a
total of $700 and another $100 in 2004, for a total of $800);
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! an increase in the equipment depreciation allowance from 30% to
50% in 2003;
! an increase the amount of equipment that can be expensed for small
businesses from $25,000 to $75,000; and
! tax credits for health insurance premiums for small businesses and
for Internet infrastructure.
In addition to these tax-related components, the plan proposed to provide $40
billion in assistance to state and local governments and extend unemployment
benefits.
The House Democratic Proposal. On May 7, House Democratic leaders
outlined a tax cut proposal they stated would reduce taxes by $58 billion in 2003 and
2004 and by $106 billion over 11 years.3 Some of the components were similar to the
provisions offered by Senator Daschle. Among the plan’s principal elements were
the following:
! an increase in the child tax credit to $800 per child (under prior law
the child tax credit was $600 per child for 2001 through 2004);
! acceleration of the expansion of the 10% tax rate bracket and the
marriage penalty relief (expansion of the 15% rate bracket for
married couples filing jointly and an increase in the basic standard
deduction amount for joint returns);
! an increase in the depreciation “bonus” provided by the tax stimulus
package enacted in March 2002 with the Job Creation and Worker
Assistance Act of 2002 (P.L. 107-147). Under the 2002 Act, firms
could claim a first-year depreciation deduction equal to 30% of the
cost of new equipment investments made in 2002-2004. The House
Democratic proposal would have increased the depreciation bonus
to 50% for the next 12 months before returning to 30% for the
balance of 2004; and
! an increase in the expensing benefit to $75,000, from the prior law’s
$25,000, for equipment investment made by small businesses
through 2004.
Further, the proposal included $177 billion in revenue offsets during FY2003
through FY2013 in order to pay for the proposed tax reductions previously outlined.
Offsets specifically included closing tax shelters and freezing the top-bracket rates,
which were scheduled to decline.
3 The proposal is described on the Democratic side of the House Budget Committee website,
[http://www.house.gov/budget_democrats/analyses/econ_stimulus/dem_jobs_plan_may0
3.pdf].
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Non-tax elements of the proposal included an extension of unemployment
benefits for 26 weeks and a $44 billion package of assistance to state and local
governments, $18 billion of which was directed to address areas including Medicaid.
Economic Stimulus and Growth Effects
Proponents of a major tax cut have based their support on various factors —
including, for example, a general philosophical belief in lower taxes. The particular
tax cut enacted in May, 2003, however, has been supported by some as a means to
stimulate a lagging economy, and proponents have argued that a properly designed
tax cut would also spur long-run economic growth. According to Chairman Grassley
of the Senate Finance Committee, the tax act was designed to provide “a balanced
package of consumption and investment incentives that will provide short-term
stimulus and the building blocks for meaningful future economic growth.”4
The possibility of tax cuts to stimulate the economy occupied the attention of
policymakers in Congress and elsewhere for several years. In 2001, signs of a
sluggish economy were one reason for enactment of the sizeable tax cut contained
in the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) that was
passed in June of that year, and economic data now show that a recession was indeed
underway: the economy contracted during the first three quarters of 2001. Since
then, the economy in general returned to positive economic growth, with real output
growing in the fourth quarter of 2001 and each quarter of 2002. Preliminary
indications suggest that the economy also grew in the first quarter of 2003.
Despite the growth, however, business spending has remained weak and
employment has not grown. The continued sluggish performance has been attributed
to various causes: the decline in the stock market; the September 11 terrorist attacks;
revelations of corporate malfeasance; and uncertainty induced by the wars in
Afghanistan and Iraq. In this context, Congress in March, 2002, enacted a modest
tax cut intended to provide additional fiscal stimulus. And in early 2003, President
Bush proposed an “economic growth” package that would reduce taxes by an
estimated $746 billion over 10 years. (The economic growth provisions were part
of a larger tax cut proposed by the President that amounted to an estimated $1.6
trillion.) This package was designed to stimulate the economy both in the near term
and to boost long-run growth. And the according to the Administration, the need for
fiscal stimulus had become “more urgent” by the time the tax cut was enacted in
May.5
As noted in other sections of this report, the tax-cut bills Congress took up in
the spring of 2003 were broadly similar to the economic growth components of the
President’s plan, including, for example, versions of the acceleration of EGTRRA’s
4 Senator Charles Grassley, statement before the Senate Finance Committee at the
committee’s mark-up of H.R. 2, May 8, 2003. Posted on the committee’s website at
[http://finance.senate.gov/hearings/statements/050803cg.pdf].
5 Executive Office of the President, Office of Management and Budget,
Statement of
Administration Policy, H.R. 2 Growth and Jobs Tax Act of 2003, May 9, 2003.
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tax cuts that the President proposed as well as tax cuts for dividends and an increased
expensing benefit for business investment. Leading congressional supporters of the
tax cut bills likewise emphasized the need for economic stimulus as a leading
purpose of the measures.
Will the tax cut improve economic performance, as intended? Economic
analyses of the tax-cut generally approach the question by distinguishing between a
tax cut’s possible effects on long-term growth and its efficacy as a short-term
economic stimulus — that is, by distinguishing between a tax cut’s impact on the
growth of the U.S. economy long after concerns about its present sluggishness pass,
and the effect of the measure in helping the economy recover more quickly from the
recent recession. We first look more closely at the long run. According to economic
theory, a tax cut could conceivably boost long run growth by increasing basic
components of the economy that contribute to growth — specifically, labor supply
and saving (the supply of capital). In principle, a cut in the tax rates applicable to
labor income might induce individuals to provide more labor. And — again, in
principle — a tax cut might encourage individuals to save more because saving bears
a higher return, after taxes.
Economic analysis, however, suggests several reasons for doubt as to the impact
of a tax cut on long-term growth. To begin, economic theory is uncertain as to
whether a tax cut actually increases private saving or labor supply because of two
offsetting effects. In the case of saving, for example, a tax cut might induce
individuals to increase their saving because the after-tax return it produces is higher;
on the other hand, if a saver’s goal is accumulate a particular sum, a tax cut will
enable him to do so at a lower level of saving. Theory predicts similar conflicting
effects on labor supply. Economic theory, in short, is not useful for assessing
whether tax cuts increase or reduce saving and labor supply. Given the ambiguity of
theory, a firm conclusion would need to rely on empirical evidence. Most evidence
does not suggest a large savings response from a tax cut.6
But whether or not a tax cut increases private saving or labor supply may be
moot because of a revenue reduction’s budgetary effects. A tax cut that is not
matched by reductions in government spending increases the government’s budget
deficit above what would otherwise occur, and thus boosts the government’s
borrowing requirements. As a consequence, real interest rates faced by private
investors may increase, “crowd out” private investment and more than offset any
increase in investment resulting from an increase in private saving. Another way of
looking at this effect is to recognize that total, national saving consists of private
saving minus government borrowing. A tax cut will thus probably reduce national
saving and may therefore reduce long-run growth.
Shifting to short-run considerations, could a tax cut similar to that enacted
stimulate the economy out of its sluggish performance? In recent decades,
economists have grown more doubtful of the efficacy of tax cuts as a short-run
stimulative tool, especially compared to monetary policy, its counter-cyclical
6 CRS Report RL31824,
Dividend Tax Relief: Effects on Economic Recovery, Long-Term
Growth, and the Stock Market, by Jane G. Gravelle.
CRS-10
alternative. There are several reasons for this skepticism. First, the modern world
economy has become more open, and — via mechanisms such as capital flows and
exchange rate adjustments — much of the stimulative force of tax cuts is thought by
economists to be dissipated in the larger world economy. Beyond this consideration,
monetary policy is thought to have an advantage over fiscal policy because changes
in monetary policy can be implemented with more alacrity than those of fiscal policy;
monetary authorities can recognize the need for stimulus and implement money-
supply changes more quickly than tax-cut or spending legislation can work its way
through Congress. Given that the tax cut at hand has been passed, the implications
of this point for the current situation is not clear. However, it might raise the
question of whether additional economic stimulus is, at this time, necessary, given
the recent tax cuts and interest-rate reductions by the Federal Reserve. For example,
Federal Reserve Board chairman Alan Greenspan, in April 2003 congressional
testimony, suggested that a stimulus fiscal-policy package was not needed.7
Beyond these general considerations, several aspects of the particular tax-cut
that was enacted led some observers to conclude that their design was not particularly
well suited to provide short-run economic stimulus. In general, a tax cut has a larger
stimulative effect in the short run if more of it is spent by individuals on consumption
rather than saved. (Note the difference here from the long-run, where increases in
economic growth depends, in part, on a tax cut eliciting an increase in saving.) For
the most recent tax cuts, upper income individuals were estimated to receive a larger
tax cut under the bills that were being considered than were lower-income persons.
Given that upper-income persons tend to save a higher proportion of additions to
their income than do lower-income individuals, this distributional character likely
reduces stimulative effects. In addition, the temporary character of several of the
particular tax cuts may reduce their stimulative efficacy, again because of saving and
consumption decisions among taxpayers. In particular, certain aspects of economic
theory suggest that individuals save much of what they regard as temporary, windfall
increases in their income and spend them only over a period of time.8
In accordance with House of Representatives rules, the Joint Committee on
Taxation conducted a macroeconomic analysis of the effects of House-passed version
of the May tax cut bill.9 The analysis focused on both the short run, stimulative
impact of the measure and its likely impact on long-run growth; it used a variety of
assumptions and models in its assessment. The study’s conclusions reflect the
divergent impact tax cuts can have on short-run and long-run economic performance.
In the short run — here, over 2003-2008 — the analysis projected the bill would
increase real Gross Domestic Product (GDP) growth by 0.2% - 0.9%, depending on
the particular assumptions and model used. In the long run, all but one of analysis’
7 Brett Ferguson, “Greenspan Warns Against Higher Deficits, Remains Unconvinced of
Need for Tax Cuts,” BNA
Daily Tax Report, May 1, 2003, p. G-11.
8 CRS Report RS21126,
Tax Cuts and Economic Stimulus: How Effective are the
Alternatives?, by Jane G. Gravelle.
9 The report was inserted in the
Congressional Record by Chairman William Thomas of the
House Committee on Ways and Means: Rep. William Thomas, remarks in the House,
Congressional Record, daily edition, May 8, 2003, pp. H3829-H3832.
CRS-11
five scenarios predicted the bill would reduce long-run growth with estimates ranging
from -0.1% to -0.2; the remaining estimate predicted no change.
Distributional Effects
There are a number of ways in which distributional analyses of tax changes are
presented and published. The interests, computational traditions, and perspectives
of the authors and conveyors of such analyses likely shape the choice and
presentation of the conclusions. Subtle, yet important, differences in the questions
being asked can significantly alter the presentation of the information. Complicating
the issue, there is not a consensus among economists or practitioners about the
methodologies associated with distributional analyses. The politically sensitive
nature of the conclusions further fuel the controversy when evaluating public policy
options. The following discussion attempts to describe a variety of distributional
impacts of P.L. 108-27 and related proposals.10 Several specific limitations and
caveats are noted. Nonetheless, omissions and objections may remain: few, if any,
analyses consider inter-generational issues and potential modifications in taxpayer
behavior following a change in tax policy. Further, popular distributional analyses
are generally limited to taxes and do not incorporate a discussion of the impact
government expenditures may have on an individual’s economic well-being.
Notwithstanding these objections, a broad discussion of the distributional impacts as
a result of P.L. 108-27 and related proposals can be informative.11
Distributional analyses are often used by economists to assess a measure’s
fairness among individuals, households, or taxpayers within tax systems. This
discussion begins with H.R. 2, as passed by the House on May 9, and is based on
analysis originally prepared by the Joint Committee on Taxation. The Committee has
not released estimates of the distributional effects of either the President’s proposal,
the Senate’s version of H.R. 2, or P.L. 108-27. However, as shown later, the
distributional effects, at least in the first year, appear to be relatively similar among
the different proposals.
Table 1, below, shows an estimated distribution of the tax cut for calendar year
2003 only. The principal provisions of H.R. 2 would have resulted in an apparent
10 The discussion relies most heavily upon CRS calculations of an analysis prepared by the
Joint Committee on Taxation for the Ways and Means Committee of H.R. 2, as passed by
the House on May 9, and distributional analyses of all legislative versions prepared by the
Urban-Brookings Tax Policy Center, a non-government research organization. The Urban-
Brookings Tax Policy Center analyses are posted on its website at
[http://www.taxpolicycenter.org/commentary/revenue.cfm]. In addition, the Department of
the Treasury has prepared a distributional analysis of P.L. 108-27. It is available on the
Department of the Treasury website: [http://www.ustreas.gov/press/releases/js409.htm].
However, the Department of the Treasury’s distributional table does not include comparable
information on percentage of after-tax changes nor does it include the necessary information
to make comparable calculations.
11 For more information on assessing the distribution of tax changes, see CRS Report
RL30779,
Across the Board Tax Cuts: Economic Issues, by Jane G. Gravelle.
CRS-12
larger increase in after-tax income, in absolute and relative terms, for higher income
groups than for lower income groups. The percent change in after-tax income is used
by economists since it reflects a measure of the change in an individual’s annual
economic well-being, or standard of living. Specifically, taxpayers with incomes less
than $20,000 were anticipated to experience an estimated increase in after-tax income
of 0.1% or less. In contrast, the analysis suggests taxpayers with incomes in excess
of $200,000 would benefit from an estimated 3.3% increase in their after-tax incomes
in 2003. Although this presentation indicates that, on average, taxpayers in all
income categories would benefit from the proposed tax reductions of H.R. 2, higher
income taxpayers were expected to receive a larger percent change in after-tax
income - thus, in a relative sense income would likely be distributed more heavily to
the to those with higher incomes.12
Table 1 shows only the tax cuts’ impact in 2003. However, given the scheduled
effective and expiration dates included in H.R. 2 and previously adopted tax cuts in
2001 (EGTRRA; P.L. 107-16), the results of a distributional analysis fluctuate
depending upon the year assessed. For example,
Table 2 illustrates the Joint
Committee on Taxation’s distributional estimates for 2008. Given the expiration of
the temporary acceleration of specific provisions as well as the interaction with prior
law, which included phased-in tax reductions in future years,
Table 2 shows the
effective tax rate changes would be quite small for all but the highest income
categories. Unlike the reductions in the marginal tax rates, the reduced tax on
dividends and capital gains would be less affected by these interactions. Therefore,
the proposal, composed mainly of tax cuts on dividends and capital gains in future
years, was expected to benefit higher income taxpayers even more prominently in
future years. Nonetheless, such an estimate of the distribution over time should not
suggest the same taxpayers would necessarily benefit over a span of time.
Taxpayers’ incomes can and do fluctuate for a variety of factors, most directly due
to entering and exiting the workforce.
12 It should be noted here that this conclusion is based upon the estimates of the Joint
Committee on Taxation data, which rely upon statistical estimates of income data, particular
definitions of “income” and “taxes,” assumptions of economic incidence, and the level of
significant digits when comparing effectively small percentage changes. Further, economic
theory offers little guidance of the desired degree of relative distribution, which is inherently
a value judgement.
CRS-13
Table 1. Distributional Effects of H.R. 2, as Passed by the House, Calendar Year 2003
Effective Tax Ratec
Change in
Income Categorya
Changes in Federal Taxesb
After-Tax Income
Present Law
Proposal
Millions
Percent
Percent
Percent
Percent
Less than $10,000
-$16
-0.3%
7.2%
7.2%
0.0%
10,000 to 20,000
-$334
-1.4%
6.0%
5.9%
0.1%
20,000 to 30,000
-$1,611
-3.1%
10.2%
9.9%
0.3%
30,000 to 40,000
-$2,906
-3.5%
13.8%
13.3%
0.6%
40,000 to 50,000
-$3,856
-4.3%
15.8%
15.1%
0.8%
50,000 to 75,000
-$11,088
-4.4%
17.5%
16.7%
0.9%
75,000 to 100,000
-$13,023
-5.5%
19.9%
18.8%
1.4%
100,000 to 200,000
-$28,292
-7.0%
23.5%
21.8%
2.1%
200,000 and over
-$41,254
-8.4%
28.3%
25.6%
3.3%
Total, All Taxpayers
-$102,430
-6.3%
19.9%
18.5%
1.6%
Source: Joint Committee on Taxation in addition to CRS calculations.
Notes: Includes acceleration of the EGTRRA provisions concerning the child credit, the marriage penalty in the 15% tax bracket and standard deduction, marginal rates, and the 10% tax bracket, an
increase in the AMT exemption and a 15%/5% rate on dividends and capital gains.
a. The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: (1) tax-exempt interest, (2) employer contributions for health plans and life insurance, (3)
employer share of FICA tax, (4) worker’s compensation, (5) nontaxable social security benefits, (6) insurance value of Medicare benefits, (7) alternative minimum tax preference items, and (8)
excluded income of U.S. citizens living abroad. Categories are measured at 2003 levels.
b. Federal taxes are equal to individual income tax (including the outlay portion of the EIC), employment tax (attributed to employees), and excise taxes (attributed to consumers). Corporate income tax
is not included due to uncertainty concerning the incidence of the tax. Individuals who are dependents of the other taxpayers and taxpayers with negative income are excluded from the analysis.
Does not include indirect effects.
c. The effective tax rate is equal to federal taxes described in note 3, divided by: income described in note 2 plus additional income attributable to the proposal.
CRS-14
Table 2. Distributional Effects of H.R. 2, as Passed by the House, Calendar Year 2008
Effective Tax Ratec
Change in
Income Categorya
Changes in Federal Taxesb
After-Tax Income
Present Law
Proposal
Millions
Percent
Percent
Percent
Percent
Less than $10,000
-$1
less than -0.05%
6.0%
6.0%
0.0%
10,000 to 20,000
-$31
-0.1%
5.8%
5.8%
0.0%
20,000 to 30,000
-$95
-0.2%
9.8%
9.8%
0.0%
30,000 to 40,000
-$221
-0.2%
13.3%
13.3%
0.0%
40,000 to 50,000
-$471
-0.4%
15.2%
15.1%
0.1%
50,000 to 75,000
-$1,483
-0.5%
17.5%
17.3%
0.1%
75,000 to 100,000
-$1,883
-0.6%
19.3%
19.1%
0.2%
100,000 to 200,000
-$5,013
-0.8%
22.7%
22.5%
0.2%
200,000 and over
-$19,599
-2.7%
27.1%
26.0%
1.0%
Total, All Taxpayers
-$28,798
-1.3%
20.1%
19.7%
0.3%
Source: Joint Committee on Taxation in addition to CRS calculations.
Notes: Includes acceleration of the EGTRRA provisions concerning the child credit, the marriage penalty in the 15% tax bracket and standard deduction, marginal rates, and the 10% tax bracket, an
increase in the AMT exemption and a 15%/5% rate on dividends and capital gains.
a. The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: (1) tax-exempt interest, (2) employer contributions for health plans and life insurance, (3)
employer share of FICA tax, (4) worker’s compensation, (5) nontaxable social security benefits, (6) insurance value of Medicare benefits, (7) alternative minimum tax preference items, and (8)
excluded income of U.S. citizens living abroad. Categories are measured at 2003 levels.
b. Federal taxes are equal to individual income tax (including the outlay portion of the EIC), employment tax (attributed to employees), and excise taxes (attributed to consumers). Corporate income tax
is not included due to uncertainty concerning the incidence of the tax. Individuals who are dependents of the other taxpayers and taxpayers with negative income are excluded from the analysis.
Does not include indirect effects.
c. The effective tax rate is equal to federal taxes described in note 3, divided by: income described in note 2 plus additional income attributable to the proposal.
CRS-15
Beyond differences in the distributional analysis over time, organizations apply
a variety of methodologies to develop the comparisons. Differing definitions of
income, units of analyses, breadth of taxes considered, preferences in statistics for
presentation, and a variety of additional assumptions can result in different
conclusions.
Table 4 presents the CRS computed change in after-tax income from
data released by the Joint Committee on Taxation and compares it to an identical
statistic computed by the Urban-Brookings Tax Policy Center for the House version
of H.R. 2 for 2003 based on its internal estimation model. The two methodologies
yield relatively similar results. Most important, the same conclusions can be drawn
from both calculations: the proposal was anticipated to have generally increased the
after-tax incomes for all income cohorts and would have shifted after-tax income
shares to those with higher incomes.13
From an economic perspective, distributional analyses using income as a basic
category ideally include an economic definition of income, rather than a more
restrictive accounting or tax-based definition of income. Accordingly, the Joint
Committee on Taxation’s analysis expanded the legal definition of income used for
tax purposes to include several other forms of income not included in the tax term,
“adjusted gross income.” The analysis prepared by Urban-Brookings Tax Policy
Center applies a more restrictive definition of income, which may provide a partial
explanation of why the two organizations’ models result in different after-tax income
changes, as a percent. In short, a narrower definition of income will result in a larger
change in after-tax income from a tax reduction. While most of the major provisions
included in H.R. 2 were incorporated into the distributional estimates, the tax
reductions on businesses, specifically, the temporarily increased allowable business
expensing, bonus depreciation, and carryback of net operating losses were not
included in either analysis.
Since the various proposals differed both in the magnitude and design of the
immediate tax reductions, the distributional analysis of the four proposals
(Administration, House, Senate, and P.L. 108-27) also differs.
Table 4 provides a
side-by-side illustration of the distributional effects of each package, as estimated by
the Urban-Brookings Tax Policy Center. One of the most significant differences is
the variety of proposals for reducing the tax on dividends. Consequently, the
distributional analyses among the plans, while quite similar for low and middle rate
taxpayers, varies most for higher income cohorts as this group tends to benefit most
from such proposals. Specifically, the House package and final version appear the
most beneficial, and the Senate package the least beneficial, for the highest income
groups.
One approach for reducing the limitations on the various definitions of income
is to illustrate the distribution of the changes in after-tax income by percentile of
13 Note the analysis here stops short of making a determination of the relative changes the
proposals would make in the progressivity of the tax system. Succinctly, there is not one
agreed upon definition of how to measure relative levels of progressivity. For further
information on this topic, see Donald W. Kiefer, “Progressivity, measures of,” in Joseph J.
Cordes, Robert D. Ebel, and Jane G. Gravelle, eds.,
The Encyclopedia of Taxation and Tax
Policy (Washington, D.C.: Urban Institute Press, 1999), pp. 285-287.
CRS-16
income class: quartile, quintile, etc.
Table 5 reflects a distributional analysis
prepared by the Urban-Brookings Tax Policy Center for each of the major legislative
proposals by income percentiles. In this depiction, the strict definitions of income
became less important since it is likely that the same taxpayers are expected to
generally fall into similar broad percentile categories, regardless of measures of
income.
CRS-17
Table 3. Comparison of the Percentage Change in After-Tax Income from H.R. 2: Joint Committee on Taxation
for House Proposal and Urban-Brookings Tax Policy Center Analysis of Administration, House, Senate, and
P.L. 108-27, Calendar Year 2003
Adjusted Gross Income
Administration
House Proposal
House Proposal
Senate Proposal
P.L. 108-27 (From
(AGI); (Income
Proposal (From Urban-
(Computed from
(From Urban-
(From Urban-
Urban-Brookings Tax
Category for JCT
Brookings Tax Policy
JCT Figures)d
Brookings Tax Policy
Brookings Tax Policy
Policy Center) b,c
Computed Figures)a
Center)b,c
Center)b,c
Center)b,c
Less than $10,000
Less than 0.05%
0.0%
Less than 0.05%
0.1%
Less than 0.05%
10,000 to 20,000
0.4%
0.1%
0.3%
0.6%
0.3%
20,000 to 30,000
0.8%
0.3%
0.8%
0.9%
0.8%
30,000 to 40,000
1.0%
0.6%
1.0%
1.0%
1.0%
40,000 to 50,000
1.2%
0.8%
1.1%
1.1%
1.1%
50,000 to 75,000
1.3%
0.9%
1.2%
1.2%
1.2%
75,000 to 100,000
2.2%
1.4%
2.1%
2.1%
2.1%
100,000 to 200,000
2.3%
2.1%
2.3%
2.2%
2.2%
200,000 to 500,000
2.4%
2.5%
2.2%
2.2%
3.3% for greater than
500,000 to 1,000,000
3.6%
$200,000
3.5%
3.1%
3.5%
More than 1,000,000
4.2%
4.4%
3.5%
4.4%
All
1.8%
1.6%
1.8%
1.7%
1.8%
Source: Urban-Brookings Tax Policy Center and CRS calculations of Joint Committee on Taxation estimates.
Notes: Statistics are for calendar year; baseline is prior law. As appropriate, the above analysis includes the following general provisions: increase child tax credit; increase in refundability
rate for additional child tax credit; expand the 10% bracket, expand width of the 15% bracket and increased standard deduction (marriage penalty provisions), accelerate reduction
in the tax rates under EGTRRA; increase AMT exemption; and reduced taxation of dividends (and capital gains).
a. Tax units with negative AGI are excluded from the lowest income class but are included in the totals.
b. Includes both filing and non-filing units. Tax units that are dependent of other taxpayers are excluded from the analysis.
c. After-tax income is AGI less individual income tax net of refundable credits.
d. Notes one through three from table 2 apply.
CRS-18
Table 4. Percentage Change in After-Tax Income by Percentiles, 2003
House
Senate
AGI Classa
Administration
P.L. 108-27
Proposal
Proposal
Proposal
Lowest Quintile (0 - 20%)
less than 0.05%
less than 0.05%
0.1%
less than 0.05%
Second Quintile (20 - 40%)
0.3%
0.3%
0.5%
0.3%
Middle Quintile (40 - 60%)
0.9%
0.8%
0.9%
0.8%
Fourth Quintile (60 - 80%)
1.1%
1.1%
1.0%
1.1%
Next 10% (80 - 90%)
1.9%
1.8%
1.8%
1.8%
Next 5% (90 - 95%)
2.4%
2.3%
2.2%
2.3%
Next 4% (95 - 99%)
2.3%
2.3%
2.2%
2.2%
Top 1% (99-100%)
3.6%
3.6%
3.0%
3.6%
All
1.8%
1.8%
1.7%
1.8%
Source: Urban-Brookings Tax Policy Center.
Notes: Statistics are for calendar year; baseline is prior law. As appropriate, the above analysis includes the following
general provisions: increase child tax credit; increase in refundability rate for additional child tax credit; expand the
10% bracket, expand width of the 15% bracket and increased standard deduction (marriage penalty provisions),
accelerate reduction in the tax rates under EGTRRA; increase AMT exemption; and reduced taxation of dividends
(and capital gains). Includes both filing and non-filing units. Tax units that are dependent of other taxpayers are
excluded from the analysis.
a. Tax units with negative AGI are excluded from the lowest income class but are included in the totals.
Table 5 shows an excerpt from the Department of the Treasury’s distributional
analysis of P.L. 108-27. It does not include a comparison of after-tax income nor
does the analysis offer the data to make that computation. Rather, it is based upon
the change in the distribution of total individual income taxes. In contrast to the
previous illustrations, other taxes such as payroll taxes and excise taxes are not
incorporated into this analysis. Interpretation is complicated without additional
information such as the number of taxpayers within each category, and even with
such information, the presentation would respond to a substantively different
question than an assessment of an individual’s well-being as previously discussed.
It considers the question of which taxpayers most heavily support government
services through income taxes, before and after the change in law. Similarly, the
percent change in individual income taxes does not provide a meaningful assessment
of the change in one’s standard of living. For example, an individual who pays a
dollar in income tax and then pays no tax after the change will receive a 100%
reduction in tax liability, but this effect will be negligible on his lifestyle. The
percentage change would also exhibit a different pattern if other federal taxes were
included.
CRS-19
Table 5. Comparison of the Distribution of Total Individual
Income Taxes, 2003
Distribution of Total
Cash Income
Individual Income Taxesb
Percent Change in
Individual Income
Classa
Law with
Taxes
Prior Law
P.L. 108-27c
less than $30,000
-2.0%
-2.6%
-15.5%
30,000 to 40,000
2.1%
1.9%
-19.3%
40,000 to 50,000
3.7%
3.6%
-14.0%
50,000 to 75,000
11.6%
11.7%
-11.1%
75,000 to 100,000
12.1%
12.0%
-12.7%
100,000 to
27.6%
27.9%
-11.0%
200,000
more than
44.8%
45.4%
-10.8%
200,000
Totald
100.0%
100.0%
-11.9%
Source: Excerpt from a table prepared by the Department of the Treasury.
Notes: The provisions of P.L. 108-27 included are i) accelerate to 2003 the reductions in income tax rates above
15% scheduled for 2004 and 2006; ii) accelerate to 2003 the increase in the width of the 10% bracket for
single and joint filers scheduled for 2008; iii) accelerate to 2003 the increase in the standard deduction
and the width of the 15% bracket for joint filers scheduled to phase in between 2005 and 2009; iv)
accelerate to 2003 the increase in the child credit from $600 to $1,000 scheduled to phase in between 2005
and 2010; v) an increase in the AMT exemption amounts; and vi) a reduction in the tax rates on dividends
and capital gains to 5% (for taxpayers in the 10% and 15% ordinary income tax brackets) and to 15% (for
taxpayers in the higher ordinary income tax brackets).
a. Cash income consists of wages and salaries, net income from a business or farm, taxable and tax-exempt
interest, dividends, rental income, realized capital gains, cash transfers from the government, and
retirement benefits. Employer contributions for payroll taxes and the federal corporate income tax are
added to arrive at a family’s cash income used in the distributions.
b. The refundable portions of the earned income tax credit (EITC) and the child credit are included in the
individual income tax. Individual income taxes are estimated at 2000 income levels under 2003 law as
if it were fully phased in law, so exclude provisions that expire prior to the end of the budget period
(ignoring the sunset of EGTRRA in 2011) and are adjusted for the effects of unindexed parameters.
c. The change in individual income taxes under P.L. 108-27 is estimated at 2000 income levels as if the change
represented fully phased in law (ignoring the sunset of EGTRRA in 2011).
d. Families with negative incomes are excluded from the lowest income class but included in the total line.
Similarly, among a wide variety of distributional measures released by the
Urban-Brookings Tax Policy Center, one statistic presented is the average tax change
among income quintiles. This absolute measure is presented in
Table 6, and would
not, alone, offer sufficient information to determine whether or not a modification to
the tax law would result in a system that relatively favors or burdens those with
higher incomes. The average tax change among income classes suggests high
income taxpayers benefit much more, in absolute dollars, than lower income
CRS-20
taxpayers. Nonetheless, it is important to recognize that these same taxpayers
currently have a larger proportion of the total income and pay a higher fraction of the
total taxes - a result of the generally progressive federal tax structure. Therefore, tax
changes that result in both more and less favorable relative treatment of high income
taxpayers would likely result in larger changes in average taxes for the highest
taxpayers.
Table 6. Average Tax Change by Income Percentile, 2003
AGI Class
Average Tax Change
Lowest Quintile (0 - 20%)
-$1
Second Quintile (20 - 40%)
-$38
Middle Quintile (40 - 60%)
-$217
Fourth Quintile (60 - 80%)
-$482
Next 10% (80 - 90%)
-$1,270
Next 5% (90 - 95%)
-$2,125
Next 4% (95 - 99%)
-$3,145
Top 1% (99-100%)
-$20,786
All
-$715
Source: Urban-Brookings Tax Policy Center.
Note: Identical to those outlined in Table 4.
Two basic economic principles inform the discussion of distributional analysis:
vertical equity and horizontal equity. An analysis of vertical equity assesses how
taxpayers with different incomes are treated, relative to the tax burden of a proposal.
The measures of percentage of after-tax income, by income category, shown in the
previous analyses provides information related to the concept of vertical equity. An
analysis of horizontal equity assesses how taxpayers with equal incomes but in
different circumstances are treated, relative to the tax burden under a proposal. In
addition to vertical equity issues, horizontal equity issues are raised within the
context of tax cuts directed at married couples, families with children, and dividends
and capital gains.
Several of the tax reduction provisions included in H.R. 2 were not solely
dependent upon an individual’s income or wealth, but on other characteristics such
as family status and, even indirectly, other deductions for which a taxpayer may be
eligible. For example, due to the acceleration in the tax reductions targeted at
married couples and the increase of the child tax credit, single taxpayers and those
without children benefit less than married taxpayers and families with children. This
result provides the basis for the anecdotal example cited by the Secretary of the
Treasury on the President’s proposal, “A typical family of four with two earners
CRS-21
making a combined $39,000 will receive a total of $1,100 in tax relief, compared to
the taxes they paid in 2002, under the President’s plan...”.14
The “marriage penalty” occurs for certain families when the incomes are
combined and subjected to progressive income tax rates.15 In contrast, it is possible
that others experience a “marriage bonus,” particularly in cases where two incomes
are unequal, since the exemption amounts and rate brackets are broader under the
prior law for married couples. In terms of the taxation of families with children, an
assessment of the “fairness” of the existing tax system is contingent upon how one
believes children and family sizes should be treated vis a vis the income tax system.
Several theories are available to guide this choice such as: treating children as
consumption, treating children as investment, and maintaining comparable before-tax
and after-tax income between families of different sizes (ability to pay). Regardless
of the treatment of families before the proposals, the distribution of all of the
proposals favored married couples and families compared to single taxpayers.
As the largest single provision in terms of reduced revenue, the reduction or
elimination of the taxation of dividends, and at times, capital gains, exhibits specific
vertical and horizontal distributional effects.16 In terms of horizontal equity, it may
be argued that owners of capital were unfairly taxed under the prior tax structure
compared to those holding other investments such as corporate debt. Therefore, any
reduction in these taxes would have disproportionately benefitted owners of
corporate equity over other classes. However, this argument fails to account for the
mobility of investment in search of equal, risk-adjusted returns on an after-tax basis.
(Those holding corporate equities at the time of passage may indeed benefit from a
one-time windfall from the reduction in taxes.) Horizontal fairness considerations,
in other words, do not apply in the usual way because investors are free to choose
whether or not to invest in heavily taxed assets.
As a result, the more significant analysis might reside with issues of vertical
equity: do the tax reductions contribute to distributional issues within the tax system?
Most economists believe that the economic incidence of a tax on capital income
largely falls on the owners of capital (as opposed to labor, for example). Further, the
distribution of both dividends and capital income is more concentrated among those
taxpayers with higher incomes compared to those with lower incomes, generally. As
illustrated in
Table 7, with the exception of the lowest income categories, dividends
generally account for a higher percentage of income for those with the highest
incomes. The distribution of capital gains make up an even greater proportion of
adjusted gross income for tax returns from higher income groups than from lower
income groups. Consequently, and notwithstanding the limitations of using adjusted
14 U.S. Department of the Treasury,
Secretary Snow’s Opening Statement before the House
Ways and Means Committee Testimony on the President’s Budget, JS-02, Feb. 4, 2003.
Posted on the Treasury’s website at [http://www.treas.gov/press/releases/js02.htm].
15 For further information on the marriage tax penalty, see CRS Report RL30419,
The
Marriage Tax Penalty: An Overview of the Issues, by Jane G. Gravelle.
16 For a more extensive discussion of issues of equity and distribution, see CRS Report
RL31597,
The Taxation of Dividend Income: An Overview and Economic Analysis of the
Issues, by Gregg A. Esenwein and Jane G. Gravelle.
CRS-22
gross income as a measure of income, those with higher incomes bore a greater
burden of the tax on capital gains and dividends under prior law. Similarly, higher
income taxpayers were expected to benefit the most from a reduction in taxes on
dividends and capital gains.
CRS-23
Table 7. Dividends and Capital Gains as a Percentage of Adjusted Gross Income, 2000
Adjusted Gross
Net Capital Gains,
Dividends as
Net Capital Gains
Income Category
Income (AGI) Less
Dividend Amount
Losses, and
Percent of AGI
as Percent of AGI
Deficit
Distributions
No AGI
-$58,599,965
$1,576,463
na
$6,629,135
na
Less than $5,000
34,203,382
1,126,432
3.3%
1,545,803
4.5%
5,000 to 10,000
95,975,660
1,903,650
2.0%
2,685,021
2.8%
10,000 to 15,000
151,243,464
2,667,185
1.8%
2,518,815
2.7%
15,000 to 20,000
203,601,716
3,192,758
1.6%
2,724,105
1.3%
20,000 to 25,000
224,389,266
2,491,989
1.1%
3,256,199
1.5%
25,000 to 30,000
229,375,741
2,617,639
1.1%
3,054,874
1.3%
30,000 to 40,000
470,892,948
5,390,865
1.1%
6,877,584
1.5%
40,000 to 50,000
465,603,449
6,288,365
1.4%
8,329,955
1.8%
50,000 to 75,000
1,044,655,055
14,571,639
1.4%
23,353,710
2.2%
75,000 to 100,000
737,503,612
12,568,533
1.7%
22,364,044
3.0%
100,000 to 200,000
1,066,341,747
26,866,194
2.5%
65,289,214
6.1%
200,000 to 500,000
613,755,638
23,168,417
3.8%
79,496,171
13.0%
500,000 to 1,000,000
269,020,887
11,465,353
4.3%
54,864,271
20.4%
1 to 1.5 million
120,604,227
5,162,730
4.3%
31,196,776
25.9%
1.5 to 2 million
76,710,836
3,489,259
4.5%
22,383,144
29.2%
2 to 5 million
199,393,478
8,072,349
4.0%
69,183,786
34.7%
5 to 10 million
120,577,375
4,694,445
3.9%
50,077,200
41.5%
10 million or more
300,128,133
9,673,414
3.2%
174,712,625
58.2%
Source: CRS calculations based on Internal Revenue Service
Statistics of Income, Fall 2002.
Note: Capital gains include net capital gains plus capital gain distributions minus net capital losses for each income cohort.
CRS-24
Appendix
This appendix provides a side-by-side comparison of prior law, President
Bush’s economic growth portion of the FY2004 Budget proposal, H.R. 2, as
approved by the House, the proposal adopted by the Senate Finance Committee on
May 9, and P.L. 108-27. (Some initial notes are included in the Senate Finance
Committee column that reflect changes made on the Senate floor.) It also presents
item-by-item revenue estimates prepared by the Joint Committee on Taxation. The
table is not intended to be comprehensive but does contain the principal provisions
of each proposal.
CRS-25
Table 8. Comparison of Principal Provisions
Prior Law
President’s Proposal
House
Senate Finance
P.L. 108-27
Individual Income Taxes
Individual Income Tax Rates
Tax rates applicable to individuals’
Would have accelerated the
Would have accelerated the
Would have accelerated the
Accelerated the reduction in the tax
taxable income were 10%, 15%,
reduction in the tax rates for
reduction in the tax rates for
reduction in the tax rates for
rates for individuals scheduled for
27%, 30%, 35%, and 38.6% for
individuals scheduled for reduction
individuals scheduled for reduction
individuals scheduled for reduction
reduction in 2004 and 2006 under
2003; 10%, 15%, 26%, 29%, 34%,
in 2004 and 2006 under then
in 2004 and 2006 under then
in 2004 and 2006 under then
prior law. The rates scheduled for
and 37.6% for 2004 and 2005; and
existing law. The rates scheduled
existing law. The rates scheduled
existing law. The rates scheduled
2006 (10%, 15%, 25%, 28%, 33%,
10%, 15%, 25%, 28%, 33%, and
for 2006 (10%, 15%, 25%, 28%,
for 2006 (10%, 15%, 25%, 28%,
for 2006 (10%, 15%, 25%, 28%,
and 35%) became effective for 2003
35% for 2006 through 2010 under.
33%, and 35%) would have become
33%, and 35%) would have become
33%, and 35%) would have become
and thereafter (given present law in
EGTRRA’s “sunset” provisions,
effective for 2003 and thereafter.
effective for 2003 and thereafter.
effective for 2003 and thereafter.
2006), but will expire as scheduled
rates in 2011 and beyond reverted
under EGTRRA after 2010.
back to the statutory rates effective
The 10% tax rate bracket would
The 10% tax rate bracket would
The 10% tax rate bracket would
prior to its passage: 15%, 28%,
have been expanded by $1,000 (to
have been expanded by $1,000 (to
have been expanded by $1,000 (to
The law expanded the 10% tax rate
31%, 36%, and 39.6%.
$7,000) for single individuals and
$7,000) for single individuals and
$7,000) for single individuals and
bracket by $1,000 (to $7,000) for
by $2,000 (to $14,000) for married
by $2,000 (to $14,000) for married
by $2,000 (to $14,000) for married
single individuals and by $2,000 (to
The 10% tax rate bracket applied to
couples filing jointly. In short, the
couples filing jointly. The bracket
couples filing jointly. The bracket
$14,000) for married couples filing
the first $6,000 of taxable income of
2008 scheduled increase would
size would have been annually
size would be annually adjusted for
jointly for 2003 and 2004. (For
individuals and $12,000 for married
have been advanced to 2003.
adjusted for inflation.
inflation.
2004, these amounts will be
couples filing jointly for 2003
indexed for inflation.) In 2005, the
through 2007. For 2008, 2009, and
Estimated revenue loss: $58.3
The reduced rates and expanded
The reduced rates would have
tax rate brackets will revert to the
2010, the 10% tax rate bracket
billion in FY2003 and FY2004;
bracket would have been effective
begun in 2003 and expired, as
schedule under prior law.
applied to the first $7,000 of taxable
$118.8 billion in FY2003 through
for 2003, 2004, and 2005. Beyond
scheduled, under EGTRRA after
income of individuals and $14,000
FY2013 (11 years).
2005, the rates imposed by
2010.
Estimated revenue loss: $58.3
for married couples filing jointly.
EGTRRA would have been
billion in FY2003 and FY2004; and
effective and would have expired,
Estimated revenue loss: $58.3
$86.1 billion over 11 years.
Both provisions were scheduled to
as scheduled in 2010. The
billion in FY2003 and FY2004; and
expire along with all of the
expanded 10% bracket would have
$118.8 billion over 11 years.
provisions of EGTRRA after 2010.
reverted to present law in 2006.
Estimated revenue loss: $58.3
billion in FY2003 and FY2004; and
$92.6 billion over 11 years.
CRS-26
Prior Law
President’s Proposal
House
Senate Finance
P.L. 108-27
Alternative Minimum Tax Exemption
The alternative minimum tax
Proposal would have increased the
The size of the AMT exemption
The size of the AMT exemption
The law increased the size of the
exemption was set at $49,000 for
AMT exemption amount by $8,000
would have been increased by
would have been increased by
AMT exemption by $9,000 (to
joint returns and $35,750 for single
(to $57,000) for joint returns and by
$15,000 (to $64,000) for joint
$12,000 (to $61,000) for joint
$58,000) for joint returns and by
returns for 2003 and 2004. The
$4,000 (to $39,750) for single
returns and by $7,500 (to $43,250)
returns and by $6,000 (to $41,750)
$4,500 (to $40,250) for single
levels were reduced to $45,000 for
returns for 2003, 2004, and 2005.
for single returns for 2003, 2004,
for single returns for 2003, 2004,
returns for 2003 and 2004.
joint returns and $33,750 for single
and 2005.
and 2005. [These were reduced on
returns for 2005 and thereafter.
The increases would not have been
the Senate floor to $60,500 for joint
The increases will not be applicable
applicable after 2005.
The increases would not have been
returns and $41,500 for singles.]
after 2004.
applicable after 2005.
Estimated revenue loss: $10.1
The increases would not have been
Estimated revenue loss: $11.5
billion in FY2003 and FY2004;
Estimated revenue loss: $15.0
applicable after 2005.
billion in FY2003 and FY2004; and
$37.3 billion over 11 years.
billion in FY2003 and FY2004;
$17.8 billion over 11 years.
$53.0 billion over 11 years.
Estimated revenue loss: $13.6
billion in FY2003 and FY2004;
$49.3 billion over 11 years.
CRS-27
Prior Law
President’s Proposal
House
Senate Finance
P.L. 108-27
Married Couples
Phased in an increase in the
Would have accelerated, to 2003,
The proposal would have
Would have accelerated, to 2003,
Accelerated the increase in the
standard deduction for couples to
the increase in the standard
accelerated, to 2003, the increase in
the increase in the standard
standard deduction for couples to
twice that of singles: 167% of
deduction for couples to twice that
the standard deduction for couples
deduction for couples to twice that
twice that of singles for 2003 and
singles bracket in 2003 and 2004,
of singles.
to twice that of singles.
of singles.
2004.
174% in 2005, 184% in 2006,
187% in 2007, and 190% in 2008
Would have accelerated, to 2003,
Would have accelerated, to 2003,
Would have accelerated, to 2003,
Accelerated the broadening of the
and 200% in 2009 and 2010.
the broadening of the 15% rate
the broadening of the 15% rate
the broadening of the 15% rate
15% rate bracket for couples to
bracket for couples to twice that of
bracket for couples to twice that of
bracket for couples to twice that of
twice that of singles for 2003 and
Phased in over 2005-2008 a
singles.
singles.
singles.
2004.
broadening of the 15% rate bracket
for couples to twice that of singles.
Estimated revenue loss: $30.9
The provision would have been
The reduced rates would have
For 2005 and thereafter, the
From 2008 through 2010, the rate
billion in FY2003 and FY2004;
applicable to tax years 2003, 2004,
expired after 2010, as scheduled
deduction and bracket width will
for married couples filing jointly
$55.4 billion over 11 years.
and 2005. Beyond 2005, the
under EGTRRA.
revert to prior law and will expire
was 200% of singles.
standard deduction amounts and the
after 2010, as previously scheduled
size of the 15% rate bracket would
Estimated revenue loss: $29.8
under EGTRRA.
have reverted to the schedule under
billion in FY2003 and FY2004;
EGTRRA.
$51.4 billion over 11 years.
Estimated revenue loss: $29.8
billion in FY2003 and FY2004;
Estimated revenue loss: $29.8
[The Senate adopted an amendment
$35.1 billion over 11 years.
billion in FY2003 and FY2004;
to accelerate the increase in the
$43.4 billion over 11 years.
standard deduction and broadening
of the tax rate bracket for couples to
195% of singles in 2003 and 200%
in 2004. Beyond 2004, the Senate
version would have reverted to the
phase-in under prior law.]
CRS-28
Prior Law
President’s Proposal
House
Senate Finance
P.L. 108-27
Child Tax Credit
The child tax credit was scheduled
The plan would have accelerated
Would have accelerated the child
The plan would have accelerated
Accelerated the child credit increase
to be increased from $600 in 2003
the child credit increase to $1,000 to
credit increase to $1,000 to 2003.
the child credit increase to $1,000 to
to $1,000 from $600 for 2003 and
to $1,000 in 2010. Specifically, the
2003.
2003.
2004. In 2003, the amount of the
credit was scheduled to be $600 in
The increase would have expired
increase ($400) is to be paid in
2003 and 2004, $700 in 2005
Estimated revenue loss: $19.4
after 2005 and reverted to the
The reduced rates would have
advance to qualifying taxpayers.
through 2008, $800 in 2009, and
billion in FY2003 and FY2004;
amounts scheduled under
expired, as scheduled under
$1,000 in 2010. The credit was
$89.6 billion over 11 years.
EGTRRA.
EGTRRA after 2010.
The reduced rates are scheduled to
scheduled to revert to $500 in 2011
revert to prior law and expire, as
under EGTRRA’s sunset
Estimated revenue loss: $19.5
Estimated revenue loss: $21.3
scheduled under EGTRRA after
provisions.
billion in FY2003 and FY2004;
billion in FY2003 and FY2004;
2010.
$45.0 billion over 11 years.
$93.3 billion over 11 years.
The child tax credit was refundable
Estimated revenue loss: $19.5
to the extent of 10% of income over
billion in FY2003 and FY2004;
$10,500 for 2003 and 2004, 15% of
$32.5 billion over 11 years.
income over $10,500, indexed for
inflation from 2005 to 2010.
CRS-29
Prior Law
President’s Proposal
House
Senate Finance
P.L. 108-27
Business Taxes
Business Expensing
Instead of depreciating certain
The threshold investment level for
The threshold investment level for
The threshold investment level for
The threshold investment level for
business equipment, businesses with
small businesses would have been
small businesses would have been
small businesses would have been
small businesses was increased from
equipment investment of less than
increased from $200,000 to
increased from $200,000 to
increased from $200,000 to
$200,000 to $400,000. The amount
$200,000 were allowed to deduct up
$325,000. The amount eligible for
$400,000. The amount eligible for
$325,000. The amount eligible for
eligible for deduction was increased
to $25,000 of the cost for tax
deduction would have been
deduction would have been
deduction would have been
from $25,000 to $100,000
purposes. (The $25,000 was
increased from $25,000 to $75,000
increased from $25,000 to $100,000
increased from $25,000 to $75,000
beginning in 2003. After 2003, the
reduced to the extent the investment
beginning in 2003. After 2003, the
beginning in 2003. After 2003, the
beginning in 2003. After 2003, the
threshold amounts and the
exceeds $200,000.)
threshold amounts and the
threshold amounts and the
threshold amounts and the
deduction limit will be indexed for
deduction limit would have been
deduction limit would have been
deduction limit would have been
inflation.
The provision did not apply to off-
indexed for inflation.
indexed for inflation.
indexed for inflation.
the-shelf computer software.
The provision is extended to off-
The provision would have been
The provision would have been
The provision would have been
the-shelf computer software.
extended to off-the-shelf computer
extended to off-the-shelf computer
extended to off-the-shelf computer
software.
software.
software.
The provision will sunset after
2005.
Estimated revenue loss: $4 billion
The provision would have expired
The provision would have expired
in FY2003 and FY2004; and $28.8
after 2007.
after 2012.
Estimated revenue loss: $4.3 billion
billion over 11 years.
in FY2003 and FY2004; $1 billion
Estimated revenue loss: $4.3 billion
Estimated revenue loss: $4.1 billion
over 11 years.
in FY2003 and FY2004; $2.7
in FY2003 and FY2004; $23.4
billion over 11 years.
billion over 11 years.
[The Senate approved an
amendment that would have
changed the Senate’s version to
more closely mirror the House
version. The threshold investment
level would have been increased
from $200,000 to $400,000 and the
eligible deduction would have been
increased from $25,000 to
$100,000. The provision would
have expired after 2007.]
CRS-30
Prior Law
President’s Proposal
House
Senate Finance
P.L. 108-27
Depreciation
In general, the tax code required
No provision.
Qualified property would have been
No provision.
Qualified property is eligible for a
businesses depreciate the cost of
eligible for a “bonus depreciation”
“bonus depreciation” deduction of
property over a scheduled time
deduction of 50% in the first year if
50% in the first year if acquired
period.
acquired after May 5, 2003 and
after May 5, 2003 and before
before January 1, 2006 and placed
January 1, 2005.
As a result of the Job Creation and
in service before January 1, 2006.
Worker Assistance Act of 2002
(This enhanced depreciation
Estimated revenue loss: $43.2
(P.L. 107-147), businesses were
provision would have thus been
billion for FY2003 and FY2004;
allowed to elect a first year
imposed for one additional year
$9.2 billion over 11 years.
depreciation deduction of 30% for
beyond the then existing 30% bonus
certain property purchased between
depreciation deduction.)
September 11, 2001 and September
11, 2004, and placed in service
Estimated revenue loss: $33.2
before January 1, 2005. This is also
billion for FY2003 and FY2004;
termed “bonus depreciation.”
$21.5 billion over 11 years.
Net Operating Losses
In most instances, a net operating
No provision.
The proposal would have extended
No provision.
No provision.
loss (NOL) could be carried back
the enhanced five-year carryback
two years and forward for 20 years
period for NOLs arising in 2003
to offset against taxable income in
through 2005.
those years.
The proposal also would have
The Job Creation and Worker
allowed both five-year carrybacks
Assistance Act of 2002 (P.L. 107-
arising in 2003 through 2005 and
147) extended the carryback period
carryforwards to taxable years 2003
to five years for NOLs arising in
through 2005 to reduce a business’s
2001 and 2002.
AMTI by 100%.
An NOL deduction was limited to
Estimated revenue loss: $20.9
offsetting 90% of a business’s
billion for FY2003 and FY2004;
alternative minimum taxable
$14.6 billion over 11 years.
income (AMTI).
CRS-31
Prior Law
President’s Proposal
House
Senate Finance
P.L. 108-27
Taxation of Dividends and Capital Gains
Dividends
A corporation pays tax on all of its
The proposal would have
Dividends received by an individual
Would have excluded the first $500
The law reduced the individual tax
taxable earnings up to the maximum
eliminated the double taxation of
from domestic corporations would
of qualified dividends received
rates applied to domestic and
rate of 35%. Individuals receiving
dividends by allowing individual
have been subjected to reduced
from taxable income, beginning in
foreign corporate dividends
distributions of after-tax earnings
and corporate shareholders to
rates: 15% for higher income
2004. In addition, 10% of
received to 15% for taxpayers in the
from a corporation in the form of
exclude dividends from their
taxpayers and 5% for those in the
dividends received in excess of
higher tax brackets and 5% for
dividends included the amount in
taxable income. (This was also
10 and 15% tax rate brackets.
$500 would also have been
taxpayers in the 15% and 10%
their gross income and pay tax at
termed “tax integration”).
(These same rates would have
excluded from taxation from 2004
income tax brackets.
the appropriate individual tax rate.
applied to capital gains.)
through 2007. From 2008 through
Corporations receiving dividends
More specifically, the amount of the
2012, 20% of dividends received in
This provision began in 2003 and is
from another domestic corporation
dividends eligible for exclusion
Dividends from foreign
excess of $500 would be excluded
scheduled to expire after 2008. (In
were allowed to exclude at least
would have been computed by the
corporations would not have
from taxation.
2008 only, the applicable rates will
70% of the dividend received.
corporation and was termed the
received the reduced rates.
be 15% and 0%, respectively.)
excludable dividend amount (EDA).
Dividends from foreign
In general, the EDA was a measure
The provision would have begun in
corporations would have qualified
Beyond 2008, the tax structure will
of the corporation’s fully taxable
2003 and expire after 2012.
for the exclusion.
revert to prior law.
income, reduced by the taxes it
paid.
Estimated revenue loss: $22.1
The provision would have begun in
Estimated revenue loss: $21.8
billion in FY2003 and FY2004;
2004 and expire after 2012.
billion in FY2003 and FY2004;
The provision would have applied
$245.8 billion over 11 years.
$125.7 billion over 11 years.
to distributions made beginning in
Estimated revenue loss: $2.0 billion
2003.
in FY2004; $81.1 billion over 10
years.
Dividends from foreign
corporations would have been
[The Senate approved an
excluded only in the case of foreign
amendment that would have
corporations conducting U.S.
reduced the taxation of dividends
business.
for foreign and domestic
corporations by 50% in 2003 and
Estimated revenue loss: $30.9
provide a 100% exclusion in 2004,
billion in FY2003 and FY2004;
2005, and 2006.]
$395.8 billion over 11 years.
CRS-32
Prior Law
President’s Proposal
House
Senate Finance
P.L. 108-27
Capital Gains
The capital gains upon sale of long-
The President’s “tax integration”
The proposal would have reduced
No provision.
The law reduced the 20% and 10%
term capital assets (held more than
proposal to eliminate the double
the 20% and 10% tax rates
tax rates applicable to capital gains
12 months) were taxed at 20%
taxation of dividends would have
applicable to capital gains to 15%
to 15% and 5%, respectively.
(10% for taxpayers in the 10 and
effectively eliminated the tax on
and 5%, respectively.
15% income tax brackets).
capital gains by allowing
This provision began in 2003 and is
shareholders to adjust their basis in
The provision would have begun in
scheduled to expire after 2007.
For assets held more than 5 years,
computing their capital gains.
2003 and expired after 2012.
beginning with ownership after
Therefore, prior to the sale of a
In 2008 only, the applicable rates
December 31, 2000, the maximum
stock, corporate income that was
Estimated revenue loss: $990
will be 15% and 0%, respectively.
rate was 18% (8% for lower
previously taxed would not have
million for FY2003 and FY2004;
brackets).
been subject to capital gains tax at
$31 billion over 11 years.
Beyond 2008, the tax structure will
the individual level.
revert to prior law.
Estimated revenue loss: The Joint
Estimated revenue loss: $1 billion
Committee on Taxation did not
in FY2003 and FY2004; $22.4
separate the revenue loss from the
billion over 11 years.
revenue loss attributed to the
elimination of the tax on dividends.
CRS-33
Prior Law
President’s Proposal
House
Senate Finance
P.L. 108-27
Other Major Provisions
Revenue Raising Offsets
For additional information on the
No provisions.
No provisions.
The proposal approved by the
No provisions.
then existing law for each of the
Senate Finance Committee included
underlying provisions, see U.S.
more than two dozen revenue
Congress, Joint Committee on
offsets, customs user fee extensions,
Taxation,
Description of the
and additional reform measures
Chairman’s Modification to the
amounting to $ 5.8 billion in
Provisions of the “Jobs and Growth
FY2003 and FY2004 and $92.4
Tax Act of 2003,” and
Description
billion over 11 years.
of Additional Chairman’s
Modification to the Provisions of
Examples of major revenue offsets
the “Jobs and Growth Tax Act of
included clarification of the
2003,” 108th Cong., 1st sess.
economic substance doctrine ($13.6
(Washington: May 8, 2003).
billion over the 11-year projection
period) and repeal of the foreign
earned income exclusion ($32.1
billion over the projection period).
Customs user fee extensions
included in the proposal would have
extended the passenger and
conveyance processing fee and the
merchandise processing fee through
2013.
Assistance to State and Local Governments
The federal government has
No provision.
No provision.
The proposal would have created a
The law created a fund to provide
provided state and local
fund to provide $20 billion in aid to
$20 billion in aid to state
governments with assistance
state and local governments ($10
governments.
through a wide variety of programs,
billion in FY2003 and $10 billion in
grants, and formulas.
FY2004).
Estimated costs: $20 billion in
FY2003 through FY2004.
Estimated cost: $20 billion in
FY2003 and FY2004.