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The following table shows the effect of these four acts on receipts for the years 1975–80.
EFFECT ON RECEIPTS OF MAJOR INCOME TAX LEGISLATION
[In billions of dollars]
-2.8 -14.4 -13.2
Tax Reduction and Simplification
Act of 1977:
-2.1 -15.3 -11.3
-2.6 -17.8 -13.7
Total effect of above acts:
Individual income taxes...-
-3.2 -17.4 -24.2 -15.3
1.4 -1.0 -1.2
-3.6 -18.5 -28.2 -17.9 -10.3
Simplification Act of 1977 if
permanently extended: 2 Individual income taxes --Corporation income taxes.
-7.2 -12.8 -1.1 -2.6
-8.3 -15.4 *$50 million or less.
Includes the effect of interim legislation that extended individual income tax withholding rates and corporation income tax rate reductions from July 1, 1976, to Oct. 4. 1976, when the Tax Reform Act of 1976 was enacted.
: Excludes extension of the jobs tax credit. Unlike other provisions of this act, the jobs tax credit is a short-term countercyclical provision.
Social security taxes.—The recently enacted Social Security Amendments of 1977 will raise social security taxes significantly. These increases, which are in addition to increases that were already scheduled under prior law, were designed to place the social security system on a sound financial basis.
The table below shows the social security tax rate and taxable earnings base scheduled under prior law and the corresponding figures under the 1977 act. By 1981, the new legislation increases the combined employer-employee tax rate by 0.7 percentage points above what it otherwise would have been and increases the taxable earnings base by $7,800. The act legislates further increases in the rate and taxable earnings base in subsequent years over and above the increases scheduled to occur under prior law. Also, this legislation requires employers as well as employees to pay social security taxes on employee income derived from tips effective January 1, 1978. The 1977 act increases receipts by $38 million in 1978, $3.2 billion in 1979, and $8.8 billion in 1980.
Income tax reductions and reforms.—The administration is proposing major tax reductions, generally effective October 1, 1978, and tax reforms, generally effective January 1, 1979. These proposals provide the economic stimulus to help maintain the momentum of the current economic recovery. They take significant steps toward developing a simpler, more efficient, and more equitable tax system, and will reduce taxes for nearly all taxpayers, particularly for low and moderate income families.
Individual income taxes.—Major tax reductions for individuals will result from substitution of a personal $240 credit for the current general tax credit and personal exemption of $750 and from reducing rates from the current range of 14-70% to 12–68%.
A number of proposed simplifications and reforms will increase receipts in 1979 and subsequent years partially offsetting the individual income tax reductions described above. They include:
• Eliminating the deductions for State and local sales, gasoline,
personal property, and miscellaneous taxes. • Combining the separate deductions for medical expenses and
uninsured casualty losses into a new "extraordinary expense" deduction available only to the extent that these items together
exceed 10% of adjusted gross income. • Eliminating the alternative tax of 25% on up to $50,000 of
capital gains. • Including unemployment compensation benefits in the adjusted
gross income of single taxpayers with incomes above $20,000 and
married couples filing joint returns with incomes above $25,000. • Eliminating the deduction for half of regular taxes paid from
the base for the minimum tax. Currently, individuals may deduct from this base (principally the untaxed half of net capital
gains) the greater of $10,000 or half of regular taxes paid. • Restricting tax shelter investments by eliminating or limiting
accelerated depreciation on investments in real estate, taxing certain limited partnerships as corporations, taxing interest currently being accrued on large annuity contracts, and restricting deductibility of losses associated with certain investments to amounts that taxpayers have invested, or for which they are at risk. Some of these provisions would also affect corporate tax
liabilities. • Allowing State and local governments the option of issuing tax
able bonds with a Federal interest subsidy in place of conventional tax-exempt bonds. The subsidy, which would be an outlay,
would be 35% in 1979 and 1980 and 40% thereafter. The estimates also reflect proposed extension of the earned income credit in its current form through calendar year 1981, at which time this credit would be expanded as part of the administration's welfare reform proposal.
Together, these and other reduction and reform proposals will reduce individual income taxes in 1979 by $18.3 billion relative to extension of temporary tax provisions.
Corporation income taxes.—Major reductions in corporation income taxes will result from proposed rate reductions and liberalization of the investment tax credit. The corporation income tax rate would be reduced effective October 1, 1978, from 20% to 18% on the first $25,000 of corporate income, from 22% to 20% on the second $25,000, and from 48% to 45% on income above $50,000. Effective January 1, 1980, the maximum corporate rate would be reduced to 44%. The investment tax credit, which currently applies only to equipment, would be extended to utility and industrial structures and certain pollution abatement facilities (retroactively to January 1, 1978) and made permanent at the current 10% rate. The credit would be allowed to offset up to 90% of the tax liability otherwise owed. Currently, the
limit is 100% of the first $25,000 of tax liability and 50% of liability above $25,000. The investment tax credit liberalization would also affect individual income taxes on business income. Partially offsetting the revenue losses from these provisions are reform proposals that include: • Reducing the tax benefits for Domestic International Sales Corporations (DISC's) by one-third in calendar year 1979, twothirds in 1980, and 100% thereafter. • Phasing out over 3 years the tax deferral for the income of foreign subsidaries of U.S. corporations controlled by U.S. taxpayers. • Reducing by 50% the otherwise allowable deduction for business meals and disallowing business deductions for tickets to entertainment events, membership dues in clubs, and the excess of first class air tickets over the cost of coach or second class tickets. These proposals would also limit business deductions claimed by individuals. * Phasing in taxation of credit unions on a basis comparable to savings and loan institutions and mutual savings banks, repealing the special bad debt allowance for commercial banks, and reducing it for thrift institutions. Together these and other reform proposals will reduce corporation income taxes in 1979 by $5.1 billion.
Energy tax proposals.-The President's national energy plan, submitted to the Congress last spring, contains tax proposals that would provide incentives to conserve energy and to convert energy use away from oil and natural gas toward greater use of non-petroleumbased fuels. The major proposals are: • A crude oil equalization tax on existing domestic production in order to raise the price of petroleum products to their replacement value. Expected tax revenues would be refunded to individuals on a per capita basis, in the form either of tax refunds or direct payments. The refund (or payment) per capita would be about $15 in calendar year 1978, $30 in 1979, and $45 in 1980. * An oil and natural gas consumption tax on certain industrial and utility use to accelerate the conversion to facilities that use nonpetroleum fuels. Industrial firms and utilities would be able to obtain refunds of the tax by making investments in equipment that uses nonpetroleum fuels. • An automoble fuel efficiency (“gas guzzler”) tax to encourage conservation. All revenues would be refunded as subsidies for the purchase of fuel-efficient vehicles. • Individual tax credits for insulating residences and installing
solar energy equipment.
• Business tax credits to promote investment in more energyefficient equipment or modification of existing structures and equipment, co-generation facilities, and coal conversion and solar energy equipment. The net effect on receipts of the administration's energy proposals is a reduction of $0.1 billion in 1978 and increases of $1.1 billion and $2.9 billion in 1979 and 1980, respectively. The administration expects that the Congress will enact energy legislation early in 1978. Changes from the administration's proposals could significantly affect the estimates of receipts.
Other receipt proposals.-A number of other tax proposals are reflected in estimated receipts. Repeal of the tax on telephone services is proposed, effective October 1, 1978. Under current law, this tax would decline from 4% to 3% on January 1, 1979, and would continue to phase out by 1 percentage point per year. This proposal reduces receipts by $1.0 billion in both 1979 and 1980. A reduction in the Federal unemployment insurance tax rate from 0.7% to 0.5% is proposed as of January 1, 1979. This tax finances the administrative expenses of the Unemployment Insurance Service and the Federal State Employment Service as well as the Federal share of extended unemployment benefits paid when unemployment is high. This proposal, which will reduce employer payroll costs, will reduce receipts by $0.6 billion in 1979 and $0.9 billion in 1980. The President has proposed that commercial users of inland waterways pay a substantial share of the costs of the facilities from which they directly benefit. They now bear none of the costs of constructing and maintaining the waterway system. User fees would start in 1980 and rise until 100% of the operating costs and 50% of new construction costs were recovered. Other proposals affecting budget receipts are: an excise tax on crude oil to create a fund to pay damages and clean up costs of oil pollution; a 2-percentage-point reduction in the 8% passenger ticket tax and the 5% tax on airfreight; payments by the Federal Reserve System of interest on member bank deposits, which will reduce miscellaneous receipts; and an increase in the charge for migratory bird hunting stamps from $5 to $10. The estimates assume that the 4-cents-per-gallon Federal gasoline tax is extended beyond its current expiration date of September 30, 1979, and that the airport and airway taxes, as amended by administration proposals, are extended beyond their current expiration date of June 30, 1980. Also included is the effect on receipts of an acceleration of State and local deposits of social security taxes, which can be accomplished by administrative action; this action will increase receipts in 1980 and subsequent years.