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and analyzes the effect of the tax reform proposals in the present budget on tax expenditures.” The figures shown for tax expenditures are necessarily estimates for past years as well as future ones, since they compare actual tax receipts with what tax receipts would have been if the tax law had been different. The method of estimation is to assume that only the tax provision in question is removed, while taxpayer behavior and all other characteristics of the tax system remain the same. If removing a particular provision increases taxable income, as would occur in most cases, the tax expenditure is then estimated as the increase in taxable income multiplied by the appropriate tax rate. The size of a particular tax expenditure depends not only on the tax provision in question but also on the interaction of this provision with the rest of the tax structure. The tax changes proposed in this budget, as an example, would automatically decrease many tax expenditures, since they would reduce tax rate schedules and would replace deductions for personal exemptions by a credit that would raise the levels of income at which tax liabilities begin. The reduction in tax rate schedules would decrease the amount of receipts gained by eliminating deductions and exclusions; the personal credit together with other reforms would decrease the number of taxpayers itemizing deductions and would thereby decrease tax expenditures for deductions, particularly those deductions taken disproportionately by low-income taxpayers. The interaction among tax provisions means that special calculations are generally needed to add tax expenditures together. For example, if more than one exclusion from individual income were ended, the gain in receipts would generally be greater than the sum of the separate tax expenditures, because more taxpayers would move into higher tax rate brackets. If more than one personal deduction were ended the gain in receipts would generally be smaller than the sum of the separate tax expenditures, because more taxpayers would switch to the standard deduction. According to a special calculation based on current law, if all itemized deductions resulting in tax expenditures were repealed, the gain in receipts in 1979 would be $24.7 billion. In comparison the sum of the tax expenditures for each separate item is $32.2 billion. Consequently, except for a few special calculations, separate tax expenditures are not added together in this budget. Where tax expenditures for both individuals and corporations result from the same provision, however, such as the investment tax credit, the two estimates may meaningfully be added. * See Special Analyses. Budget of the United States Government. Fiscal Year, 1979. The pres
entation in this special analysis meets the requirement in the Congressional Budget Act that tax expenditures be set forth in the budget.
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Interaction among separate tax expenditure provisions is one reason why tax expenditures cannot all be added together to form a meaningful total amount. In addition, there are two conceptual reasons why even a total amount that took these interactions into account would be of little use. First, as explained above, the list of tax expenditure items would be different if a different standard were used for comparison. Any total amount would depend on the normative judgments that defined the standard, and a total based on the present standard could readily be raised or lowered. Second, the effect of tax expenditures on receipts depends on the extent to which eliminating tax expenditures would be offset by reducing tax rates in order to compensate for the higher receipts otherwise collected. Frequently tax expenditures and other provisions of tax law have been changed together; and one particular provision, whether a tax expenditure or not, has been used to modify, compensate, or substitute for another provision. The administration's present tax program, for example, proposes that the use of different taxes, the rate schedules of different taxes, tax expenditure provisions, and other tax provisions should be changed simultaneously in the light of the entire set of proposed tax changes and the whole tax system. Thus, as more tax expenditures are removed, the tax rate schedules would ordinarily be reduced and the net effect on receipts might be small. The effects on resource allocation and income distribution from repealing tax expenditure provisions would depend on which method of changing tax rates and outlays—out of a limitless number of alternatives—would be used to compensate for their removal. The administration is proposing extensive changes in tax expenditures and other provisions of tax law in its tax reform and reduction program and in its energy plan. These proposals will reduce substantially the Nation's overall tax burden and will simplify the work of filling out tax returns. The principal distributional and allocative goals are to improve equity, stimulate business investment, and conserve energy. The estimated effects of these proposals on receipts are shown in Part 4. In order to improve equity and simplify the tax system, the tax reform proposal will generally reduce the tax expenditures under the individual income tax. This will be accomplished by changing certain tax expenditure provisions and also certain other provisions of law. Some tax expenditure provisions, such as the deductions for State and local sales and gasoline taxes, will be repealed, and the deductions for medical expenses and casualty losses will be restricted. The fraction of taxpayers itemizing deductions is estimated to decline from 23.3% to 16.5%. The decrease in taxpayers itemizing deductions will automatically decrease tax expenditures for all deductions, including those not changed by the proposals. Finally, as noted above, the tax expenditures for all deductions and exclusions will be decreased by the reduction in the tax rate schedules and by the subsitution of personal tax credits in place of deductions for personal exemptions. Equity will also be improved by limiting the deductibility of business meals to half their cost and by repealing the deductibility of tickets to entertainment and membership dues in clubs. These changes are not defined as reducing tax expenditures, however, since tax expenditure analysis ordinarily accepts the definition of deductible business expense under current law. Business investment will be stimulated by reducing the corporation income tax rates and liberalizing the investment tax credit. The credit will be made permanent at its current rate, extended to include industrial and utility structures as well as equipment, and generally allowed to offset a greater proportion of tax liability than before. The tax reduction from the investment tax credit will be a tax expenditure, whereas the tax reduction from the cut in the maximum corporate rate will not. The tax measures to conserve energy, as proposed by the administration last year and included in this budget, primarily make use of excise taxes. By definition, excise taxes do not lead to tax expenditures. The crude oil equalization tax, the oil and natural gas consumption tax, and other excises are designed to raise the prices of oil and natural gas. This is intended to encourage both the conservation of energy in general and the conversion of facilities that burn oil and natural gas to the use of other kinds of fuel. In addition, several tax expenditure provisions are proposed, such as the residential and business energy credits, that will allow tax credits for the installation of insulation and solar equipment and for the conversion of oil burning and natural gas burning equipment to coal.
BUDGET FUNDS AND THE FEDERAL DEBT
The budget may be divided into two major groups of funds: Federal funds and trust funds."
is Data for Federal funds and trust funds are presented in Special Analysis C. "Funds in the Budget." in Special Analyses, Budget of the United States, Fiscal Year 1979.
The Federal funds are derived mainly from taxes and borrowing and are used for the general purposes of the Government. Most of these funds are not restricted by law to any specific Government purpose. The trust funds, on the other hand, collect certain taxes and other receipts for specified purposes, such as payment of social security and unemployment insurance benefits.
BUDGET FINANCING AND CHANGE IN DEBT OUTSTANDING
(In billions of dollars]
Change in gross Federal debt.
• $50 million or less.
The budget combines the receipts and outlays of the Federal funds and trust funds and deducts the various transactions that occur between them. It therefore generally displays the net transactions of the Federal Government with the public. Thus, as is shown in the table on the preceding page the unified budget surplus or deficit is the principal determinant of the change in Federal debt held by the public. In the last several years, however, the transactions of the Federal Financing Bank and other off-budget Federal entities have become an important determinant of the change in Federal debt held by the public. The transactions of the off-budget Federal entities have been excluded from the budget under provisions of law and are not part of either the Federal funds or the trust funds grouping. Were they to be included in the budget, virtually all transactions of off-budget Federal entities would be classified as Federal funds transactions.
1 All off-budget Federal entities are revolving funds; income is offset against expenditures to derive net outlays. Hence, no adjustments are made to receipts when on and off-budget totals are consolidated. Virtually all off-budget outlays would be classified as Federal funds outlays if they were included in the budget.