ACCF Urges Enactment of President’s Tax Cut Proposal

Comparison of Estate Tax Plans

ACCF Congratulates Dr. R. Glenn Hubbard

ACCF in the News

ACCF Urges Enactment of President’s Tax Cut Proposal

The American Council for Capital Formation supports President Bush’s tax cut proposal and urges enactment of the measure by Congress.

The President’s proposal is to be commended on all provisions: a long-overdue reduction in U.S. taxpayer burdens through across-the-board and equitable cuts in individual marginal tax rates, but with special, generous reductions for lower-income Americans; elimination of the archaic and unfair “death tax” which taxes income already taxed and therefore hampers growth-inducing capital formation; a permanent extension of the research and development tax credit; and other “fairness” provisions, some of which have already passed Congress only to be vetoed by former President Clinton.

One of the pillars of President Bush’s campaign proposal—estate tax repeal—is an important capital formation initiative. Treasury Secretary Paul H. O’Neill, in his written statement before the House Ways and Means Committee on February 8, said: “Government has no business confiscating the legacy parents work their entire lives to build for their children.” The Administration is recommending a phase-in of estate tax repeal, but has demonstrated some flexibility on this issue. Lawrence Lindsey, President Bush’s chief economic adviser, was recently quoted as saying that “the president wants to see his approach adopted but is leaving the structure of repeal up to the Congress. He has told the [Congressional] leadership, ‘You guys make the sausage, I just brought the meat and the spice.’”

Congressional Estate Tax Repeal Measures

What is expected to be the President’s recommendation for a phase-out of the “death” (estate) tax was first introduced in a bipartisan fashion on January 22 by Senators Phil Gramm (R-TX) and Zell Miller (D-GA) as “The Tax Cut With a Purpose Act of 2001” (S. 35). Representatives Jennifer Dunn (R-WA) and John Tanner (D-TN) are expected to introduce “The Death Tax Elimination Act of 2001,” which phases out estate, gift, and generation-skipping taxes beginning in 2001, leading to full repeal in 2010.

On February 7, Senator Jon Kyl (R-AZ) together with several Senate Finance Committee members as original co-sponsors, including Senators John Breaux (D-LA), Blanche Lincoln (D-AR), and Phil Gramm (R-TX), introduced “The Estate Tax Elimination Act of 2001” (S. 275), which provides for immediate repeal of the estate tax. The bill continues “step-up in basis” for estates smaller than $2.8 million per individual ($5.6 million per couple) and eliminates “step-up” for estates greater than $2.8 million per individual ($5.6 million per couple).

Legislation representing the views of the congressional Democratic leadership was introduced on January 22 by Senate Democratic Leader Thomas Daschle (SD) as “The Working Family Tax Relief Act of 2001” (S. 9). This measure is limited to increasing the unified credit and increasing the “qualified family-owned business interest” or a small business/family farm carve-out. Other estate tax reform or repeal legislation has been introduced, but the aforementioned are the principal concepts that will be on the table. See a side-by-side comparison of these proposals. (For an update on current legislation or additional background, please contact the ACCF.)

Pro-Capital Formation Initiatives

The ACCF has historically been supportive of measures that reduce the bias in the tax system against saving and investment. Therefore, at the earliest time possible consistent with our support of the President’s tax plan, the ACCF urges Congress to consider a three-part capital formation initiative.

• Pension Reform and IRA Liberalization
  
  The American Council for Capital Formation commends Representatives Rob Portman (R-OH) and Ben Cardin (D-MD) who plan to reintroduce their “Comprehensive Retirement Security and Pension Reform Act” in the 107th Congress. This measure, designed to expand retirement saving opportunities for millions of workers, was the leading pro-saving initiative in the 106th Congress.
  
  ACCF research and that of others shows that too many Americans are not saving enough for a secure retirement. The Portman-Cardin bill contains a number of provisions designed to address the saving gap, including increasing the limits on contributions to Individual Retirement Accounts, allowing increased portability, and making numerous other pension reforms aimed at simplifying pension rules and reducing red tape. (For a discussion of the need for retirement saving reform, see “Stretching the Pension Dollar: Improving U.S. Retirement Security and National Saving by Enhancing Employer-Based Pension Plans,” [172k PDF] prepared for the American Council for Capital Formation and the American Benefits Council by Sylvester J. Schieber and his colleagues at Watson Wyatt Worldwide.)
  
  The Portman-Cardin measure has attracted 209 cosponsors as of February 27, including 125 Republicans, 83 Democrats, and 1 independent.
  
  
• Reduction in Corporate Tax Burden
  
  To reduce the ultra-high U.S. taxation of productive business investment and thus enhance this nation’s international competitiveness, ACCF is developing an innovative “choice” proposal that includes a 10-point cut in the corporate income tax rate (from 35 to 25 percent) phased in over three years; or, at the choice of the taxpayer, accelerated “capital cost recovery” (e.g., accelerated business depreciation) in the amount of the foregone rate cut. This would be the first corporate rate cut since 1986 and the first overall reduction in the business tax burden since 1981. The “choice” option would appeal to both capital-intensive companies and non-capital intensive companies. All profitable companies would enjoy lower tax burdens that would help ameliorate current recessionary pressures and foster international competitiveness. Jobs and growth would tend to benefit.
  
  
• Amelioration of Taxes on U.S.-Based Multinational Corporations
  
  Consideration should be given to lightening the taxation of the foreign source income of U.S.-based multinational corporations to ensure a “level playing field” for them compared to U.S. trading partners. For example, the phase-in of a “territorial” income tax, which confines all income taxes paid to income generated in the home country (although the company would still, as at present, pay taxes abroad on profits earned abroad), is one such approach. Another approach would be to reform various provisions in current law by liberalizing the foreign tax credit and interest allocation rules, and to reevaluate whether Subpart F is obsolete in the light of changes in global trade patterns.
  

The economic analysis arm of the American Council for Capital Formation, the ACCF Center for Policy Research, has underway several research projects on the impact of these proposals on GDP, jobs, capital costs, and federal revenues. For more information, please contact ACCF.

Comparison of Estate Tax Plans

A gift tax is imposed on lifetime transfers and an estate tax is imposed on transfers at death. The gift tax and the estate tax are unified so that a single graduated rate schedule applies to cumulative taxable transfers made by a taxpayer during his or her lifetime and at death. The unified estate and gift tax rates begin at 18 percent on the first $10,000 in cumulative taxable transfers and reach 55 percent on cumulative taxable transfers over $3 million. The unified credit effectively exempts from tax transfers by gift and death an amount totaling $675,000 in 2000 and 2001, $700,000 in 2002 and 2003, $850,000 in 2004, $950,000 in 2005, and $1 million in 2006 and thereafter. Because the law allows each individual an exemption, a married couple can, with proper estate planning, use the exemption twice. The benefit of the unified credit applies between the 18 percent and the 37 percent estate and gift tax rates. Thus, in 2001, taxable transfers, after application of the unified credit, are subject to estate and gift tax rates beginning at 37 percent. The basis of property acquired or passing from a decedent is its fair market value on the date of the decedentÕs death. This step up (or step down) in basis eliminates the recognition of any income on the appreciation of the property that occurred prior to the decedent’s death, and it has the effect of eliminating any tax benefit from any unrealized loss. Family businesses that meet the definition of a “qualified family-owned business interest” (QFOBI) can shield up to $1.3 million ($2.6 million per married couple) of the value of the business from the estate tax. A credit is allowed against the federal estate tax for any estate tax paid to any state or the District of Columbia.

ACCF congratulates Dr. R. Glenn Hubbard, who has served as an ACCF Fellow and authored research on tax policy sponsored by the ACCF Center for Policy Research, on his nomination as chairman of the White House Council of Economic Advisers. Dr. Hubbard is a former deputy assistant Treasury secretary and professor of economics at Columbia University.

ACCF in the News

“Charls E. Walker…[t]he most enduring and perhaps best known of the scores of lobbyists who push tax cuts for business…”

—Richard W. Stevenson, New York Times, February 23, 2001

“Mark Bloomfield, head of the American Council for Capital Formation, a business tax cut lobbying group, said his members wanted tax relief to make America more competitive…”

—Martin Crutsinger, Associated Press, February 4, 2001

“Next week’s White House tax blueprint will only be the first step in what Mr. Bloomfield terms ‘a marathon—that’s the metaphor for the tax process this year.’ Nobody knows how that process works better than Mr. Bloomfield. An avid long-distance runner, his fourth-floor office on K Street—a street famous for the many lobbyists based there—mixes pictures of him running real marathons with mementos of his 25-year quest for lower business taxes as ACCF leader.”

—Jacob M. Schlesinger and John D. McKinnon, Wall Street Journal, February 2, 2001

“Mark Bloomfield…contended that it is important that estate tax repeal is done the right way, saying…that immediate, rather than phased-in, repeal and inclusion of the step-up in basis for calculating an estate’s value is the way to go, since it has a more tangible economic impact and actually generates some revenue.”

—Stephen Norton, CongressDaily, January 26, 2001