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ACCF Capital Formation Newsletter
Capital Formation Newsletter
July-August 1997, Vol. 22, No. 5
American Council for Capital Formation:
Significant Pro-Capital FormationTax Cuts Signed Into Law
ACCF Center for Policy Research: Center Forum Assesses Impact of U.S.
Tax Code on Competitiveness of Financial Service Firms
ACCF Center for Policy Research Director: Norman B. Ture
Save the Date: September Forums Planned
on International Trade and Climate Change Policy
Significant Pro-Capital Formation Tax Cuts
Signed Into Law
On July 31, the House of Representatives, by a vote of 389 to 43,
and the Senate, by a vote of 92 to 8, passed the first major tax reductions
on saving and investment since 1981 as a part of "The Taxpayer
Relief Act of 1997." On August 5, President Clinton signed the
measure into law.
The American Council for Capital Formation, which has fought for over
two decades to see important pro-growth tax measures such as these
enacted into law, congratulates especially House Ways and Means Committee
Chairman Bill Archer and Senate Finance Committee Chairman William
V. Roth. The effective leadership of the chairmen of the two tax-writing
committees of Congress ensured that the 1997 tax bill contained strong
pro-saving and -investment provisions, including substantial cuts
in capital gains taxes for individuals, a liberalization of individual
retirement accounts, and much-needed easing of the corporate alternative
minimum tax.
Key pro-capital formation provisions of the 1997 tax act are summarized
below.
- Capital Gains Tax Cuts for Individuals
The maximum capital gains tax rate for individuals is reduced
to 20 percent for gains on assets held (1) for 18 months or (2)
for 12 months if sold after May 6, 1997 and before July 29, 1997.
A 10 percent rate applies to individuals in the 15 percent bracket
for the same time periods.
Gains on assets sold on or after July 29, 1997, and held less
than 12 months are taxed at the same rate as ordinary income (as
high as 39.6 percent). Gains on assets sold on or after July 29,
1997, and held between 12 and 18 months are taxed at a maximum
rate of 28 percent. (This was done to avoid penalizing taxpayers
who would otherwise would have been better off under the old law.)
Gains on sales of collectibles continue to be taxed at a top rate
of 28 percent.
The 20 percent rate drops to 18 percent for assets purchased on
or after January 1, 2001 (or existing assets "marked-to-market")
and held for five years. Similarly, the 10 percent rate drops
to 8 percent for assets sold on or after that date and held for
five years (without having to mark-to-market).
There is no capital gains tax on up to $250,000 for single individuals
and $500,000 for married couples on the gain from the sale of
a principal residence. To qualify, taxpayers generally must own
and use the residence as a principal residence for at least two
of five years prior to the sale. The provision is effective for
sales and exchanges after May 6, 1997.
Any part of a gain on the sale of depreciable real property which
represents prior depreciation is "recaptured" and taxed
at a maximum rate of 25 percent.
- Individual Retirement Accounts
In general, the traditional "front-loaded" IRAs are
substantially expanded, and are made more flexible through the
addition of penalty-free withdrawal options. In addition, two
new types of "back-loaded" IRAs are created-the Roth
IRA PLUS and Education IRA.
Specifically, current law income limits on the traditional deductible
IRAs are phased-up over time. The income limits for the $2,000
IRA deduction, which currently phase out between $40,000 and $50,000
of adjusted gross income for joint returns and $25,000 and $35,000
for individuals, are increased gradually beginning in 1998 when
the income phase-out range will be $50,000 and $60,000 of adjusted
gross income for joint returns and $30,000 and $40,000 for individuals,
until 2007, when the income phase-out range will be $80,000 and
$100,000 for joint returns and $50,000 and $60,000 for individuals.
In addition, starting in 1998, an individual who does not participate
in an employment-based retirement plan would be eligible to make
deductible IRA contributions even if that individual's spouse
participates in an employment-based retirement plan. Eligibility
for this special active participant relief will phase-out for
adjusted gross incomes between $150,000 and $160,000 for joint
returns.
A new "back-loaded" IRA, called a Roth IRA PLUS, is
created. Contributions are not deductible but the income can be
withdrawn tax-free if (1) the IRA holder is at least 59 1/2, on
account of death or disability of the holder, or for a first-time
home purchase; and (2) the IRA has been open for at least five
years after the first contribution to a Roth IRA PLUS. Contributions
are phased out at income levels of $95,000 and $110,000 for singles
and $150,000 and $160,000 for couples. Beginning in 1998, taxable
rollovers from a tax-deductible IRA to a back-loaded Roth IRA
PLUS without application of the 10 percent early withdrawal penalty
are permitted for IRA account holders (both individuals and joint
returns) with income of less than $100,000.
Beginning in 1998, contributions may be made to a new Education
IRA. The Eduction IRA will be a trust or custodial account established
for the purpose of paying higher education expenses of the designated
beneficiary. Contributions to the ED IRA will not be deductible
but earnings would accrue tax free. All distributions from the
ED IRA will be tax-free if used to pay higher education expenses
of the designated beneficiary. Eligibility to contribute to an
ED IRA is phased out for adjusted gross incomes between $150,000
and $160,000 for joint returns and $95,000 and $110,000 for individuals.
IRA assets may be invested in certain platinum coins and in certain
gold, silver, platinum, or palladium bullion, effective after
December 31, 1997.
- Alternative Minimum Tax
The recovery periods used for purposes of the alternative minimum
tax are conformed for purposes of the regular tax for property
placed in service after December 31, 1998. However, AMT taxpayers
must use the 150 percent declining balance method rather than
the 200 percent method used by regular taxpayers.
Center Forum Assesses Impact of
U.S. Tax Code on Competitiveness of Financial Service Firms
America's increasingly important financial service sector firms can
face much higher tax rates on foreign source income than do their
international competitors when operating in the same third country,
according to a new study prepared for a June 26 forum sponsored by
the ACCF Center for Policy Research on Capitol Hill.
Dr. Thomas Horst, former director of the international
tax staff at the U.S. Treasury and now managing director of Horst,
Frisch, Clowery & Finan, presented his analysis comparing the
tax treatment of U.S.-based financial service firms with that of the
eleven countries that are the home base for most major competitors
of the U.S.-based firms. Dr. Horst found that, as a consequence of
their more favorable tax codes, foreign financial service firms can
offer products at lower prices than can U.S. firms, thereby giving
them a competitive advantage in world markets.
Using Taiwan as one example, the Horst study shows that while U.S.
insurance firms are taxed at a rate of 35 percent on income earned
abroad, French-, Swiss-, or Belgian-owned firms face a tax rate of
only 14.3 percent. To clarify, a U.S. subsidiary is taxed at an assumed
rate of 14.3 percent on income earned in a country such as Taiwan,
and then the U.S. parent company is taxed at an additional 20.7 percent
on the foreign source investment income-whether it is repatriated
or not-for a total of 35 percent. As a result, U.S. firms face tax
rates that are as much as 145 percent higher than those paid by their
competitors on income earned in the same third country.
Responding to Dr. Horst's paper were Dr. Gary C. Hufbauer,
director of studies and Maurice R. Greenberg Chair, Council on Foreign
Relations, and Dr. Scott Newlon, international economist,
U.S. Department of the Treasury. Moderating the panel was Dr.
Margo Thorning, senior vice president and chief economist
of the ACCF Center for Policy Research.
The Honorable Orrin Hatch (R-UT), member of the Senate
Finance Committee and sponsor of the "International Tax Simplification
for American Competitiveness Act" (S. 843), a measure that would
give active financial firms equal treatment with other multinationals
and allow U.S. financial firms to increase their competitiveness abroad,
opened the forum with his perspective on the U.S. tax treatment of
financial service companies.
Senator Hatch noted that "since 1986, income that is earned abroad
by a U.S. financial service company is taxed currently in the U.S.
as foreign personal holding company income. However, this treatment
and the extension of the Subpart F rules to active financial service
income, while noteworthy in its attempt to prevent abuse, impedes
the ability of U.S firms that are active in providing financial and
insurance services to compete with the powerful German, Swiss, and
British financial firms in the international financial services business."
The 1997 tax bill included a provision designed to ameliorate the
disadvantage faced by U.S. financial service firms compared to their
international competitors. This provision, the exemption from foreign
personal holding company income under Subpart F for active financing
income, was selected for line-item veto by President Clinton on August
11, 1997.
The June 26 forum is one of a series of Center-sponsored symposia
on tax, regulatory, and environmental policy issues. On September
9, the Center will host its second international tax policy forum,
"Free Trade vs. Protectionism and International Sanctions: What
Are the Issues?" On September 24, the Center will sponsor a symposium
on "Climate Change Policy, Economic Growth, and Environmental
Quality."
For more information on programs sponsored by the ACCF Center
for Policy Research or to obtain a monograph containing the complete
edited proceedings of the Center's forum on "The Impact of the
U.S. Tax Code on the Competitiveness of Financial Service Firms,"
please contact the Center at 1750 K Street, N.W., Suite 400, Washington,
D.C. 20006-2302; telephone: 202/293-5811; fax: 202/785-8165; e-mail:
info@accf.org. Single copies are available for $25.00; 10 or more
copies are $20.00 each.
ACCF Center for
Policy Research Director
NORMAN B. TURE
Dr. Norman B. Ture, long-time member of the board of trustees of
the ACCF Center for Policy Research, died on August 10. As Undersecretary
of the Treasury in the first Reagan Administration, Dr. Ture was
a principal architect of the 1981 tax cuts. The author of numerous
books and articles on public policy issues, particularly in the
field of tax policy, he was the founder and president of IRET, the
Institute for Research on the Economics of Taxation, a Washington,
D.C.-based public policy research institute. Noted the Wall
Street Journal, "Dr. Ture was among the most economically
rigorous of the supply-side theorists, articulating honestly and
carefully for any who cared to see the links between the tax system
and the economy's incentives to produce. His input to the ongoing
debates over the fundamentals of economic policymaking will be very
much missed."
Save the Date: September Forums
Planned on International Trade and Climate Change Policy
September 9 · Free Trade vs. Protectionism and
International Sanctions: What Are the Issues?
Gary C. Hufbauer and Bruce Stokes of the
Council on Foreign Relations will present research on the benefits
of open markets and the costs of trade protection and economic sanctions.
Congressman Jim Kolbe (R-AZ) will keynote. 8:30
a.m. at the Capitol Hill Club.
September 24 · Climate Change Policy, Economic Growth,
and Environmental Quality
Mary H. Novak of the WEFA Group will show how policies
to restrict carbon emissions could affect lifestyles; Richard
Schmalensee of MIT will discuss joint implementation and
tradable permits issues. Congressman John D. Dingell (D-MI)
and Senator Charles T. Hagel (R-NE) will keynote.
8:00 a.m. at the Holiday Inn on the Hill, registration fee.
Please contact the ACCF Center for Policy Research to register
for these forums.
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Capital
Formation is published by the American Council for Capital Formation,
a nonprofit, tax-exempt corporation organized under the laws of the District
of Columbia. Editor-in-Chief: Charls E. Walker, Chairman and Founder.
Editor: Mark A. Bloomfield, President. Associate Editors: Mari Lee Dunn,
Senior Vice President and Chief Administrative Officer; Margo Thorning,
Senior Vice President and Chief Economist. Capital Formation is
distributed to ACCF supporters, the media, policymakers in the executive
branch, and members of Congress and congressional staff. If you would
like to subscribe to Capital Formation and obtain information on
the activities of the ACCF, please contact Capital Formation, 1750
K Street, N.W., Suite 400, Washington, D.C. 20006-2302. Phone: 202/293-5811;
fax: 202/785-8165; e-mail: info@accf.org
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