President Bush Signs Major Tax Reduction Into Law

Energy and Climate Briefing Draws Congressional Staff

ACCF Center for Policy Research Board Members Join Administration

Leading Australian Climate Expert Meets With Center Advisory Board

Top Administration Officials Speak Out on Need for Tax Reform

Lawmakers Applaud Center’s Capital Gains Study

President Bush Signs Major Tax Reduction Into Law
Death tax relief, pension reform, reductions in marginal rates enacted

THREE OF THE American Council for Capital Formation’s legislative priorities—death tax relief, pension reform, and reductions in marginal tax rates—were signed into law June 7 by President George W. Bush as part of the “Economic Growth and Tax Relief Reconciliation Act of 2001” (H.R. 1836).

“Across-the-board tax relief does not happen often in Washington, D.C.,” President Bush noted during the White House signing ceremony. “In fact, it has happened only twice: President Kennedy’s tax cut in the 1960s and President Reagan’s tax cuts in the 1980s. And now it’s happening for the third time, and it’s about time.”

Throughout the Congressional debate, the ACCF played an active role in promoting repeal of the death tax, reform of U.S. pension provisions, and marginal tax rate reductions for individuals. ACCF’s research and analysis helped make the case for these pro-capital formation tax initiatives, which will encourage saving and investment, thereby promoting economic growth, job creation, and retirement security.

Estate Tax Repeal

Death tax repeal was a key provision of the tax cut plan the President sent to Congress shortly after taking office. The ground for repeal was laid in 2000, when death tax repeal passed both houses with strong bipartisan support. The measure was vetoed by President Clinton.

The 2001 tax relief package establishes the principle of death tax repeal for all estates, irrespective of the type of assets (a farm, business, or portfolio of securities), and for all taxpayers regardless of wealth. In fact, the “Qualified Family-Owned Business Interest” deduction, or family business“carve-out” from the death tax now in the tax code, is repealed, lending support for an across-the-board repeal of the estate tax. The bill also provides some reductions in death tax rates and an increase in the unified credit exemption.

See the adjacent table for the estate and gift tax rate schedule and unified credit exemption enacted as part of H.R. 1836.

Retirement Savings Reform

The “Economic Growth and Tax Relief Reconciliation Act” included expanded saving incentives and pension reform measures that will encourage saving for retirement by all Americans. The provisions were drawn from H.R. 10, the “Retirement Security and Savings Act” originally introduced by Representatives Rob Portman (R-OH) and Ben Cardin (D-MD).

Among the key pension and individual retirement reforms included in H.R. 1836 were:

• An increase in the maximum annual dollar contribution limit for IRA contributions from $2,000 to $3,000 for 2002 through 2004, to $4,000 for 2005 through 2007, and to $5,000 for 2008. After 2008, the limit is adjusted annually for inflation in $500 increments. Catchup contributions by individuals age 50 and over are allowed for IRAs and 401(k) plans.
• A gradual increase in the contribution limit to 401(k), 403(b), and 457 plans from $10,500 to $15,000 annually in 2005.
• Increased portability so that employees can more easily transfer their pension plans between employers.

Marginal Rate Cuts

The tax package also included cuts in marginal income tax rates for individuals. Under the legislation, present-law regular income tax rates of 28 percent, 31 percent, 36 percent, and 39.6 percent will phased down over six years to 25 percent, 28 percent, 33 percent, and 35 percent, effective after June 30, 2001. The taxable income levels for the new rates in all years are the same as those under current law. A new 10 percent bracket applies to the first $6,000 of income for singles and $12,000 for couples. This change, retroactive to January 1, will save couples up to $600 and single filers up to $300 annually. Most taxpayers will receive credit as a check from the Treasury Department later this year.

Speaking shortly after the tax bill’s passage, Treasury Secretary Paul H. O’Neill estimated that the dynamic effect of this reduced burden on taxpayers could boost U.S. economic growth by about 0.5 percent and promote increased saving and investment. 

Energy and Climate Briefing Draws Congressional Staff

“WE MUST keep in mind that every decision to decrease emissions or add some new regulatory requirement affects our ability to produce energy,” Representative Joe Barton (R-TX), a leading congressional expert on energy policy, told participants at a June 6 ACCF Center for Policy Research briefing on energy and climate issues on Capitol Hill. The Center’s briefing focused on the fundamental imbalance between U.S. energy supply and demand, and how new approaches could affect U.S. relationships with our international allies, especially on climate change policy.

Representative Barton, chairman of the House Energy and Commerce Subcommittee on Energy and Air Quality, outlined his views on the need for a comprehensive U.S. energy package. He also stressed that the United States must improve access to domestic oil and gas reserves, upgrade and expand transmission capacity, investigate the next generation of nuclear power plants, and promote conservation, including an examination of the issue of auto fuel efficiency.

Turning to measures to reduce carbon emissions, Representative Barton called for “sound science and sound economics.” He advocated a voluntary approach to emissions control, including policy changes such as tax incentives to upgrade older power plants thus reducing carbon dioxide emissions, better depreciation schedules for investment in new technologies, and cost-sharing arrangements to help pay for pollution-control equipment.

The Texas congressman also noted that the Clean Air Act would be up for reauthorization under his subcommittee, and said he believes that Congress ought to take a fresh look at new technologies and methods to reduce costs as well as increase air quality and energy production. “We must strike a responsible balance between environmental protection and adequate energy supplies,” he concluded.

National Energy Policy

Ms. Karen Knudsen, deputy director of the White House National Energy Policy Development Group, spoke about the Bush Administration’s recently released National Energy Plan. The National Energy Plan, Ms. Knudsen said, follows three basic principles: it offers a long-term, comprehensive strategy; it will advance new, environmentally friendly technologies to increase energy supplies and encourage cleaner, more efficient energy use; and it seeks to raise the living standards of the American people. The Plan also sets five specific national goals: modernize conservation; modernize the energy infrastructure; increase energy supplies; accelerate the protection and improvement of the environment; and increase our nation’s energy security.

International Outlook on Climate Policy

Ms. Mary Novak, senior vice president, DRI-WEFA, addressed the current outlook for international climate negotiations. EuropeÕs policymakers may support the goals of carbon emission reductions, Ms. Novak explained, but a review of five recent government studies and an independent report by WEFA energy analysts in Europe supports the conclusion that the emissions targets cannot be achieved without high carbon taxes or emissions caps. Ms. Novak noted that while rhetoric from European leaders continues to stress the need to “do something” to mitigate the risk of climate change, she nevertheless sees momentum gathering for a “new step forward.” 

ACCF Center for Policy Research Board Members Join Administration

THE ACCF Center for Policy Research congratulates two of its board members, Dr. Kathleen Cooper and Mr. Thomas White, on their confirmations to high-level positions in the Bush Administration.

Dr. Cooper is serving as Undersecretary for Economic Affairs at the U.S. Department of Commerce, where she will oversee the nation’s major statistical agencies—the Census Bureau and the Bureau of Economic Analysis. Prior to her appointment, Dr. Cooper was chief economist and manager of the economics and energy division of ExxonMobil Corporation. She has also served as president of both the U.S. Association for Energy Economics and the National Association for Business Economics.

Mr. White is the 18th Secretary of the Army, where he has responsibility for all matters relating to manpower, installations, weapons systems, and financial management. He previously held the position of vice chairman of Enron Energy Services. From 1967 to 1990, Mr. White served in the U.S. Army, rising to the rank of brigadier general. 

Leading Australian Climate Expert Meets With Center Advisory Board

Dr. Brian Fisher, executive director of the Australian Bureau of Agricultural and Resource Economics (ABARE), met with ACCF Center for Policy Research Senior Vice President and Director of Research Dr. Margo Thorning and members of the CenterÕs Climate Advisory Board. He discussed his new research findings on the economic impacts of the Kyoto Protocol.

The work of Dr. Fisher and his colleagues at ABARE was published in the Center's most recent book on climate policy, The Kyoto Commitments: Can Nations Meet Them With the Help of Technology? Copies are available by contacting the Center. 

Top Administration Officials Speak Out on Need for Tax Reform

Treasury Secretary Paul H. O’Neill, in interview with the Financial Times (May 19/20, 2001), laid out a vision for radical reform of the U.S. tax structure, including abolishing the corporate income tax and the capital gains tax on businesses. He also called for reform of the Social Security system. Secretary O’Neill said that the level of corporate taxes as well as their administrative costs are too high. He noted that tax simplification would improve U.S. competitiveness.

In addition, White House Economic Council Director Dr. Lawrence Lindsey, in a May 7 address to the National Tax Association, suggested lower rates and a broader tax base. And, in a speech in Washington on June 26, Council of Economic Advisers Chairman Dr. R. Glen Hubbard said, “I do think that the stars are in alignment in terms of the President’s commitment to tax reform [and] conditions in the world. ItÕs not just academic head-scratching.”

The ACCF has long argued for the elimination of the corporate income tax. In an editorial for the Houston Chronicle last year, ACCF Chairman Dr. Charls E. Walker made the point that people, not companies, pay corporate taxesÑas customers, workers or shareholders. The fairness of the corporate tax, Dr. Walker argues, must be judged in terms of which groups of people take the final tax hit. He noted that research by University of California at Los Angeles Professor of Economics Arnold Harberger, a member of the board of scholars of the ACCF Center for Policy Research, concludes that any attempt to tax capital here more heavily than in competitor nations will cause it to seek the higher after-tax returns available abroad, thus leaving U.S. laborÑespecially less-skilled workers—bearing the primary burden of the corporate tax.

“The corporate income tax is anti-growth, anti-job creation, anti-incentive, anti-entrepreneurial, anti-efficiency—‘anti’ almost everything important in helping foster growth and prosperity in a market-based economy,” Dr. Walker notes. 

Lawmakers Applaud Center's Capital Gains Study

AT A RECENT press conference to introduce a bill to lower and simplify capital gains taxes, Senator Jon Kyl (R-AZ) praised a new research report by the ACCF Center for Policy Research:

“According to a recent study by the ACCF Center for Policy Research, American taxpayers face capital gains tax rates that are 38 percent higher than those faced by the average investor in other countries. In addition, the United States is one of a small number of countries that imposes a holding period requirement in order for an investment to qualify for a lower capital gains treatment,” said Senator Kyl.

The bipartisan “Capital Gains Relief and Simplification Act” (S. 818) was cosponsored by Senators Kyl, Orrin Hatch (R-UT), Frank Murkowski (R-AK), and Robert Torricelli (D-NJ). The bill:

• Provides a 100 percent exclusion for the first $1,000 in capital gains for an individual ($2,000 on a joint return).
• Provides a 50 percent deduction for individual capital gains above the exclusion level. The effect of this would be to lower an individual’s top capital gains tax rate to exactly half the ordinary income tax rate.
• Under the reduced tax rate structure just enacted (see elsewhere this issue of Capital Formation), the capital gains rates would be exactly half the new brackets. For example, for those in the 10 percent bracket, the capital gains rate would be 5 percent; for those in the 15 percent bracket, the capital gains rate would be 7.5 percent; and for those in higher brackets, the capital gains rate would be exactly half the income tax rate.
• Reduces the holding period of long-term capital gains from one year to 6 months.
• Increases the amount of capital loss an individual may deduct against ordinary income to $10,000 from the current-law $3,000, and indexes it for future inflation.