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9 IRET Congressional Advisory 1 (1992)

handle is hein.taxfoundation/iretcgadv0009 and id is 1 raw text is: August 4, 1992 No. 9 SENATE TAX BILL RAISES MARGINAL TAX RATES, FAILS TO SPUR GROWTH The Revenue Act of 1992, reported out by the Senate Finance Committee on July 31, would permanently extend two de facto increases in marginal tax rates on upper income taxpayers enacted in the 1990 budget agreement in exchange for growth provisions that are largely ineffective and temporary. The few modest pluses - repeal of some luxury taxes, amortization of intangibles, and easing of the alternative minimum tax - are half measures at best. Damaging tax increases. The de facto increases in marginal tax rates in the 1990 budget agreement stem from the phase-out of itemized deductions for taxpayers with adjusted gross The bill in its income (AGI) over $105,250 and the phase-out of personal likel epyre exemptions for taxpayers with aw, especuuly AGI of $157,900 (joint filers) or $105,250 (single filers). The itemized deduction phase- out implicitly increases the 31% tax rate to nearly 32% (more precisely, 31.93%). The personal exemption phase-out implicitly raises the marginal tax rate by roughly 0.57% per exemption, adding over 1.1% to the tax rate for a married couple, over 2.3% for a family of four, and over 3.4% for a family of six. The combined effect of the two curre rathe 01ompa afte ,I provisions is to generate marginal tax rates of about 32.5% for a single taxpayer, 33.1% for a couple filing jointly, 34.2% for a family of four, and 35.4% for a family of six. (Further details below.) These anti-growth provisions are currently scheduled to expire after 1995. The Senate tax bill would make them permanent. This would be a great mistake, particularly if one expects pressure in the future for explicit increases in the top tax rate, either alone or in connection with a restoration of a capital gains differential. Another anti-growth tax increase in the bill would require securities firms to pay tax on unrealized gains in their securities inventories. The bill would damage real estate by extending the write-off period for commercial real estate to 40 years from 31.5 years. Ineffective growth incentives. The bill would offer a temporary additional 15% first year write-off for equipment installed before next July. The basis of the equipment would be reduced accordingly, lowering future write-offs by an equal amount and offsetting most of the benefit to the investor. Much of the limited benefit would go to investment already planned, and would do little within the short time frame to spark additional investment not yet under way. nt orm would More importantly, the current rt weakness in investment is not ire tamerely a temporary recession- ired to current related phenomenon. It has 1995. been caused by features of the _1986 Tax Reform Act that raised the cost of capital on a permanent basis. A temporary credit will not restore investment to permanently higher levels. The bill offers only partial relief from the passive loss limitations on real estate deductions of the 1986 Tax Reform Act. The one-time home buyer credit is an ineffective give-away. Institute for Research on the Economics of Taxation IRET is a non-profit, tax exempt 501(c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote economic growth and efficient operation of the free market economy. 1730 K Street, N.W., Suite 910, Washington, D.C. 20006 Voice 202-463-1400 * Fax 202-463-6199 0 Internet www.iret.org

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