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41 IRET Congressional Advisory 1 (1995)

handle is hein.taxfoundation/iretcgadv0039 and id is 1 raw text is: April 28, 1995 No. 41 ANOTHER CONGRESSIONAL SLAP AT SAVERS Once again Congress is telling Americans not to save. The latest message is directed at people with below average incomes. In early April, when Congress passed legislation restoring the 25% health-insurance cost deduction for the self-employed for 1994 and increasing it to 30% thereafter, it financed the majority of the revenue loss by denying the Earned Income Tax Credit (EITC) to people with investment income above $2,350. When the EITC provision becomes claim an EITC of $2,080 (estimate for 1996). If the family's investment income rises to $2,400, however, its EITC would fall to zero. In this case, the extra $100 of investment income would cost the family $2,080; that is a marginal tax rate on investment of 2,080%! In the absence of this provision, the family would still lose some of the EITC because the EITC phases out as adjusted gross income (AGI) rises. Under the phaseout based on AGI, an extra $100 of income, whether from wages or investments, would lower the family's EITC by $21.06. That's a marginal tax rate of 21.06% just from the phaseout, an awfully stiff disincentive against additional work and saving, but a far cry from 2,080%. Another of the bill's revenue raisers, repeal of a controversial rule that allowed capital gains to be deferred on some sales of broadcasting facilities to certain minorities, received widespread attention. The EITC provision, however, involves much larger revenues and has much more effect on the incomes of the poor; yet it attracted scant attention. Congress's Joint Committee on es that EITC recipients with Taxation estimat effective in 1996, it could cost a tax filer with 1 investment income will pay 60% more over a 5-year child up to $2,152, a tax filer children up to $3,556, and a tax filer with no children up to $323 (based on estimates of the maximum EITC in 1996). Although this provision affects EITC eligibility, it is really a tax penalty on investment income. The reason is that investment income above a specified level, with 2 or more budget window Instead of taking a meat ax to saing incentives.. .a better way to r-ein in the EITC would be to trim the extremely generous formula used in computing the credit. $2,350, is what the threshold. A than sellers of broadcasting facilities, rising to twice as much over a 10-year budget window. Relatively modest asset holdings will trigger EITC disqualification. For instance, $30,000 of accumulated saving in a bond fund paying 8% interest pushes a family above family with a low yearly income triggers loss of the EITC. The loss is sudden, like going over a cliff. For example, a family with 2 or more qualifying children, $16,000 of earned income, and $2,300 of investment income would be able to but a strong desire to save can accumulate that amount over a number of years. With regard to rental income, suppose a family owns a house, rents a room to a lodger, and in consequence receives net Institute for Research on the Economics of Taxation Although this pr-oision affects EITC eligibility, it is really a tax penalty on investment income. 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., Suite 910, Washington, D.C. 20006 Voice 202-463-1400 * Fax 202-463-6199 0 Internet www. ret.org

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