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62 IRET Congressional Advisory 1 (1997)

handle is hein.taxfoundation/iretcgadv0059 and id is 1 raw text is: June 20, 1997 No. 62 A TROUBLING TAX BILL FROM THE HOUSE WAYS AND MEANS COMMITTEE The tax plan that is emerging in Congress is not based on fundamental principles of good taxation but on the priorities and revenue targets in the budget agreement struck between President Clinton and Congressional leaders. Unless the tax plan is substantially modified, it will produce a tax system that is more complicated and more arbitrary than the current one. Further, although some parts of the plan are pro- efficiency, other provisions move in the opposite direction. The principles toward which tax reform should strive are: greater neutrality, so that people are less likely to take Unless the tax plan modified, it will p system that is mor01 and mor-e ar-bitnt curr~ient one. otherwise wasteful actions for tax reasons; simplicity, so that taxpayers are not forced to expend as much time and money on unproductive tax paperwork; visibility, so that people can better know how much they are paying for government services when deciding what level of government to demand; and equity, which means that the tax system should not discriminate among people because of differences in their activities and incomes. A few aggregate numbers show the different priorities embodied in the budget deal. The agreement allows a gross tax reduction of $135 billion over 5 years but requires $50 billion of offsetting tax increases. Thus, the net tax cut is only $85 billion over 5 years. At the President's insistence, approximately $35 billion of this must be devoted to tax subsidies for college students. The budget agreement also requires that the tax plan include a $500 child credit, which is hugely expensive. In the plan approved by the House Ways and Means Committee under the leadership of Chairman Bill Archer (R-TX), the child credit and the college- student tax breaks have revenue costs of $71 billion and $31 billion, respectively. Thus, these two items, neither of which would simplify the tax code nor reduce tax biases, consume over 100% of the net tax cut. That is to say, the budget agreement forces the remainder of the plan, which includes many tax reductions as well as numerous revenue raisers, to be a net tax increase. (Over 10 years, the budget agreement permits a $250 billion net tax cut, but the child credit and tax subsidies for college students absorb $225 billion, or 90%, of that.) The child credit, which is substantially would be in addition to roduce a tax personal exemptions, is e complicated targeted tax relief; it is iry than the intended to lighten the income tax burden on people who pay taxes and have children under age 18, subject to an upper- income phase out. On the basis of tax principles, though, it is not evident why these people are more deserving of tax relief than other people. Unfortunately, because the credit would not change most people's marginal tax rates, it would not relieve the many distortions the tax system imposes on people's work, saving, production, and consumption decisions. Moreover, the credit would add some complexity to many people's tax returns, and for people in the phase-out zone, the loss of the child credit would be a work and saving disincentive. In conformity with the budget agreement, the Ways and Means bill includes a $1,500 college tax 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 inorming 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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