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TAXI FOUNDATION TAX FEATURES www.taxfoundation.org October 2000 Volume 44, Number 9 h and Gore Argue T es oughout Debates Vice President's Plan Would Slow Tax Growth Slightly; Governor Bush's Would Hold Tax Burden Level Al Gore and George W. Bush have repeatedly exchanged accusations that their tax plans are a "risky scheme" or the result of "fuzzy math" How can taxpayers make sense of the claims? How Big Are These Tax Cuts ? As the chart at left shows, the two tax plans would have substantially different results for the future of Tax Freedom Day, though neither would have a huge impact . The much debated "cost" of the candidates ' plans, roughly $ 500 billion for Gore and $1 . 3 trillion for Bush, may seem huge . However, whe n these ten-year estimates are measured on th e nation's calendar along with Tax Freedom Day , their magnitude diminishes considerably. The "Current Law" line of the chart shows a cautious estimate of what Tax Freedom Da y would be if no changes were made to our ta x system. The steady rise in Americans' tax bur- dens is primarily due to our progressive tax sys- tem. In short, "progressive" means that the mor e 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 See Gore and Bush on page 2 FRONT & CENTE R Promoting Basic Research with a Pe Credit U.S. Representative Robert T. Matsui (D-CA) 4-5 Figure 1 : How the Candidates' Plans Would Affect Tax Freedom Day, 1990-201 0 13 4 13 2 13 0 12 8 12 6 12 4 m 122 O 120 ro 11 8 -o a) 11 6 o 11 4 11 2 11 0 108 106 104 102 100 Current Law Gore Pla n Bush Plan Bush Plan with Persona l Retiremen t Accounts n The answer is to measure each plan's effec t on Tax Freedom Day, according to a new repor t from the Tax Foundation (see Publication Sum- mary on page 3) . Probably the best known tax day after April 15th, Tax Freedom Day is the day when Ameri- cans have finally earned enough to pay tax col - lectors at the federal, state, and local levels and keep a day's pay for themselves . This year, Tax Freedom Day fell on May 3, the latest ever and 1 3 days later than it arrived in 1992 . Source : Tax Foundatio n In this issue: One Last Look at th e Gore & Bush Tax Plans 1 Rep . Matsui on the R&E Tax Credit 4 Corporate Taxes Trend Up 6 Foundation Message 7 Dunn To Be Honored fo r Distinguished Service 8 Lawrence Summers To Keynote IF Conference 8 2 Gore & Bush from page you earn, the higher the percentage of your income that you pay in taxes . When tax rates are left unchange d over several years, tax burdens rise b y themselves because people earn more a s years go by and find themselves paying higher rates . So while the nation's income has grown by an average annual rate o f 6.2 percent over the past decade, tax collections have grown even faster—an average of 7 .8 percent each year. Left unchecked, then, Tax Freedom Day would reach May 7 by 2005 (12 7 days of work to pay taxes), and May 10 by 2010 (133 days) . How do the Candidates' Plans Affect Tax Freedom Day? The "Gore plan" line shows that the Vice President's plan would have only a modest slowing effect on the encroach- ing tax burden . The Gore plan is largely composed of many small, targeted tax credits, and it allows Tax Freedom Day to grow to May 7 by 2005, and to May 8 b y 2010. That means the decade would end with Americans working five extra days for the government, but still two days les s than they would under current law. By contrast, the "Bush Plan" line shows that Gov. Bush would hold the line on America's tax burden . Tax Freedom Day would roll back to May 2 in 2005— five days earlier than under current law and three days earlier than the Gore plan . By 2010, the tax burden would begin t o trend up slightly, and Tax Freedom Day would arrive on May 4, six days less tha n under current law, and four days less than under the Gore Plan . The last line in the chart combines the Bush tax plan with his support for a plan allowing younger workers to invest a portion of their payroll taxes in personal retirement accounts . If 2 percent of their wages (equal to roughly 13 percent of their payroll taxes) could be deposited into such accounts, this reduction i n taxes—albeit diverted into savings — would enhance the overall impact of the Bush tax plan . The combination of these two plans would roll back the date of Tax Freedom Day to April 29 by 2005 — the lowes t level since 1997 — before it rose slightl y again to May 1 by 2010 . Table 1 : Tax Relief in the Bush Tax Plan, FY 2001-201 0 Billions of Dollars I. Reduction of Individual Income Tax Rates $ 727 . 0 II. Family Tax Relief $ 165 . 8 Double Child Credit $ 162 . 3 Education Savings Accounts 3 . 5 III. Marriage Penalty Relief IV. Encourage Charitable Givin g Non-itemizer deduction s IRA Funds to Charity Raise Corporate Charity Limi t V . Business Incentives Eliminate Estate Tax Make Research Tax Credit Permanent $ 260 .0 $ 236 .2 23.8 NET TAX RELIEF OVER TEN YEAR S Sources : Descriptions from georgewbush .com ; estimates from Joint Tax Committee . $ 1,320 .5 $ 87 . 7 $ 79 . 6 $ 75 . 8 2 . 1 1 . 7 Table 2: Tax Relief in the Gore Tax Plan, FY 2001-201 0 Billions of Dollar s Investing in Education and Learnin g College Opportunity Tax Cut 401(j) Education and Training Account s National Tuition Savings Account s Training Tax Credi t School Construction Tax Credi t After-School Tax Credi t Improving and Expanding Quality Healthcare Tax Credit for Health Insurance $ 48 . 0 Small Business Health Insurance 0 . 3 Long-term Care Credit 26 . 6 Disability and Work Tax Credit 1 . 7 Rewarding Family, Reducing Poverty, and Empowering Communities $ 144 . 1 Eliminate the Marriage Penalty for Millions of Working Familie s Expand Child and Dependent Care Tax Credit 31 . 0 Expand the Earned Income Tax Credit 29 . 0 Increase the Low-Income Housing Tax Credit 5 . 7 Expand and Improve EZ/EC Incentives 4 . 4 New Markets 5 . 1 Close the Digital Divide 2 . 1 Technology Bonds 0 . 6 Cleaning Up the Environment and Enhancing Energy Securit y Conservation Tax Incentives $ 2 . 0 Better America Bonds 3 . 1 Permanently Extend Brownfields Tax Credit 1 . 1 Encouraging Energy Efficient Homes, Buildings, Autos, and Other 45 . 1 Making Retirement More Secure By Encouraging Savings $ 202 . 4 Retirement Savings Plus $ 200 . 0 Tax Credit for Small Business Startup Pension Expenses 1 . 3 Simplify, Increase Portability of Pensions, Including 415 1 . 1 Encouraging the Development of New Technologies and Other $ 45 . 9 Permanent R&E Tax Credit $ 23 . 8 Reduce the Estate Tax for Small Businesses and Family Farms 11 . 0 Democracy Endowment 2 . 1 Additional Unallocated Tax Cuts 9 . 0 GROSS TAX CUT $ 575 . 2 Close Corporate Shelters and Unwarranted Loopholes - $ 95 . 6 NET TAX RELIEF OVER TEN YEARS $ 479 . 6 Sources: Descriptions and estimates from algore2000 .com $ 54 . 9 $ 36 . 0 3 . 0 2 . 0 0 . 6 8 . 0 5 .3 $ 76 . 6 $ 66 . 2 $ 51 .3 3 How the Bush Plan Would Wor k The components of the Bush tax plan include broad-based tax relief achieved by cutting individual income tax rates ; targeted relief aimed at families ; charitable giving incentives ; and eco- nomic stimulus (see Table 1) . Lowering Individual Tax Rates The cornerstone of the Bush plan is a proposal to phase in lower individual in - come tax rates . There are now five rates , and if current law prevails until 2006 , married couples filing jointly will pay 1 5 percent on their first $51,350 in taxable income ; 28 percent on income between $51,350 and $124,050 ; 31 percent be- tween $124,050 and $189,050 ; 36 percen t between $189,050 and $337,650; and 39 . 6 percent on taxable income over $337,650 . Under the Bush plan, tax rates woul d gradually fall between 2002 and 2006 . In 2006, with changes fully phased in, there would be four rates . A married coupl e filing jointly would then pay a 10 percent tax on their first $12,000 of taxable in - come; 15 percent on income between $12,000 and $51,350 ; 25 percent between $51,350 and $189,050, and 33 percent o n all taxable income over $189,050 . Family Provisions The Bush plan would double the per- child tax credit to $1,000 and make filer s with less than $200,000 inAGI eligible . Two-income married couples some - times pay more tax than if they were single, filing separately. To remedy this so - called "marriage penalty," the Bush pla n would grant up to a $3,000 deduction to two-earner families . The Governor's plan would als o allow filers to contribute up to $5,000 per child each year to an educational savings account . Boosting Charitable Giving The Bush plan would allow filers who do not itemize their deductions t o claim a deduction for charitable giving . In addition, individuals over age 59 coul d make tax-free contributions of IRA fund s to charities . Under current law corporations are allowed to deduct charitable gifts up to 10 percent of corporate income . Bush would raise the limit to 15 percent . Economic Stimulu s Governor Bush argues that federal estate and gift taxes deter capital forma- tion and impede economic growth . Therefore, he would phase them out by 2009 . To encourage research and devel- opment of new technologies, the plan makes the research and experimentatio n tax credit permanent . Promoting Retirement Savings While the Governor has not en- dorsed any specific proposal, he spoken favorably about allowing workers to place a portion of their payroll taxes into per- sonal retirement accounts that would b e invested in stocks and bonds . Upon re- tirement, individuals would be allowed to draw principal and interest from thes e accounts . Any unused funds could b e passed on to an individual's heirs . How the Gore Plan Would Work The Gore plan offers $575 .2 billion over 10 years in highly targeted tax relief (see Table 2 for details), but it would als o raise $95 .6 billion in business taxes, leav- ing a net tax cut of $479 .6 billion . Promoting Retirement Savings The largest item in Vice President Gore's plan proposes to boost retirement savings by having the government match the amount a taxpayer saves in new Re- tirement Savings Plus accounts . The size of the match would range from 3- 1 down to 1-3, depending on a filer's in- come . For example, a married couple filin g jointly and earning under $30,000 woul d get the maximum—three dollars for every one they put in . Married couple s with anAGI between $60,000 an d $100,000 would receive the smallest match—33 cents for each dollar they contributed . People earning ove r $100,000 would be ineligible . Other Individual Tax Incentives The second largest category in th e Gore plan is a set of targeted cuts aime d at lower- and middle-income families , totalling $144.1 billion . The Vice Presi- dent proposes $66 .2 billion in marriage penalty relief and another $31 .0 billion to expand the child and dependent care tax credit . The other large item in thi s category is a provision to expand the Earned Income Tax Credit . Another set of tax credits is aimed at dealing with perceived health care prob- lems . Under the plan, $48 .0 billio n would provide a tax credit so that indi- viduals without employer-provide d health insurance could purchase cover - age. The plan would also spend $26 . 6 billion to provide a tax credit for long - term care . The Gore plan includes $54 .9 billion in education-related tax incentives . The bulk of it, $36 .0 billion, would be a tax deduction of up to $10,000 for post - secondary educational expenses . The plan would also provide tax credits fo r school construction and after-school care for children 16 years of age and younger . Stimulating the Economy The Gore plan also has tax incen- tives aimed at business . They are in- tended to encourage environmental res- toration and the development of energy - efficient devices as well as other ne w technologies . Like Gov. Bush, the Vic e President would make the research an d experimentation tax credit permanent . The Gore plan also provides some estate tax relief for small businesses and family farms . 0 Publication Summary General : Special Report No . 100 ; ISS N 1068-0306 ; 6pp . ; $10 or $50/yr. for 1 0 issues on varied fiscal topic s Title : Comparing the Bush and Gore Ta x Plan s Author : Patrick Fleeno r Date : October 200 0 Subject: Calculation of how the tax plans of Vice Pres . Al Gore and Gov. George Bush would affect Tax Freedom Day, which measures America's overal l tax burden . Includes a straightforwar d exposition of the plans, each presente d on its own terms . Tables & Charts : Projections of Tax Freedom Day Under Current Law, the Gore Plan, the Bush Plan, and the Bus h Plan with Personal Retirement Ac - counts, 1990-2010 ; Tax Freedom Day & Total Effective Tax Rate, Selected Year s 1902-2010; Number of Days American s are Working to Pay for Government and Other Major Expenses, 2000 ; Targete d Tax Cuts in the Gore Tax Plan, FY 2001 - 2010; Various Forms of Tax Relief in th e Bush Tax Plan, FY 2001-2010 4 Promoting Basic Research With a Permanent R&E T Credit by US. Rep. Robert T Matsui (D-CA) Research and development (R&D) i s widely seen as a cornerstone of tech- nological innovation, which in turn serves as a primary engine of long- term economic growth . What is the R&E tax credit ? The federal government support s business research and development in a variety of ways, direct and indirect . One notable indirect source of sup- port is the R&E tax credit, Section 4 1 of the Internal Revenue Code . It wa s enacted as a temporary 25 percen t credit as part of the Economic Recov - eryTax Act of 1981 . The Tax Reform Act of 1986 extended it but reduced it to 20 percent. It has been repeatedly extended at the 20-percent level since then and was recently extended to June 30, 2004. I believe that to main- tain current levels of research and development and encourage future advancements, the credit should b e made permanent . Robert T Matsui is the third-ranking Democrat on the House Ways and Means Committee . At first glance, it may not see m realistic that private firms need any prodding or incentive to do some- thing that leads to new products .After all, being first to market with a new product can amount to significan t profits . However, according to stan- dard economic theory, when firm s invest in R&D, the benefits to society as a whole are far greater than the benefits to the firms themselves . A well-known example of this is the mapping of the human genome . Cer- tainly the firm doing the mapping wil l recoup its costs and make a substan- tial profit, but the economic benefits overflowing to other firms and societ y at large are likely to be much larger . Since R&D is essentially an invest- ment decision for businesses, they wil l invest in R&D projects only if thei r expected real after-tax rate of return exceeds their real cost of capital . Firms cannot take into account the `spillover' benefits to other firms and society at large . Because of this dis- crepancy, firms are likely to invest less in research than would be warrante d by its economic benetits .Therefore , government support lhr business R&D is justified, but how much to provid e how to provide it are perennial prob. lems in Congress . The R&E tax credit seeks to stimu- late increased business R&D invest- ment by lowering the cost of capital for the firms doing the research . Since the idea of the credit is not to reward firms for doing R&D that they would have done anyway but to motivate them to engage in extra R&D, the credit is "incremental ."That means th e credit only applies to a firm's spend- ing on qualified research above a base amount .That way, the firms have to FRONT & CENTE R increase their R&D spending every year to benefit from the credit. Critics of the credit view it as a form of corporate welfare that shoul d be curbed or abolished .They conten d that it rewards firms for doing wha t they would do in any event and often The R&E tax credit is a necessary component of our nation's comprehen- sive strategy to remain competitive in the global marketplace. applies to R&D projects with little or no external benefits . While the credit is not perfect, both of these assertions are largely unwarranted . Recent studies suggest that one dollar of the credit's revenue cos t leads to a one dollar increase in busi- ness R&D spending . Others point to the conclusion that the credit may be responsible for somewhere betwee n 6.5 percent and 13 percent of busi- ness R&D spending .And as for the possibility that some research doesn' t cause the kind of spillover benefits that the mapping of the human ge- nome will, that possibility exists, but obviously the positive effects of basic research cannot be predicted with any precision : We just know that if enoug h basic research is undertaken, the posi- tive spillover benefits to society are enormous . Is the R&E Credit Perfect? Certainly the credit is not perfect . Its design contains flaws that reduc e its effectiveness as an R&D subsidy, three in particular. First, because of certain rules governing the use of the credit, its maximum marginal effectiv e rate is substantially lower than it s statutory rate . Second, the credit has never been made a permanent feature Recent studies suggest that one dollar of the credit's revenue cost leads to a one dollar increase in business R&D spending. Others point to the conclusion that the credit may be responsible for somewhere between 6.5 percent and 13 percent of business R&D spending. 5 of the federal tax code .And third, the credit confers uneven marginal ben- efits among firms performing qualifie d research . The Credit Level is Too Low Although the R&E tax credit has a positive effect on business R&D in- vestment, I believe that the effect is too modest to generate the level of R&D investment warranted by it s economic benefits . Businesses cannot even know with certainly in advanc e that they can use the R&E tax credits they earn because the credit is no t refundable .And if a business has t o lower its R&D spending compared t o the previous year, it loses the credit even if R&D spending is a higher per- centage of its total spending than in the previous year. The Credit is Temporary The credit's temporary status limits its effectiveness as a R&D sub- sidy. Undertaking basic research i s unavoidably expensive and risky.The unreliability of the credit exacerbate s Make the research and experimentation tax credit better, and make it permanent. this already substantial uncertaint y surrounding the expected returns to prospective R&D projects . The Impact ofthe Credit is Uneven Some firms derive more tax ben- efits from the credit than others fo r no apparent reason . In fact, even among specific research projects con- ducted by the same firm, the credit applies quite unevenly This hurts the credit's credibility as a sound ta x policy and creates the impression that , in its current design, the credit subsi- dizes business R&D in an inequitable and arbitrary manner. Proposed Solutions A total of eight bills pending in the current Congress would perma- nently extend the credit . The R&E credit should be made a permanent feature of the tax code and there ar e other possible changes that could b e considered. For instance, it probably makes economic sense - as noted by a recent CRS report - to ensure that th e credit is refundable, especially fo r smaller, newer firms suffering fro m cash flow troubles . However, the credit should not b e expanded—either legislatively or ad- ministratively—so that corporations receive tax benefits for routine, non - innovative research expenses . The credit should be targeted to produc e the maximum research bang for th e buck. Not only is that the right tax policy but itwill make permanentl y extending the R&E credit less costly and therefore easier to accomplish . Conclusion The R&E tax credit is a necessar y component of our nation's compre- hensive strategy to remain competi- tive in the global marketplace . Clearly, the R&E tax credit promotes researc h and experimentation in additional to that already underway, leading to new technological innovations that migh t not have been developed otherwise . The R&E tax credit also counter s one of the primary disincentives to private sector research and experi- mentation — the financial disadvan- tage incurred by a firm that conducts research, only to have their competi- tors gain access to the new technol- ogy without having incurred the re- search expense themselves . In a sense , the R&E tax credit "reimburses" thos e industries whose research benefits the economy as a whole . The R&E tax credit provides a mechanism for the government to encourage private sector development of a strong research base on which t o build future economic stability.Also , the tax incentive relies on existing research resources already available , rather than establishing costly, new programs . I urge my fellow Members of Con- gress and the incoming President not to allow this valuable tax provision to languish in a series of temporary ex - tensions . Make the research and ex- perimentation tax credit better, an d make it permanent . , The Tax Foundation invites a national leader to provide a "Front and Center " column each month in Tax Features. The views expressed are not necessarily those of the Tax Foundation . G ration Income T Coll ions Trend Up Figure 1 : Corporate Income Tax Collection s As a Percentage of GDP Rising Afte r A 32-Year Decline Sources : Tax Foundation, Office of Management and Budget . Figure 2 : Corporate Tax Rates and Tax Credit s 1950 -1994 Top Statutory Tax Rat e Average Effective Corporate Tax Rat e Tax Credit s A I I I I I I I i i I I I I I L I III. 1 58 62 66 70 74 78 82 86 90 94 Year Sources : Tax Foundation, Internal Revenue Service . 40% 30% 20% 10 % 60 % 50% 0 50 54 Table 1 : Federal Corporate Income Tax Rates, 1950 - Present 1950 First $25,000 Over $25,000 1982 First $25,000 16 % (Normal Rate) 23% (Add Surtax of 26%) 48% $25,000 to $50,000 19 % Over $25,000 With 10% Surcharge $50,000 to $75,000 30 % (Add Surtax of 19%) 42% First $25,000 $75,000 to $100,000 40 % Excess Profits Tax 30% (Normal Rate) 24 .20% Over $100,000 46 % 1951 First $25,000 Over $25,000 1983-1984 First $25,000 15 % (Normal Rate) 28 .75% (Add Surtax of 26%) 52 .80% $25,000 to $50,000 18 % Over $25,000 1970 First $25,000 $50,000 to $75,000 30% (Add Surtax of 22%) 50 .75% (Normal Rate) 22% $75,000 to $100,000 40 % Excess Profits Tax 30% Over $25,000 Over $100,000 46 % 1952 First $25,000 (Add Surtax of 26%) 48% 1985-1986 First $25,000 15 % (Normal Rate) 30% With 2 .5% Surcharge a $25,000 to $50,000 18 % Over $25,000 First $25,000 $50,000 to $75,000 30 % (Add Surtax of 22%) 52% (Normal Rate) 22.55% $75,000 to $100,000 40 % Excess Profits Tax 30% Over $25,000 $100,000 to $1,000,000 46 % 1953-1963 First $25,000 (Add Surtax of 26%) 49 .20% $1,000,000 to $1,405,000° 51 % (Normal Rate) 30% 1971-1974 First $25,000 Over $1,405,000 46 % Over $25,000 (Normal Rate) 22% 1987 d -1993 First $50,000 15 % (Add Surtax of 22%) 52% Over $25,000 $50,000 to $75,000 25 % 1964 First $25,000 (Add Surtax of 26%) 48% $75,000 to $100,000 34 % (Normal Rate) 22% 1975-1978 First $25,000 $100,000 to $335,000° 39 % Over $25,000 (Graduated Normal Rate) 20% Over $335,000 34 % (Add Surtax of 28%) 50% Next $25,0000 1994- First $50,000 15 % 1965-1967 First $25,000 (Graduated Normal Rate) 22% Present $50,000 to $75,000 25 % (Normal Rate) 22% Over $50,000 $75,000 to S100,000 34 % Over $25,000 (Add Surtax of 26%) 48% $100,000 to $335,000 39 % (Add Surtax of 26%) 48% 1979-1981 b First $25,000 17% $335,000 to $10,000,000 34 % 1968-1969 First $25,000 $25,000 to $50,000 20% $10,000,000 to $15,000,00 0 $15,000,000 to $18,333,33 3 f 35 % 38 % (Normal Rate) 22% $50,000 to $75,000 30% Over $18,333,333 35 % $75,000 to $100,000 40 % Over $100,000 46% a The Tax Reform Act of 1969 extended the Surcharge at a five percent rate from January 1, 1970 through June 30, 1970 . On an annualized basis, the Surcharge would be 2 .5 percent. ° The Revenue Act of 1978 repealed the corporate normal tax and surtax and in their place imposed a graduated rate structure with five brackets . The Deficit Reduction Act of 1984 placed an additional 5 percent to the tax rate in order to phase out the benefit of the lower graduated rates for corporations with taxable incom e between $1,000,000 and $1,405,000 . Corporations with taxable income above $1,405,000, in effect, pay a flat marginal rate of 46 percent . d Rates shown effective for tax years beginning on or after July 1, 1987 . Taxable income befor e July 1, 1987 was subject to a two tax rate schedules or a blended tax rate . e An additional 5 percent tax, not exceeding $11,750, is imposed on taxable income between $100,000 and $335,000 in order to phase out the benefits of the lower graduated rates . f An additional 3 percent tax, not exceeding $100,000, is imposed on taxable income between $15,000,000 and $18,333,333 to phase out the benefits of the lower graduated rates . Source : Tax Foundation . 7 FOUNDATION MESSAG E Tax Meets re's Law A frequent complaint of corporate tax professionals is the difficulty in managing the realities of today' s ever-changing technology with th e rigid rules imposed by an industria l era tax code . How, for instance, do companies square the law of straight-line depreciation—which requires them to depreciate high- tech equipment over five years— with Moore's law, which states that the speed and power of a computer chip will double every eighteen months ? Individual taxpayers are als o discovering that the tax code is out of step with the changing composi- tion of the "typical" family. A soon to be released report by the U .S . Census Bureau shows that for the first time ever, the number of families wit h children in which both the husban d and wife work is now greater than the number of single-earner families . Moreover, 55 percent of these dual- income couples had annual incomes of $50,000 and over, compared to 4 0 percent of the single-income couples . The rise in dual-income couple s likely explains the popularity of re - pealing the so-called marriage pen- alty. It may also explain why some polls show that voters are unmove d by the highly publicized charges tha t Governor George W. Bush's tax cut plan would deliver most of its ben- efits to the "richest" taxpayers . The fact is that many of these dual-in- come couples have actually entered tax brackets that were once reserve d only for the `"rich " The latest Internal Revenue Ser- vice data shows that the threshol d for entering the top 25 percent of al l taxpayers—who pay about 83 per- cent of all income taxes—is $50,607 . Based on Bureau of Labor Statistic s surveys of occupational earnings, a n average-paid kindergarten teacher married to a entry-level firefighter would easily find them- selves within th e top 25 per- cent of tax- payers . Should this school teacher become an assis- tant principal and the firefighter become an assistant fire chief, thei r combined income of $97,106 woul d easily surpass the $83,200 threshold to enter the top 10 percent of all taxpayers . While folks in these pro- fessions may never reach the $269,496 in earnings it would take to put them into the top one percent of taxpayers, they are not far from the $114,729 threshold that would put them into the top five percent . Ironically, while these familie s are clearly in the "elite" of taxpayers , most if not all still consider them - selves solidly middle class . So imag- ine their surprise when they lear n that they earn more than the politi- cal definition of middle class and ar e thus ineligible for many of the "tar- geted" tax cuts promoted by candi- dates this year—including most of the measures in Al Gore's tax cut plan . The proliferation of tax credits i n recent years has also had the unin- tended consequence of increasing the number of families with Alterna- tive Minimum Tax (AMT) liabilities . According to the Joint Tax Commit - tee (JTC), there are currently about one million taxpayers affected by th e AMT, but that number is expected t o rise to 10 .5 million by 2010 under current law. JTC determined that Bush's tax cut plan would increas e the number ofAMT-affected taxpay- ers by 16 percent by 2010. While JTC has not performed a similar analysis of the Vice President's tax plan, it is a certainty that Gore' s credit-laden plan would exacerbate the AMT problem to an even greater degree . Estate tax repeal is another issue that has transended traditional clas s lines because of the rise of a new class—the investor class . During this years' congressional debate over Rep . Jennifer Dunn's estate tax repea l legislation, many mainstream journal- ists marveled at the breadth of bi- partisan support she had garnered . But the old model doesn't work any longer. With more than half of all American households now investe d in the stock market, lawmakers are realizing that millions of average families (who vote) are reconsider- ing the fairness of the estate tax . Some obviously think they coul d save enough to be hit by the tax, and some may own a home whose ap- preciated value will put them ove r the top ; but many have simply re- thought the issue and concluded that the tax is unfair on principle . Of course, the hallmark of the New Economy are the Internet en- trepreneurs working out of their basements in the hopes of designing the next dot-com success story. But a recent General Accounting Offic e report indicates that these would-b e e-millionaires are spending as muc h time complying with the tax code a s they are writing computer code . GAO found that a small business can face up to 200 different IRS forms , schedules and requirements depend- ing on how they organize, if they hire employees, and what kind of products or services they plan t o offer. Doubters will say that the near- term prospects of Washington enact- ing fundamental tax reform are sli m to none—even should a candidate who supports reform be elected . But the daily evidence that the cur - rent tax code is incompatible with the vibrant and dynamic Ne w Economy may force Washington t o stop talking about the problem and start solving it . 41 Scott A. Hodge Executive Director Tax Foundation 8 Rep. Jennifer Dunn to Be Treasury Secretary Honored for Distinguished Lawrence Summers t o Service at Tax Foundation's Keynote Conference o n 63rd Annual Dinner Corporate Tax Shelters TAX FEATURES© Tax Features© (ISSN 1069 - 711X) is published 10 times a year by the Tax Foundation , an independent 501(c)(3 ) organization chartered in the District of Columbia . Annual subscriptions to the newsletter are $15 . James C . Miller III, Ph .D . Chairman, Policy Counci l Joseph O . Luby, Jr. Chairman, Program Committee Michael P Boyle Vice Chairman, Program Committee Scott A . Hodg e Executive Directo r Bill Ahern Editor & Communications Directo r Patrick Fleenor Chief Economist Alicia Hanse n Staff Write r J . Scott Moody Staff Economis t Renée A . Nowland Senior Director, Developmen t and Operation s Jan Rogers Development Manage r Vernetta Scott Administrator Tax Foundation (202) 783-276 0 (202) 783-6868 Fax www.TaxFoundation . org TF@TaxFoundation .org Congresswoman Jennife r Dunn (R-WA) will accept a Distinguished Service Award at the Tax Foundation's 63rd Annual Dinner, November 16 at the Four Seasons Hotel in Washington, DC . Each year the Founda- tion honors a public officia l Rep .Jennifer Dunn and a private citizen wh o (R-WA) have contributed notably to the national discussion of sensible tax policies . Congresswoman Dunn wil l share the stage with Charles G . Koch, Chairman and Chief Executive Officer of Koch Industries, Inc . Congresswoman Dunn made history in 199 8 as the first woman of either party to run fo r House Majority Leader. She was the only fresh - man in the 103rd Congress to hold a seat on the Joint Committee on the Organization of Con- gress, and in just her second term, she won ap- pointment to the Ways and Means Committee . A champion of tax relief and budget balanc- ing, Dunn has also advocated IRS reform, tax simplification, retirement security and expande d international trade . Her recent bipartisan work on the estate tax is well-known . e Treasury Secretary Lawrence Summers will keynote the Tax Foundation's 63rd National Conference the afternoon of November 16 a t the Four Seasons Hotel in Washington, DC . The conference will present views of cor- porate tax shelters from the perspectives o f Capitol Hill, the Judiciary, and tax practitioners . Registration begins at 11 :30, and Secretary Summers will speak at 12 :30 . At 1 :30, Joseph Luby, Jr., Assistant General Tax Counsel, Exxon - Mobil Corporation, will moderate a panel on th e distinctions between legitimate business transac- tions and tax shelters . Speaking to this subject are Prof. Ronald Pearlman from Georgetown Univer- sity Law School ; Kenneth Kies, Managing Partner, Federal Tax Policy Group, PricewaterhouseCoop- ers LLP; and John E . Chapoton, Esq., Managing Partner at Vinson & Elkins, LLP. A second panel on the legislative outlook, moderated by Richard Grafmeyer, Partner, Arthu r Andersen LLP, will feature Mark Prater, Majority Chief Tax Counsel, Senate Finance Committee ; Timothy Hanford,Tax Counsel, House Ways an d Means Committee ; and Russ Sullivan, Minority Chief Tax Counsel, Senate Finance Committee . Judge David Laro of the U .S . Tax Court wil l speak on the judicial outlook at 4 :00 pm . For details on the conference and dinner, check www. taxfoundation. org or call us at 202-783-2760. Ask for Renee Nowland or Jan Rogers. 6ZZS ON llutaad DO'uol ulgse~ QIVd ' iTO SS1 I3 l sa ld 9060-90002 ~a 'uo}6uius~M 09L ol!nS MN 'TeeJTS H 09 l N011b~a , XV1 teed. gams
