MAJOR PROVISIONS OF FINANCE COMMITTEE'S TAX BILL

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP89-00066R000400070057-2
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 5
• Document Creation Date: December 22, 2016
• Document Release Date: January 10, 2011
• Sequence Number: 57
• Publication Date: May 10, 1986
• Content Type: OPEN SOURCE

Approved For Release 2011/01/10: CIA-RDP89-00066R000400070057-2
Major Provisions of Finance Committee's Tax Bill
Th
e sweeping tax overhaul bill approved by the Senate
Finance Committee early in the morning of May 7 would increase
the tax burden on corporations by $105 billion to $110 billion
over five years, while reducing the burden on individuals and
cutting some miscellaneous taxes by about the same amount.
Most individual taxpayers would receive a tax cut. (Tax liability by
income class, table, p. 1013)
The shift would be accomplished by reducing the top tax rate
for individuals by nearly half and that for corporations by more
than one-fourth, and by eliminating or significantly curtailing
exemptions, deductions and credits used by taxpayers to reduce
their payments.
Although the panel voted 20-0 to order the bill reported,
staff director Bill Diefenderfer said senators had agreed to "con-
cepts" only, and that it would be up to the committee staff, in'
consultation with individual senators, to draft the precise legisla-
tive language that would go to the Senate floor. As a result, the
details of some provisions might not be clear for several weeks,
and could differ from what is presented below.
Estimates of the revenue effect of many provisions were not
available, and staffers cautioned that estimates that were available
could, be subject to major revision.
Most provisions would take effect Jan. 1, 1987; where known,
those with other effective dates are noted.
The House-passed tax overhaul bill (HR 3838), though similar
in that it also would chop rates and curtail tax breaks, differs in
several key respects. It would shift about $140 billion in tax
burden from individuals to corporations, but would not make so
many dramatic alterations in the code as would the Finance bill.
(House committee action, 1985 Weekly Report p. 2483; committee
provisions, p. 2492; floor action, p. 2705)
Individual Tax Changes
? Individual Rates. Replace the existing 14 tax brackets (15 for
single taxpayers) ranging from 11-50 percent with two brack-
ets - 15 percent and 27 percent.
For single taxpayers, the 27 percent tax bracket would apply
to taxable income of $17,600 or more. The graduated income tax
would be phased out for single taxpayers with incomes
between $45,000 and $87,240. For those with taxable income
above $87,240 the 15 percent rate would not apply, and all
income would be taxed at 27 percent.
For joint returns, the top rate would apply to taxable income
of $29,300 or more, and the 15 percent bracket would be phased
out for incomes of between $75,000 and $145,320.
Single heads of households would begin to pay a 27 percent
rate on taxable income of $23,500 or more and the lower bracket
would be phased out between $55
000
d
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an
$111,400.
The new rates, which would be indexed annually to reflect
inflation, would go into effect July 1, 1987.
? Standard Deduction. Set the standard deduction allowed
those who do not itemize deductions at $3,000 for individuals,
$5,000 for joint returns and $4,400 for single heads of house-
holds. The existing standard deduction (the so-called zero-
bracket amount) is $2,480 for individuals and single heads of
households and $3,670 for joint returns.
The new standard deduction would be indexed to rise with
inflation; it is not clear when this provision would become
effective. An additional $600 standard deduction would be
allowed for the elderly and the blind.
?Personal Exemption. The existing $1,080 personal exemption
for taxpayers and dependents would be raised to $1,900 in
1987 and $2,000 in 1988. The amount would be indexed for
inflation in later years.
PAGE 1014-May 10; 1986
The exemption would be phased out gradually for individuals
with incomes between $87,240 and $127,240, for married cou-
ples with incomes between $145,320 and $185,320 and for
single heads of households with incomes of between $111,400
and $151,400.
Individuals who can be claimed as dependents by other
taxpayers would not be allowed their own personal exemptions.
? Earned Income Tax Credit. Retain the current-law earned
income credit for poor persons, but increase the benefit. The
cost of the increased benefit is expected to be at least $700
million over five years, but Finance Committee staffers have
yet to determine exactly how it should be computed. Increasing
the income level at which the credit would be phased out was
considered the likeliest technique for making the credit more
generous.
? Rounding. Adjust downward to the nearest $50 the standard
deduction, personal exemption and rate brackets, and possi-
bly the earned income tax credit, when indexed for inflation in
future years.
? Two-Earner Deduction. Repeal the deduction now allowed
married couples filing joint returns. The deduction was de-
signed to eliminate the so-called "marriage penalty," which
caused working couples filing jointly to pay higher taxes than
if they had been able to file separately as single taxpayers.
? Income Averaging. Repeal the ability that taxpayers with
fluctuating incomes now have to average their incomes over a
period of years to reduce their tax liability when they have a
large increase in income.
? Elderly and Disabled. Retain current law allowing a 15 per-
cent tax credit for individuals aged 65 and over, or those who
have retired on permanent and total disability.
? Unemployment Compensation. Tax all unemployment bene-
fits as income. Currently, such benefits are taxed only if the
benefits, in combination with a taxpayer's adjusted gross income,
exceed $12,000 for individuals and $18,000 for joint returns.
Workers' compensation and black lung disability payments
would not be subject to tax, as under current law.
? Scholarships and Fellowships. Retain current law governing
the taxation of scholarships and fellowships. Generally, such
amounts are not taxed for degree candidates.
? State and Local Taxes. Retain full deductions for state and
local income, personal property and real estate taxes. Deduc-
tions for state and local sales taxes would be eliminated.
? Charitable Contributions. Allow the deduction now allowed
those who do not itemize deductions to expire at the end of
1986. Itemizers would continue to be allowed to deduct chari-
table contributions.
? Adoption Expenses. Retain the existing deduction for up to
$1,500 of adoption expenses for handicapped or other hard-
to-place children.
? Ministers and Military Personnel. Allow ministers and military
personnel receiving tax-free housing allowances to deduct
mortgage interest or real property tax payments.
? Meth ea di cal mounDet dofuctioa ns. Increase from 5 percent to 10 percent
djusted gross income that a taxpayer's medical
expenses must exceed before such expenses may be deducted.
? Travel and Entertainment. Allow only 80 percent of business
meal and entertainment expenses to be deductible, except
that expenses for banquets would be fully deductible. Deduc-
tions for travel made solely for educational purposes would
not be allowed; deductions for luxury water transportation
would he limited. No deductions would be allowed for
attending investment seminars or conventions.
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?Child Care. Retain the current child and dependent care tax
credit of up to $720 a year for one dependent and up to
$1,440 for two dependents.
? Miscellaneous Deductions. Deductions for miscellaneous job
expenses, such as union dues, would not be allowed. Certain
other unreimbursed employee business expenses, however,
such as transportation costs, would be deductible only for
itemizers and only to the extent they exceed 1 percent of
adjusted gross income.
? Home Offices. Limit deductions for home offices to a taxpay-
er's net income from the business. Currently the deduction
cannot exceed gross income. The limits would also apply to cases
where a taxpayer leases a home office to his employer.
? Hobbies. Expand the definition of "hobbies" for which ex-
pense deductions are more limited than for regular busi-
nesses. An activity would be a hobby if it is not profitable in at
least three out of five consecutive years, instead of two out of
five years as under current law. Horse breeding and racing would
be exempt from the tightened restrictions.
? Political Contribution Credit. Repeal the existing $50 credit
($100 for joint returns) for contributions to political campaigns
and certain political campaign organizations.
? Presidential Campaign Checkoff. Continue to allow taxpay-
ers to check off a box on their tax returns to allocate $1 ($2 for
joint returns) of their tax liability to the Presidential Election
Campaign Fund.
Depreciation
? Accelerated Depreciation. Generally retain the Accelerated
Cost Recovery System of depreciation and permit faster
write-offs through use of a 200 percent declining balance
method in place of the current 150 percent. However, the
depreciation would be applied over a longer period of time for
some property.
Among the changes from current law: Some long-lived manu-
facturing property would be taken out of the five-year class and
would have to be depreciated over 10 years, as would oil
refinery equipment; research and experimentation property
would be moved from the three-year class to the five-year
class until Dec. 31, 1989, when it would revert to the three-year
class; property in the three-year class would be depreciated
either straight-line (as for autos) or at the 150 percent rate.
Real estate would be hit hardest by the changes with the
depreciable life of such assets expanded from the current 19
years (15 years for low-income housing) to 271/2 years for
residential property and 311/2 years for commercial. In addition,
such investments would have to be written off over the
straight-line method, meaning that larger write-offs would not
be allowed in the early years of the investment as under
current law.
President Reagan wanted the value of depreciation deduc-
tions to be indexed to reflect increases in inflation, but the
committee did not go along.
? Investment Tax Credit. Repeal the 10 percent (6 percent for
certain short-lived investments) tax credit now allowed for a
taxpayer's investment in certain property. The change would be
effective retroactively to )an. 1, 1986.
Only 70 percent of the value of unused investment tax credits
could be used to offset past or future tax liability. Currently, firms
can carry the full amount of unused credits forward 15 years
or back three. The committee dropped a controversial proposal
by Chairman Bob Packwood, R-Ore., for the government to
buy 70 percent of the, value of a firm's unused credits.
? Small Business. Allow small firms to write off in one year, or
"expense," up to $10,000 in personal property investments.
The current ceiling is $5,000; Packwood initially had proposed a
$50,000 cap that won accolades for the bill from the small
business community.
Accounting
*Installment Sales. Eliminate the tax benefits home builders,
retailers and others can realize by borrowing against the
future repayments of home mortgages and installment sale
contracts.
The change would eliminate the use of "builder bonds,
which allow home builders to receive cash for new develop-
ments by borrowing against mortgages they have provided
home buyers. Packwood's original insistence on exempting
builder bonds from the installment sales restrictions to help
the housing industry, and thus the Oregon timber industry,
caused many members of the Finance Committee. to demand
similar tax breaks for home-state economic interests. Builders
can, in effect, defer paying taxes on the gain from such sales,
while currently enjoying the benefit of the loans.
? Long-Term Contracts. Restrict the use of a method of ac-,
counting that allows defense and other contractors to delay
tax payments until work on a project has been completed, and
often to reduce dramatically or eliminate their tax liability.
Current law would be retained for real property construction
--contracts requiring less than two years to complete for firms with
average annual gross-ieceipts of $10 million. or less.
? Bad-Debt Reserves. Prevent businesses from taking .deduc
tions for reserves held to cover bad debts. Instead, deductions
would be allowed when specific-loans become partially or wholly
worthless. -
An exception would be provided for financial institutions,
which could continue to benefit from the bad-debt reserve
deduction, although it would be limited for thrifts.
? Savings and Loan Associations. Allow thrift institutions to
carry losses forward eight years as deductions against income,
rather than five years as under current law, in recognition of
severe losses incurred by the industry since 1982.
To pay for this change, the committee agreed to limit bad-
debt reserves deductions by savings and loans.
? Inventories. Require wholesalers and retailers with sales of $5
million or more a year to capitalize over a period of time
certain inventory costs rather than to deduct the costs in one
year.
Capital Gains
? Individuals. Repeal the 60 percent capital gains exclusion for
individuals. The impact would be to subject income from
capital gains to the same tax rate as ordinary income (i.e., 15
percent or 27 percent). Currently, the top effective tax rate
for long-term capital gains is 20 percent (resulting from a 50
percent rate imposed on 40 percent of an individual's capital
gains income).
? Corporations. Retain the current-law corporate capital gains
rate of 28 percent.
Compliance
? Internal Revenue Service. Provide increased funding for
agents, audits and modernization, to be paid for by the
interest and penalty receipts the enhanced enforcement is
expected to bring in. Total collections over five years are
projected to reach $31 billion.
? Penalties. Increase assorted penalties for failure to pay taxes
or to file required information with the IRS. Penalties for tax
underpayments would be increased from 10 percent to 20
percent of the underpayment.
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