The 2003 Tax Cut: Proposals and Issues

Order Code RL31907

CRS Report for Congress

Received through the CRS Web

The 2003 Tax Cut: Proposals and Issues

Updated July 16, 2004

David L. Brumbaugh

Specialist in Public Finance

Government and Finance Division

Don C. Richards

Analyst in Public Finance

Government and Finance Division

Congressional Research Service ˜ The Library of Congress

The 2003 Tax Cut: Proposals and Issues

Summary

Tax cuts were a major focus of the tax policy debate in the first part of 2003.

Initially President Bush proposed a set of tax cuts for economic stimulus and

released budget proposals calling for tax cuts totaling an estimated $1.57 trillion over

fiscal years (FY) 2003-2013. The Administration characterized $726 billion of the

cuts as “economic growth” measures, designed to stimulate the economy and

improve its performance. On May 9, the House approved H.R. 2, the Jobs and

Growth Tax Act. The bill proposed cutting taxes by an estimated $550 billion over

FY2003-FY2013. Previously on May 8, the Senate Finance Committee approved its

own tax bill (S. 2, later replaced by S. 1054). The bill included tax cuts estimated at

$422 billion over FY2003-FY2013, fiscal assistance for the states of $20 billion, and

revenue increases of $90 billion for a net revenue reduction/outlay increase of $350

billion. The full Senate approved a modified version of the bill on May 15 as H.R.

2 (amended). The House and Senate approved a conference committee report

reconciling the differences between the two legislative versions on May 23. The final

Act, (Jobs and Growth Tax Relief and Reconciliation Act of 2003, JGTRRA, P.L.

108-27), contained $350 billion in tax cuts (and spending increases) over FY2003FY2013, as estimated by the Joint Committee on Taxation.

All four versions (the President’s proposal, the House and Senate bills, and P.L.

108-27) proposed to accelerate the tax cuts for individuals scheduled for gradual

phase-in by the 2001 tax cut act (Economic Growth and Tax Relief Reconciliation

Act of 2001, or EGTRRA; P.L. 107-16), including a gradual reduction of tax rates,

an increase in the child tax credit, tax cuts for married couples, and expansion of the

lowest (10%) tax bracket.

The Senate, House and final version differed from the Administration proposal

on the provisions for dividends and capital gains tax cuts. The Administration plan

would have generally eliminated individual income taxes investors pay on dividends

received from corporations and capital gains from the sale of corporate stock; the

plan would have implemented a form of corporate “tax integration,” and would have

eliminated the double-taxation of corporate-sector equity income. The House

proposal would have reduced (but not eliminated) taxes on corporate dividends and

capital gains generally; the Senate bill would have temporarily eliminated the

taxation of all dividends, without including the administrative features of the

President’s proposal designed to identify the portion of the dividends upon which

taxes had already been paid. The final law was similar to the House version and

expires in 2008.

The business expensing and depreciation provisions of the plans also contained

several differences. In addition, the Senate’s version included several revenue

increasing provisions, which offset some of the tax cuts (and outlays). The final

version did not include these measures. Finally, both the Senate version and the final

version included a fund of $20 billion in outlays designed to assist state governments.

This report is no longer being maintained but remains available to Congress as

a record of the progression of the tax reduction proposals in 2003.

Contents

The President’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

The House Bill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

The Senate Bill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

The Final Bill, P.L. 108-27 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Other Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

The Daschle Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

The House Democratic Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Economic Stimulus and Growth Effects

...............................8

Distributional Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

List of Tables

Table 1. Distributional Effects of H.R. 2, as Passed by the House,

Calendar Year 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Table 2. Distributional Effects of H.R. 2, as Passed by the House,

Calendar Year 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Table 3. Comparison of the Percentage Change in After-Tax Income from

H.R. 2: Joint Committee on Taxation for House Proposal and

Urban-Brookings Tax Policy Center Analysis of Administration,

House, Senate, and P.L. 108-27, Calendar Year 2003 . . . . . . . . . . . . . . . . 17

Table 4. Percentage Change in After-Tax Income by Percentiles, 2003 . . . . . . 18

Table 5. Comparison of the Distribution of Total Individual Income Taxes,

2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Table 6. Average Tax Change by Income Percentile, 2003 . . . . . . . . . . . . . . . . 20

Table 7. Dividends and Capital Gains as a Percentage of Adjusted Gross

Income, 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Table 8. Comparison of Principal Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

The 2003 Tax Cut: Proposals and Issues

Tax cuts were a major focus of the tax policy debate in the first part of 2003.

In January, President Bush proposed a set of tax cuts for economic stimulus and in

February he released budget proposals calling for tax cuts totaling an estimated $1.57

trillion over fiscal years (FY) 2003-2013. The Administration characterized $726

billion of the tax cuts as “economic growth” measures, designed to provide economic

stimulus and improve economic performance. On May 6, the House Committee on

Ways and Means approved H.R. 2, the Jobs and Growth Tax Act of 2002. The

Committee bill proposed cutting taxes by an estimated $550 billion over FY2003FY2013. The full House approved the measure on May 9. On May 8, the Senate

Finance Committee approved its own tax bill (S. 2). The bill included tax cuts

amounting to an estimated $422 billion over FY2003-FY2013, fiscal assistance for

the states of $20 billion, and revenue-raising measures offsetting the amounts in

excess of $350 billion. On May 15, the full Senate approved a modified version of

the Committee bill as H.R. 2 (amended). The final compromise version was agreed

to by both the House and Senate on May 23. The Joint Committee on Taxation

estimated the final law would reduce revenues (and increase outlays) by $350 billion.

This report provides a brief description of each proposal, including major

proposals offered by the Democrats in both the House and the Senate. A discussion

of the distributional affects of the proposals and potential effects on short and long

term economic growth follows. A side-by-side detailed description of the various

major proposals concludes the report as an appendix.

The President’s Proposal

The President’s tax cut plan released with his FY2004 budget proposal

contained three broad elements: a set of tax cuts designed to provide economic

stimulus and promote economic growth; a group of narrowly targeted tax incentives

generally designed to encourage particular types of investment or activities; and

extension of a number of expiring tax provisions. (Principal among these last

provisions was a proposal to extend the tax cuts enacted by the Economic Growth

and Tax Relief Reconciliation Act of 2001, or EGTRRA, whose broad tax cuts are

scheduled to expire after 2010.) Neither of the tax cut bills approved by the

congressional tax-writing committees included the last two elements of the

President’s plan. Accordingly, the discussion here focuses on the “economic

stimulus” part of the President’s plan.1

1

For information on the President’s full tax proposal, see CRS Report RS21420,

President Bush’s 2003 Tax Cut Proposal: A Brief Overview, by David L.

Brumbaugh.

CRS-2

The stimulus portion of the President’s proposal consisted of the following

elements.

!

Acceleration, to 2003, of tax cuts phased in gradually under

EGTRRA. The specific reductions were cuts in individual income

tax rates (scheduled to be fully effective under EGTRRA in 2006);

tax cuts for married couples (scheduled to be phased in over 20052010); and an increase in the child tax credit (also previously

scheduled for 2005-2010).

!

“Tax integration,” or elimination of individual income tax on

corporate-source equity income (dividends and capital gains). Under

then existing law, corporate equity income was taxed twice: once

under the corporate income tax and once when received by

stockholders as dividends or capital gains. According to economic

theory, the double taxation reduces economic efficiency by diverting

capital from the corporate sector to other sectors of the economy

(e.g., housing). The Administration proposed excluding dividends

from individuals’ taxable income, and eliminating (in effect) tax on

capital gains by permitting stockholders to increase their “basis”

deduction when calculating their capital gains tax.

!

Expansion of the “expensing” allowance for business investment.

Under prior law, firms were permitted to deduct in the year of

purchase (“expense”) up to $25,000 of equipment acquisitions. The

proposal reduced the allowance for amounts for which investment

exceeds $200,000, thus restricting its use to relatively small

businesses. Expensing confers a tax benefit by speeding up tax

deductions that firms would ordinarily have to spread over the life

of the equipment as depreciation. The Administration proposed to

increase the annual allowance to $75,000 and the beginning of the

phase-out threshold to $325,000.

!

A $4,000 increase in the individual alternative minimum tax (AMT)

exemption for individuals. The increase would have expired after

2005.

Taken alone, the economic stimulus portion of the President’s proposed tax cut

was estimated by the Joint Committee on Taxation to reduce revenue by $726 billion

over FY2003-FY2013.

The House Bill

On May 6, the House Committee on Ways and Means approved H.R. 2, the Jobs

and Growth Tax Act of 2003 (H.Rept. 108-94); the full House approved the measure

on May 9. The bill proposed a tax cut estimated at $550 billion over 10 years. It

incorporated — with some differences — the principal elements of the economic

stimulus tax-cut package proposed by President Bush in February. H.R. 2's principal

CRS-3

provisions were to cut the tax rates applicable to dividends and capital gains;

temporarily increase the “expensing” allowance for small business; temporarily

provide a depreciation “bonus” for investment in machines and equipment;

accelerate, to 2003, several phased-in tax cuts enacted under the Economic Growth

and Tax Relief Reconciliation Act of 2001 (EGTRRA; P.L. 107-16); and temporarily

increase the alternative minimum tax (AMT) exemption for individuals.

A major difference between H.R. 2 and President’s proposal was the treatment

of capital gains and dividends. As described above, the President proposed complete

elimination of individual income taxes on corporate-source capital gains and

dividends; H.R. 2 proposed a reduction of rates rather than complete elimination of

tax, and would have applied the reduced rates to most capital gains, not just those on

corporate stock. Another difference between H.R. 2 and the President’s proposal was

that several of H.R. 2's accelerations of tax cuts were temporary and would have

expired at the end of 2005, reverting to the phase-in schedule enacted by EGTRRA.

These temporary provisions included widening of the 10% rate bracket, increasing

the child credit, and doubling the standard deduction for married couples. Largely

as a result of these differences, the proposed size of H.R. 2's tax cut was smaller over

10 years than the President’s plan: $550 billion compared to the $726 billion

proposed by the President.2 In contrast, the bill’s proposed tax cut was larger than

either the total of $422 billion of tax cuts approved by the Senate Finance Committee

on a gross basis, or the Finance bill’s net tax cut of $350 billion, after subtracting the

bill’s revenue-raising offsets.

The bill’s principal provisions were as follows.

2

!

Acceleration, to 2003, of individual income tax cuts enacted but

phased in under EGTRRA, including expansion of the 10% rate

bracket, reduction of marginal tax rates, an increase in the child tax

credit to $1,000, and the expanded standard deduction and 15% rate

bracket for married couples. With the exception of the reduction in

tax rates the House version of H.R. 2 proposed that each of these

provisions would have expired at the end of 2005. The proposal

reverted to the phase-in rules scheduled by EGTRRA after 2005.

!

An increase in the exemption amount under the individual

alternative minimum tax (AMT). Under temporary rules enacted by

EGTRRA, the AMT exemption is $49,000 for couples and $35,750

for singles, but was scheduled to fall to $45,000 and $33,750,

respectively, for tax years beginning in 2005 and thereafter. H.R. 2

proposed to increase the AMT exemption to $64,000 for couples and

Along with tax cuts aimed at providing economic growth and stimulus, the President’s

budget proposal contained tax cuts targeted at specific activities and investments (tax

“incentives”) and would have made the 2001 tax cuts — which are scheduled to expire in

2010 — permanent. According to Joint Tax Committee estimates, the President’s $726

billion growth package, his proposed tax incentives, and elimination of the 2010 expiration

would together have reduced revenue by an estimated $1,575 billion over 10 years. Neither

the proposed tax incentives nor provisions making the 2001 tax cut permanent were

contained in H.R. 2.

CRS-4

$43,250 for singles. The increased exemption would have applied

to 2003, 2004, and 2005, but the amounts reverted to those

scheduled under prior law in 2006 and thereafter.

!

Reduced rates for dividends and capital gains. Rather than

eliminating individual taxes on corporate-source income, H.R. 2

proposed to reduce tax on corporate dividends as well as corporate

and non-corporate capital gains. Under then existing law, capital

gains were generally taxed at a maximum rate of 20% (10% for

taxpayers in the 15% ordinary-income rate bracket). For capital

gains, H.R. 2 proposed to reduce these rates to 15% and 5%

respectively. The proposal treated dividends received from domestic

corporations as capital gains for purposes of applying the rates.

!

A temporary increase in the expensing benefit for small business

investment to $100,000 from prior law’s $25,000 and an increase in

the provision’s phase-out threshold to $400,000 from prior law’s

$200,000. The provision would have expired after 2007.

!

A temporary depreciation “bonus” deduction equal to 50% of an

asset’s cost in its first year of service. The provision would have

expired after 2005.

!

Temporary extension of the net operating loss (NOL) carryback

period for business losses as defined by the tax code to five years

from then existing law’s two years. The provision would have

applied for losses incurred in 2003-2005.

The Senate Bill

On May 8, the Senate Committee on Finance approved S. 2 (later replaced by

S. 1040), a bill containing a set of tax cuts broadly similar to those of the President

and the House. Like the other two proposals, for example, the Committee bill

proposed to accelerate many of the 2001 tax cuts including rate reductions, tax cuts

for married couples, child credits, and expanded rate brackets. The bill also

contained a tax cut for dividends, although it differed from the Administration and

House proposals. Also in contrast to the other two proposals, the Finance bill

contained a number of revenue-raising proposals, offsetting part of the revenue loss

from the bill’s tax cuts. According to estimates by the Joint Committee on Taxation

for FY2003-FY2013, the bill contained $422 billion in tax cuts and other revenue

reductions, $20 billion in fiscal relief to state and local governments and $90 billion

of revenue-raising items. Its net revenue reduction/outlay increase was estimated at

$350 billion over the period. On May 15, the full Senate approved a modified

version of the bill as H.R. 2 (amended).

The bill’s principal tax cut provisions were as follows.

CRS-5

!

Acceleration of EGTRRA’s phased-in tax cuts for individuals to

2003. As with the President’s and the House proposal, these

included the reduction in marginal tax rates, increase in the child

credit, expansion of the 10% tax bracket, and expanded standard

deduction and 15% bracket for married couples.

!

An increase in the expensing benefit for small business investment

from prior law’s $25,000 to $100,000 and an increase in the

provision’s phase-out threshold to $400,000 from $200,000. The

increases would have expired after 2007.

!

An increase in the AMT exemption to $60,500 for couples and

$41,500 for singles. The proposed amounts would have applied for

2003 - 2005. Under existing law during the debates, the exemptions

were $49,000 and $35,750, but were scheduled to fall to $45,000

and $33,750 for 2005 and thereafter.

!

A 50% reduction in taxes on dividends received by individuals from

both foreign and domestic corporations in 2003. In 2004, 2005, and

2006, the proposal excluded 100% of the tax on dividends. The tax

reduction would have expired in 2007.

The bill’s principal revenue-raising items included a set of provisions aimed at

restricting tax shelters generally, including a provision clarifying the “economic

substance” doctrine that courts have applied to tax shelters. (This doctrine generally

denies tax benefits with respect to transactions that do not change a taxpayer’s

economic position in a substantive way.) The bill’s largest single revenue-raising

item was a proposed repeal of the foreign earned income exclusion provided by

section 911 of the tax code. Under existing law at the time of consideration, U.S.

citizens residing abroad were permitted to exclude up to $80,000 of non-government

source income from foreign employment along with a certain amount of housing

costs. The Senate bill proposed to repeal the exclusion.

The Final Bill, P.L. 108-27

On May 23, the House and Senate agreed to the conference report for H.R. 2,

reconciling the differences between the House and Senate versions of the Jobs and

Growth Tax Act. According to the Joint Committee on Taxation, the package was

estimated to result in $350 billion in reduced revenues (and increased outlays) from

FY2003 through FY2013. In contrast to the Senate provision, which had the same

net cost, the final bill did not include revenue raising measures or “offsets.” The

principal outlay in the package established a $20 billion fund to provide relief to state

governments. The principal components of the tax package included:

!

acceleration, to 2003, of the individual income tax cuts enacted and

phased-in under EGTRRA. Specifically, income tax rates above

15%, scheduled to decline in 2004 and 2006, were accelerated to

CRS-6

their 2006 levels in 2003. The application of the 10% tax bracket,

scheduled to increase in 2008, was accelerated to 2003 and 2004;

!

increase in the child tax credit previously scheduled to be $600 for

2003 and 2004 to $1,000 and for 2003 and 2004. For 2003, the

increase will be paid in advance to qualifying taxpayers;

!

for 2003 and 2004 only, expansion of the standard deduction and

15% tax bracket for married taxpayers to twice that of singles.

Beginning in 2005, these provisions will revert to prior law, which

provides for a phased-in increase to the levels of twice that of singles

over several years;

!

increase of alternative minimum tax exemption amount by $9,000

for married couples and $4,500 for singles for 2003 and 2004;

!

temporary increase in maximum allowable business expensing from

$25,000 to $100,000 for 2003, 2004, and 2005 for small businesses.

The provision’s phase-out threshold was increased from $200,000

to $400,000 over the same time period;

!

temporary increase in “bonus” depreciation allowance. Originally

passed in March of 2002, this bonus depreciation was increased and

extended to allow for a 50% first year deduction (up from 30%) for

the period between May 5, 2003 and December 31, 2004; and

!

reduction of rate on both dividends and capital gains to 15% for

taxpayers in the higher tax brackets and 5% for those in the lower

tax brackets for 2003 through 2008. (The tax rate for those in the

lower tax brackets will be 0% in 2008.) The dividend provision

applies to both domestic and foreign corporations.

Other Proposals

The Daschle Proposal. On May 6, Senate Minority Leader Daschle

announced a tax cut proposal as an update to a plan he proposed in January. The

anticipated total cost of the plan was $125 billion in 2003 and $152 billion over 11

years. The proposal included the following:

!

an immediate $300 tax cut for each adult and up to two children per

family;

!

expanded standard deduction for married couples and earned income

tax credit;

!

an increase in the child tax credit (an additional $100 in 2003, for a

total of $700 and another $100 in 2004, for a total of $800);

CRS-7

!

an increase in the equipment depreciation allowance from 30% to

50% in 2003;

!

an increase the amount of equipment that can be expensed for small

businesses from $25,000 to $75,000; and

!

tax credits for health insurance premiums for small businesses and

for Internet infrastructure.

In addition to these tax-related components, the plan proposed to provide $40

billion in assistance to state and local governments and extend unemployment

benefits.

The House Democratic Proposal. On May 7, House Democratic leaders

outlined a tax cut proposal they stated would reduce taxes by $58 billion in 2003 and

2004 and by $106 billion over 11 years.3 Some of the components were similar to the

provisions offered by Senator Daschle. Among the plan’s principal elements were

the following:

!

an increase in the child tax credit to $800 per child (under prior law

the child tax credit was $600 per child for 2001 through 2004);

!

acceleration of the expansion of the 10% tax rate bracket and the

marriage penalty relief (expansion of the 15% rate bracket for

married couples filing jointly and an increase in the basic standard

deduction amount for joint returns);

!

an increase in the depreciation “bonus” provided by the tax stimulus

package enacted in March 2002 with the Job Creation and Worker

Assistance Act of 2002 (P.L. 107-147). Under the 2002 Act, firms

could claim a first-year depreciation deduction equal to 30% of the

cost of new equipment investments made in 2002-2004. The House

Democratic proposal would have increased the depreciation bonus

to 50% for the next 12 months before returning to 30% for the

balance of 2004; and

!

an increase in the expensing benefit to $75,000, from the prior law’s

$25,000, for equipment investment made by small businesses

through 2004.

Further, the proposal included $177 billion in revenue offsets during FY2003

through FY2013 in order to pay for the proposed tax reductions previously outlined.

Offsets specifically included closing tax shelters and freezing the top-bracket rates,

which were scheduled to decline.

3

The proposal is described on the Democratic side of the House Budget Committee website,

[http://www.house.gov/budget_democrats/analyses/econ_stimulus/dem_jobs_plan_may0

3.pdf].

CRS-8

Non-tax elements of the proposal included an extension of unemployment

benefits for 26 weeks and a $44 billion package of assistance to state and local

governments, $18 billion of which was directed to address areas including Medicaid.

Economic Stimulus and Growth Effects

Proponents of a major tax cut have based their support on various factors —

including, for example, a general philosophical belief in lower taxes. The particular

tax cut enacted in May, 2003, however, has been supported by some as a means to

stimulate a lagging economy, and proponents have argued that a properly designed

tax cut would also spur long-run economic growth. According to Chairman Grassley

of the Senate Finance Committee, the tax act was designed to provide “a balanced

package of consumption and investment incentives that will provide short-term

stimulus and the building blocks for meaningful future economic growth.”4

The possibility of tax cuts to stimulate the economy occupied the attention of

policymakers in Congress and elsewhere for several years. In 2001, signs of a

sluggish economy were one reason for enactment of the sizeable tax cut contained

in the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) that was

passed in June of that year, and economic data now show that a recession was indeed

underway: the economy contracted during the first three quarters of 2001. Since

then, the economy in general returned to positive economic growth, with real output

growing in the fourth quarter of 2001 and each quarter of 2002. Preliminary

indications suggest that the economy also grew in the first quarter of 2003.

Despite the growth, however, business spending has remained weak and

employment has not grown. The continued sluggish performance has been attributed

to various causes: the decline in the stock market; the September 11 terrorist attacks;

revelations of corporate malfeasance; and uncertainty induced by the wars in

Afghanistan and Iraq. In this context, Congress in March, 2002, enacted a modest

tax cut intended to provide additional fiscal stimulus. And in early 2003, President

Bush proposed an “economic growth” package that would reduce taxes by an

estimated $746 billion over 10 years. (The economic growth provisions were part

of a larger tax cut proposed by the President that amounted to an estimated $1.6

trillion.) This package was designed to stimulate the economy both in the near term

and to boost long-run growth. And the according to the Administration, the need for

fiscal stimulus had become “more urgent” by the time the tax cut was enacted in

May.5

As noted in other sections of this report, the tax-cut bills Congress took up in

the spring of 2003 were broadly similar to the economic growth components of the

President’s plan, including, for example, versions of the acceleration of EGTRRA’s

4

Senator Charles Grassley, statement before the Senate Finance Committee at the

committee’s mark-up of H.R. 2, May 8, 2003. Posted on the committee’s website at

[http://finance.senate.gov/hearings/statements/050803cg.pdf].

5

Executive Office of the President, Office of Management and Budget, Statement of

Administration Policy, H.R. 2 Growth and Jobs Tax Act of 2003, May 9, 2003.

CRS-9

tax cuts that the President proposed as well as tax cuts for dividends and an increased

expensing benefit for business investment. Leading congressional supporters of the

tax cut bills likewise emphasized the need for economic stimulus as a leading

purpose of the measures.

Will the tax cut improve economic performance, as intended? Economic

analyses of the tax-cut generally approach the question by distinguishing between a

tax cut’s possible effects on long-term growth and its efficacy as a short-term

economic stimulus — that is, by distinguishing between a tax cut’s impact on the

growth of the U.S. economy long after concerns about its present sluggishness pass,

and the effect of the measure in helping the economy recover more quickly from the

recent recession. We first look more closely at the long run. According to economic

theory, a tax cut could conceivably boost long run growth by increasing basic

components of the economy that contribute to growth — specifically, labor supply

and saving (the supply of capital). In principle, a cut in the tax rates applicable to

labor income might induce individuals to provide more labor. And — again, in

principle — a tax cut might encourage individuals to save more because saving bears

a higher return, after taxes.

Economic analysis, however, suggests several reasons for doubt as to the impact

of a tax cut on long-term growth. To begin, economic theory is uncertain as to

whether a tax cut actually increases private saving or labor supply because of two

offsetting effects. In the case of saving, for example, a tax cut might induce

individuals to increase their saving because the after-tax return it produces is higher;

on the other hand, if a saver’s goal is accumulate a particular sum, a tax cut will

enable him to do so at a lower level of saving. Theory predicts similar conflicting

effects on labor supply. Economic theory, in short, is not useful for assessing

whether tax cuts increase or reduce saving and labor supply. Given the ambiguity of

theory, a firm conclusion would need to rely on empirical evidence. Most evidence

does not suggest a large savings response from a tax cut.6

But whether or not a tax cut increases private saving or labor supply may be

moot because of a revenue reduction’s budgetary effects. A tax cut that is not

matched by reductions in government spending increases the government’s budget

deficit above what would otherwise occur, and thus boosts the government’s

borrowing requirements. As a consequence, real interest rates faced by private

investors may increase, “crowd out” private investment and more than offset any

increase in investment resulting from an increase in private saving. Another way of

looking at this effect is to recognize that total, national saving consists of private

saving minus government borrowing. A tax cut will thus probably reduce national

saving and may therefore reduce long-run growth.

Shifting to short-run considerations, could a tax cut similar to that enacted

stimulate the economy out of its sluggish performance? In recent decades,

economists have grown more doubtful of the efficacy of tax cuts as a short-run

stimulative tool, especially compared to monetary policy, its counter-cyclical

6

CRS Report RL31824, Dividend Tax Relief: Effects on Economic Recovery, Long-Term

Growth, and the Stock Market, by Jane G. Gravelle.

CRS-10

alternative. There are several reasons for this skepticism. First, the modern world

economy has become more open, and — via mechanisms such as capital flows and

exchange rate adjustments — much of the stimulative force of tax cuts is thought by

economists to be dissipated in the larger world economy. Beyond this consideration,

monetary policy is thought to have an advantage over fiscal policy because changes

in monetary policy can be implemented with more alacrity than those of fiscal policy;

monetary authorities can recognize the need for stimulus and implement moneysupply changes more quickly than tax-cut or spending legislation can work its way

through Congress. Given that the tax cut at hand has been passed, the implications

of this point for the current situation is not clear. However, it might raise the

question of whether additional economic stimulus is, at this time, necessary, given

the recent tax cuts and interest-rate reductions by the Federal Reserve. For example,

Federal Reserve Board chairman Alan Greenspan, in April 2003 congressional

testimony, suggested that a stimulus fiscal-policy package was not needed.7

Beyond these general considerations, several aspects of the particular tax-cut

that was enacted led some observers to conclude that their design was not particularly

well suited to provide short-run economic stimulus. In general, a tax cut has a larger

stimulative effect in the short run if more of it is spent by individuals on consumption

rather than saved. (Note the difference here from the long-run, where increases in

economic growth depends, in part, on a tax cut eliciting an increase in saving.) For

the most recent tax cuts, upper income individuals were estimated to receive a larger

tax cut under the bills that were being considered than were lower-income persons.

Given that upper-income persons tend to save a higher proportion of additions to

their income than do lower-income individuals, this distributional character likely

reduces stimulative effects. In addition, the temporary character of several of the

particular tax cuts may reduce their stimulative efficacy, again because of saving and

consumption decisions among taxpayers. In particular, certain aspects of economic

theory suggest that individuals save much of what they regard as temporary, windfall

increases in their income and spend them only over a period of time.8

In accordance with House of Representatives rules, the Joint Committee on

Taxation conducted a macroeconomic analysis of the effects of House-passed version

of the May tax cut bill.9 The analysis focused on both the short run, stimulative

impact of the measure and its likely impact on long-run growth; it used a variety of

assumptions and models in its assessment. The study’s conclusions reflect the

divergent impact tax cuts can have on short-run and long-run economic performance.

In the short run — here, over 2003-2008 — the analysis projected the bill would

increase real Gross Domestic Product (GDP) growth by 0.2% - 0.9%, depending on

the particular assumptions and model used. In the long run, all but one of analysis’

7

Brett Ferguson, “Greenspan Warns Against Higher Deficits, Remains Unconvinced of

Need for Tax Cuts,” BNA Daily Tax Report, May 1, 2003, p. G-11.

8

CRS Report RS21126, Tax Cuts and Economic Stimulus: How Effective are the

Alternatives?, by Jane G. Gravelle.

9

The report was inserted in the Congressional Record by Chairman William Thomas of the

House Committee on Ways and Means: Rep. William Thomas, remarks in the House,

Congressional Record, daily edition, May 8, 2003, pp. H3829-H3832.

CRS-11

five scenarios predicted the bill would reduce long-run growth with estimates ranging

from -0.1% to -0.2; the remaining estimate predicted no change.

Distributional Effects

There are a number of ways in which distributional analyses of tax changes are

presented and published. The interests, computational traditions, and perspectives

of the authors and conveyors of such analyses likely shape the choice and

presentation of the conclusions. Subtle, yet important, differences in the questions

being asked can significantly alter the presentation of the information. Complicating

the issue, there is not a consensus among economists or practitioners about the

methodologies associated with distributional analyses. The politically sensitive

nature of the conclusions further fuel the controversy when evaluating public policy

options. The following discussion attempts to describe a variety of distributional

impacts of P.L. 108-27 and related proposals.10 Several specific limitations and

caveats are noted. Nonetheless, omissions and objections may remain: few, if any,

analyses consider inter-generational issues and potential modifications in taxpayer

behavior following a change in tax policy. Further, popular distributional analyses

are generally limited to taxes and do not incorporate a discussion of the impact

government expenditures may have on an individual’s economic well-being.

Notwithstanding these objections, a broad discussion of the distributional impacts as

a result of P.L. 108-27 and related proposals can be informative.11

Distributional analyses are often used by economists to assess a measure’s

fairness among individuals, households, or taxpayers within tax systems. This

discussion begins with H.R. 2, as passed by the House on May 9, and is based on

analysis originally prepared by the Joint Committee on Taxation. The Committee has

not released estimates of the distributional effects of either the President’s proposal,

the Senate’s version of H.R. 2, or P.L. 108-27. However, as shown later, the

distributional effects, at least in the first year, appear to be relatively similar among

the different proposals.

Table 1, below, shows an estimated distribution of the tax cut for calendar year

2003 only. The principal provisions of H.R. 2 would have resulted in an apparent

10

The discussion relies most heavily upon CRS calculations of an analysis prepared by the

Joint Committee on Taxation for the Ways and Means Committee of H.R. 2, as passed by

the House on May 9, and distributional analyses of all legislative versions prepared by the

Urban-Brookings Tax Policy Center, a non-government research organization. The UrbanBrookings Tax Policy Center analyses are posted on its website at

[http://www.taxpolicycenter.org/commentary/revenue.cfm]. In addition, the Department of

the Treasury has prepared a distributional analysis of P.L. 108-27. It is available on the

Department of the Treasury website: [http://www.ustreas.gov/press/releases/js409.htm].

However, the Department of the Treasury’s distributional table does not include comparable

information on percentage of after-tax changes nor does it include the necessary information

to make comparable calculations.

11

For more information on assessing the distribution of tax changes, see CRS Report

RL30779, Across the Board Tax Cuts: Economic Issues, by Jane G. Gravelle.

CRS-12

larger increase in after-tax income, in absolute and relative terms, for higher income

groups than for lower income groups. The percent change in after-tax income is used

by economists since it reflects a measure of the change in an individual’s annual

economic well-being, or standard of living. Specifically, taxpayers with incomes less

than $20,000 were anticipated to experience an estimated increase in after-tax income

of 0.1% or less. In contrast, the analysis suggests taxpayers with incomes in excess

of $200,000 would benefit from an estimated 3.3% increase in their after-tax incomes

in 2003. Although this presentation indicates that, on average, taxpayers in all

income categories would benefit from the proposed tax reductions of H.R. 2, higher

income taxpayers were expected to receive a larger percent change in after-tax

income - thus, in a relative sense income would likely be distributed more heavily to

the to those with higher incomes.12

Table 1 shows only the tax cuts’ impact in 2003. However, given the scheduled

effective and expiration dates included in H.R. 2 and previously adopted tax cuts in

2001 (EGTRRA; P.L. 107-16), the results of a distributional analysis fluctuate

depending upon the year assessed. For example, Table 2 illustrates the Joint

Committee on Taxation’s distributional estimates for 2008. Given the expiration of

the temporary acceleration of specific provisions as well as the interaction with prior

law, which included phased-in tax reductions in future years, Table 2 shows the

effective tax rate changes would be quite small for all but the highest income

categories. Unlike the reductions in the marginal tax rates, the reduced tax on

dividends and capital gains would be less affected by these interactions. Therefore,

the proposal, composed mainly of tax cuts on dividends and capital gains in future

years, was expected to benefit higher income taxpayers even more prominently in

future years. Nonetheless, such an estimate of the distribution over time should not

suggest the same taxpayers would necessarily benefit over a span of time.

Taxpayers’ incomes can and do fluctuate for a variety of factors, most directly due

to entering and exiting the workforce.

12

It should be noted here that this conclusion is based upon the estimates of the Joint

Committee on Taxation data, which rely upon statistical estimates of income data, particular

definitions of “income” and “taxes,” assumptions of economic incidence, and the level of

significant digits when comparing effectively small percentage changes. Further, economic

theory offers little guidance of the desired degree of relative distribution, which is inherently

a value judgement.

CRS-13

Table 1. Distributional Effects of H.R. 2, as Passed by the House, Calendar Year 2003

Effective Tax Ratec

Income Category

a

Present Law

Proposal

Change in

After-Tax Income

b

Changes in Federal Taxes

Millions

Percent

Percent

Percent

Percent

Less than $10,000

-$16

-0.3%

7.2%

7.2%

0.0%

10,000 to 20,000

-$334

-1.4%

6.0%

5.9%

0.1%

20,000 to 30,000

-$1,611

-3.1%

10.2%

9.9%

0.3%

30,000 to 40,000

-$2,906

-3.5%

13.8%

13.3%

0.6%

40,000 to 50,000

-$3,856

-4.3%

15.8%

15.1%

0.8%

50,000 to 75,000

-$11,088

-4.4%

17.5%

16.7%

0.9%

75,000 to 100,000

-$13,023

-5.5%

19.9%

18.8%

1.4%

100,000 to 200,000

-$28,292

-7.0%

23.5%

21.8%

2.1%

200,000 and over

-$41,254

-8.4%

28.3%

25.6%

3.3%

Total, All Taxpayers

-$102,430

-6.3%

19.9%

18.5%

1.6%

Source: Joint Committee on Taxation in addition to CRS calculations.

Notes: Includes acceleration of the EGTRRA provisions concerning the child credit, the marriage penalty in the 15% tax bracket and standard deduction, marginal rates, and the 10% tax bracket, an

increase in the AMT exemption and a 15%/5% rate on dividends and capital gains.

a. The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: (1) tax-exempt interest, (2) employer contributions for health plans and life insurance, (3)

employer share of FICA tax, (4) worker’s compensation, (5) nontaxable social security benefits, (6) insurance value of Medicare benefits, (7) alternative minimum tax preference items, and (8)

excluded income of U.S. citizens living abroad. Categories are measured at 2003 levels.

b. Federal taxes are equal to individual income tax (including the outlay portion of the EIC), employment tax (attributed to employees), and excise taxes (attributed to consumers). Corporate income tax

is not included due to uncertainty concerning the incidence of the tax. Individuals who are dependents of the other taxpayers and taxpayers with negative income are excluded from the analysis.

Does not include indirect effects.

c. The effective tax rate is equal to federal taxes described in note 3, divided by: income described in note 2 plus additional income attributable to the proposal.

CRS-14

Table 2. Distributional Effects of H.R. 2, as Passed by the House, Calendar Year 2008

Effective Tax Ratec

Income Category

a

Present Law

Proposal

Change in

After-Tax Income

b

Changes in Federal Taxes

Millions

Percent

Percent

Percent

Percent

Less than $10,000

-$1

less than -0.05%

6.0%

6.0%

0.0%

10,000 to 20,000

-$31

-0.1%

5.8%

5.8%

0.0%

20,000 to 30,000

-$95

-0.2%

9.8%

9.8%

0.0%

30,000 to 40,000

-$221

-0.2%

13.3%

13.3%

0.0%

40,000 to 50,000

-$471

-0.4%

15.2%

15.1%

0.1%

50,000 to 75,000

-$1,483

-0.5%

17.5%

17.3%

0.1%

75,000 to 100,000

-$1,883

-0.6%

19.3%

19.1%

0.2%

100,000 to 200,000

-$5,013

-0.8%

22.7%

22.5%

0.2%

200,000 and over

-$19,599

-2.7%

27.1%

26.0%

1.0%

Total, All Taxpayers

-$28,798

-1.3%

20.1%

19.7%

0.3%

Source: Joint Committee on Taxation in addition to CRS calculations.

Notes: Includes acceleration of the EGTRRA provisions concerning the child credit, the marriage penalty in the 15% tax bracket and standard deduction, marginal rates, and the 10% tax bracket, an

increase in the AMT exemption and a 15%/5% rate on dividends and capital gains.

a. The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: (1) tax-exempt interest, (2) employer contributions for health plans and life insurance, (3)

employer share of FICA tax, (4) worker’s compensation, (5) nontaxable social security benefits, (6) insurance value of Medicare benefits, (7) alternative minimum tax preference items, and (8)

excluded income of U.S. citizens living abroad. Categories are measured at 2003 levels.

b. Federal taxes are equal to individual income tax (including the outlay portion of the EIC), employment tax (attributed to employees), and excise taxes (attributed to consumers). Corporate income tax

is not included due to uncertainty concerning the incidence of the tax. Individuals who are dependents of the other taxpayers and taxpayers with negative income are excluded from the analysis.

Does not include indirect effects.

c. The effective tax rate is equal to federal taxes described in note 3, divided by: income described in note 2 plus additional income attributable to the proposal.

CRS-15

Beyond differences in the distributional analysis over time, organizations apply

a variety of methodologies to develop the comparisons. Differing definitions of

income, units of analyses, breadth of taxes considered, preferences in statistics for

presentation, and a variety of additional assumptions can result in different

conclusions. Table 4 presents the CRS computed change in after-tax income from

data released by the Joint Committee on Taxation and compares it to an identical

statistic computed by the Urban-Brookings Tax Policy Center for the House version

of H.R. 2 for 2003 based on its internal estimation model. The two methodologies

yield relatively similar results. Most important, the same conclusions can be drawn

from both calculations: the proposal was anticipated to have generally increased the

after-tax incomes for all income cohorts and would have shifted after-tax income

shares to those with higher incomes.13

From an economic perspective, distributional analyses using income as a basic

category ideally include an economic definition of income, rather than a more

restrictive accounting or tax-based definition of income. Accordingly, the Joint

Committee on Taxation’s analysis expanded the legal definition of income used for

tax purposes to include several other forms of income not included in the tax term,

“adjusted gross income.” The analysis prepared by Urban-Brookings Tax Policy

Center applies a more restrictive definition of income, which may provide a partial

explanation of why the two organizations’ models result in different after-tax income

changes, as a percent. In short, a narrower definition of income will result in a larger

change in after-tax income from a tax reduction. While most of the major provisions

included in H.R. 2 were incorporated into the distributional estimates, the tax

reductions on businesses, specifically, the temporarily increased allowable business

expensing, bonus depreciation, and carryback of net operating losses were not

included in either analysis.

Since the various proposals differed both in the magnitude and design of the

immediate tax reductions, the distributional analysis of the four proposals

(Administration, House, Senate, and P.L. 108-27) also differs. Table 4 provides a

side-by-side illustration of the distributional effects of each package, as estimated by

the Urban-Brookings Tax Policy Center. One of the most significant differences is

the variety of proposals for reducing the tax on dividends. Consequently, the

distributional analyses among the plans, while quite similar for low and middle rate

taxpayers, varies most for higher income cohorts as this group tends to benefit most

from such proposals. Specifically, the House package and final version appear the

most beneficial, and the Senate package the least beneficial, for the highest income

groups.

One approach for reducing the limitations on the various definitions of income

is to illustrate the distribution of the changes in after-tax income by percentile of

13

Note the analysis here stops short of making a determination of the relative changes the

proposals would make in the progressivity of the tax system. Succinctly, there is not one

agreed upon definition of how to measure relative levels of progressivity. For further

information on this topic, see Donald W. Kiefer, “Progressivity, measures of,” in Joseph J.

Cordes, Robert D. Ebel, and Jane G. Gravelle, eds., The Encyclopedia of Taxation and Tax

Policy (Washington, D.C.: Urban Institute Press, 1999), pp. 285-287.

CRS-16

income class: quartile, quintile, etc. Table 5 reflects a distributional analysis

prepared by the Urban-Brookings Tax Policy Center for each of the major legislative

proposals by income percentiles. In this depiction, the strict definitions of income

became less important since it is likely that the same taxpayers are expected to

generally fall into similar broad percentile categories, regardless of measures of

income.

CRS-17

Table 3. Comparison of the Percentage Change in After-Tax Income from H.R. 2: Joint Committee on Taxation

for House Proposal and Urban-Brookings Tax Policy Center Analysis of Administration, House, Senate, and

P.L. 108-27, Calendar Year 2003

Adjusted Gross Income

(AGI); (Income

Category for JCT

Computed Figures)a

Administration

Proposal (From UrbanBrookings Tax Policy

Center)b,c

House Proposal

(Computed from

JCT Figures)d

House Proposal

(From UrbanBrookings Tax Policy

Center)b,c

Senate Proposal

(From UrbanBrookings Tax Policy

Center)b,c

P.L. 108-27 (From

Urban-Brookings Tax

Policy Center) b,c

Less than $10,000

Less than 0.05%

0.0%

Less than 0.05%

0.1%

Less than 0.05%

10,000 to 20,000

0.4%

0.1%

0.3%

0.6%

0.3%

20,000 to 30,000

0.8%

0.3%

0.8%

0.9%

0.8%

30,000 to 40,000

1.0%

0.6%

1.0%

1.0%

1.0%

40,000 to 50,000

1.2%

0.8%

1.1%

1.1%

1.1%

50,000 to 75,000

1.3%

0.9%

1.2%

1.2%

1.2%

75,000 to 100,000

2.2%

1.4%

2.1%

2.1%

2.1%

100,000 to 200,000

2.3%

2.1%

2.3%

2.2%

2.2%

200,000 to 500,000

2.4%

2.5%

2.2%

2.2%

3.5%

3.1%

3.5%

4.4%

3.5%

4.4%

1.8%

1.7%

1.8%

500,000 to 1,000,000

3.6%

More than 1,000,000

4.2%

All

1.8%

3.3% for greater than

$200,000

1.6%

Source: Urban-Brookings Tax Policy Center and CRS calculations of Joint Committee on Taxation estimates.

Notes: Statistics are for calendar year; baseline is prior law. As appropriate, the above analysis includes the following general provisions: increase child tax credit; increase in refundability

rate for additional child tax credit; expand the 10% bracket, expand width of the 15% bracket and increased standard deduction (marriage penalty provisions), accelerate reduction

in the tax rates under EGTRRA; increase AMT exemption; and reduced taxation of dividends (and capital gains).

a. Tax units with negative AGI are excluded from the lowest income class but are included in the totals.

b. Includes both filing and non-filing units. Tax units that are dependent of other taxpayers are excluded from the analysis.

c. After-tax income is AGI less individual income tax net of refundable credits.

d. Notes one through three from table 2 apply.

CRS-18

Table 4. Percentage Change in After-Tax Income by Percentiles, 2003

AGI Classa

Administration

Proposal

House

Proposal

Senate

Proposal

P.L. 108-27

Lowest Quintile (0 - 20%)

less than 0.05%

less than 0.05%

0.1%

less than 0.05%

Second Quintile (20 - 40%)

0.3%

0.3%

0.5%

0.3%

Middle Quintile (40 - 60%)

0.9%

0.8%

0.9%

0.8%

Fourth Quintile (60 - 80%)

1.1%

1.1%

1.0%

1.1%

Next 10% (80 - 90%)

1.9%

1.8%

1.8%

1.8%

Next 5% (90 - 95%)

2.4%

2.3%

2.2%

2.3%

Next 4% (95 - 99%)

2.3%

2.3%

2.2%

2.2%

Top 1% (99-100%)

3.6%

3.6%

3.0%

3.6%

All

1.8%

1.8%

1.7%

1.8%

Source: Urban-Brookings Tax Policy Center.

Notes: Statistics are for calendar year; baseline is prior law. As appropriate, the above analysis includes the following

general provisions: increase child tax credit; increase in refundability rate for additional child tax credit; expand the

10% bracket, expand width of the 15% bracket and increased standard deduction (marriage penalty provisions),

accelerate reduction in the tax rates under EGTRRA; increase AMT exemption; and reduced taxation of dividends

(and capital gains). Includes both filing and non-filing units. Tax units that are dependent of other taxpayers are

excluded from the analysis.

a. Tax units with negative AGI are excluded from the lowest income class but are included in the totals.

Table 5 shows an excerpt from the Department of the Treasury’s distributional

analysis of P.L. 108-27. It does not include a comparison of after-tax income nor

does the analysis offer the data to make that computation. Rather, it is based upon

the change in the distribution of total individual income taxes. In contrast to the

previous illustrations, other taxes such as payroll taxes and excise taxes are not

incorporated into this analysis. Interpretation is complicated without additional

information such as the number of taxpayers within each category, and even with

such information, the presentation would respond to a substantively different

question than an assessment of an individual’s well-being as previously discussed.

It considers the question of which taxpayers most heavily support government

services through income taxes, before and after the change in law. Similarly, the

percent change in individual income taxes does not provide a meaningful assessment

of the change in one’s standard of living. For example, an individual who pays a

dollar in income tax and then pays no tax after the change will receive a 100%

reduction in tax liability, but this effect will be negligible on his lifestyle. The

percentage change would also exhibit a different pattern if other federal taxes were

included.

CRS-19

Table 5. Comparison of the Distribution of Total Individual

Income Taxes, 2003

Cash Income

Classa

Distribution of Total

Individual Income Taxesb

Percent Change in

Individual Income

Taxes

Prior Law

Law with

P.L. 108-27c

less than $30,000

-2.0%

-2.6%

-15.5%

30,000 to 40,000

2.1%

1.9%

-19.3%

40,000 to 50,000

3.7%

3.6%

-14.0%

50,000 to 75,000

11.6%

11.7%

-11.1%

75,000 to 100,000

12.1%

12.0%

-12.7%

100,000 to

200,000

27.6%

27.9%

-11.0%

more than

200,000

44.8%

45.4%

-10.8%

Totald

100.0%

100.0%

-11.9%

Source: Excerpt from a table prepared by the Department of the Treasury.

Notes: The provisions of P.L. 108-27 included are i) accelerate to 2003 the reductions in income tax rates above

15% scheduled for 2004 and 2006; ii) accelerate to 2003 the increase in the width of the 10% bracket for

single and joint filers scheduled for 2008; iii) accelerate to 2003 the increase in the standard deduction

and the width of the 15% bracket for joint filers scheduled to phase in between 2005 and 2009; iv)

accelerate to 2003 the increase in the child credit from $600 to $1,000 scheduled to phase in between 2005

and 2010; v) an increase in the AMT exemption amounts; and vi) a reduction in the tax rates on dividends

and capital gains to 5% (for taxpayers in the 10% and 15% ordinary income tax brackets) and to 15% (for

taxpayers in the higher ordinary income tax brackets).

a. Cash income consists of wages and salaries, net income from a business or farm, taxable and tax-exempt

interest, dividends, rental income, realized capital gains, cash transfers from the government, and

retirement benefits. Employer contributions for payroll taxes and the federal corporate income tax are

added to arrive at a family’s cash income used in the distributions.

b. The refundable portions of the earned income tax credit (EITC) and the child credit are included in the

individual income tax. Individual income taxes are estimated at 2000 income levels under 2003 law as

if it were fully phased in law, so exclude provisions that expire prior to the end of the budget period

(ignoring the sunset of EGTRRA in 2011) and are adjusted for the effects of unindexed parameters.

c. The change in individual income taxes under P.L. 108-27 is estimated at 2000 income levels as if the change

represented fully phased in law (ignoring the sunset of EGTRRA in 2011).

d. Families with negative incomes are excluded from the lowest income class but included in the total line.

Similarly, among a wide variety of distributional measures released by the

Urban-Brookings Tax Policy Center, one statistic presented is the average tax change

among income quintiles. This absolute measure is presented in Table 6, and would

not, alone, offer sufficient information to determine whether or not a modification to

the tax law would result in a system that relatively favors or burdens those with

higher incomes. The average tax change among income classes suggests high

income taxpayers benefit much more, in absolute dollars, than lower income

CRS-20

taxpayers. Nonetheless, it is important to recognize that these same taxpayers

currently have a larger proportion of the total income and pay a higher fraction of the

total taxes - a result of the generally progressive federal tax structure. Therefore, tax

changes that result in both more and less favorable relative treatment of high income

taxpayers would likely result in larger changes in average taxes for the highest

taxpayers.

Table 6. Average Tax Change by Income Percentile, 2003

AGI Class

Average Tax Change

Lowest Quintile (0 - 20%)

-$1

Second Quintile (20 - 40%)

-$38

Middle Quintile (40 - 60%)

-$217

Fourth Quintile (60 - 80%)

-$482

Next 10% (80 - 90%)

-$1,270

Next 5% (90 - 95%)

-$2,125

Next 4% (95 - 99%)

-$3,145

Top 1% (99-100%)

-$20,786

All

-$715

Source: Urban-Brookings Tax Policy Center.

Note: Identical to those outlined in Table 4.

Two basic economic principles inform the discussion of distributional analysis:

vertical equity and horizontal equity. An analysis of vertical equity assesses how

taxpayers with different incomes are treated, relative to the tax burden of a proposal.

The measures of percentage of after-tax income, by income category, shown in the

previous analyses provides information related to the concept of vertical equity. An

analysis of horizontal equity assesses how taxpayers with equal incomes but in

different circumstances are treated, relative to the tax burden under a proposal. In

addition to vertical equity issues, horizontal equity issues are raised within the

context of tax cuts directed at married couples, families with children, and dividends

and capital gains.

Several of the tax reduction provisions included in H.R. 2 were not solely

dependent upon an individual’s income or wealth, but on other characteristics such

as family status and, even indirectly, other deductions for which a taxpayer may be

eligible. For example, due to the acceleration in the tax reductions targeted at

married couples and the increase of the child tax credit, single taxpayers and those

without children benefit less than married taxpayers and families with children. This

result provides the basis for the anecdotal example cited by the Secretary of the

Treasury on the President’s proposal, “A typical family of four with two earners

CRS-21

making a combined $39,000 will receive a total of $1,100 in tax relief, compared to

the taxes they paid in 2002, under the President’s plan...”.14

The “marriage penalty” occurs for certain families when the incomes are

combined and subjected to progressive income tax rates.15 In contrast, it is possible

that others experience a “marriage bonus,” particularly in cases where two incomes

are unequal, since the exemption amounts and rate brackets are broader under the

prior law for married couples. In terms of the taxation of families with children, an

assessment of the “fairness” of the existing tax system is contingent upon how one

believes children and family sizes should be treated vis a vis the income tax system.

Several theories are available to guide this choice such as: treating children as

consumption, treating children as investment, and maintaining comparable before-tax

and after-tax income between families of different sizes (ability to pay). Regardless

of the treatment of families before the proposals, the distribution of all of the

proposals favored married couples and families compared to single taxpayers.

As the largest single provision in terms of reduced revenue, the reduction or

elimination of the taxation of dividends, and at times, capital gains, exhibits specific

vertical and horizontal distributional effects.16 In terms of horizontal equity, it may

be argued that owners of capital were unfairly taxed under the prior tax structure

compared to those holding other investments such as corporate debt. Therefore, any

reduction in these taxes would have disproportionately benefitted owners of

corporate equity over other classes. However, this argument fails to account for the

mobility of investment in search of equal, risk-adjusted returns on an after-tax basis.

(Those holding corporate equities at the time of passage may indeed benefit from a

one-time windfall from the reduction in taxes.) Horizontal fairness considerations,

in other words, do not apply in the usual way because investors are free to choose

whether or not to invest in heavily taxed assets.

As a result, the more significant analysis might reside with issues of vertical

equity: do the tax reductions contribute to distributional issues within the tax system?

Most economists believe that the economic incidence of a tax on capital income

largely falls on the owners of capital (as opposed to labor, for example). Further, the

distribution of both dividends and capital income is more concentrated among those

taxpayers with higher incomes compared to those with lower incomes, generally. As

illustrated in Table 7, with the exception of the lowest income categories, dividends

generally account for a higher percentage of income for those with the highest

incomes. The distribution of capital gains make up an even greater proportion of

adjusted gross income for tax returns from higher income groups than from lower

income groups. Consequently, and notwithstanding the limitations of using adjusted

14

U.S. Department of the Treasury, Secretary Snow’s Opening Statement before the House

Ways and Means Committee Testimony on the President’s Budget, JS-02, Feb. 4, 2003.

Posted on the Treasury’s website at [http://www.treas.gov/press/releases/js02.htm].

15

For further information on the marriage tax penalty, see CRS Report RL30419, The

Marriage Tax Penalty: An Overview of the Issues, by Jane G. Gravelle.

16

For a more extensive discussion of issues of equity and distribution, see CRS Report

RL31597, The Taxation of Dividend Income: An Overview and Economic Analysis of the

Issues, by Gregg A. Esenwein and Jane G. Gravelle.

CRS-22

gross income as a measure of income, those with higher incomes bore a greater

burden of the tax on capital gains and dividends under prior law. Similarly, higher

income taxpayers were expected to benefit the most from a reduction in taxes on

dividends and capital gains.

CRS-23

Table 7. Dividends and Capital Gains as a Percentage of Adjusted Gross Income, 2000

Adjusted Gross

Income (AGI) Less

Deficit

Dividend Amount

Dividends as

Percent of AGI

Net Capital Gains,

Losses, and

Distributions

Net Capital Gains

as Percent of AGI

No AGI

-$58,599,965

$1,576,463

na

$6,629,135

na

Less than $5,000

34,203,382

1,126,432

3.3%

1,545,803

4.5%

5,000 to 10,000

95,975,660

1,903,650

2.0%

2,685,021

2.8%

10,000 to 15,000

151,243,464

2,667,185

1.8%

2,518,815

2.7%

15,000 to 20,000

203,601,716

3,192,758

1.6%

2,724,105

1.3%

20,000 to 25,000

224,389,266

2,491,989

1.1%

3,256,199

1.5%

25,000 to 30,000

229,375,741

2,617,639

1.1%

3,054,874

1.3%

30,000 to 40,000

470,892,948

5,390,865

1.1%

6,877,584

1.5%

40,000 to 50,000

465,603,449

6,288,365

1.4%

8,329,955

1.8%

50,000 to 75,000

1,044,655,055

14,571,639

1.4%

23,353,710

2.2%

75,000 to 100,000

737,503,612

12,568,533

1.7%

22,364,044

3.0%

100,000 to 200,000

1,066,341,747

26,866,194

2.5%

65,289,214

6.1%

200,000 to 500,000

613,755,638

23,168,417

3.8%

79,496,171

13.0%

500,000 to 1,000,000

269,020,887

11,465,353

4.3%

54,864,271

20.4%

1 to 1.5 million

120,604,227

5,162,730

4.3%

31,196,776

25.9%

1.5 to 2 million

76,710,836

3,489,259

4.5%

22,383,144

29.2%

2 to 5 million

199,393,478

8,072,349

4.0%

69,183,786

34.7%

5 to 10 million

120,577,375

4,694,445

3.9%

50,077,200

41.5%

10 million or more

300,128,133

9,673,414

3.2%

174,712,625

58.2%

Income Category

Source: CRS calculations based on Internal Revenue Service Statistics of Income, Fall 2002.

Note: Capital gains include net capital gains plus capital gain distributions minus net capital losses for each income cohort.

CRS-24

Appendix

This appendix provides a side-by-side comparison of prior law, President

Bush’s economic growth portion of the FY2004 Budget proposal, H.R. 2, as

approved by the House, the proposal adopted by the Senate Finance Committee on

May 9, and P.L. 108-27. (Some initial notes are included in the Senate Finance

Committee column that reflect changes made on the Senate floor.) It also presents

item-by-item revenue estimates prepared by the Joint Committee on Taxation. The

table is not intended to be comprehensive but does contain the principal provisions

of each proposal.

CRS-25

Table 8. Comparison of Principal Provisions

Prior Law

President’s Proposal

House

Senate Finance

P.L. 108-27

Accelerated the reduction in the tax

rates for individuals scheduled for

reduction in 2004 and 2006 under

prior law. The rates scheduled for

2006 (10%, 15%, 25%, 28%, 33%,

and 35%) became effective for 2003

and thereafter (given present law in

2006), but will expire as scheduled

under EGTRRA after 2010.

Individual Income Taxes

Individual Income Tax Rates

Tax rates applicable to individuals’

taxable income were 10%, 15%,

27%, 30%, 35%, and 38.6% for

2003; 10%, 15%, 26%, 29%, 34%,

and 37.6% for 2004 and 2005; and

10%, 15%, 25%, 28%, 33%, and

35% for 2006 through 2010 under.

EGTRRA’s “sunset” provisions,

rates in 2011 and beyond reverted

back to the statutory rates effective

prior to its passage: 15%, 28%,

31%, 36%, and 39.6%.

The 10% tax rate bracket applied to

the first $6,000 of taxable income of

individuals and $12,000 for married

couples filing jointly for 2003

through 2007. For 2008, 2009, and

2010, the 10% tax rate bracket

applied to the first $7,000 of taxable

income of individuals and $14,000

for married couples filing jointly.

Both provisions were scheduled to

expire along with all of the

provisions of EGTRRA after 2010.

Would have accelerated the

reduction in the tax rates for

individuals scheduled for reduction

in 2004 and 2006 under then

existing law. The rates scheduled

for 2006 (10%, 15%, 25%, 28%,

33%, and 35%) would have become

effective for 2003 and thereafter.

Would have accelerated the

reduction in the tax rates for

individuals scheduled for reduction

in 2004 and 2006 under then

existing law. The rates scheduled

for 2006 (10%, 15%, 25%, 28%,

33%, and 35%) would have become

effective for 2003 and thereafter.

Would have accelerated the

reduction in the tax rates for

individuals scheduled for reduction

in 2004 and 2006 under then

existing law. The rates scheduled

for 2006 (10%, 15%, 25%, 28%,

33%, and 35%) would have become

effective for 2003 and thereafter.

The 10% tax rate bracket would

have been expanded by $1,000 (to

$7,000) for single individuals and

by $2,000 (to $14,000) for married

couples filing jointly. In short, the

2008 scheduled increase would

have been advanced to 2003.

The 10% tax rate bracket would

have been expanded by $1,000 (to

$7,000) for single individuals and

by $2,000 (to $14,000) for married

couples filing jointly. The bracket

size would have been annually

adjusted for inflation.

The 10% tax rate bracket would

have been expanded by $1,000 (to

$7,000) for single individuals and

by $2,000 (to $14,000) for married

couples filing jointly. The bracket

size would be annually adjusted for

inflation.

Estimated revenue loss: $58.3

billion in FY2003 and FY2004;

$118.8 billion in FY2003 through

FY2013 (11 years).

The reduced rates and expanded

bracket would have been effective

for 2003, 2004, and 2005. Beyond

2005, the rates imposed by

EGTRRA would have been

effective and would have expired,

as scheduled in 2010. The

expanded 10% bracket would have

reverted to present law in 2006.

The reduced rates would have

begun in 2003 and expired, as

scheduled, under EGTRRA after

2010.

Estimated revenue loss: $58.3

billion in FY2003 and FY2004; and

$92.6 billion over 11 years.

Estimated revenue loss: $58.3

billion in FY2003 and FY2004; and

$118.8 billion over 11 years.

The law expanded the 10% tax rate

bracket by $1,000 (to $7,000) for

single individuals and by $2,000 (to

$14,000) for married couples filing

jointly for 2003 and 2004. (For

2004, these amounts will be

indexed for inflation.) In 2005, the

tax rate brackets will revert to the

schedule under prior law.

Estimated revenue loss: $58.3

billion in FY2003 and FY2004; and

$86.1 billion over 11 years.

CRS-26

Prior Law

President’s Proposal

House

Senate Finance

P.L. 108-27

The size of the AMT exemption

would have been increased by

$12,000 (to $61,000) for joint

returns and by $6,000 (to $41,750)

for single returns for 2003, 2004,

and 2005. [These were reduced on

the Senate floor to $60,500 for joint

returns and $41,500 for singles.]

The law increased the size of the

AMT exemption by $9,000 (to

$58,000) for joint returns and by

$4,500 (to $40,250) for single

returns for 2003 and 2004.

The increases would not have been

applicable after 2005.

Estimated revenue loss: $11.5

billion in FY2003 and FY2004; and

$17.8 billion over 11 years.

Alternative Minimum Tax Exemption

The alternative minimum tax

exemption was set at $49,000 for

joint returns and $35,750 for single

returns for 2003 and 2004. The

levels were reduced to $45,000 for

joint returns and $33,750 for single

returns for 2005 and thereafter.

Proposal would have increased the

AMT exemption amount by $8,000

(to $57,000) for joint returns and by

$4,000 (to $39,750) for single

returns for 2003, 2004, and 2005.

The increases would not have been

applicable after 2005.

Estimated revenue loss: $10.1

billion in FY2003 and FY2004;

$37.3 billion over 11 years.

The size of the AMT exemption

would have been increased by

$15,000 (to $64,000) for joint

returns and by $7,500 (to $43,250)

for single returns for 2003, 2004,

and 2005.

The increases would not have been

applicable after 2005.

Estimated revenue loss: $15.0

billion in FY2003 and FY2004;

$53.0 billion over 11 years.

Estimated revenue loss: $13.6

billion in FY2003 and FY2004;

$49.3 billion over 11 years.

The increases will not be applicable

after 2004.

CRS-27

Prior Law

President’s Proposal

House

Senate Finance

P.L. 108-27

Married Couples

Phased in an increase in the

standard deduction for couples to

twice that of singles: 167% of

singles bracket in 2003 and 2004,

174% in 2005, 184% in 2006,

187% in 2007, and 190% in 2008

and 200% in 2009 and 2010.

Phased in over 2005-2008 a

broadening of the 15% rate bracket

for couples to twice that of singles.

From 2008 through 2010, the rate

for married couples filing jointly

was 200% of singles.

Would have accelerated, to 2003,

the increase in the standard

deduction for couples to twice that

of singles.

The proposal would have

accelerated, to 2003, the increase in

the standard deduction for couples

to twice that of singles.

Would have accelerated, to 2003,

the increase in the standard

deduction for couples to twice that

of singles.

Accelerated the increase in the

standard deduction for couples to

twice that of singles for 2003 and

2004.

Would have accelerated, to 2003,

the broadening of the 15% rate

bracket for couples to twice that of

singles.

Would have accelerated, to 2003,

the broadening of the 15% rate

bracket for couples to twice that of

singles.

Would have accelerated, to 2003,

the broadening of the 15% rate

bracket for couples to twice that of

singles.

Accelerated the broadening of the

15% rate bracket for couples to

twice that of singles for 2003 and

2004.

Estimated revenue loss: $30.9

billion in FY2003 and FY2004;

$55.4 billion over 11 years.

The provision would have been

applicable to tax years 2003, 2004,

and 2005. Beyond 2005, the

standard deduction amounts and the

size of the 15% rate bracket would

have reverted to the schedule under

EGTRRA.

The reduced rates would have

expired after 2010, as scheduled

under EGTRRA.

For 2005 and thereafter, the

deduction and bracket width will

revert to prior law and will expire

after 2010, as previously scheduled

under EGTRRA.

Estimated revenue loss: $29.8

billion in FY2003 and FY2004;

$43.4 billion over 11 years.

[The Senate adopted an amendment

to accelerate the increase in the

standard deduction and broadening

of the tax rate bracket for couples to

195% of singles in 2003 and 200%

in 2004. Beyond 2004, the Senate

version would have reverted to the

phase-in under prior law.]

Estimated revenue loss: $29.8

billion in FY2003 and FY2004;

$51.4 billion over 11 years.

Estimated revenue loss: $29.8

billion in FY2003 and FY2004;

$35.1 billion over 11 years.

CRS-28

Prior Law

President’s Proposal

House

Senate Finance

P.L. 108-27

The plan would have accelerated

the child credit increase to $1,000 to

2003.

Accelerated the child credit increase

to $1,000 from $600 for 2003 and

2004. In 2003, the amount of the

increase ($400) is to be paid in

advance to qualifying taxpayers.

Child Tax Credit

The child tax credit was scheduled

to be increased from $600 in 2003

to $1,000 in 2010. Specifically, the

credit was scheduled to be $600 in

2003 and 2004, $700 in 2005

through 2008, $800 in 2009, and

$1,000 in 2010. The credit was

scheduled to revert to $500 in 2011

under EGTRRA’s sunset

provisions.

The child tax credit was refundable

to the extent of 10% of income over

$10,500 for 2003 and 2004, 15% of

income over $10,500, indexed for

inflation from 2005 to 2010.

The plan would have accelerated

the child credit increase to $1,000 to

2003.

Estimated revenue loss: $19.4

billion in FY2003 and FY2004;

$89.6 billion over 11 years.

Would have accelerated the child

credit increase to $1,000 to 2003.

The increase would have expired

after 2005 and reverted to the

amounts scheduled under

EGTRRA.

The reduced rates would have

expired, as scheduled under

EGTRRA after 2010.

Estimated revenue loss: $19.5

billion in FY2003 and FY2004;

$45.0 billion over 11 years.

Estimated revenue loss: $21.3

billion in FY2003 and FY2004;

$93.3 billion over 11 years.

The reduced rates are scheduled to

revert to prior law and expire, as

scheduled under EGTRRA after

2010.

Estimated revenue loss: $19.5

billion in FY2003 and FY2004;

$32.5 billion over 11 years.

CRS-29

Prior Law

President’s Proposal

House

Senate Finance

P.L. 108-27

The threshold investment level for

small businesses was increased from

$200,000 to $400,000. The amount

eligible for deduction was increased

from $25,000 to $100,000

beginning in 2003. After 2003, the

threshold amounts and the

deduction limit will be indexed for

inflation.

Business Taxes

Business Expensing

Instead of depreciating certain

business equipment, businesses with

equipment investment of less than

$200,000 were allowed to deduct up

to $25,000 of the cost for tax

purposes. (The $25,000 was

reduced to the extent the investment

exceeds $200,000.)

The provision did not apply to offthe-shelf computer software.

The threshold investment level for

small businesses would have been

increased from $200,000 to

$325,000. The amount eligible for

deduction would have been

increased from $25,000 to $75,000

beginning in 2003. After 2003, the

threshold amounts and the

deduction limit would have been

indexed for inflation.

The threshold investment level for

small businesses would have been

increased from $200,000 to

$400,000. The amount eligible for

deduction would have been

increased from $25,000 to $100,000

beginning in 2003. After 2003, the

threshold amounts and the

deduction limit would have been

indexed for inflation.

The threshold investment level for

small businesses would have been

increased from $200,000 to

$325,000. The amount eligible for

deduction would have been

increased from $25,000 to $75,000

beginning in 2003. After 2003, the

threshold amounts and the

deduction limit would have been

indexed for inflation.

The provision would have been

extended to off-the-shelf computer

software.

The provision would have been

extended to off-the-shelf computer

software.

The provision would have been

extended to off-the-shelf computer

software.

Estimated revenue loss: $4 billion

in FY2003 and FY2004; and $28.8

billion over 11 years.

The provision would have expired

after 2007.

The provision would have expired

after 2012.

Estimated revenue loss: $4.3 billion

in FY2003 and FY2004; $2.7

billion over 11 years.

Estimated revenue loss: $4.1 billion

in FY2003 and FY2004; $23.4

billion over 11 years.

[The Senate approved an

amendment that would have

changed the Senate’s version to

more closely mirror the House

version. The threshold investment

level would have been increased

from $200,000 to $400,000 and the

eligible deduction would have been

increased from $25,000 to

$100,000. The provision would

have expired after 2007.]

The provision is extended to offthe-shelf computer software.

The provision will sunset after

2005.

Estimated revenue loss: $4.3 billion

in FY2003 and FY2004; $1 billion

over 11 years.

CRS-30

Prior Law

President’s Proposal

House

Senate Finance

P.L. 108-27

No provision.

Qualified property is eligible for a

“bonus depreciation” deduction of

50% in the first year if acquired

after May 5, 2003 and before

January 1, 2005.

Depreciation

In general, the tax code required

businesses depreciate the cost of

property over a scheduled time

period.

No provision.

As a result of the Job Creation and

Worker Assistance Act of 2002

(P.L. 107-147), businesses were

allowed to elect a first year

depreciation deduction of 30% for

certain property purchased between

September 11, 2001 and September

11, 2004, and placed in service

before January 1, 2005. This is also

termed “bonus depreciation.”

Qualified property would have been

eligible for a “bonus depreciation”

deduction of 50% in the first year if

acquired after May 5, 2003 and

before January 1, 2006 and placed

in service before January 1, 2006.

(This enhanced depreciation

provision would have thus been

imposed for one additional year

beyond the then existing 30% bonus

depreciation deduction.)

Estimated revenue loss: $43.2

billion for FY2003 and FY2004;

$9.2 billion over 11 years.

Estimated revenue loss: $33.2

billion for FY2003 and FY2004;

$21.5 billion over 11 years.

Net Operating Losses

In most instances, a net operating

loss (NOL) could be carried back

two years and forward for 20 years

to offset against taxable income in

those years.

The Job Creation and Worker

Assistance Act of 2002 (P.L. 107147) extended the carryback period

to five years for NOLs arising in

2001 and 2002.

An NOL deduction was limited to

offsetting 90% of a business’s

alternative minimum taxable

income (AMTI).

No provision.

The proposal would have extended

the enhanced five-year carryback

period for NOLs arising in 2003

through 2005.

The proposal also would have

allowed both five-year carrybacks

arising in 2003 through 2005 and

carryforwards to taxable years 2003

through 2005 to reduce a business’s

AMTI by 100%.

Estimated revenue loss: $20.9

billion for FY2003 and FY2004;

$14.6 billion over 11 years.

No provision.

No provision.

CRS-31

Prior Law

President’s Proposal

House

Senate Finance

P.L. 108-27

Would have excluded the first $500

of qualified dividends received

from taxable income, beginning in

2004. In addition, 10% of

dividends received in excess of

$500 would also have been

excluded from taxation from 2004

through 2007. From 2008 through

2012, 20% of dividends received in

excess of $500 would be excluded

from taxation.

The law reduced the individual tax

rates applied to domestic and

foreign corporate dividends

received to 15% for taxpayers in the

higher tax brackets and 5% for

taxpayers in the 15% and 10%

income tax brackets.

Taxation of Dividends and Capital Gains

Dividends

A corporation pays tax on all of its

taxable earnings up to the maximum

rate of 35%. Individuals receiving

distributions of after-tax earnings

from a corporation in the form of

dividends included the amount in

their gross income and pay tax at

the appropriate individual tax rate.

Corporations receiving dividends

from another domestic corporation

were allowed to exclude at least

70% of the dividend received.

The proposal would have

eliminated the double taxation of

dividends by allowing individual

and corporate shareholders to

exclude dividends from their

taxable income. (This was also

termed “tax integration”).

More specifically, the amount of the

dividends eligible for exclusion

would have been computed by the

corporation and was termed the

excludable dividend amount (EDA).

In general, the EDA was a measure

of the corporation’s fully taxable

income, reduced by the taxes it

paid.

The provision would have applied

to distributions made beginning in

2003.

Dividends from foreign

corporations would have been

excluded only in the case of foreign

corporations conducting U.S.

business.

Estimated revenue loss: $30.9

billion in FY2003 and FY2004;

$395.8 billion over 11 years.

Dividends received by an individual

from domestic corporations would

have been subjected to reduced

rates: 15% for higher income

taxpayers and 5% for those in the

10 and 15% tax rate brackets.

(These same rates would have

applied to capital gains.)

Dividends from foreign

corporations would not have

received the reduced rates.

The provision would have begun in

2003 and expire after 2012.

Estimated revenue loss: $22.1

billion in FY2003 and FY2004;

$245.8 billion over 11 years.

Dividends from foreign

corporations would have qualified

for the exclusion.

The provision would have begun in

2004 and expire after 2012.

Estimated revenue loss: $2.0 billion

in FY2004; $81.1 billion over 10

years.

[The Senate approved an

amendment that would have

reduced the taxation of dividends

for foreign and domestic

corporations by 50% in 2003 and

provide a 100% exclusion in 2004,

2005, and 2006.]

This provision began in 2003 and is

scheduled to expire after 2008. (In

2008 only, the applicable rates will

be 15% and 0%, respectively.)

Beyond 2008, the tax structure will

revert to prior law.

Estimated revenue loss: $21.8

billion in FY2003 and FY2004;

$125.7 billion over 11 years.

CRS-32

Prior Law

President’s Proposal

House

Senate Finance

P.L. 108-27

No provision.

The law reduced the 20% and 10%

tax rates applicable to capital gains

to 15% and 5%, respectively.

Capital Gains

The capital gains upon sale of longterm capital assets (held more than

12 months) were taxed at 20%

(10% for taxpayers in the 10 and

15% income tax brackets).

For assets held more than 5 years,

beginning with ownership after

December 31, 2000, the maximum

rate was 18% (8% for lower

brackets).

The President’s “tax integration”

proposal to eliminate the double

taxation of dividends would have

effectively eliminated the tax on

capital gains by allowing

shareholders to adjust their basis in

computing their capital gains.

Therefore, prior to the sale of a

stock, corporate income that was

previously taxed would not have

been subject to capital gains tax at

the individual level.

Estimated revenue loss: The Joint

Committee on Taxation did not

separate the revenue loss from the

revenue loss attributed to the

elimination of the tax on dividends.

The proposal would have reduced

the 20% and 10% tax rates

applicable to capital gains to 15%

and 5%, respectively.

The provision would have begun in

2003 and expired after 2012.

Estimated revenue loss: $990

million for FY2003 and FY2004;

$31 billion over 11 years.

This provision began in 2003 and is

scheduled to expire after 2007.

In 2008 only, the applicable rates

will be 15% and 0%, respectively.

Beyond 2008, the tax structure will

revert to prior law.

Estimated revenue loss: $1 billion

in FY2003 and FY2004; $22.4

billion over 11 years.

CRS-33

Prior Law

President’s Proposal

House

Senate Finance

P.L. 108-27

The proposal approved by the

Senate Finance Committee included

more than two dozen revenue

offsets, customs user fee extensions,

and additional reform measures

amounting to $ 5.8 billion in

FY2003 and FY2004 and $92.4

billion over 11 years.

No provisions.

Other Major Provisions

Revenue Raising Offsets

For additional information on the

then existing law for each of the

underlying provisions, see U.S.

Congress, Joint Committee on

Taxation, Description of the

Chairman’s Modification to the

Provisions of the “Jobs and Growth

Tax Act of 2003,” and Description

of Additional Chairman’s

Modification to the Provisions of

the “Jobs and Growth Tax Act of

2003,” 108th Cong., 1st sess.

(Washington: May 8, 2003).

No provisions.

No provisions.

Examples of major revenue offsets

included clarification of the

economic substance doctrine ($13.6

billion over the 11-year projection

period) and repeal of the foreign

earned income exclusion ($32.1

billion over the projection period).

Customs user fee extensions

included in the proposal would have

extended the passenger and

conveyance processing fee and the

merchandise processing fee through

2013.

Assistance to State and Local Governments

The federal government has

provided state and local

governments with assistance

through a wide variety of programs,

grants, and formulas.

No provision.

No provision.

The proposal would have created a

fund to provide $20 billion in aid to

state and local governments ($10

billion in FY2003 and $10 billion in

FY2004).

Estimated cost: $20 billion in

FY2003 and FY2004.

The law created a fund to provide

$20 billion in aid to state

governments.

Estimated costs: $20 billion in

FY2003 through FY2004.