June 27, 1973
Page 21666
AMENDMENT NO. 262
Mr. KENNEDY. Mr. President, I call up my amendment No. 262.
The PRESIDING OFFICER. The amendment will be stated.
The legislative clerk read as follows:
At the end of the bill insert the following:
SEC. (a) Section 56 of the Internal Revenue Code of 1954 (relating to imposition of minimum tax for tax preferences) is amended–
(1) by striking out subsection (a) and inserting in lieu thereof the following:
"(a) IN GENERAL. – In addition to the other taxes imposed by this chapter, there is hereby imposed for each taxable year, with respect to the income of every person, a tax equal to 10 percent of the amount (if any) by which the sum of the items of tax preference exceeds $30,000."; and–
(2) by striking out subsection (c).
(b) The amendment made by this section shall apply to taxable years beginning after the date of the enactment of this Act.
Mr. KENNEDY. Mr. President, I ask for the yeas and nays on the amendment.
The yeas and nays were ordered.
Mr. KENNEDY. Mr. President, I offer this amendment on behalf of myself, Senator BAYH, Senator MUSKIE, Senator NELSON, and a number of other Senators whose names are printed on the amendment.
The purpose of the amendment is to strengthen the minimum tax by eliminating the so-called deduction for taxes paid, which has become one of the largest, most notorious and least justified loopholes in the Federal income tax law. On the basis of estimates for the current calendar year, the amendment will generate increased tax revenues totaling $580 million, based on a $330 million increase in individual income tax liability and a $250 million increase in corporate income tax liability.
The minimum tax is the imaginative technique enacted by Congress as part of the Tax Reform Act of 1969, in an effort to insure that all citizens with substantial income would pay at least some tax on their income, thereby ending the gross tax inequity by which thousands of wealthy taxpayers were able to use the loopholes in existing law to avoid large amounts of taxes they ought to pay, or even to avoid taxes altogether.
In effect, the minimum tax is supposed to be a "bucket under a sieve." It is designed to impose a modest tax on all income that slips otherwise untaxed through the many loopholes in the existing Revenue Code. If the minimum tax fulfills its function, no one with substantial income would be able to avoid paying a fair share of taxes on his income.
Unfortunately, the minimum tax does not adequately fulfill its function. In 1970, the first full year of operation, the revenue yield was a paltry $117 million, compared to an anticipated yield of $290 million when it was enacted in 1969. Thanks to the exemptions and deductions written in at the beginning and in subsequent years, the minimum tax is itself a loophole-ridden tax – minimum in impact as well as name. As such, the minimum tax is the most aptly named provision in the tax laws. Instead of being a "bucket under a sieve," it is instead simply another sieve under the existing sieve.
I call this particular deduction the "Executive Suite" loophole, because it allows highly paid executives to use their large salaries to shelter large amounts of tax preference income against the minimum tax. Surely, simply because a wealthy individual pays taxes on his salary just like everybody else, it does not follow that the taxes he pays should give him free entry to the "loophole club" by allowing him to amass large amounts of sheltered income, free not only from the regular tax, but from the minimum tax as well.
For 1971, the most recent year for which figures are available, $163 million in minimum tax was paid on total reported tax preference income of $6.2 billion, yielding an average effective minimum tax rate of only 2.63 percent, even though the statutory rate is 10 percent.
Further, of the 98,000 individuals who reported tax preferences, 74,000 paid no minimum tax at all, even though they had tax preference income of nearly $4 billion. And, of the remaining 24,000 individuals who actually paid some minimum tax on their preferences totaling more than $2 billion, the minimum tax they paid was at an effective rate of only 4.13 percent. Thus, 75 percent of the individuals, with 36 percent of the total reported tax preference income, escaped the minimum tax altogether.
In large part, the reason for this enormous avoidance of the minimum tax is the deduction allowed for regular taxes paid. Thus, the minimum tax works reasonably well in the case of individuals who pay little or no regular taxes, but it contains a gaping loophole in the case of individuals who pay substantial regular taxes. To me, there is no justification for allowing this loophole in the minimum tax to remain open. Simple tax justice requires that the minimum tax be applicable even-handedly to all preference income. The amendment we are proposing today will achieve that result by eliminating the deduction for taxes paid, and I urge the Senate to approve it.
Mr. President, I ask unanimous consent that an analysis of the amendment may be printed at this point in the RECORD.
There being no objection, the analysis was ordered to be printed in the RECORD, as follows:
MINIMUM TAX – KENNEDY-BAYH-NELSON-MUSKIE AMENDMENT 262 TO THE DEBT CEILING BILL
Purpose: Repeal the step in the calculation of the minimum tax which currently allows a deduction for other taxes paid.
Explanation: The minimum tax was enacted by Congress as part of the Tax Reform Act of 1969, in an effort to guarantee that persons with substantial amounts of untaxed income would pay at least a modest tax on that income. As reported by the Finance Committee in 1969, a 5% tax would be paid on income from tax preferences. A floor amendment raised the rate to 10% and added a deduction for regular taxes paid. A 1970 Senate floor amendment allowed a 7-year carry over of the deduction. Under the minimum tax in present law, a person is taxed at the rate of 10% on the sum of his income from tax preferences, less a $30,000 exclusion and less the amount of regular income tax owed, including the carry over.
Amendment No. 262 would eliminate the deduction and carry over for taxes paid, which has allowed large numbers of taxpayers to avoid the minimum tax completely, even though they have large amounts of income from tax loopholes. In practice, the current deduction is an "Executive Suite" loophole, since one of its principal effects is to allow high salaried executives to use the large amount of regular taxes they pay as an offset against income they receive from tax loopholes.
Individual A, who has $100,000 in income from tax preferences and pays $100,000 in regular taxes on his salary, owes no minimum tax. Individual B, who has $100,000 in income from the same tax preferences, but who pays no regular taxes, owes a minimum tax of $10,000. The minimum tax should operate equally on individuals A and B, yet the deduction for taxes paid gives A an unfair benefit over B. Amendment 262 would equalize the two cases by insuring that A pays a minimum tax on his loophole income. In effect, the amendment requires equal treatment of the rich.
Current operation of minimum tax:
Individuals – In 1971, 24,000 individuals paid $163 million in minimum tax on loophole income of $3.9 billion, for an effective tax rate of 4.1 %.
But, 74,000 other individuals paid no minimum tax at all on loophole income of $22 billion.
Thus, the overall effective rate of the minimum tax on individuals is 2.6%, compared to the statutory rate of 10%.
Corporations (less precise data available) – In 1970, 6,000 corporations paid $280 million in minimum tax on loophole income of $4.1 billion, for an effective rate of 6.7%. But 75,000 corporations paid no minimum tax at all on loophole income of $1.6 billion. Thus, the overall effective rate of the minimum tax on corporations is about 4.8%.
Revenue Gain from Amendment 262 (1972 figures) : $580 million ($330 million from individuals; $250 million from corporations). The distribution of the gain from individuals is:
[Table Omitted]
Major preferences subject to minimum tax – Excess investment interest, accelerated depreciation on real property, accelerated depreciation on personal property subject to a net lease, amortization of certified pollution control facilities, amortization of railroad rolling stock, stock options, reserves for losses on bad debts of financial institutions, depletion, capital gains, and amortization of on-the-job training and child care facilities.
Major preferences not subject to minimum tax – Interest on state and local government bonds, intangible drilling and development expenses, interest and taxes during construction period of real estate, investment credit, gain on property transferred at death, gain on appreciated property given to charity.
Summary – The deduction for taxes paid was added by a Senate floor amendment in 1969, and it is appropriate that it now be repealed by a Senate floor amendment. Previous minimum tax amendments defeated on the Senate floor have also included changes in the tax preferences, in the $30,000 exemption, and in the rate of the minimum tax. Amendment 262 would affect only the deduction for taxes paid, the most flagrant and least justifiable loophole in the minimum tax.
The tax has worked reasonably well in the case of persons who pay little or no regular tax, and the Senate should close the loophole that allows those already paying regular taxes to escape the minimum tax.
Mr. KENNEDY. Mr. President, I yield such time as I have remaining to the Senator from Maine.
Mr. MUSKIE. Mr. President, I commend the effort of Senator KENNEDY in introducing this amendment to bring about a much needed reform of the minimum tax. Along with 15 other Senators, I cosponsored this amendment, because I believe that Congress must begin now the difficult process of bringing fairness to our tax code.
Our tax system is sadly replete with unfairness. For instance, even after the minimum tax and other welcome reforms were enacted in the 1969 Tax Reform Act, the Treasury Department acknowledged that 107 persons with earnings over $200,000 paid no 1970 income taxes. And almost 400 persons with incomes over $100,000 that year also avoided Federal income taxes altogether. A few individuals paid no taxes even though they had incomes of more than $1 million.
Our taxes fall hard and heavy on the vast bulk of low- and middle-income Americans, on the men and women whose only source of income is the wage they work for, or the earnings of small family-owned stores, workshops, and farms.
But the tax code too often treats the wealthy more generously. Tax preferences – unexamined and increasingly unjust – have made it possible for a well-to-do minority to pay less than a fair share of the tax burden. The weaknesses of the law have given birth to a myriad of institutionalized tax dodges most of them technically legal, and most of them repugnant to the foundation of our society – that a citizen's contribution to society match his ability to contribute.
I have detailed the workings of unfair provisions in the tax code in statements before the Ways and Means Committee and in statements in this Chamber. I have examined the tax code and introduced legislation to correct many of these inequities – the Tax Reform Act of 1973 (S. 1439) which would raise approximately $18 billion in new Federal revenue in 1974 without increasing the tax burden on low- and middle-income Americans. I have hopes that thorough tax reform, along lines of the bill I have introduced, will finally be enacted by this Congress.
The amendment before us, to strengthen the minimum tax, is a first step. Under current law, the minimum tax applies to nine items of tax preference: First, accelerated depreciation on real property; second, accelerated depreciation on net leased personal property; third, stock options; fourth, depletion allowances; fifth, capital gains; sixth, special amortization of pollution control facilities; seventh, special amortization of railroad rolling stock; eighth, bad debt reserves for banks; and ninth, special amortization for job training and child care facilities. The maximum tax, at a rate of 10 percent, is imposed on these items of preferential income, with three deductions allowed: a $30,000 exclusion; the deduction of all Federal taxes paid in the current year; and the carry-forward of any excess of these Federal tax deductions from the 7 previous years.
The amendment we are considering today would repeal what is perhaps the most illogical and self-defeating of these deductions from the minimum tax: the deduction allowable for "regular" taxes paid. The reason for the minimum tax is that Congress judged that the taxes paid on these preferential items were too low. It makes little sense to allow a further escape from the taxation, under the minimum tax, by allowing an unrelated deduction for taxes paid on normal income.
Mr. President, I commend the work of Senator KENNEDY in bringing this issue before the Senate today. I urge that the Senate adopt this amendment, as a first small step toward thorough reform of our tax system.
Mr. KENNEDY. Mr. President, I want to express appreciation to the distinguished Senator from Maine for his statement. He has been one of the real leaders in the Senate for tax reform and, as he mentioned, has appeared before the Ways and Means Committee and on the Senate floor to outline in considerable detail a program of tax equity and fairness for all taxpaying Americans. I commend him for the leadership he has shown in this area, as in so many others.
Mr. President, I withhold the remainder of my time.