December 17, 1973
Page 41871
MINIMUM TAX AMENDMENT
Mr. KENNEDY. Mr. President, on behalf of Senators BAYH , MUSKIE, and myself, I send to the desk an amendment to H.R. 8214, and I ask that it may lie on the table and be printed. I ask unanimous consent that the text of my amendment may be printed in the RECORD, and that a joint statement by Senators BAYH and MUSKIE and myself and accompanying materials explaining the amendment may be printed in the RECORD.
There being no objection, the statement and amendment were ordered to be printed in the RECORD, as follows:
JOINT STATEMENT – DECEMBER 14, 1973
Senators Edward M. Kennedy, Birch Bayh, and Edmund S. Muskie announced today that they intend to offer an amendment to close the existing tax loopholes used by President Nixon to avoid payment of the so-called "minimum tax," the measure enacted by Congress in 1969 to insure that wealthy individuals do not escape tax altogether on the large amounts of tax preference income they receive.
The President filed the required IRS forms for the minimum tax for the past three years (1970- 1972) indicating many thousands of dollars in tax preference income. But in two of those years (1971 and 1972), he used the loopholes in existing law to reduce his minimum tax to zero, and in the third year (1970), he used the loopholes to reduce his minimum tax to only $792.81.
The amendment to be offered would affect two parts of the minimum tax. First, it would eliminate the "deduction for taxes paid," the provision under which wealthy individuals are allowed to deduct, from their tax preference income, the regular taxes they pay before the minimum tax is levied. This provision enables high-salaried individuals to use the taxes they pay on their salaries to shelter large amounts of income derived from tax preferences. Although this provision was not directly involved in the President's tax returns, it might come into play for the 1970 return, for example, if the deduction for Presidential papers is disallowed and a regular tax is assessed for that year.
The same Senators had offered a proposal earlier this year to delete the deduction for taxes paid, and it had been narrowly defeated on two occasions. The Senators blamed the earlier defeats on cries of "Wolf" from wealthy individuals and corporations affected by the change, and said they felt prospects for success were greater now because of the President's disclosures.
The second part of the amendment would affect the existing provision that exempts the first $30,000 of tax loophole income from the minimum tax. This provision was apparently used by the President to reduce his minimum tax to zero in 1971 and 1972 and to near-zero in 1970. The three Senators said the current level of the exemption was excessively high, and their proposal would reduce it to $10,000.
The amendment proposed by the Senators will be offered to the so-called "Christmas Tree" tax bill now on the Senate calendar, which the Senators said contains a number of controversial provisions to benefit certain special interests.
In commenting on their amendment, the Senators said, "It is highly appropriate that a bill containing new tax breaks for the special interests should become the vehicle for the modest tax reform measure we propose. We urge Congress to recognize the new urgency given to the public's perennial plea for tax reform as a result of the President's tax disclosures. The amendment we propose is a first down-payment on tax reform, a forerunner of comprehensive reform to come.
"How can Congress defend a tax system that contains such flagrant inequities? How can we have a Revenue Code that gives a free ride to the wealthiest citizens in the nation, but demands heavy taxes from the average working man and woman? What do we tell the ordinary taxpayer, who wants to know why he has to pay so much in taxes, when the President pays virtually no taxes on his $200,000 a year income and $50,000 a year expense account?"
The Senators predicted that the new disclosures by the President would generate widespread pressure on Congress for comprehensive tax reform in 1974, and would make tax reform a major election issue in Senate and House elections next year if Congress fails to act. They also said that the recent disclosures could well have an impact comparable to Secretary of the Treasury Joseph Barr's dramatic disclosure in 1969 that large numbers of wealthy individuals were using tax loopholes to escape all taxes. Mr. Barr's disclosure is widely regarded as the trigger for the Tax Reform Act of 1969.
KENNEDY-BAYH-MUSKIE MINIMUM TAX AMENDMENT – AMENDMENT TO H.R. 8214
PURPOSE
Repeal the step in the calculation of the minimum tax which currently allows a deduction for other taxes paid, and reduce the current $30,000 exemption from the minimum tax to $10,000.
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 to the bill raised the rate to 10% and added a deduction for regular taxes paid. A 1970 Senate floor amendment allowed a seven-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 exemption and less the amount of regular income tax owed, including the carry over.
The proposed amendment has two parts. The first part would eliminate the deduction and carry-over for taxes paid. These provision have 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. The following two examples illustrate the point:
[Table omitted]
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. The proposed amendment 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. In the case of individuals, ninety percent of the revenue gain from this change would come from persons with adjusted gross income of $100,000 or more.
The second part of the amendment would reduce the existing $30,000 exemption to $10,000. The present level was set far too high by the 1969 Act. It enables wealthy taxpayers to enjoy their first $30,000 in tax loophole income completely free of the minimum tax. By reducing the level to $10,000, substantial amounts of income that are currently tax-free would become subject to the minimum tax. At the same time, the $10,000 level would remain high enough to prevent any substantial deleterious impact on middle-income taxpayers with modest tax-preference income, such as a capital gain on the sale of a residence. In addition, the $10,000 level would avoid any unnecessary inconvenience in the administration of the minimum tax, since it would not require the forms to be filed or the tax to be paid on modest amounts of tax preference income.
CURRENT OPERATION AND YIELD 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 $2.2 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%.
MAJOR TAX PREFERENCES SUBJECT TO MINIMUM TAX
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 TAX 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.
NOTE
The proposed amendment makes no change in the tax preferences subject to the minimum tax, and no change in the current 10% rate of the minimum tax. It affects only the deduction for taxes paid and the $30,000 exemption, the most flagrant and least justifiable loopholes in the minimum tax.
Also, contrary to arguments raised in the past against the provision to repeal the deduction for taxes paid, this change would have only a marginal impact on capital gains or on the percentage depletion allowance. The effect of the change would be to increase the maximum effective tax rate on capital gains for individuals from its present level of 36.5% to 40% (but the 40% rate would apply only to that portion of gains for any year over $460,000), and it would reduce the
depletion allowance from its present "effective" level of approximately 18% by less than a single percentage point. In the Tax Reform Act of 1969, the maximum effective tax rate on capital gains was increased from 25% to 36.5%, with no measurable overall effect on the flow of capital in the nation. And the same Act reduced the effective rate of the oil depletion allowance from 27½ % to 18%, with no measurable overall effect on oil company profits. Obviously, If Wall Street and the oil industry could take these far more substantial reforms in stride in 1969, they can easily do the same with respect to the reform now proposed in the minimum tax.
AMENDMENT No. 920
At the appropriate place in the bill insert the following new section:
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 (c);
(2) 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 the excludable amount.;
(3) by striking out "$30,000" in subsection (b) (1) (B) and inserting in lieu thereof "$10,000"; and
(4) by inserting a new subsection (c) as follows:
"(c) For the purpose of subsection (a) of this subsection, the excludable amount shall be $10,000."
(b) The amendments made by this section hall apply to taxable rears beginning after. December 31, 1973.