April 2, 1973
Page10432
By Mr. MUSKIE:
S. 1439. A bill to reform the Federal income, estate, and gift tax laws. Referred to the Committee on Finance.
THE TAX REFORM ACT OF 1973
Mr. MUSKIE. Mr. President, today I introduce The Tax Reform Act of 1973. This bill represents the technical implementation of the detailed proposals I discussed in the Senate on January 23. It would close unjustifiable tax loopholes which benefit large corporations, wealthy individuals, and special interests. And it would raise a substantial amount of additional tax revenue totaling $18 billion in fiscal year 1975 and even more in later fiscal years. But it would not in any way increase the burden on middle-income or low-income taxpayers.
Mr. President, we all recognize the need to control Federal expenditures. We all recognize the need to avoid a tax increase. But we must also recognize that it is possible to raise substantial additional revenues to reduce the budget deficit and pay for important Government programs without raising the tax burden on middle- and low-income Americans.
This is exactly what the Tax Reform Act of 1973 does. The act does not change the existing standard deductions; it does not repeal the deduction for State and local gasoline taxes; it does not change the existing exemption of $100 for qualifying dividends; and it does not affect the present homeowner's deduction for interest paid on mortgages.
Some of these provisions and others which benefit low- and middle-income earners have been criticized as being inequitable and unfair. But I believe that before any of such sections in our tax code are changed, we must rid our tax system of its fundamental inequities: Those loopholes which benefit only the rich, and allow millionaires and multibillion-dollar corporations to evade their fair share of taxes.
The Tax Reform Act of 1973 attacks these upper-income and corporate loopholes thoroughly and comprehensively – yet without making changes that could have disruptive effects on our economy. This act would make moderate changes – for instance, by marginally increasing the capital gains tax; by allowing a 5-year period for phasing-in taxes on capital gains at death; by marginally decreasing percentage depletion rates; by allowing farm losses in excess of the permitted deduction to be carried forward to future years; and by marginally increasing the minimum tax.
The Tax Reform Act of 1973 would raise $8.1 billion by lessening the unfair advantage of tax shelters and by moderating or abolishing a number of tax preferences. By tightening up our treatment of depreciation, it would raise $5.3 billion. It would give State and local governments an additional $1.3 billion, at a net cost to the Federal Treasury of only $300 million, by allowing taxation of interest on State and municipal bonds. And it would raise $4.9 billion by more equitably taxing the transfer of large estates.
Many tax preferences and tax shelters are being justified for the contributions they are said to make to important social or economy policy goals. The revenues the Federal Government does not collect because of these special provisions are in reality "tax expenditures," almost as if they were direct appropriations from the Federal Treasury. They should be subject to the same scrutiny that we give to the Federal budget: How much do they cost? What goals do they supposedly serve? What benefits do they actually provide? And, finally, are their benefits worth their costs?
Many of these preferences supposedly serve goals with which I agree. But just as I would not vote for an appropriation until I was assured it would produce benefits worth its cost, I cannot condone continued tax expenditure unless I am satisfied that it produces worthwhile results for the people of this country. And the benefits of these tax preferences have not been proven. We know at least one thing for certain – that their costs go directly into the pockets of the wealthy.
In general, the goals of these provisions are better served through direct subsidies and incentives. We can know exactly how much is being spent on such programs. And we can have the benefit of reports assessing their effectiveness. For instance, I agree with the goals of increasing the supply of low-income housing or bolstering foreign trade or the economies of undeveloped areas.
I would, therefore, urge Congress to consider responsible Federal programs to replace the tax preferences repealed or modified by the Tax Reform Act of 1973. But there is no justification for retaining these preferences as they now stand.
Following this philosophy, the Tax Reform Act of 1973 contains provisions which would moderate or eliminate tax shelters and tax preferences, to create total increased revenue of $8.1 billion. These provisions, and the extra Federal income they would produce by fiscal year 1975, include:
Increasing the long-term capital gains rates to a maximum of 42 percent for individuals – and 35 percent for corporations – instead of current rates of 25 percent for individuals on the first $50,000 and 36.5 percent on the remainder and 30 percent for corporations – $2.1 billion;
Tightening the minimum tax on tax preference items, including reducing the existing $30,000 exemption to $10,000, imposing graduated minimum tax rates, and eliminating the tax carry-forward – $300 million;
Tightening treatment of the farm loss tax shelter by reducing to $15,000 per year the amount of farm loss which can be deducted from non-farm income – $100 million;
Uniformly reducing by 20 percent the rates for percentage depletion of mineral resources – $300 million;
Requiring capitalization and recapture of intangible drilling and development costs and of mine exploration and development costs – $800 million;
Tightening existing provisions which restrict the amount of deductions of interest on large investments – $300 million;
Six provisions restricting preferential treatment for foreign income and investment – $1.5 billion;
Reforming the investment tax credit given to investments in machinery and equipment by allowing credits only for net increases in investment – $2.5 billion; and
Disallowing excessive deductions by banks of bad debt reserves – $200 million.
In addition, the Tax Reform Act of 1973 would raise $5.3 billion through provisions that reform tax treatment of depreciation. These include:
Modifying ADR, the system which allows corporations to depreciate assets 20 percent faster than the industry average, to permit depreciation only at average industry rates – $4.2 billion;
Reforming tax treatment of real estate investment – 41 billion; and
Repealing rapid amortization provisions for the rehabilitation of low-income housing, railroad rolling stock, and pollution control facilities – $100 million.
Interest on State and local municipal bonds is now tax free. The Tax Reform Act of 1973 would, – at the option of State and local governments, make interest on those bonds taxable, thus producing $1 billion in additional revenue for the Federal Treasury. If State and local governments choose to make their bonds taxable, the act contains provisions which would grant a Federal subsidy to States and municipalities of 50 percent of their interest costs. The net effect would be to incur additional Federal expenditures of $300 million, but provide an extra $1.3 billion each year for States and municipalities.
Finally, the Tax Reform Act of 1973 includes five specific measures, raising a total of $4.9 billion, to tax the transfer of large estates more equitably. The amount of $2.4 billion would be raised by taxing the appreciation of capital gains held at the time of death, gains which now entirely escape tax. An additional $2.5 billion would be raised by establishing a unified gift and estate tax, imposing a special tax on generation-skipping transfers of wealth, allowing a spouse to deduct from the estate one half of its value plus $100,000, and changing the rate structure to include a maximum rate of 80 percent on estates and gifts.
Mr. President, I am impressed by the beginning this Congress has made on tax reform. The thorough hearings being conducted by the Committee on Ways and Means in the House of Representatives have, I believe, generated much interest and thought about our tax code. I hope that my contribution to this discussion can help us enact meaningful tax reform this year. On February 28, I introduced S. 1036, a bill to amend the tax code with respect to legislative activity by certain types of exempt organizations. On March 15, I introduced S. 1255, a measure to reform State property taxes by relieving excessive property taxes on the poor and the elderly and encourage States to reform unsatisfactory local property tax administration. Soon I hope to present a proposal to reform the social security payroll tax.
I hope that this Congress, and its distinguished Members who are primarily responsible for writing tax reform legislation, will carefully consider these proposals, and the Tax Reform Act of 1973, which I introduce today. In my judgment passage of a bill such as the Tax Reform Act of 1973 should be a top priority for this Congress.
I ask unanimous consent that a summary of the provisions of the Tax Reform Act of 1973 be printed in the RECORD at this point.
There being no objection, the summary was ordered to be printed in the RECORD, as follows:
SUMMARY OF THE CONTENTS OF THE TAX REFORM ACT OF 1973
Section 1.– Short Title, Etc.
This section provides that the Act may be cited as the Tax Reform Act of 1973, includes a table of contents, and provides for technical and conforming changes.
TITLE I – AMENDMENTS PRIMARILY AFFECTING INDIVIDUALS
Section 101. Minimum Tax for Tax Preferences.
This section strengthens the minimum tax on certain items of "tax preference" by (1) reducing the existing $30,000 exemption to $10,000; (2) imposing a graduated rate of tax of 10 percent on the first $10,000, 15 percent on the second $10,000, and 20 percent of additional amounts of tax preferences; and (3) eliminates deferral of the minimum tax.
Section 102. Gains and Losses on Property Held at Death or Transferred by Gift.
This section imposes a tax on the appreciation of capital assets transferred at death, or by gift, but provides a marital exclusion of one-half of the assets plus $100,000 and an exemption for property given to charity. This section includes a five-year phase-in period for these provisions.
Section 103. Interest on investment indebtedness.
This section strengthens current laws which disallows deductions of certain interest paid by an individual for borrowings for large investments. This section reduces the existing $25,000 interest exemptions to $10,000; disallows all investment interest deductions in excess of the exemption level, while present law only limits one-half; and expands the definition of "investment interest" to include interest paid on passive oil, gas, mineral, or real estate investments.
Section 104. Earned Income from Sources Without the United States.
This section terminates the present law which allows U.S. citizens who live abroad to exclude from their taxable income $25,000 (if they are bona fide residents of a foreign country) or $20,000 (if they live abroad for at least 17 out of 18 months).
Section 105. Capital Gains.
This section changes taxation of capital gains for individuals by repealing the provision that permits the first $50,000 of long-term capital gains to be taxed at no more than 25 percent. The section also requires that individuals include 55 percent of their long-term capital gains in their income in the first year of enactment, and 60 percent in their income thereafter, rather than only 50 percent as permitted under present law. The effect would be to have long-term capital gains taxed at 60 percent of normal income tax rates.
Section 106. Clerical Amendments.
This section makes changes in the table of contents of part of the Internal Revenue Code.
Section 107. Effective Date.
This section provides that the changes made by this title apply to taxable years beginning after the date of enactment, unless otherwise specified.
TITLE II – AMENDMENTS PRIMARILY AFFECTING CORPORATIONS
Section 201. Limitation of Investment Credit.
This section restricts the investment tax credit, given to corporations and individuals for investments in machinery and equipment, to allow a credit only, for net increases in investment.
Section 202. Modification of Class Life System.
This section modifies the ADR system, under which businesses may take depreciation 20 percent faster than the industry average. The section requires that depreciation rates be no more favorable than the industry average.
Section 203. Repeal of Rapid Amortization Provisions.
This section repeals the rapid amortization allowed under current law for rehabilitation of low-income rental housing, emergency facilities, pollution control facilities, certain railroad rolling stock, certain coal mine safety equipment, and certain expenditures for on-the-job training and child care facilities.
Section 204. Termination of Special Treatment of Bad Debt Reserves of Financial Institutions.
This section would allow commercial banks, mutual savings banks, and savings and loan associations to create bad debt reserves based solely upon their actual loss experience. For purposes of transition, this section would not take effect until 1975.
Section 205. Repeal of Deduction for Western Hemisphere Trade Corporations.
This section terminates the current law which allows U.S. businesses operating in Western Hemisphere countries other than the United States to be taxed at 34 percent, rather than the normal 48 percent corporate rate.
Section 206. Taxation of Earnings and Profits of Controlled Foreign Corporations.
This section adds new provisions to the tax code to eliminate the tax deferral available to United States shareholders of foreign corporations they control, and to tighten the definition of a "controlled foreign corporation" to frustrate tax evasion schemes.
Section 207. Termination of Special Tax Treatment for Domestic International Sales Corporations.
This section terminates the DISC provisions, which now allow export corporations to indefinitely defer from tax up to 50 percent of their income.
Section 208. Capital Gains.
This section increases the corporate tax rate on long-term capital gains from 30 percent to 35 percent.
Section 209. Clerical Amendment.
This section makes changes in the table of contents of part of the Internal Revenue Code.
Section 210. Effective Date.
This section provides that, unless otherwise specified, the changes made by this Title apply only to taxable years beginning after the date this Act is enacted.
TITLE III – AMENDMENTS AFFECTING INDIVIDUALS AND CORPORATIONS
Section 301. Real Property.
This section reforms the present highly favorable tax rules for investments in real estate (such as apartment buildings). The section would: (1) restrict depreciation to the straight line method and to the owner's actual equity; (2) require capitalization of interest and taxes incurred on undeveloped real estate held for investment and during construction; (3) recapture in full at the time of sale the excess depreciation taken on real property; (4) include in taxable income, up to the amount of depreciation previously taken, any proceeds from a mortgage loan which exceed the depreciated cost of the real property to the investor; and (5) provide for review of the useful lives of buildings to determine if present depreciation guidelines are too liberal.
Section 302. Intangible Drilling and Development Costs in the Case of Oil and Gas Wells; Intangible Exploration and Development Costs in the Case of Mining Property.
This section requires that intangible drilling and development costs, and mine exploration and development costs, be capitalized rather than deducted immediately from income. It also provides for the recapture of past deductions when such mineral property is sold.
Section 303. Tax Shelter Farm Losses.
This section reduces from $25,000 to $15,000 the amount of farm losses which can be deducted from non-farm income in any year. It also provides that losses in excess of the limit may be carried over to future years for deduction from farm income. The yearly limit on farm loss deductions is adjusted upward for taxes, interest, losses from fire, storm, or other casualties, abandonment or theft, drought, and losses from sales, exchanges, and involuntary conversions.
Section 304. Reduction in Percentage Depletion.
This section reduces by one-fifth all existing percentage depletion rates for mines, wells, and other natural deposits. For example, it would reduce the depletion rate for oil and gas wells from 22 percent to 17.6 percent.
Section 305. Income from Sources Within United States Possessions.
This section terminates the provision which exempts from federal income taxation certain income earned in possessions of the United States, but it does not affect binding commitments made on or before the date of enactment.
Section 306. Foreign Tax Credit.
This section requires that the foreign tax credit be computed only by the "per country" method, which requires that the computation be made with reference to the income earned in the foreign country whose tax is being credited. In addition, this section prohibits corporations operating in less-developed countries from deducting foreign taxes from income as well as crediting them against United States tax.
Section 307. Clerical Amendments.
This section makes changes in the table of contents of part of the Internal Revenue Code.
Section 308. Effective Date.
This section provides that, unless otherwise specified, the changes made by this title apply only to taxable years beginning after the date this Act is enacted.
TITLE IV – ESTATE AND GIFT TAX AMENDMENTS
Section 401. Integration of Estate and Gift Taxes.
This section enacts the same exemption and tax rate schedule for estate and gift taxation. It exempts $25,000, over and above the liberalized marital deduction contained in Section 402. For estates exceeding exemptions and deductions, the new marginal rate schedule would range from 20 percent for the smallest taxable estates to 80 percent for taxable estates over $5 million.
Section 402. Increase in Estate Tax Marital Deduction.
This section would increase the estate tax deduction allowed to the spouse from one half of the value of the adjusted gross estate to one half of the value of the adjusted gross estate plus $100,000.
Section 403. Generation-Skipping Transfers.
This section imposes a special tax on generation-skipping transfers, such as bequests to grandchildren and great grandchildren, which currently are used to avoid the gift and estate tax. Generation-skipping transfers are defined as distributions to persons other than children, contemporary relatives or friends, or tax-exempt organizations. The tax imposed by this section is three-fifths of the normal estate tax.
Section 404. Clerical Amendments.
This section makes changes in the table of contents of part of the Internal Revenue Code.
TITLE V – STATE AND LOCAL BONDS
Section 501. Interest on Certain Governmental Obligations.
This section allows state and local governments, at their option, to issue bonds which pay taxable interest.
Section 502. United States To Pay 50 Percent of Interest Yield On Taxable Issues.
This section provides that the federal government shall pay 50 percent of the interest cost of state and local government bonds if state and local governments elect to make interest on their bonds taxable.