TABLE 1.-Effective tax rate on taxable income under present law tax rates and under H.R. 8363 tax rates, 1965

SELECTED TAXABLE INCOME LEVELS-SINGLE PERSON

It will be observed that the difference approximates 4 percentage points at many levels and is exactly 4 points at the $3,000 level and the $7,000 level. In the entire range between these two levels the difference in effective rates is actually slightly less than 4 percentage points.

If the impact of the additional exclusion is also brought into the picture the results would be as shown in table 2.

TABLE 2.-Tax effect of increasing dividend exclusion, eliminating dividend tax credit, and reducing individual income tax rates under H.R. 8363, 1965 SINGLE PERSON-WITH DIVIDEND INCOME AFTER EXCLUSION EQUAL TO OR IN EXCESS OF TAXABLE INCOME

This table presents the tax effect of three provisions of H.R. 8363; the increase of the dividend exclusion, the elimination of the dividend credit, and the reduction of the individual income tax rates. It shows the tax actually payable under present law and under H.R. 8363 in 1965. It is apparent from the data in this table that for many taxpayers whose incomes are primarily from dividends, the reduction in rates will be almost fully counterbalanced by the repeal of the credit.

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Some retired taxpayers (whose income is primarily from dividends) will pay more under the bill than under existing law. This may be illustrated by taking the case of a single taxpayer 65 years of age whose entire gross income (all from dividends) is $3,500 and who is entitled to the maximum retirement income tax credit. It is assumed his deductions amount to 10 percent of his adjusted gross income under present law. The computation of tax under existing law and under H.R. 8363 in 1965 and thereafter is as follows:

Such a taxpayer would pay more tax at the 1965 rates under H.R. 8363 than under existing law rates so long as his entire income (all from dividends) does not exceed a level approximating $13,000.

SECTION 202. INVESTMENT CREDIT: REPEAL OF PROVISION REDUCING BASIS OF PROPERTY BY 7 PERCENT AND OTHER AMENDMENTS

In the Revenue Act of 1962, Congress allowed a credit against tax of 7 percent for certain types of investment and in effect allowed a credit of 3 percent in the case of certain public utility property. This credit may entirely offset the first $25,000 of tax liability and may offset one-quarter of the tax liability above $25,000. Any credit which cannot be used in the current year because of these limitations may be carried back 3 years and then forward for 5 years. Property with an estimated useful life of 8 years or more may be fully taken into account in computing this credit, property with an estimated life from 6 to 8 years may be taken into account at twothirds of its cost, and property with an estimated life from 4 to 6 years can be taken into account at one-third of its cost. Property with a life of less than 4 years is not eligible for the credit. If the property is disposed of before the end of the life used in computing the credit, some or all of the credit is recaptured. The same rule applies if the use of the property is changed to a use which does not qualify for the credit (such as use outside the United States). For the most part, the credit is limited to purchases of tangible personal property, such as machinery and equipment. Generally, the credit is limited to purchases of new equipment although purchases of up to $50,000 of used machinery and equipment may also be taken into account. A. Repeal of basis adjustment provision

The Senate Finance Committee added a provision to the Revenue Act of 1962 to provide that in the case of assets eligible for the investment credit, the base on which depreciation could be taken (and the base for determining gain or loss on sale) was to be reduced by the amount equal to the amount of the credit allowed. Thus, for example, where a taxpayer purchased an asset for $100 and $7 of this purchase price was allowed as an investment credit, the basis on which depreciation can be computed with respect to this asset is decreased from $100 to $93. Where the 5-year carryover period expires, and the taxpayer was unable to use the credit (because of the limitation to 25 percent of the liability over $25,000), the taxpayer is allowed a special deduction in computing taxable income equal to the adjustment in basis attributable to the unused credit. In addition, if there is a recapture of some or all of the credit, because of a premature disposition, or change in use, of the property, the basis is increased to the extent of the credit recaptured.

For property placed in service after June 30, 1963, the House bill repeals the adjustment to basis provisions (sec. 48 (g)) of existing law. Thus, for property placed in service after that date an investment credit will be available without making any 7-percent downward adjustment in the basis of the property involved.

In the case of property placed in service before July 1, 1963, and still on hand at the beginning of the taxpayer's first year beginning after June 30, 1963, the bill provides for the restoration of the basis to the property to the extent of the net reduction because of the credit. The basis increase is to equal 7 percent of the qualified investment in the property. However, if an increase in basis has previously been made because the property, before the end of its estimated useful life, became ineligible property (as occurs when it is used abroad), the amount of basis to be restored is to be reduced by the amount of any previous basis increase made.

This addition to basis in the case of those computing depreciation on a straight-line basis is to be recouped ratably by the taxpayer over the remaining life of the assets. This can be illustrated by a taxpayer having an asset which cost $100, which has a 10-year life, and on which an investment credit of $7 has been taken. In this case his base for taking depreciation is $93. Therefore, if he has taken a year's depreciation, it would have amounted to $9.30. This leaves a base still to recover of $83.70. The bill would add back to this base the $7 by which it was previously reduced, leaving $90.70 ($83.70+$7) still to be recovered. It is understood that this would be recovered ratably over the 9 remaining years of useful life and would therefore amount to $10.08 a year ($90.70÷9). In the case of double declining balance depreciation, the recoupment would occur somewhat faster. This is also true of the sum-of-the-year's-digits method. This method of handling the restoration of the basis in the case of investment credit assets previously placed in use makes the taxpayer "whole" without the necessity of refunds.

The bill also provides for a similar adjustment in the case of lessees. Last year when Congress enacted the investment credit it provided that lessors could pass the benefit of the investment credit on to the lessees in most cases. Where this occurred, it was provided that the rental deductions taken by the lessee with respect to this property were to be decreased by an amount equal to what otherwise would have been the downward adjustment in basis. The House bill in these cases provides that for the future, no such decreases in the rental deductions are to be made, and the amount of the decreases in rental deductions already taken with respect to a property are to be restored by allowing rental deductions larger than would otherwise be the case. The increases allowed in the rental deductions will, in effect, restore the amount of decreases previously taken by spreading the increased deductions over the remaining useful life of the asset.

The adjustments in the basis and the rental deductions referred to above are to apply to the taxpayer's first year beginning after June 30, 1963.

Conforming amendments to the provision described above provide for (1) the repeal of the sentence which in the case of leased property requires the decrease in the rental deduction; (2) the repeal of the section (sec. 181) providing for the deduction of amounts attributable to unused investment credits after the application of the carryforward; and (3) amendment of the provision (sec. 1016 (a) (19)) requiring a basis adjustment.