Table 3.-Tax Rate Schedule Under Present Law and H.R. 13511 For Married Couples Filing Jointly1 Present Law The tax is: If the taxable income is: If the taxable income is: H.R. 13511 1 And surviving spouses. The tax is: 14% of the excess over $3,400. Increase in zero bracket amount The first change from present law is the increase in the zero bracket amount in the joint return schedule from $3,200 to $3,400. The increase is from $2,200 to $2,300 for single persons, or one-half as much as for married couples, to avoid increasing the marriage tax penalty. For heads-of-households the increase is also $100 to $2,300. For married persons filing separate returns, the increase is from $1,600 to $1,700. Because the zero bracket amount, in effect, builds the old standard deduction into the tax rate schedule, it is necessary to permit itemizers to claim only those itemized deductions in excess of that amount, if they are to be able to use the same tax rate schedule as nonitemizers. Otherwise, they would, in effect, get their itemized deductions plus the standard deduction amount. Thus, the bill also increases the present floor under itemized deductions by $200 for joint returns and $100 for single, head-of-household and separate returns. The provision includes a technical amendment to the income averaging provisions relating to the zero bracket amount addition to base period income for years before the adoption of the zero bracket system (i.e., pre-1977). The amendment specifies that the zero bracket amount increase to base period income is not to be increased with the increase in the zero bracket amount in this bill but is to remain at existing levels (i.e., $3,200 for joint returns, $2,200 for single individuals and $1,600 for married individuals filing separately). Widening of tax rate brackets The second rate schedule change is that the size of the tax brackets (in excess of the zero bracket) are increased by 6 percent. For example, under present law the zero bracket amount is $3,200 and the first tax bracket is from $3,200 to $4,200, or $1,000 wide. Under the bill, the zero bracket amount is $3,400 and the bracket width is increased by 6 percent of $1,000 (or $60) to $1,060, so that the first income bracket range is from $3,400 to $4,460. Under present law, the second tax bracket, to which the 15-percent rate applies, is also $1,000 wide and it also is increased by 6 percent to $1,060. The second bracket then becomes $4,460 to $5,520 ($4,460+$1,060= $5,520). The same principle applies throughout the rate schedule. The next-to-the-top bracket, which under present law is $20,000 wide and to which the 69-percent rate applies, is increased by 6 percent to become $21,200 wide. Thus, under the bill, the upper end of the next-tothe-top bracket becomes $194,200 plus $21,200, or $215,400. This bracket widening is the principal adjustment which would have to be made to index the individual income tax rates for a 6-percent inflation. Reduction in certain tax rates Third, the bill reduces three of the lower tax rates (indicated by an asterisk on the bill's rate schedule in Table 3). The present 19, 22 and 25 percent rates are each reduced one point to 18, 21 and 24 percent, respectively. Distribution of tax reduction The reduction in tax and its distribution by income classes (at 1978 income levels) from the change in the tax rate schedule is shown in Table 4 below. Table 4.-Tax Reductions From Widening Tax Brackets, Rate Cuts, and Increased Zero Bracket Amount, 1978 Income Levels 1 Expanded income equals adjusted gross income plus minimum tax preferences less investment interest to the extent of investment income. Effective date The change in the tax rate schedule, including the higher zero bracket amount, is effective for taxable years beginning after December 31, 1978. The bill specifically applies the rules for rate changes of fiscal year taxpayers (sec. 21 of the Code) to allow these taxpayers the benefits of the rate cuts and increase in the zero bracket amount (as well as the personal exemption increase) for that part of their fiscal year which falls in 1979. In addition, the expiration of the general tax credit is treated as a change in the rate of tax. Under this provision, fiscal year taxpayers are to compute their tax liability for their full year both under 1978 law and 1979 law. The difference in these two amounts is then to be prorated over the fiscal year, and the tax reduction is allowed to the extent of the amount falling in 1979. Revenue effect The changes in the tax rate schedules, including the zero bracket amounts, are estimated to reduce calendar year liabilities by $10,584 million in 1979, $12,240 million in 1980 and $19,121 million in 1983. Budget receipts will be reduced by $6,549 million in fiscal year 1979, $11,608 million in 1980, and $18,104 million in fiscal year 1983. 3. Increase in the personal exemption (sec. 102 of the bill and secs. 151 and 6013(b)(3) of the Code) Present law Under present law, the amount of the personal exemption is $750 for the taxpayer, his or her spouse, and each dependent. An additional exemption is provided for a taxpayer who is blind or age 65 or over. Present law also provides a general tax credit, which is the larger of $35 per exemption or 2 percent of the first $9,000 of taxable income (in excess of the zero bracket amount), with a maximum credit of $180. The credit is scheduled to expire at the end of 1978. Reasons for change The personal exemption was last increased by the Tax Reform Act of 1969, from $600 (where it had been since 1948) to $750. The $750 exemption became effective in 1972. Inflation since then has eroded the real value of the $750 exemption and increased the difference between $750 and the cost of supporting a dependent. Consumer prices have in fact increased 55 percent since 1972. This erosion in the value of the exemption has been particularly severe for middle- and uppermiddle income taxpayers, especially those with large families. The committee concluded that an appropriate adjustment in the tax structure (in conjunction with the increase in the zero bracket amount and tax bracket and rate changes discussed above) is to increase the personal exemption from $750 to $1,000. This is intended as a replacement for the temporary general tax credit, which is permitted to expire at the end of 1978. The $35 per exemption credit provided by the general tax credit was the equivalent of an additional $250 worth of personal exemption at the bottom tax rate (14% x $250-$35). Therefore, the substitution of the $250 exemption increase for the credit will not increase the taxes of lower-income taxpayers and will result in a tax decrease for those who have income taxed at a rate higher than 14 percent and who elect the $35 credit rather than the 2-percent alternative credit. It does not affect the taxfree income level. This change (along with the tax rate and bracket changes) is designed to focus relief primarily on taxpayers who have been moved rapidly up the tax rate schedule due to inflation, particularly those with larger families where the increase in the cost-ofliving has had the most severe impact. While no taxpayers will experience a tax increase as a result of the replacement of the $35 per exemption credit by a $250 exemption increase, some taxpayers who elect the 2-percent-of-taxable-income alternative credit will have a tax increase which will not be offset by the rate changes in the bill. These are almost entirely single persons or married couples with no dependents who itemize their deductions. (For nonitemizers, the increase in the zero bracket amount prevents virtually all tax increases.) The overall effect of these changes is that only 900,000 taxpayers, or one percent of the total will experience a tax (34) increase from the combination of these three provisions. (About 2.6 million taxpayers will experience a tax increase from the entire bill.) The committee was also concerned about two other aspects of the general tax credit, which contributed to the conclusion that a $250 increase in the personal exemption would be preferable. First, the general tax credit is an additional provision. Although most taxpayers do not have to compute it because it has been built into the tax look-up tables, it is a source of complexity. Some taxpayers who cannot use the tax tables (generally because their income is in excess of $20,000 for single persons and $40,000 for joint returns) must compute the credit. The existence of the general tax credit for even a few taxpayers requires 7 lines on the tax computation schedule (schedule TC) out of the 11 lines used for the tax computation. It also requires an explanation in both the regulations and instructions. Second, the 2-percent alternative credit increases the marriage tax penalty that often results when two single persons with fairly equal earnings marry each other. Because both single persons and joint returns are each limited to a maximum credit of $180, a total of $360 for the two single taxpayers, they lose as much as $180 of general tax credit when they marry. The cutting back of the marriage penalty resulting from the general tax credit is what made it necessary to have many of the tax increases for single persons. Explanation of provision The bill provides a permanent increase in the personal exemption from $750 to $1,000. The general tax credit is allowed to expire at the end of 1978, as under existing law. The income distribution of the revenue change from substituting a $1,000 personal exemption for the general tax credit is shown in table 5 below. The tax increases shown result from the loss of the 2 percent of taxable income credit and are generally offset by the rate cuts. Table 5.-Tax Change From Substituting a $1,000 Personal Exemption for the General Tax Credit, 1978 Income Levels 1 Expanded income equals adjusted gross income plus minimum tax preferences less investment interest to the extent of investment income. |