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TABLE 5.-COMPARISON OF TAX LIABILITIES UNDER PROPOSED SURCHARGE CONTINUATION, 1 MARRIED COUPLE, 2 DEPENDENTS

(There is no surcharge increase in 1968, 1969, or 1970 for a married couple whose regular tax is $290 or less]

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0

290

- $61
-130

191
-258
-334
424

40
-906
- 1,508

290

737
1,198
1,685
2,217
3,397
4,743
8,094

$51

84
118
155
237
331
565

290

755
1,225
1,724
2,268
3, 476
4,853
8,282

0

0
$18
27
39
51
79
110
188

- $61
-130

122
147
177
218
-324
465
-755

$4
290

720
1,170
1,645
2,165
3,318
4,633
1,905

-$35 -55 -79 -103 -158 -220 -377

3,000.
$5,000.
$7,500..
$10,000
$12,500.
$15,000.
$20,000.
$25,000.
$35,000.

$65 420

877
1, 372
1,901
2, 486
3,800
5,318
9,037

686
1,114
1,567
2,062
3,160
4,412
7,529

Note: See footnotes at end of table.

TABLE 6.- COMPARISON OF TAX LIABILITIES UNDER PROPOSED SURCHARGE CONTINUATION, MARRIED COUPLE, NO DEPENDENTS

1970

(There is no surcharge increase in 1968, 1969, or 1970 for a married couple whose regular tax is $290 or less]

1967

1968

1969

Change from

1963

Change from

1967

Change from

1968

Change from

Wage income

1963 tax

Tax 2

Tax 3

Tax 4

$10

$2,000.

$3,000.

$3,600

$5,000.

$7,500.

$10,000.

$12,500.

$15,000

$20,000.

$25,000

$35,000

$122

305

413

660

1,141

1, 636

2, 213

2,810

4, 192

5,774

9, 601

$58

204

294

501

914

1, 342

1,831

2,335

3, 484

4, 796

7,997

-- $64

101

-119

159

-227

-294

382

-475

-708

--978

-1,604

$58

204

295

533

983

1,443

1, 968

2,510

3,745

5, 156

8, 597

101

137

175

261

360

600

$58

204

295

543

1,005

1, 476

2,014

2,568

3,832

5, 276

8, 797

46

58

87

120

200

1 Tax liabilities assume minimum standard deduction or deductions equal to 10 percent of income,

whichever is greater. Tax liabilities from optional tax table where income is under $5,000.

? From tax schedule revised in 1964 Tax Act.

3 Includes 10-percent tax surcharge effective from Apr. 1, 1968, to Dec. 31, 1968 (i.e., 742 percent

for calendar year). Surcharge liability from tables contained in the Revenue and Expenditure Control

Act of 1968.

* Includes 10-percent tax surcharge proposed for full year. Surcharge liability computed as 10

percent of adjusted tax, but not to exceed 20 percent of adjusted tax in excess of $145 for single

returns and $290 for joint returns.

* Includes 10-percent surcharge proposed for a year, effective from Jan. 1, 1970, to June 30,

1970 (i.e., 5 percent for calendar year). Surcharge liability from tables prescribed for calendar year

1969 in the Revenue and Expenditure Control Act of 1968.

TAX EXPENDITURE STUDY

Secretary BARR. In conclusion, Mr. Chairman, I want to submit something that I can only warn you is highly controversial. You may have some fun with it. We have had great sport with it. This is a study of Government expenditures made through the income tax system. You appropriate public funds for Federal programs but built into the revenue code of the United States are various tax provisions which assist individuals in different sectors of the economy, similar in some ways to Federal appropriations. However, these “tax expenditures” are never reflected in the Federal budget.

Now, as I look around this room I think I can say I know nearly all of you. Let me warn you, don't take this document and try to make a campaign platform out of it because it is pretty hot.

I do think, however, that it should be submitted for the record. I do think you should take into consideration the fact that you provide Federal resources through the tax route as well as through the appropriations route, and sometimes more that way than you might think. All I am suggesting, Mr. Chairman, is to review this analysis which has been done by the Treasury staff. I would invite your staff to take a close look at it, perhaps in conjunction with the staff on the Joint Committee on Internal Revenue and Taxation, and do with it what you may. This is for information purposes only. I only warn you it is highly controversial, but I think I should and I am delighted as one of the last things I do to bring it to your attention.

(The document referred to follows:)

TAX EXPENDITURES : GOVERNMENT EXPENDITURES MADE THROUGH THE INCOME

Tax SYSTEM

The Annual Report of the Secretary of the Treasury for fiscal year 1968 includes an exhibit which presents Government expenditures for 1968 made through the income tax system (exh. 29). The availability of the budget for fiscal year 1970 enables us to present an updating of tax expenditures to cover the fiscal years 1968, 1969, and 1970 on a basis consistent with the 1970 budget data and classifications. The following statement is a condensed and revised version of the exhibit in the Secretary's 1968 annual report with the updated figures.

PURPOSE OF ANALYSIS

This analysis extends the budget to include Government expenditures made through the income tax system. The present Federal income tax structure contains a large number of special deductions, credits, exclusions, exemptions, and preferential rates designed to achieve various social and economic objectives. Most of these special provisions serve ends similar in nature to those served by direct Government expenditures or loan programs, and they affect the private economy in the same way. In a specific functional area the Government may have direct expenditures, direct Federal loans, Federal insurance or guarantees of private loans, and interest subsidies which represent alternative methods of accomplishing the purpose which the special tax provision seeks to achieve or encourage. This analysis, together with the fuller presentation in the Secretary's annual report, will permit a better understanding of the amount and allocation of resources on both the outlay and revenue side of the 1970 budget.

A tax expenditure has the same impact on the budget surplus or deficit as a di. rect increase in expenditures. The tax revenues which the Government does not collect because of these special tax provisions, however, are not reported in the budget as presently constituted. The absence of line items—either on the receipts or outlays side of the budget--for these revenue losses thus results in an understatement of the role of Federal Government financial influence on the behavior of individuals and businesses and on income distribution. In many areas the magnitude of tax expenditures approaches and, in some instances, approximates direct outlays having the same objective.

24-475 0693

Tax expenditures are not disclosed in the budget and therefore are not subject to careful annual scrutiny in the budget and appropriation process. Budget outla y decisions, on the other hand, involve the departments and agencies, the Bureau of the Budget, the House and Senate program committees which are competent and experienced in their specialized fields, and the appropriation committees. Tax expenditures are not generally considered by the program departments and congressional committees concerned, and are not reviewed annually or periodically to measure the benefits they achieve against the amounts expended.

The purpose of this analysis is to present information which compares tax expenditures with direct expenditures or loan programs in various functional areas and thus to clarify and present more fully the role of the Federal Gorernment in these areas. Such a comparison should be helpful in the allocation of public resources.

A few illustrations will indicate how tax expenditures are alternatives to direct expenditures or Government lending programs. Under the functional category of health and welfare, the budget lists large direct expenditures which benefit the aged. In addition, $2.3 billion was expended in 1968 through the tax system to aid the elderly.

Direct expenditures for natural resources are itemized in the budget. To these should be added the $1.6 billion assistance the tax system provides these industries by permitting the expensing of certain capital costs, the use of per centage depletion in excess of cost depletion, and special capital gains treatment for iron ore and coal royalties.

In the field of housing, the Government now provides direct subsidies to lower the interest rates on mortgages paid by buyers of certain homes. Home ownership is also subsidized through the tax deductions for interest paid oi home mortgages and for property taxes on homes which now cost the Govern ment, annually, about $1.9 billion and $1.8 billion, respectively.

SCOPE OF TAX EXPENDITURES

Some of the special tax provisions cause revenue to be lost to the Goveri ment forever because the current tax base or the tax rates are reduced withoi any offsetting increase later. Such tax expenditures correspond closely 1 direct expenditures.

Other special tax provisions serve to defer the time when the taxes wi be paid. For a particular taxpayer, transaction, or asset, the special provisio may really represent a deferral of tax. However, for stable or growing bui nesses with an indefinite life, for the Government, and for the entire econom the deferral of taxes continues forever under most of these provisions ; furthe more, in an expanding economy the aggregate amount of deferred taxes ten to grow year after year. Examples of special tax provisions which cause deferi of taxes include: Deduction of employer and self-employed contributions private pension plans and exemption of investment income of such plar accelerated depreciation deductions on buildings; net income reinvested ship construction and renovation by certain shipping companies; expensi of capital costs in agriculture and natural resource industries; and exclusi of nonrepatriated earnings of foreign subsidiaries.

Special tax provisions, which serve to defer but not forgive taxpaymer might be compared to net lending in budget terminology. These special tax p visions are generally open ended, with the extent and duration of their largely at the taxpayers' option. For these reasons, the tax expenditure clası cations in this analysis do not separate the special provisions which reduce ta from those which defer taxes.

This analysis does not attempt a complete listing of all the special tax visions. Various items have been excluded for one or more of several reasons

(a) Some items were excluded because there is insufficient information av able on which to base a sound estimate. For example, in the case of deprecia on machinery and equipment, accelerated tax methods may provide an allowa beyond that appropriate to the measurement of net income but it is difficul measure that difference because the true economic deterioration or obsolesc factor cannot be readily determined.

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(0) Some items were excluded where the case for their inclusion in the income base stands on relatively technical or theoretical tax arguments. The imputed rent on owner-occupied homes, for example, involves not only a conceptual problem but difficult practical problems of measurement.

(c) Some items were omitted because of their relatively small quantitative importance

Other features of our income tax systems are considered not as variations from the generally accepted measure of net income or as tax preferences but as a part of the structure of an income tax system based on ability to pay. Such features include personal exemptions and the rate schedules under the individual income tax.

It must be recognized that the exclusions from the listing are to some extent arbitrary. The objective of this analysis is to provide a list of items that would be generally recognized as an intended use of the tax system to achieve results which are now, or could be, achieved through direct Government expenditures. The design of the list seems best served by constructing a minimum list rather than including highly complicated or controversial items that would becloud the utility of this analysis,

TAX EXPENDITURES BY FUNCTIONAL CATEGORY

The tax expenditures resulting from the various special tax provisions are classified under the functional categories used in the budget. In most cases, particular special tax provisions which affect more than one budget category hare been classified in the one where the effect is most important. In a few cases where the amount is large and the allocation relatively clear, the tax expenditures are divided between two functions.

No significant tax expenditures are made in three budget categories, space, interest, and general government and others. Two classes of tax expenditures (aid to State and local governments and capital gains-individual) which involve large amounts have not been assigned to specific functional categories for the reasons given in those sections of the analysis.

All estimates of tax expenditures resulting from special tax provisions represent revenues lost on an annual basis. The estimates of revenue forgone are, in general, based on the assumption that such provisions never existed, or, alternatively, that such provisions have been withdrawn sufficiently long ago that we are now beyond the period needed to permit an equitable transition to a new tax situation.

The revenue cost estimated for these special provisions is not in many cases the revenue change which would result in the first full year if these provisions were withdrawn. Replacement of some or all of these provisions by direct expenditures or lending programs might change the level and composition of economic activity. The revenue cost of each special tax provision presented for 1968 would, of course, generally vary over time with growth in the economy and changes in various parts of the tax base. Also, a realistic approach to any change in these provisions would provide, in many situations, transition arrangements which would effect the revenue change gradually over a period of years.

Another key assumption is that economic activity for the year would not have been affected by the absence of these special provisions. This, of course, is a simplifying assumption for tax expenditures undoubtedly have significant effects on the composition and perhaps the level of economic activity. Also, in the absence of these tax benefits, there would doubtless have been changes in Government direct spending and net lending to accomplish some of the objectives of the existing provisions. No attempt has been made to speculate how the budget and the economy might differ if none of these provisions were in the law.

No account is taken here of other taxes, such as payroll taxes, estate and gift taxes, excises, or tariffs. The assumption inherent in current law, that corporations are separate entities and subject to income taxation independently from their shareholders, is adhered to in this analysis.

The tax expenditures shown here for the 3 fiscal years 1968, 1969, and 1970 are figured at the tax rates which affect the revenues in these years.

A brief description of each of the special tax provisions for which a tax expenditure estimate is shown accompanies the estimates.

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