WikiLeaks Document Release
http://wikileaks.org/wiki/CRS-RS21420
February 2, 2009
Congressional Research Service
Report RS21420
President Bushs 2003 Tax Cut Proposal: A Brief Overview
David L. Brumbaugh, Government and Finance Division
Updated May 12, 2003
Abstract. On January 7, 2003, President Bush announced the elements of a new tax cut plan intended to
provide a fiscal stimulus to the economy by encouraging consumer spending and promoting investment. As
initially announced, the stimulus package contained an estimated $670 billion in tax cuts over 10 years, and
included acceleration to 2003 of tax cuts scheduled to be gradually phased in under the tax cut enacted in 2001;
elimination of individual income taxes on corporate-source dividends and capital gains; and an increase in the
expensing tax benefit for business investment. On February 3, 2003, the Administration released FY2003 budget
documents providing a more comprehensive outline of the Presidents tax proposals. The budget proposes tax
cuts totaling an estimated $1.46 trillion over 10 years. This amount includes the already-proposed stimulus
package, a set of additional tax cut proposals characterized as tax incentives, and a proposal to make the
expiring provisions of the 2001 tax cut permanent.
Order Code RS21420
Updated May 12, 2003
CRS Report for Congress
Received through the CRS Web
President Bush's 2003 Tax Cut Proposal:
A Brief Overview
David L. Brumbaugh
Specialist in Public Finance
Government and Finance Division
Summary
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On January 7, 2003, President Bush announced the elements of a new tax cut plan
intended to provide a fiscal stimulus to the economy by encouraging consumer spending
and promoting investment. As initially announced, the stimulus package contained an
estimated $670 billion in tax cuts over 10 years, and included acceleration to 2003 of
tax cuts scheduled to be gradually phased in under the tax cut enacted in 2001;
elimination of individual income taxes on corporate-source dividends and capital gains;
and an increase in the "expensing" tax benefit for business investment. On February 3,
the Administration released fiscal year (FY) 2004 budget documents providing a more
comprehensive outline of the President's tax proposals. The budget proposes tax cuts
totaling an estimated $1.46 trillion over 10 years. This amount includes the already-
proposed stimulus package, a set of additional tax cut proposals characterized as "tax
incentives," and a proposal to make the expiring provisions of the 2001 tax cut
permanent.1 Congress began consideration of tax cut legislation similar to the
President's proposal in April and May 2003. For information on congressional tax-cut
legislation, see CRS Report RL31907, Tax Cut Bills in 2003: A Comparison, by David
L. Brumbaugh and Don C. Richards. This report will be updated as events warrant.
The Proposal's Size
The Administration estimates that the tax-cut proposals in its budget will reduce
federal revenue by $1.46 trillion over 10 years and by $493.4 billion over its first five
years. Based on Congressional Budget Office (CBO) estimates for total revenue and
gross domestic product (GDP) otherwise expected over the period, the 10-year revenue
loss amounts to 5.2% of federal revenue and 1.0% of GDP.
1
A detailed description of the proposals has been published by the Treasury Department in its
General Explanations of the Administration's Fiscal Year 2004 Revenue Proposals (Washington:
Feb. 2003). See [http://www.treas.gov/offices/tax-policy/library/bluebk03.pdf].
Congressional Research Service ~ The Library of Congress
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The revenue impact of the proposal, however, is better seen by separating the
proposal into its likely long-run, permanent effects, and its more near-term transitory
effects. In the near-term, much of the proposal's revenue cost consists of acceleration of
the cuts that were previously enacted under the Economic Growth Tax Relief and
Reconciliation Act (EGTRRA; P.L. 107-16) but that were scheduled to be phased in over
a number of years. According to the Administration's estimates for the plan's first 5
years, the combined elements of the proposal would reduce revenue by 4.2% of otherwise
expected revenues and 0.8% of GDP. Between one-third and one-half of this (41%)
consists of revenue reductions from acceleration of EGTRRA's tax cuts.
The long-run picture is different. First, to comply with procedural rules in the
Senate, EGTRRA contained a provision repealing all of its tax cuts at the end of calendar
year 2010. Accordingly, the President's proposal to make those cuts permanent will not
register its full revenue effect until after the expiration is scheduled to take place in fiscal
year 2012 and beyond. Second, the provisions of the current proposal that would
accelerate EGTRRA's tax cuts do not impose additional costs in the long run; the cost of
the acceleration is confined to the first six to eight years of the plan. For these reasons,
the long-run, permanent revenue effect of the President's proposal is best seen by looking
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at the revenue estimates for the plan's "out years." According to the Administration's
estimates, the revenue loss in FY2013 would be $299.1 billion, or � again using CBO
projections to scale the estimated loss � 8.1% of otherwise expected revenues and 1.7%
of GDP. In FY2013, $203.5 billion of the revenue loss would be from extension of
EGTRRA's tax cut. In terms of its long-run general revenue effect, the proposal can thus
be summarized as reducing tax revenue by 5.5% so as to make EGTRRA's tax cuts
permanent, plus providing roughly half again as much in new tax cuts.
Components of the Plan
Table 1 presents the Administration's estimates of the revenue cost of the plan's
major components for its first 5 years, its first 10 years, and � in keeping with the
considerations outlined above � for FY2013. The table listings can be separated into three
groups: the "economic growth" or stimulus package; extension of EGTRRA's tax cuts;
the plan's tax incentives and other tax cuts. On the basis of the numbers in the table, the
stimulus package would account for most (about two-thirds) of the plan's revenue cost
in the proposal's early years but falls to less than one-quarter by 2013. The cancelling of
EGTRRA's expiration, on the other hand, accounts for a very small part of the plan's cost
in its first 5 years, but rises to over two-thirds by 2013. Among the other provisions, the
largest are generally extension of a set of expiring tax benefits that are not a part of
EGTRRA (the so-called "extenders"), tax benefits for health care, and tax benefits related
to charitable giving. The provisions are described in more detail in the following sections.
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Table 1. Estimated Reductions in Tax Revenue
Under the President's Proposal
(dollars in billions)
5-Year 10-Year Long-Run
Reduction Reduction Single Year
(FY2004-2008) (FY2004-2013) (FY2013)
% of % of % of
$ $ $
Total Total Total
Total, All Provisions $493.4 100% $1,460.6 100% $299.1 100%
Economic Growth Package 390.4 79.1 664.9 45.5 57.6 19.3
Acceleration of EGTRRA
203.5 41.2 239.1 16.4 3.3 1.1
Tax Cuts
Dividend Exemption 152.7 30.9 385.4 26.4 53.0 17.7
Expensing for Business
8.4 1.7 14.6 1.0 1.3 0.4
Investment
Minimum Tax Reductions 25.8 5.2 25.8 1.8 0.0 0.0
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Tax Incentives
Charitable Giving 9.0 1.8 19.5 1.3 2.3 0.8
Education 4.3 0.9 6.2 0.4 0.3 0.0
Health Care 47.8 9.7 135.4 9.3 19.5 6.5
Telecommuting 0.2 0.0 0.6 0.0 0.1 0.0
Housing 3.5 0.7 17.5 1.2 3.2 1.1
Environment 1.4 0.3 2.8 0.2 0.3 0.1
Energy 5.2 1.1 8.0 0.5 0.6 0.2
Trade, Tax Administration and
4.4 0.9 3.3 0.2 (1.6)a (0.5)a
Unemployment Insurance
Tax Simplification and Other
(13.2)a (2.7)a 1.6 0.1 3.4 1.1
Proposals
Make EGTRRA Cuts
5.8 1.2 523.0 35.8 203.5 68.0
Permanent
Extend Other Expiring
34.5 7.0 77.8 5.3 10.0 3.3
Provisions
Source: General Explanations of the Administration's Fiscal Year 2004 Revenue Proposals (Washington:
Feb. 2003), p. 151.
a
Estimated net revenue gain.
Economic Growth (Stimulus) Package
The President's budget calls for Congress "to pass an economic growth package
quickly that will reinvigorate the economic recovery and provide new jobs, reduce tax
burdens, and strengthen investor confidence."2 EGTRRA's tax cut in June 2001was also
enacted, in part, to provide economic stimulus. Data now show that a recession was in
2
U.S. Office of Management and Budget, Budget of the United States Government, Fiscal Year
2004. Analytical Perspectives (Washington: GPO, 2004), p. 66.
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progress at the time, with the economy contracting during the first three quarters of 2001.
Since then, the economy has registered positive rates of growth, and the Administration
has acknowledged that the economy "continues to recover and long-run fundamentals are
solid, with low inflation and strong productivity growth."3 Nonetheless, the
Administration has stated that the recovery is slow, with businesses expanding production
slowly and "too few jobs being created." Outside the Administration, economists also
viewed the pace of the recovery in 2002 as disappointing, but generally expect economic
growth to gather momentum over the course of 2003, despite lingering uncertainties.4 (As
described below in the report's last section, however, not all analysts have concluded a
tax cut is the appropriate economic remedy.)
The stimulus portion of the President's proposal consists of the following elements:
! Acceleration to 2003 tax cuts phased in gradually under EGTRRA. The
specific reductions are cuts in individual income tax rates (scheduled to
be fully effective under EGTRRA in 2006); tax cuts for married couples
(scheduled to be phased in over 2005-2010); and an increase in the child
tax credit (also currently scheduled for 2005-2010).
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! "Tax integration," or elimination of individual income tax on corporate-
source equity income (dividends and capital gains.) Under current law,
corporate equity income is taxed twice: once under the corporate income
tax and once when received by stockholders as dividends or capital gains.
According to economic theory, the double taxation reduces economic
efficiency by diverting capital from the corporate sector to other sectors
of the economy (e.g., housing). The Administration would exclude
dividends from individuals' taxable income, and would (in effect)
eliminate tax on capital gains by permitting stockholders to increase their
"basis" deduction when they calculate their capital gains tax.
! Increase in the "expensing" allowance for business investment. Under
current law, firms are permitted to deduct in the year of purchase
("expense") up to $25,000 of equipment acquisitions. The allowance is
reduced for amounts by which investment exceeds $200,000, thus
restricting its use to relatively small businesses. Expensing confers a tax
benefit by speeding up tax deductions that firms would ordinarily have
to spread over the life of the equipment as depreciation. The
Administration proposes to increase the annual allowance to $75,000 and
the beginning of the phase-out threshold to $325,000.
! A $4,000 increase in the individual alternative minimum tax (AMT)
exemption for individuals. The increase would expire after 2005.
3
U.S. Department of the Treasury, General Explanations of the Administration's Fiscal Year
2004 Revenue Proposals, p. 3.
4
Blue Chip Economic Indicators, Jan. 10, 2003, p. 1.
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Making EGTRRA's Tax Cuts Permanent
A Senate procedural rule � the "Byrd rule" � provides that a point of order can be
raised against any provision of a budget reconciliation bill that is "extraneous" to the
budget reconciliation legislation. Included among the several types of provisions the Byrd
rule defines as extraneous are those that would increase the budget deficit (or reduce the
budget surplus) for a fiscal year beyond that covered by the reconciliation measure being
considered. To avoid application of the Byrd rule, EGTRRA contained language
providing for the expiration of its provisions at the end of calendar year 2010. Over the
course of 2002, the House passed several bills that would have made some or all of
EGTRRA's cuts permanent, but the Senate did not act on them. The President's proposal
would rescind the expiration of all of EGTRRA's tax cuts.
Other Provisions
The remaining elements of the President's proposal fall into the following categories:
"tax incentives;" trade, tax administration and unemployment insurance; tax
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simplification and other proposals; and extension of expiring provisions not included in
EGTRRA. The principal tax incentives are as follows:
! Tax benefits for charitable giving. In terms of revenue cost, the largest
of these would be a deduction allowable to non-itemizers (an "above-the-
line" deduction) for charitable donations and tax-free withdrawal for
charitable donations from IRAs;
! Tax cuts for education, including a refundable tax credit for the costs of
switching attendance from a failing public school, and an above-the-line
deduction for certain out-of-pocket expenses of teachers;
! Tax benefits related to health care, including a refundable tax credit for
the costs of purchasing health insurance, and an above-the-line deduction
for the cost of long-term care insurance;
! Exclusion from income for the cost of an employer-provided home
computer (intended to promote telecommuting);
! Tax credit for developers of low income housing;
! Tax benefits related to the environment, including permanent extension
of the benefit for environmental remediation expenses;
! Tax benefits for energy production and conservation. Prominent among
these are a tax credit for production of gas from landfills; a tax credit for
the purchase of hybrid and fuel cell vehicles; and a tax credit for
residential solar energy systems.
Among the remaining proposals, the most prominent "simplification" measure is a
structuring of the tax code's individual retirement account (IRA) tax-favored savings
benefit. Under the plan, IRAs would be replaced with two sorts of tax-favored accounts:
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lifetime savings accounts, which could be used for any type of saving; and retirement
savings accounts, which would be restricted to retirement saving. Contribution limits
would be $7,500 per year for each type of account.
The administrative portions of the proposal would increase rather than reduce
revenues, and include changes to the 1998 IRS restructuring legislation, tighter
restrictions on the deductibility of interest payments to related firms ("earnings
stripping"), and an increase in restrictions on tax shelters. The proposal would also
extend or make permanent a number of tax benefits (not included in EGTRRA) that are
scheduled to expire at various times. Prominent among the extended provisions are the
research and experimentation tax credit (which the plan would make permanent), the
work opportunity tax credit and welfare-to-work tax credit (which the plan would also
modify) and certain AMT relief for individuals.
Other Proposals
The President's tax proposals have been criticized by some congressional Democrats
and others on three general grounds: that the plan will disproportionately favor upper-
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income individuals; that it is overly costly in terms of lost tax revenues and will expand
the federal budget deficit; and that its economic stimulus elements will be ineffective in
boosting economic growth.5
On January 6, House Democratic leaders proposed a smaller stimulus package
amounting to an estimated $87 billion in 2003 and $59 billion over 10 years.6 The plan's
principal tax provisions are a refundable tax rebate in 2003 of $300 per person; an
increase in the depreciation "bonus" for businesses previously enacted in March, 2002,
and an increase to $50,000 of the expensing benefit for business investment. On January
24, Senate Minority Leader Thomas Daschle outlined a one-year economic stimulus
proposal containing tax-cut and spending elements that would total an estimated $141
billion over the year it is in effect.7 For the year the plan is in effect, the tax elements of
the plan include a $300 per-person tax credit; an increase in the depreciation bonus; an
increase to $75,000 in the expensing allowance for business investment; a tax credit for
health insurance outlays of small businesses; and a 20% credit for business investment in
broadband Internet infrastructure.
5
See, for example, the views reported in Katherine M. Stimmel and Nancy Ognanovich, "Senate
Democratic Moderates' Opposition Puts Fate of White House Plan in Flux," BNA Daily Tax
Report, Jan. 9, 2003, p. GG-1.
6
The proposal is described on the Democrats' side of the House Budget Committee's Web site:
[http://www.house.gov/budget_democrats/analyses/house_dem_stimulus.htm]. The estimated
revenue loss over 10 years is smaller than the projected loss in 2003, and is likely the result of
the plan's depreciation component, which shifts deductions to 2003 from future years.
7
The proposal is described on Senator Daschle's web site at [http://daschle.senate.gov/pdf/
democraticplan.pdf].