Online NewsHour: The Budget Deal's Impact: Tax Cuts -- August 5, 1997

CRUNCHING THE NUMBERS

AUGUST 5, 1997

TRANSCRIPT

President Clinton signed a budget and tax cutting bill today that promises to balance the federal books by 2002 and provide tax relief. But who benefits the most from this plan? The NewsHour's economic correspondent, Paul Solman of WGBH-Boston, looks at three typical American families and how the new tax cuts effects the financial help of each.

A RealAudio version of of this segment is available.
NewsHour Links:
August 8, 1997:
Will the balance budget deal improve the economy? Ask Paul Solman in an online forum.
July 29, 1997:
Economists debate the merits of the new budget agreement.
July 29, 1997:
Kasich and Sperling defend the merits of the agreement against economists' criticisms.
July 2, 1997:
Paul Solman outlines how the new tax plan would effect three different familes.
June 26, 1997:
The Senate works on finishing touches for the budget reconciliation.
June 10, 1997:
Rep. Bill Archer and Treasury Secretary Robert Rubin discuss the budget negotiations.
May 22, 1997:
The Senate works through numerous amendments on its way to a balanced budget deal.
May 2, 1997:
Congress and the President make a deal to balance the budget by 2002.
February 26, 1997:
The Republican Balanced Budget bill is rejected by the Senate, overturned by one vote.
February 7, 1997:
Office of Management and Budget Director, Franklin Raines, and Sen. Pete Domenici (R-N.M.), debate President Clinton's budget proposal.
January 30, 1997:
The NewsHour historians look at the history of bipartisanship.
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PAUL SOLMAN: Well, last month while the President and Congress were negotiating the tax deal, we introduced to you three families of various levels of income to show how the proposed tax cuts would affect real people. Now that the deal’s done, we thought we’d bring out three families back to see how they have actually fared. But first, let’s reintroduce them.
Making ends meet
PAUL SOLMAN: To begin with, our low-income family, represented by Linda. We’re using first names only to try to provide a measure of privacy. She’s a divorced mother with two young kids. Linda makes $22,000 a year as a cost analyst. She told us how she tries to manage on her $350-a-week take-home pay.
LINDA: What I try to do is I calculate what I need to spend for the week. During schooltime I calculate what I need for the kids, for their lunches, and for their everyday needs, and things that--and just leave a miscellaneous fund of things that will come up--like if they have a book fair at school and they need some extra money--I calculate what I need to spend on gas for the week, allow myself some money for coffee in the morning and lunch in the afternoon, and then the rest I put in the bank to pay my bills at the end of the month. If I’m short at the end of the month--which most times I am--I have to put a bill off until my next pay cycle.
PAUL SOLMAN: When we talked with Linda about education--again this was a month ago--she told us that given her monthly bills, she worries about how she’s going to save enough for college.
LINDA: Basically, they’re going to have to do with financial loans and go to college. And they’ll just have to pay it, which I hate to do, but there’s nothing else I can do. I don’t have the money to save for them right now.
In the middle
PAUL SOLMAN: Okay. On to our middle-income household. David works at home in a very modest neighborhood in very expensive Cambridge, Massachusetts. His wife, who works full-time, took the afternoon off so their five-year-old could go to the doctor. Household income: about $65,000, well above the midpoint for American families, about $1,000 in capital gains this year, but David considers himself squarely middle income.
DAVID: Well, I mean, the main factor is that the money we make is gone by the end of the month. If you think about it on a monthly basis, the money goes to the mortgage, the insurance, the car, the child care, the food, all the basics, and at the end of the month, there’s nothing left.
PAUL SOLMAN: One other pertinent fact about David. He smokes, like millions of other Americans. When we did our interviews a month ago, a proposal was on the table to increase taxes on cigarettes by 20 cents a pack.
DAVID: It’s not going to affect my income really, and I hope it affects my habit. I’m all for it. I’d be glad if they raised it to $10 a pack, that it would be helpful to me--
PAUL SOLMAN: Really? You might--
DAVID: --in my continuing struggle with this pernicious addiction.
The upper crust
PAUL SOLMAN: Last, our upper-income example: an anonymous stereotype, since no real family would appear on camera--with a lawyer father, a middle manager mother, a seventeen-year-old high school senior, a seven-year-old, and a preppie pre-teen. Their income--say $125,000 for dad, $75,000 for mom, $22,000 in stock dividends, $37,000 this year in capital gains, $6,000 in interest income.
Okay. Today, as we’ve seen, the tax deal was signed into law, and here are the highlights that will affect our three families. Among the new law’s highlights, a $400 credit for children under the age of 17, which increases to $500 per child in 1999, but you get nothing, for instance, if you’re a couple making more than $120,000 a year; a $1500 per year tuition tax credit for the first two years of college, and then up to $1,000 in any subsequent year. But, again, there’s a phase-out for those with higher incomes. The capital gains tax rate falls from 28 to 20 percent for long-term assets--those held between eighteen months and five years. Then the rate falls again after 2001. For low-income taxpayers with capital gains, the rate will fall to just 10 percent. Two new Individual Retirement Accounts, or IRA’s, will be established; estate taxes will be reduced, with the exemption rising to $1 million by 2006 for most estates, more for those inheriting businesses and farms; and finally, cigarette taxes will be increased by 10 cents a pack in the year 2000 and 5 cents more in 2002.
PAUL SOLMAN: So, what’s the bottom line going to be for our three families and their fellow Americans under the new tax law? Well, joining us to crunch the numbers is Clint Stretch, director of tax policy with the accounting firm of Deloitte & Touche. And Mr. Stretch, welcome.
CLINT STRETCH, Deloitte & Touche: Thank you very much. Good to be here.
Help for working families
PAUL SOLMAN: Okay. So let’s start with Linda, first, as sort of an overview. How does she, as the sort of representative low-income family, do?
CLINT STRETCH: She’s going to do fairly well under this tax bill. She’s going to get a child credit for each of those kids, $500 apiece, so that’s going to be $1,000 that she’ll get as an additional tax benefit.
PAUL SOLMAN: $400, $500?
CLINT STRETCH: $400 in ‘98, $500 in ‘99.
PAUL SOLMAN: Okay. She’ll get that. What about tuition?
CLINT STRETCH: Eventually, when the kids go to college, she’ll be able to get the tuition credit also, and that may be a big help for her, because, as she said, she’s having a hard time. In addition, there’s an item you didn’t talk about--deductibility of interest on student loans. If those kids are going to have to take out loans to go to college, having the ability to deduct $2500 a year of interest after they go to work and are paying that off will be very powerful for them.
PAUL SOLMAN: Okay. She does well on the first two. What about capital gains?
CLINT STRETCH: She’s not able to save, so she’s not going to have any capital gains to worry about.
PAUL SOLMAN: All right. Estate taxes is our fourth category here.
CLINT STRETCH: It didn’t look to me as if she was going to have a big estate to leave, and unless she’s got a rich Aunt Millie, that’s not an issue for her.
PAUL SOLMAN: Okay. I forgot actually one, IRA’s.
CLINT STRETCH: IRA’s. Again, she’s telling us--
PAUL SOLMAN: Individual Retirement Accounts--I didn’t spell it out.
CLINT STRETCH: Individual Retirement Accounts. She was telling us she’s living hand-to-mouth. She doesn’t have the ability to be putting a lot of money away. Her first place to think about savings may be the new education IRA--up to $500 a year for each of those kids that could go in and grow tax free.
PAUL SOLMAN: But she’d have to be saving money in order to do that?
CLINT STRETCH: Absolutely.
PAUL SOLMAN: Okay. And what about cigarettes? She gets hit on this, right?
CLINT STRETCH: If she’s smoking a pack and a half a day, she’ll be paying $54 a year extra in the year 2000. And that will go up to $81 in the year 2002.
PAUL SOLMAN: All right. So the net effect on her in particular?
CLINT STRETCH: Net effect, she’s looking like a $950 winner; certainly somebody that needs the help.
PAUL SOLMAN: Now, how representative is she of lower-income Americans?
CLINT STRETCH: I think, unfortunately, she’s very representative. There’s probably a third of the nation that’s earning less than $25,000 a year, struggling to keep things together. And that’s part of what drove this particular budget deal to find some help for them.
PAUL SOLMAN: So some help, in general. Do you think it’s a lot of help, a little help? How do you characterize it?
CLINT STRETCH: I think it’s a lot of help. If you look at it in terms of what would it take for her to go in to her boss on that cost accounting job and get a $1,000 take-home raise, that would be hard to do.
Moderate breaks for the middle class
PAUL SOLMAN: All right. So, second is our middle-income family, David. So how does his family do just generally overall?
CLINT STRETCH: Generally, I think they’re doing okay. They’re going to get a child credit. They have just the one child, as I understood it.
PAUL SOLMAN: A five-year-old.
CLINT STRETCH: Five-year-old. They’re going to get a $500 credit for the child.
PAUL SOLMAN: Again, $400 this year, $500 next year.
CLINT STRETCH: Right. I keep doing that to you.
PAUL SOLMAN: Okay. That’s all right. So, all right, that’s child credit. What about tuition--education?
CLINT STRETCH: Tuition. When the kid goes to college, their income isn’t so high, so they’ll continue to get a tuition credit of $1500 a year for the first two years, $1,000 after that. By the time that kid’s grown up, that credit will actually have gone up to $2,000 a year for years three and four of college.
PAUL SOLMAN: But only those four years of college is what you get it for?
CLINT STRETCH: That’s right. Right.
PAUL SOLMAN: Okay. So what about capital gains? They’ve got $1,000 in capital gains--this family.
CLINT STRETCH: They’re going to save $80 on that capital gain, so that’s not a big item for them.
PAUL SOLMAN: Okay. And what about IRA’s?
CLINT STRETCH: IRA’s look like a place that they might have some opportunities. They may have some savings sitting around that they can move over into IRA’s slowly.
PAUL SOLMAN: They do actually. This family had $12,000 worth of savings.
CLINT STRETCH: Yes. To just move that from one bank account to the other and re-label it an IRA would make a lot of sense for them. It would make the income on that tax exempt for them.
PAUL SOLMAN: And how does that work? I mean, what’s good about these IRA’s, or what’s different about these?
CLINT STRETCH: Well, there are three IRA’s now. There’s the old-fashioned IRA that we all know, where you deduct the money going in. It grows tax free, but then you pay tax when it comes out and you try to use it for retirement.
PAUL SOLMAN: That is, if you--up until only a certain amount of income, right?
CLINT STRETCH: That’s right. Those income limits are going up under this bill. They’re too wealthy to use that IRA now. Eventually, that income limit will go up to $80,000. They could start using it. There’s the new IRA, the Roth IRA.
PAUL SOLMAN: New in this bill.
CLINT STRETCH: New in this legislation. And that is available to families with incomes up to $150,000. So a lot of families can look at this Roth IRA. They don’t get any tax benefit for setting it up. They can put $2,000 of their own money into it. And then that money and the interest on it never get taxed again.
PAUL SOLMAN: What do you mean? When you take it out--like when I take out my pension money and have to pay taxes on it?
CLINT STRETCH: Absolutely. You don’t pay anything on the money you take out of this IRA if you take it out for retirement, for buying a first-time home, for paying for an education.
PAUL SOLMAN: No matter how big it grows?
CLINT STRETCH: That’s right. You can invest it in the high-tech stock of tomorrow and turn it into a million dollars, and it’s yours.
PAUL SOLMAN: So that really is a change.
CLINT STRETCH: That is.
PAUL SOLMAN: What about estate taxes for these people? They might conceivably have--I don’t think I know--but, you know, have family money--I mean, somebody--they’d stand to inherit--
CLINT STRETCH: If there is somebody in the senior generation who has an estate of say $1 million, right now we don’t tax the first $600,000 that is left to people, but we tax above that at very steep rates, starting at 37 percent. Over--
PAUL SOLMAN: Explain that. What do you mean?
CLINT STRETCH: So if you have--if you have a $700,000 estate, you don’t pay taxes on the first $600,000. The next $100,000 you pay $37,000 in tax.
PAUL SOLMAN: You, meaning if I inherit my father’s estate.
CLINT STRETCH: Right.
PAUL SOLMAN: Six hundred to seven hundred thousand--I’m paying $37,000 on that extra?
CLINT STRETCH: That’s right. It’s a very steep tax. As this moves up to a million dollars, if their Aunt Millie has a million dollars to leave them, they’re going to save $153,000 in estate taxes.
PAUL SOLMAN: That’s 37 percent of that difference, you mean?
CLINT STRETCH: It’s several rates built into there--
PAUL SOLMAN: But somewhere around there.
CLINT STRETCH: Yes.
PAUL SOLMAN: Okay. And finally, cigarettes for these people.
CLINT STRETCH: Well, if he’s at a pack and a half, he’s got that $54 increase at the turn of the century that Linda had, it’s probably not enough to help him with that bad habit.
PAUL SOLMAN: Okay. So net effect for the middle income?
CLINT STRETCH: They’re going to save about $500. I understood they were paying about $10,000 in taxes, so they’re going to--about 5 percent off when you add everything up and push it together.
PAUL SOLMAN: And how representative are they of middle-income taxpayers in general?
CLINT STRETCH: I think they’re very representative. They have a very typical level of income for middle-income taxpayers. They’re the kind of people that the bill was looking at. The thing that’s different about them is they only have one kid. If they had several children, this bill would be dynamite for them. If they had two kids in college and one in high school, they could be saving $3500 a year off their taxes. It would practically wipe out their income tax.
Big capital gains cuts
PAUL SOLMAN: Is that right? Okay. Well, let’s go to our third family. How do they do net on this?
CLINT STRETCH: Of your families, these are the big winners.
PAUL SOLMAN: Go down again our list. Child credits?
CLINT STRETCH: No child credit. They’re too wealthy to get a child credit.
PAUL SOLMAN: No tuition credit. They’re too wealthy for that.
CLINT STRETCH: Too wealthy for that.
PAUL SOLMAN: So why do they--
CLINT STRETCH: Capital gains. They had $37,000 of capital gains. Cutting that capital gains rate is going to save them $3,000 of tax.
PAUL SOLMAN: So that’s more than any of these people are getting?
CLINT STRETCH: That’s right. They’re also paying much more tax.
PAUL SOLMAN: Right.
CLINT STRETCH: They’re paying more tax than David earns.
PAUL SOLMAN: He’ll be sorry to hear that, I’m sure.
CLINT STRETCH: The other thing that they have is they have a lot of dividend income.
PAUL SOLMAN: Yes. They have about $22,000, I think we’ve said, in stock dividend income, which is what?
CLINT STRETCH: That’s the returns that corporations pay out to their shareholders. They share part of their profits back to the shareholders. That’s the dividend. It’s currently taxed at the same rate as interest and wages, so for this family at 36 percent. Their financial adviser or broker is going to suggest to them they look at moving some of that into capital gains stocks, rather than dividend-paying stocks. So if they move that tax down from 36 to 20, they could save another $3,000 that way.
PAUL SOLMAN: So they do very well. What about people who are even better off?
CLINT STRETCH: People who are better off, they’re going to do well, because--
PAUL SOLMAN: Do better, will they do better?
CLINT STRETCH: They’ll do better. People with large capital gains clearly win big in this bill.
The biggest winners?
PAUL SOLMAN: So what Americans do best under this bill when we look at the whole spectrum of Americans here?
CLINT STRETCH: The people who do best are the people with a lot of kids and the people with a lot of capital. And they’re two distinctly different groups.
PAUL SOLMAN: But if you have a lot of capital and a lot of kids--
CLINT STRETCH: You can do real well.
PAUL SOLMAN: Does anybody get no benefit at all?
CLINT STRETCH: There’s no benefit in this bill for folks who have high incomes but don’t have children and are not--don’t have capital gains yet. Your young lawyer who’s gotten through the income limits and they don’t have children yet, when they do have children, they’re not going to have the benefits of the tuition credit and the child credit, because they’re going to have too much income, but all their savings are still going into retirement plans and places where they’re not recognizing capital gains on a regular basis.
PAUL SOLMAN: So there’s something for everybody?
CLINT STRETCH: Older couples I think don’t do very well under this bill because their savings is pretty much in place. It’s a lot of retirement assets, so they don’t get a lot of juice out of the capital gains treatment. They don’t have kids anymore.
PAUL SOLMAN: Okay. Good. Let’s leave it there. Thanks very much. I appreciate it.
CLINT STRETCH: Thank you.

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