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| A TALE OF THREE TAX PLANS
JULY 3, 1997TRANSCRIPT |
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The President and both houses of Congress have each proposed ways to reform what we pay in income tax. All three address child and college tax credits, and capital gains and estate tax reductions. But their formula's vary widely. What's the best plan? Paul Solman of WGBH tells the tale of how three different families could be affected by each scheme.
PAUL SOLMAN:
A RealAudio version of this NewsHour segment is available.
June 26, 1997:
Kwame Holman reports on efforts to reconcile the budget agreement.
June 10, 1997:
Treasury Secretary Robert Rubin and Ways and Means Chairman Bill Archer discuss the GOP'stax cut proposal.
June 9, 1997:
Congress investigates the fairness of estate taxes.
April 16, 1997:
In an Online NewsHour Freshman Forum, Reps. Pappas and Tauscher discuss congressional tax planning.
October 16, 1996:
An online forum with the Reps. Archer and Rangel of the House Ways and Means Committee.
October 10, 1996:
Paul Solman reports on the Republican and Democratic economic plans.
Browse The Online NewsHour's congressional coverage.
To begin with, there are three competing tax cuts on the table: President Clinton's plan, the House plan, and the Senate plan.
They're similar in that they each cut taxes by about the same total amount as agreed to in the balanced budget deal. But they differ when it comes to the four major specifics of the plans: Child tax credits and college tax credits, capital gains tax cuts, and estate tax cuts.
Now, to illustrate how the plans differ for real people we came up with three families at various levels of income: a low income household, a divorced mother with two young kids, a middle income family, a self-employed husband of a working wife may have a five-year-old, and an anonymous composite high-income stereotype, since we couldn't get a real family to appear on camera.
Finally, to make sense of all this, we recruited a tax expert, Michigan economist Jim Hines to apply each of the plans to each of our families. Okay. Let's start with our low-income entrant, Linda. We're using first names only to try to provide a measure of privacy.
LINDA: I make $22,000 a year as a cost analyst for Century Protective Systems, and I have two children. My daughter is 11. My son is nine and a half. I live basically off a credit card because I don't have the cash to make purchases.
PAUL SOLMAN: Linda had given her income numbers to Professor Hines , who crunched them for us and calculated her tax bill. After getting an earned income tax credit, she pays $100 in federal income taxes. So, first, the President's plan.
JAMES HINES, University of Michigan: Under the Clinton plan with two children you're eligible for an $800 credit in the first year and a $1,000 credit thereafter. For someone who is only paying $100 a year in federal income tax already, it means that you would need to get money back.
PAUL SOLMAN: But Linda wouldn't get anything else, no college taxes, no breaks on capital gains, which she doesn't have, or estate taxes. She neither has an estate nor stands to inherit one.
JAMES HINES: The only other that might help her in this plan is that it's possible for the economy to be improved by this tax reform and, as a result, some day she might get a better higher paying job, but that's pretty speculative.
PAUL SOLMAN: Okay. Now, how does Linda do under the House and Senate tax plans?
JAMES HINES: Under the House plan she gets a child credit, but it's limited to the amount of her tax liability, which is only $100, so she gets a child credit, in essence, for $100. No benefit from the education credit, from the capital gains tax reduction, or from the estate tax reduction.
PAUL SOLMAN: Under the Senate plan, however, Linda will get a child tax credit, in her case because of the quirk involving the earned income tax credit. As a result, she'll get $750 a year, but again nothing for education, nothing for capital gains, and nothing for estate tax cuts. So when you compare the three plans--
JAMES HINES: She does best under Clinton, and so do low income taxpayers, in general. As it happens, do to her special tax situation, she'll do almost as well in the Senate plan, but only a small number of people fall into that category, and she does very poorly under the House plan.
PAUL SOLMAN: We had one more pertinent fact about Linda. Like millions of Americans, she smokes. Both the Clinton and Senate plans, but not the House, would increase cigarette taxes by 20 cents a pack, costing Linda about $75 a year. But it also might get her to stop smoking entirely.
LINDA: And I have just recently bought Nicorette gum because I can't afford to smoke. It's a luxury. It's a bad habit, but it's a luxury, and I hope to give it up. I did make that purchase on a credit card for the gum so that I can do away with that, because that will be more money I can save too.
PAUL SOLMAN: So you consider yourself a typical middle income family?
DAVID: Yes, I do.
PAUL SOLMAN: Okay. On to household number two. David works at home in a very modest neighborhood in very expensive Cambridge, Massachusetts. His wife took the afternoon off to take their five-year-old to the doctor. Household income about $65,000, well above the mid point for American families but 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: Prof. Hines crunched the numbers of David's family too: $65,000 in wages, another
$1,000 each in interest in capital gains; one child, a mortgage, IRA contributions. In all, this family pays about $10,000 a year in federal income taxes, roughly the median in America. David's family, like many in the American middle, does stand to inherit, although only possibly, and who knows how much. Okay. So how do the three plans compare for this family?
JAMES HINES: Under the Clinton plan, these taxpayers are eligible for a child credit, but not all of the child credits, the reason being that they're in the income tax bracket where the credit starts getting phased out. In the first year, instead of getting a $400 child credit, they would get only $300. They wouldn't get any education benefits. They'd have rather modest capital gains and might save $30 a year in capital gains, and don't get any benefit from the estate tax.
PAUL SOLMAN: That's because the president's plan only lowers the estate tax for those with businesses or farms, irrelevant to this family. Now, under the House plan, our middle income family would get $400 in child credits, nothing for education yet, because the kid is too young, about $30 for capital gains, but if they were to inherit a lot, they would get a break.
Under the Senate plan they'd get an even higher child credit of $500, nothing for education, $30 for capital gains, the same estate tax break the House has given. The plans didn't knock David out, but he wasn't poopooing the child credit.
DAVID: Yes, that's very nice. That's very nice. We spent over $8,000 last year on preschool.
PAUL SOLMAN: Is that right?
DAVID: Full-time daycare, five days a week, so that we can work. Now that credit is nice. I'm not saying it's not.
PAUL SOLMAN: On to our last family, an anonymous high-income stereotype, remember, featuring a
JAMES HINES: Under the Clinton plan their income level is too high to receive any of the child credits. They will, however, get an education credit when their 17 year old goes to college. They'll get $1,500 a year back as a credit for that.
PAUL SOLMAN: And then it goes up after a couple of years.
JAMES HINES: It goes up after two years.
PAUL SOLMAN: They'll also benefit from capital gains tax reduction, though modestly, about $1,000 a year. But no businesses or funds to inherit, so no estate tax break. Owning lots of corporate stock, however, will be a benefit, says Professor Hines.
JAMES HINES: Well, because the tax plan reduces the taxes on capital gains and also includes many provisions that reduce corporate tax plans, it'll increase the value of stocks.
PAUL SOLMAN: Okay. Back to our favorite graphic one last time for the House and Senate plans.
JAMES HINES: Here, the House and Senate plans are identical. Under neither plan will they get any
child credits because their income is way too high for that. They are, however, eligible for the education tax credits. When their 17 year old goes to college, they'll get $1500 a year for the first two years, and then nothing after that. They'll have more generous reduction of their capital gains taxes under the House and Senate plans. They'll save about $3,000 a year under each of those plans.
PAUL SOLMAN: As for estate taxes, their kids may eventually benefit from tax breaks on the parents' estate, as the parents may from anything they inherit. Finally, people with high incomes tend to own a lot of stock. Economists at least think stock prices will go up if capital gains and corporate taxes are cut.
They figure to go up more under the House and Senate plans than under the President's because the tax cuts are bigger. Add it all up, and in the short-term, our low-income family does best under the President's plan; our middle income family under the Senate's; our upper income under either the House or Senate. But, of course, the justification for these tax cuts is their effect on the economy in the long-term.
And here, the argument is that cuts on capital gains and corporate profits will stimulate investments, and, thus, economic growth, while the President argues that educational investments in people, via larger tuition credits, is a greater key to prosperity.
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