60 THE BUDGET FOR FISCAL YEAR 1980 BUDGET RECEIPTS

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1 THE BUDGET FOR FISCAL YEAR 1980 BUDGET RECEIPTS This section of the budget describes the major sources of budget receipts for 1978 to 1982 and discusses the legislative proposals and administrative actions affecting them. Detailed estimates of budget receipts by source are shown in table 10 of Part 9. The economic assumptions underlying the estimates are presented in Part 3 together with estimates of receipts for and estimates of receipts at high employment. Part 6 analyzes the difference between actual receipts for 1978 and the budget estimates for 1978 made 2 years ago. SUMMARY Total budget receipts in 1980 are estimated to be $502.6 billion, an increase of $46.6 billion from the $456.0 billion in Receipts in 1981 and 1982 are estimated to be $576.8 billion and $652.6 billion, respectively. These estimates reflect the effects of: the real wage insurance proposed by the President as a part of the anti-inflation program; administrative actions and proposed legislative changes to collect taxes closer to the time when liabilities occur; other receipts proposals currently being made; and increases in social security taxes scheduled under current law. The estimates of receipts for 1981 and 1982 do not include provision for tax reductions. The desirability of tax reductions in these years will depend on the future state of the economy, especially progress in reducing inflation, and on the need to reduce tax burdens. The administration will consider future tax changes, including social security tax reductions in conjunction with the savings resulting from benefit reforms and other cost saving proposals. Composition of budget receipts. The Federal tax system relies predominantly on income and payroll taxes. In 1980: Income taxes paid by individuals and corporations are estimated at $227.3 billion and $71.0 billion, respectively. Combined, these sources account for 59% of estimated total budget receipts. Social insurance taxes and contributions composed largely of payroll taxes levied on wages and salaries, most of which are paid equally by employers and employees will yield an estimated $161.5 billion, 32% of the total. Excise taxes imposed on selected products, services, and activities are expected to provide $18.5 billion, 4% of the total. Estate and gift taxes, customs duties, and miscellaneous receipts are estimated at $24.3 billion, the remaining 5% of the total.

2 1980 BUDGET RECEIPTS 61 Under the tax policy assumptions described earlier, the income tax share of receipts is projected to rise to 61% by 1982, 1.5 percentage points more than projected for Social insurance taxes as a share of total receipts are projected to decline by 0.3 percentage point while the projected share of all other receipts declines by 1.2 percentage points. BUDGET RECEIPTS BY SOURCE [In billions of dollars] Source actual estimate estimate estimate Individual income taxes Corporation income taxes Social insurance taxes and contributions Excise taxes Estate and gift taxes Customs duties Miscellaneous receipts Total, budget receipts ENACTED LEGISLATION Three major acts were passed last year that have significant effects on receipts in 1979 and beyond: the Revenue Act of 1978, the Energy Tax Act of 1978, and the Foreign Earned Income Act of The summary table below shows the effect of these acts on calendar year liabilities and fiscal year receipts. The subsequent discussion describes the major provisions of each act O 79 5

3 THE BUDGET FOR FISCAL YEAR 1980 SUMMARY TABLE EFFECT OF MAJOR TAX LEGISLATION ENACTED IN (In billions of dollars) Calendar year liabilities: Revenue Act of Energy Tax Act Foreign Earned Income Act Total Fiscal year receipts: Revenue Act of Energy Tax Act Foreign Earned Income Act Total ADDENDUM Effect of extending temporary provisions of the Tax Reduction and Simplification Act of 1977 (other than the jobs credit): 3 Calendar year liabilities Fiscal year receipts These estimates are based on the direct effect only of legislative changes at a given level of income. They therefore exclude indirect effects caused by changes in individual and corporation incomes. However, these indirect effects are taken into account when estimating the incomes upon which the receipts estimates and the estimates of the effects of legislation are based. In this way, the indirect effects are included in the receipts estimates by major source and in total. 2 The effect of this Act on calendar year tax liabilities and fiscal year receipts is calculated in comparison to the liabilities and receipts that would have resulted if all the temporary provisions of the Tax Reduction and Simplification Act of 1977 had been extended except the jobs credit. 3 Excludes earned income credit payments in excess of individuals' tax liabilities, which are recorded in the budget as outlays. THE REVENUE ACT OF 1978 The Revenue Act of 1978 (Public Law ) was enacted November 6, This Act reduced taxes for individuals and corporations, generally effective January 1, 1979, and included several of the administration's tax reform proposals. In the absence of this Act, receipts would have been increased substantially in 1979 because several temporary provisions of the Tax Reduction and Simplification Act of 1977 were scheduled to expire at the end of calendar year The effects of the Revenue Act on calendar year tax liabilities and fiscal year receipts are presented in comparison to the liabilities and receipts that would have resulted if most of these temporary provisions had been extended. 1 This is the ' 'current services" base from which the size of the tax reductions is generally measured. Individual income taxes. The Revenue Act reduces tax liabilities for individuals by $14.5 billion in calendar year The largest reduction results from a widening of tax brackets and a reduction in the tax rates applicable to several of these brackets. These 1 The only exception is the jobs credit. Unlike the other temporary provisions, which were expected to be extended or replaced by other provisions, the jobs credit was enacted as a 2-year economic stimulus measure.

4 1980 BUDGET RECEIPTS 63 reductions will reduce calendar year 1979 tax liabilities by $10.4 billion. The personal exemption was increased from $750 to $1,000 and the general tax credit was allowed to expire. Substitution of the exemption increase for the general tax credit reduces liabilities in calendar year 1979 by $1.3 billion. The zero bracket amount (formerly called the standard deduction) was increased from $3200 to $3400 for taxpayers filing a joint return and from $2200 to $2300 for single taxpayers. These changes reduce tax liabilities by $1.4 billion in calendar year The earned income tax credit, which had been scheduled to expire December 31, 1978, was increased and made permanent. In 1978 the credit was 10% of the first $4,000 of earned income and was phased out at the rate of $1 for each $10 of income above that level. For 1979 and later years the credit will be 10% of the first $5,000 and will phase out at the rate of $1.25 for each $10 of earned income above $6,000. This expansion of the earned income credit will reduce tax liabilities in calendar year 1979 by $0.3 billion; it will also add $0.7 billion to outlays (to be paid in fiscal year 1980) for individuals whose earned income credit exceeds tax liability. Capital gains taxes were reduced significantly by the Revenue Act. Under previous law, 50% of net long-term gains from the sale of capital assets were excluded from taxable income. Alternatively, taxpayers could elect to be taxed at a 25% rate on the first $50,000 of gains if that tax was lower than would otherwise apply. Under the new legislation, which is generally applicable to gains and losses realized after October 31, 1978, the percentage of capital gains excluded from taxable income is raised to 60%. However, for tax years beginning after December 31, 1978, the 25% alternative tax has been eliminated and the excluded 60% of net long-term capital gains will no longer be included as a preference item in computing the minimum tax, although it is subject to a new alternative minimum tax in some instances. The Act also provides, for taxpayers age 55 and older, a once-in-a-lifetime exclusion on gains up to $100,000 from the sale of a principal residence. This replaces a provision under previous law that allowed a taxpayer age 65 or older a one-time exclusion of gain attributable to the first $35,000 of sales price of a principal residence. These and other changes in capital gains taxation and the minimum tax reduce liabilities by $2.7 billion in calendar year It is estimated that about $0.9 billion of this revenue loss will be offset by taxes on additional capital gains realizations as a result of the 1978 Act. These and other smaller tax reductions were partially offset by higher receipts from reform measures. The two most significant reforms were repeal of the non-business deduction for State and local gasoline taxes and taxation of unemployment compensation

5 THE BUDGET FOR FISCAL YEAR 1980 benefits paid to taxpayers with adjusted gross incomes (including unemployment compensation) above certain income levels ($20,000 for single taxpayers and $25,000 for married couples filing joint returns). These two measures increase tax liabilities in calendar year 1979 by $1.1 billion and $0.3 billion, respectively. Corporation income taxes. The Revenue Act of 1978 made several significant changes to corporation income taxes, the largest of which was a reduction in tax rates. As shown in the following table, rates were reduced much more for small corporations than for large ones. The average tax rate on the first $100,000 of income was reduced by nearly 8 percentage points. For income above $100,000, the rate was reduced by 2 percentage points, from 48% to 46%. These reductions in tax rates will reduce corporation income tax liabilities by $5.0 billion in calendar year In addition to these rate reductions, the alternative tax rate on capital gains received by corporations was reduced from 30% to 28%. CHANGE IN CORPORATION INCOME TAX RATES [Percent] 1978 tax 1979 tax Taxable income law law First $25, Second $25, Third $25, Fourth $25, Above $100, The investment tax credit, which had been scheduled to decrease from 10% to 7% on January 1, 1981, was made permanent at the 10% rate. The percentage of tax liability that can be offset by the investment credit was also increased. Under prior law, the limit was generally 100% of the first $25,000 of tax liability and 50% of tax liability above $25,000. Under the new law, the percentage applicable to tax liability in excess of $25,000 was increased to 60% in calendar year 1979 and will increase by an additional 10 percentage points each year until it reaches its permanent level of 90% in The investment credit was also extended to cover rehabilitation expenditures on nonresidential buildings in use over 20 years and was liberalized for investments in pollution control facilities amortized over a 5-year life. These changes in the investment credit reduce corporation income tax liabilities by $0.4 billion in calendar year The 1978 legislation also included a targeted jobs tax credit to replace the jobs credit that was in effect in calendar years 1977 and 2 These changes also reduce individual income taxes on unincorporated businesses and sub-chapter S corporations.

6 1980 BUDGET RECEIPTS Employers who hire individuals from certain target groups, primarily disadvantaged youth, are eligible for the targeted jobs credit. This credit is generally equal to 50% of the first $6,000 of first-year wages of such an employee and 25% of the first $6,000 of second-year wages. The Revenue Act also revised the work incentive (WIN) tax credit, which is available to employers of recipients of aid to families with dependent children (AFDC), to pattern it more closely after the new targeted jobs credit. These provisions together reduce corporation income tax liabilities by $0.3 billion in calendar year THE ENERGY TAX ACT OF 1978 This Act (Public Law ) is an important part of the energy program enacted in 1978, which will reduce this country's energy problems. The major components of the 1978 energy tax legislation are: A tax on the sale of automobiles whose fuel economy fails to meet certain standards. The tax will apply to 1980 and later model cars and will increase annually from 1980 to Tax credits for purchases of insulation and other energy-conserving items for the principal residence of a taxpayer. This credit against income tax liability, which applies retroactively to qualifying expenditures after April 20, 1977, and before January 1, 1986, is 15% of qualifying expenditures up to a maximum credit of $300. Credits for renewable energy source equipment (e.g., solar and wind energy equipment) on the principal residence of a taxpayer. For businesses, an extra 10% investment credit, in addition to the regular 10% investment credit, for certain energy conservation or conversion investments, such as shale oil equipment and solar or wind energy investments. Together, these and other provisions in the 1978 energy legislation reduce tax liabilities by $0.8 billion in calendar year THE FOREIGN EARNED INCOME ACT OF 1978 Prior to 1978, a U.S. citizen was generally able to exclude up to $20,000 per year of foreign earnings if the taxpayer was a bona fide resident of a foreign country. After 3 years of foreign residence a taxpayer could exclude up to $25,000 per year of foreign earnings. The Foreign Earned Income Act of 1978 (Public Law ) replaced the exclusion provision with one based on the excess cost of 3 These changes also reduce individual income taxes on unincorporated businesses and sub-chapter S corporations.

7 THE BUDGET FOR FISCAL YEAR 1980 living abroad. Under this new law, the taxpayer may claim a costof-living deduction to reflect the amount by which overseas living costs other than housing and education exceed living costs for the most expensive metropolitan area in the continental United States (except Alaska) as determined by the IRS. Other deductions are permitted for the excess costs associated with housing, dependents' elementary and secondary education, and annual home leave for the taxpayer and dependents, and for employment in certain hardship areas. This Act reduces tax liabilities by an estimated $0.2 billion in 1979.

8 1980 BUDGET RECEIPTS 67 EFFECT OF MAJOR 1978 TAX LEGISLATION 1 [In billions of dollars] Calendar year liabilities Fiscal year receipts Revenue Act of 1978: 2 Individual income taxes: Rate reductions Exemption increase and expiration of general tax credit Increase in zero bracket amount Expansion of earned income credit Capital gains and minimum tax revisions Repeal of gasoline tax deduction Taxation of unemployment benefits Other - i -^ ^ Subtotal-Individuals Corporation income taxes: Rate reductions Capital gains rate cut Expansion of investment credit Jobs credit provisions Other J - J -^ Subtotal Corporations Other A. - -A - J Total Revenue Act The Energy Tax Act of 1978: Individual income taxes: Residential energy credits Other Corporation income taxes Other Total Energy Tax Act The Foreign Earned Income Act of 1978: Individual income taxes Total Major legislation $50 million or less. 'These estimates are based on the direct effect only of legislative changes at a given level of income. They therefore exclude indirect effects caused by changes in individual and corporation incomes. However, these indirect effects are taken into account when estimating the incomes upon which the receipts estimates and the estimates of the effects of legislation are based. In this way, the indirect effects are included in the receipts estimates by major source and in total. 2 The effect of this act on calendar year tax liabilities and fiscal year receipts is calculated in comparison with the liabilities and receipts that would have resulted if all the temporary provisions of the Tax Reduction and Simplification Act of 1977 were extended except the jobs credit. The estimates exclude the effect of the Revenue Act on earned income credit payments in excess of individuals' tax liabilities, which are recorded in the budget as outlays. 3 Excludes the effect on payments in excess of individuals' tax liabilities. These payments are recorded as outlays in the budget. 4 Includes the increases in liabilities and receipts estimated to result from additional captial gains realizations as a result of this act.

9 THE BUDGET FOR FISCAL YEAR 1980 RECEIPTS PROPOSALS Real wage insurance. An integral part of the President's comprehensive anti-inflation program is the real wage insurance proposal announced on October 24, The purpose of real wage insurance is to increase compliance with the wage standard in the President's anti-inflation program and thereby reduce inflation. Under this proposal, groups of employees whose compensation increases for the program year are within the anti-inflation guidelines will generally be eligible for a tax credit if inflation exceeds 7%. The program year is defined to be the period from October 1, 1978 to September 30,1979. The rate of the credit will be equal to the difference between the percentage increase in the consumer price index (CPI) over the applicable period (October-November 1978 to October-November 1979) and 7 percent, with a maximum credit of 3 percentage points. The credit will apply to qualified wages up to a limit of $20,000 from any one employer. Since the credit is intended to replace wages and salaries, it will be included in the taxable income of the employee. The cost of real wage insurance, which is based on a projected increase in the CPI of 7.5% over the applicable period, is estimated to be $2.5 billion in Of this amount, $2.3 billion appear as a reduction in individual income tax receipts; the remaining $0.2 billion are payments over and above individuals' tax liabilities and therefore are recorded in the budget as outlays. Cash management The receipts estimates reflect several initiatives to require taxpayers to make income tax payments closer to the time when tax liabilities occur and to require employers to deposit taxes withheld from employees on a more timely basis. These initiatives, which are described in more detail below, will increase receipts by $2.2 billion in 1980, $5.0 billion in 1981, and $5.3 billion in These estimates reflect a phase-in of the cash management initiatives over 3 years to minimize the burden on taxpayers in making the transition to the new collection procedures. State and local deposits of social security taxes. The administration has already published regulations to accelerate State and local deposits of social security taxes. Currently, these deposits are made quarterly, payable within 45 days after the end of the quarter. Under the revised system, which will place State and local governments on a basis more like that of private employers, deposits for the first 2 months of a quarter will be due 15 days after the end of each month. The deposit for the final month of the quarter will be due 45 days after the end of the quarter. This change, which was

10 1980 BUDGET RECEIPTS 69 announced in November 1978, will become effective in July 1980 and will increase receipts by $2.2 billion in Employer deposits of withheld taxes. Under current law, the times at which withheld income and payroll taxes must be paid depend on the amount of such taxes accumulated by the employer. The larger the amount of accumulated withheld taxes, the sooner they must be paid. The proposed changes will accelerate the deposits by large employers. At the same time, the changes will give relief to an estimated 470,000 very small employers (quarterly withheld taxes of less than $1,000) who will pay the entire liability with quarterly tax reports. Employers with quarterly withheld taxes of $1,000 to $13,000 will be required to make only one deposit per month. These changes, which will be phased in during calendar years 1981 and 1982, increase receipts by $2.4 billion in 1981 and $1.5 billion in Individuals 1 payments of estimated taxes. Under current law, individuals whose tax liabilities exceed withheld taxes by $100 or more are required to make estimated tax payments 4 times a year. Because these quarterly payments are only estimated, a substantial deviation is permitted before penalties (in the form of interest) are applied for underpayment. Generally, there is no penalty so long as estimated tax payments plus withheld taxes exceed 80 percent of tax liabilities shown on the tax return. Taxpayers whose liabilities are paid as estimated taxes pay their taxes substantially later than those whose liabilities are satisfied through withholding. In addition, such taxpayers only need to pay 80 percent of their liabilities in the year in which they occur. To reduce the advantages of paying taxes through estimated payments and at the same time avoid unduly burdening the taxpayer for paying small amounts of estimated tax, the following changes are proposed: Increase the minimum percentage of liabilities to be met by withheld and estimated payments from 80 percent to 85 percent. Increase from $100 to $300 the amount by which liabilities must exceed withheld payments before estimated payments are required. This change would reduce the number of taxpayers who are required to make payments of estimated tax. These changes, which will be phased in during calendar years 1981 and 1982, will increase receipts by $0.1 billion in 1981 and $0.4 billion in Corporation income tax payments. Corporations are generally required to pay 80 percent of their corporate income tax liability through estimated tax payments. For calendar year corporations,

11 THE BUDGET FOR FISCAL YEAR 1980 the estimated tax payments are due on the fifteenth of April, June, September and December. The remainder of the tax liability is due in two equal installments after the close of the year, payable on March 15 and June 15. The required level of estimated tax payments has several exceptions. A major one is that corporations can make estimated payments on the basis of the previous year's tax liability. Thus, a corporation with a loss in the preceding year need not make any estimated tax payments. The receipts estimates for 1981 and beyond reflect several proposed changes to require tax payments closer to the time the liabilities occur. These proposals include: Raising the required level of estimated tax payments from 80 percent to 85 percent. Requiring full payment of the remaining liability in a single payment due on March 15. Modifying the provision described above that allows corporations to make estimated payments on the basis of the prior year's tax liability. Large corporations will be required to make estimated payments that are at least 60 percent of the current year liability, regardless of the prior year liability. These changes will be phased in during calendar years 1981 and 1982 and will add $1.8 billion to estimated receipts in 1981 and $3.2 billion in In addition, to better meet the cash needs of the Treasury, which are heaviest at the beginning of each month, it is proposed that estimated corporate tax payments be made on the first of the month rather than the 15th. This will be achieved by accelerating two of the estimated payments by one-half month and by delaying the other two by one-half month. Other cash management initiatives, The administration is also proposing to accelerate the collections of customs duties and tobacco excise taxes in 1981 and In the case of customs duties, importers and brokers currently have 10 days to submit such duties after they have been collected. This lag will be reduced to 3 days by Tobacco excise taxes from large manufacturers will also be accelerated. Currently, these taxes are due within 15 days after each semi-monthly collection period. The revised regulations will require payment within 3 days after each weekly collection period. These proposals will increase receipts by $0.4 billion in 1981, but will have no significant effect on receipts in 1982 and subsequent years. Other receipts proposals. The administration is proposing a number of other proposals to improve resource allocation and the

12 1980 BUDGET RECEIPTS 71 overall efficiency and equity of the tax structure. Each of these proposals is described briefly below. Modification of carryover of basis provisions. The administration is proposing changes in the tax treatment of accrued capital gains on property passing from decedents to estates or heirs. The income on a sale of property generally is measured by the difference between cost (basis) and selling price. However, prior to 1977, the basis of property passing from a decedent was the value at the time of death. Thus, any increase in value during the decedent's lifetime was never taxed. The Tax Reform Act of 1976 revised this treatment for decedents dying after December 31, Under this provision the heir would have a "carryover basis"; that is, income on a sale by the heir would be measured by the difference between selling price and cost to the decedent. Small estates were exempted. The 1976 provision is complex primarily for two reasons transitional rules which would forgive tax on gains accrued prior to December 31, 1976, and adjustments to basis to compensate for the fact that death taxes are imposed on the value of the estate without taking account of the potential income tax on the sale of appreciated property held by the estate. The Revenue Act of 1978 postponed the effective date of the carryover basis provisions so that they apply only to property passing from decedents dying after December 31, The Administration is proposing to continue to require carryover of basis for decedents dying after December 31, 1979 but would facilitate its administration by exempting many more smaller estates from its effect and by simplifying the transitional rules and the adjustment for death taxes. This proposal will reduce receipts by $35 million in 1982 and by increasingly larger amounts in subsequent years. Restrictions on tax-exempt housing bonds. State governments provide mortgage assistance for low income families through State housing authorities. Because the interest income on State and local securities is exempt from Federal taxation, these securities are financed at interest rates that are well below market rates for mortgages. Recently, borrowing through the intermediation of State and local governments has been used in some instances to provide mortgage assistance for higher income families heretofore obtained without use of tax exemption. The administration will therefore propose legislation to limit the use of tax-exempt funds for mortgage financing to low and moderate income families or to other narrowly targeted public policy objectives. Tax distinction between employees and independent contractors. A worker gets favorable withholding and employment tax treat-

13 THE BUDGET FOR FISCAL YEAR 1980 ment from being classified as an "independent contractor" rather than as an "employee." Current law offers no clear method to distinguish between these two classifications. As a result, this distinction has become a frequent source of controversy between taxpayers and the Internal Revenue Service. The administration therefore will propose legislation, to become effective for taxable years beginning after December 31, 1979, to clarify this distinction. The receipts estimates do not include the effects of this proposal. Taxation of fringe benefits. The tax law requires fringe benefits to be included in income subject to tax unless specifically exempted. In practice, however, many fringe benefits that are not specifically exempted have nevertheless been excluded from the tax base. The two primary types of such fringe benefits are: provision to employees, without charge or at a reduced cost, of products or services that the employer normally sells to the public; and benefits related to an employee's job, such as provision of an automobile for commuting. With a view toward later adoption of additional legislative standards, the Congress acted in 1978 to preclude the Treasury from issuing final regulations prior to 1980 that would govern the income tax treatment of fringe benefits. The administration is therefore making proposals to become effective for taxable years beginning after December 31, 1979 to aid the Congress in the development of such standards. The receipts estimates do not include the effects of such proposals. Railroad retirement taxes. The budget estimates reflect proposed legislation to increase railroad retirement payroll taxes to alleviate funding problems of the Railroad Retirement trust fund. The largest part of the increase in receipts results from the elimination of the taxable earnings maximum (currently $1,700 per month) on the employer portion of the tax. Thus, the employer portion of the tax will apply to all wages and salaries covered by this retirement system. This legislation is proposed to become effective January 1, 1980 and would increase receipts by $0.2 billion in Airport and airway trust fund taxes. These taxes are generally scheduled to expire on June 30, This budget proposes legislation to extend the current freight waybill and passenger ticket taxes, and certain other taxes, at their present rates. The legislation would also change the current 7 cents per gallon tax on aviation fuel to an ad valorem tax of 10% of the price of aviation fuel. A new 6% tax on new aircraft and avionics is also being proposed to become effective October 1, 1980.

14 1980 BUDGET RECEIPTS 73 Oil pollution liability and compensation. The administration is again proposing legislation to establish a fund of up to $200 million to assure adequate and timely cleanup of oil spills in the Nation's waterways. A fee of up to 3 cents per barrel of oil is proposed on oil received at any U.S. refinery or terminal. The proposal is estimated to increase receipts by $0.1 billion in Employer social security tax on tips. Under current law, employers pay social security taxes on only part of the cash tips received by their employees, whereas employees pay such taxes on all cash tips. Legislation is being proposed, to become effective January 1, 1981, to require employer social security tax payments on all tips income now subject to employee social security taxes. This legislation increases estimated receipts by $30 million in 1981 and $43 million in EFFECT OF ADMINISTRATIVE ACTIONS AND PROPOSED LEGISLATION [In billions of dollars] Individual income taxes: Real wage insurance Cash management initiatives Other Subtotal, individuals -2.3 Corporation income taxes: Cash management initiatives Other Subtotal, corporations Social insurance taxes and contributions: Acceleration of State and local deposits of social security taxes (announced Nov., 1978) 2.2 Other cash management initiatives Railroad retirement tax increase.2 Other Subtotal, social insurance 2.4 Other: ~- Cash management initiatives Airport and airway trust fund taxes 3 Oil pollution liability and compensation Total million or less. 1 These estimates are based on the direct effect only of legislative changes at a given level of income. They therefore exclude indirect effects caused by changes in individual and corporation incomes. However, these indirect effects are taken into account when estimating the incomes upon which the receipts estimates and the estimates of the effects of legislation are based. In this way, the indirect effects are included in the receipts estimates by major source and in total. 2 This proposal also increases estimated outlays by $0.2 billion in These estimates are for increases in airport and airway tax receipts over and above those that would result from extending the current tax rates beyond their June 30, 1980 expiration date. The extension of current tax rates would add $0.1 billion to receipts in 1980, $0.8 billion in 1981, and $0.9 billion in 1982.

15 THE BUDGET FOR FISCAL YEAR 1980 CHANGES IN BUDGET RECEIPTS Budget receipts are estimated to rise by $54.0 billion in 1979 and $46.6 billion in The year-to-year changes can be divided between those due to growth in the tax base and those due to revisions in the tax structure. Under the tax rates and structure in effect on January 1, 1977, receipts would have risen by $56.9 billion in 1979 and $46.1 billion in Thus, the combined effect of enacted and proposed tax law changes, which is shown in the accompanying table, decreases the growth in receipts by $2.9 billion in 1979 and increases the growth by $0.5 billion in Growth in receipts (in billions of dollars): Under existing and proposed legislation.. Under tax rates and structure in effect January 1, Difference

16 1980 BUDGET RECEIPTS 75 CHANGES IN BUDGET RECEIPTS [In billions of dollars] Receipts under tax rates and structure in effect January 1, Enacted legislative changes: 1 Income taxes: Tax Reduction and Simplication Act of Revenue Act of Energy Tax Act of Foreign Earned Income Act of Social insurance taxes and contributions: Social security taxable earnings base increases-. 2! to $17,700 effective Jan. 1, ! ;17,7OO to $22,900 effective Jan. 1, i;22 f900 to $25,900 effective Jan. l t S25 r900 to $29,700 effective Jan. 1,1981, :;29,700 to $32,100 effective Jan. 1, Social security tax rate increases: % to 12.1% effective Jan. 1, % to 12.26% effective Jan. 1, % to 13.3% effective Jan. 1, % to 13.4% effective Jan. 1, Social security employer tax on tips effective January 1, Increase in SMI (medicare) premiums Surface Mining Control and Reclamations Act Black Lung Benefits Revenue Act of Other - A Total, receipts under existing legislation Administrative actions and proposed changes: 1 Real wage insurance -2.3 Cash management: Acceleration of State and local deposits of social security taxes Other Other Total, receipts under exisiting and proposed legislation $50 million or less. 1 These estimates are based on the direct effect only of legislative changes at a given level of income. They therefore exclude indirect effects, caused by changes in individual and corporation incomes. However, these indirect effects are taken into account when estimating the incomes upon which the receipts estimates and the estimates of the effects of legislation are based. In this way, the indirect effects are included in the receipts estimates by major source and in total. 2 Technical note: When the tax rate and the taxable earnings base increase at the same time, dividing up the total effect on receipts is arbitrary to some smalll extent because of an interaction effect. The increase in receipts due to this interaction effect is attributed to the rate ana base changes in proportion to the increases in receipts that would occur if the rate and base were each changed separately. RECEIPTS BY SOURCE Individual income taxes. Individual income tax receipts are estimated at $203.6 billion in 1979 and $227.3 billion in 1980, an increase of $23.7 billion. As discussed earlier, the major proposal affecting individual income taxes in 1980 is the real wage insurance initiative. This reduces estimated 1980 receipts by $2.3 billion. Individual income taxes in 1981 and 1982 are projected at $269.1 billion and $311.2 billion, respectively. These figures reflect the cash management proposals described earlier, which add $1.5 bil-

17 THE BUDGET FOR FISCAL YEAR 1980 lion and $1.3 billion, respectively, to 1981 and 1982 receipts. They also reflect a rise in the average tax rate on personal income as inflation and real growth move taxpayers into higher tax brackets. As discussed in Part 3, the appropriateness of future legislated tax reductions to offset some or all of this rise in effective tax rates will depend on progress against inflation and on the future performance of the economy. Budget Receipts: $ Billion, 800 $ Billions 800 TOTAL mo n» FisedYem Esfimat Corporation income taxes, -Corporation income tax receipts are estimated at $70.3 billion in 1979 and $71.0 billion in Corporation income tax receipts in 1981 and 1982 are estimated at $76.7 billion and $86.0 billion respectively. These estimates reflect increases of $1.8 billion in 1981 and $3.2 billion in 1982 from the cash management proposals described earlier. Social insurance taxes and contributions. This category includes social security and railroad retirement taxes, unemployment insurance taxes and deposits, Federal employee retirement contributions, and premium payments for supplementary medical insurance. Receipts from this source are expected to be $141.8 billion in 1979 and $161.5 billion in These figures reflect the increase in the social security tax rate from 12.1% to 12.26% that became effective January 1, 1979, and scheduled annual increases in the

18 1980 BUDGET RECEIPTS 77 social security taxable earnings base. The 1980 estimate also includes $2.2 billion from the cash management initiative described earlier to accelerate State and local deposits of social security taxes. The estimates for 1981 and 1982 are $185.2 billion and $208.0 billion respectively. These estimates reflect a significant rise in the social security tax rate from 12.26% to 13.3% that is scheduled to occur in January 1981, and annual increases in the taxable earnings base. Excise taxes. Excise taxes are levied on a variety of products, services, and activities. Receipts from these taxes are estimated at $18.4 billion in 1979 and $18.5 billion These estimates reflect the continued phase-out of the telephone excise tax that is scheduled under current law. This tax rate was reduced from 4% to 3% on January 1, 1979, and will be reduced by one percentage point each following year until the tax expires. These estimates also reflect proposed legislation to continue in a modified form the airport and airway taxes that are currently scheduled to expire June 30, Other receipts. Estate and gift taxes, customs duties, and miscellaneous receipts (the largest of which are deposits of earnings by the Federal Reserve System) are estimated to be $21.9 billion in 1979 and $24.3 billion in The 1980 estimate includes $0.1 billion for the proposed legislation described earlier to create an oil pollution liability and compensation fund. Proprietary receipts. In addition to budget receipts, the Government receives significant proprietary income from the public. This income is derived from various market-oriented activities such as interest, rents, royalties, and the sale of Government property, products, and services. Since this income arises from business-type transactions rather than from taxation, it is treated as an offset to related outlays and budget authority rather than as budget receipts. Proprietary receipts from the public are shown by receiving agency in Part 8 and by source of receipts in table 11 of Part O 79 6

19 1981 PART 4 BUDGET RECEIPTS 59

20 1981 BUDGET RECEIPTS This section of the budget describes the major sources of budget receipts for 1979 to 1983 and discusses the legislative proposals and administrative actions affecting them. Detailed estimates of budget receipts by source are shown in table 10 of Part 9. The economic assumptions underlying the estimates are presented in Part 3 together with estimates of receipts for and estimates of receipts at high employment. Part 6 contains an analysis of the difference between actual receipts for 1979 and the budget estimates for 1979 made 2 years ago. In addition, Part 7 explains the conceptual basis for classifying certain amounts collected by the Federal Government as budget receipts and other amounts as offsetting collections. SUMMARY Total budget receipts in 1981 are estimated to be $600.0 billion, an increase of $76.2 billion from the $523.8 billion estimated for Receipts in 1982 and 1983 are estimated to be $691.1 billion and $798.8 billion, respectively. These estimates include the effects of: increases in social security taxes scheduled under current law; the proposed windfall profit tax and energy credits that are part of the administration's energy program; administrative actions and proposed legislative changes to collect taxes closer to the time when liabilities occur; and other receipts proposals currently being made. The estimates of receipts for 1982 and 1983 are based on current tax law as modified by the tax proposals and administrative actions in this budget. The timing of tax reductions in future years will depend on the state of the economy, especially on progress in reducing inflation. Composition of budget receipts. The Federal tax system relies predominantly on income and payroll taxes. In 1981: Income taxes paid by individuals and corporations are estimated at $274.4 billion and $71.6 billion, respectively. Combined, these sources account for 58% of estimated budget receipts. Social insurance taxes and contributions composed largely of payroll taxes levied on wages and salaries, most of which are 60 Digitized for FRASER

21 1981 BUDGET RECEIPTS 61 paid equally by employers and employees will yield an estimated $187.4 billion, 31% of the total. Excise taxes imposed on selected products, services, and activities are expected to provide $40.2 billion, 7% of the total. Estate and gift taxes, customs duties, and miscellaneous receipts are estimated at $26.4 billion, the remaining 4% of the total. Under the tax policy assumptions presented in this budget, the income tax share of total receipts is projected to rise to 59% by 1983, 2 percentage points more than projected for Social insurance taxes are projected to fall as a share of total receipts from 31% in 1981 to 30% in The projected share of all other receipts declines by 1 percentage point between 1981 and BUDGET RECEIPTS BY SOURCE (In billions of dollars) Source actual estimate estimate estimate estimate Individual income taxes Corporation income taxes Social insurance taxes and contributions Excise taxes Estate and gift taxes Customs duties Miscellaneous receipts Total, budget receipts RECEIPTS PROPOSALS Energy program. On April 5, 1979, the President announced the phased decontrol of domestic oil prices beginning on June 1, 1979, and ending with the expiration of price control authority on September 30, As part of the decontrol program, a windfall profit tax on domestic producers of crude oil was proposed. Several energy tax credits and a change in the existing foreign tax credit on oil and gas extraction were also proposed. These proposals, which are described in greater detail below, are estimated to result in a net increase in receipts of $6.2 billion in 1980, $14.4 billion in 1981, $18.4 billion in 1982, and $19.6 billion in Windfall profit to. Higher OPEC prices and the phased decontrol of domestic oil prices will result in high profits for domestic oil producers. Fairness requires that some of these windfall profits be returned to the Nation as a whole, to be used for public purposes including the reduction of oil imports, conservation of energy, and mitigation of the impact of higher energy prices on low-income Americans. The President, therefore, proposed a windfall profit tax to become effective January 1, The proposed tax base is equal

22 THE BUDGET FOR FISCAL YEAR 1981 to the amount a producer receives for domestically produced crude oil in excess of a base price and any State severance taxes attributed to the windfall. The tax rate generally is 60%, although it varies in certain cases, depending on the type of oil. The gross windfall profit tax is estimated to increase excise tax receipts by $7.7 billion in 1980, $20.9 billion in 1981, $28.4 billion in 1982, and $31.5 billion in Because the proposed windfall profit tax is an excise tax, it is deductible for income tax purposes. The administration has proposed, however, that gross income for purposes of calculating percentage depletion be reduced by the windfall profit amount as determined before any severance tax adjustment. The net gain from the windfall profit tax proposal the gross windfall profit tax less the reduction in income taxes due to the deductibility of the tax plus the gain from the denial of percentage depletion is $5.5 billion in 1980, $13.9 billion in 1981, $18.2 billion in 1982, and $19.5 billion in Each house of Congress has passed its own version of a windfall profit tax; differences between the two are being resolved by a Conference Committee. It is anticipated that a windfall profit tax will be enacted early in The windfall profit tax proposal presented in this budget follows generally the administration's position presented to the Senate Finance Committee. Energy tax credits. The proposed energy program includes several income tax credits to stimulate the conservation and production of energy. These credits are estimated to reduce receipts by $0.1 billion in 1980, $0.3 billion in 1981, $0.4 billion in 1982, and $0.6 billion in Each credit is described briefly below: Tax credit for commercial passive solar construction. A tax credit of up to $10,000 per building would be provided to builders who employ passive solar technology in the construction of new buildings. The amount of the credit would be $20 per million Btu that were saved in excess of a specified level above the Building Energy Performance Standard baseline. Tax credit for residential passive solar construction. A tax credit of up to $2,000 per unit would be provided to builders who use passive solar technology in new residential units. The amount of the credit would be based on the amount of energy conserved as a result of the passive solar design. Tax credit for process heat. The cost of solar thermal energy equipment used to produce process heat in agricultural and industrial applications would be eligible for an additional investment tax credit of 15%. Gasohol. Fuels that are at least 10% alcohol are currently exempt from the 4-cent-per-gallon Federal excise tax on gasoline and diesel fuels. This exemption would be extended to

23 1981 BUDGET RECEIPTS 63 January 1, In cases where alcohol is used as a fuel that is suitable for use in internal combustion engines, but is ineligible for the excise tax exemption, a taxable tax credit of up to 40 cents per gallon would be provided. Woodburning stoves. The cost of purchasing a qualified woodburning stove would be eligible for a tax credit of 15%, up to a maximum of $300. Oil shale tax credit. A $3-per-barrel tax credit would be provided to domestic producers of shale oil. The credit would phase out as the price of imported oil, adjusted for inflation, increases from $22.00 to $27.56 per barrel. Unconventional natural gas tax credit. Unconventional natural gas derived from tight sands, Devonian shale, coal seams, and geopressured brine would be eligible for a production tax credit of $0.50 per thousand cubic feet. Foreign tax credit on oil and gas extraction. Under current law, foreign income taxes may be offset dollar for dollar against U.S. income taxes. These foreign income taxes may be used, in general, only to offset U.S. income taxes on foreign source income. The administration is proposing legislation to assure that foreign taxes on income from oil and gas extraction be used to offset U.S. taxes only on that income, rather than U.S. taxes on all foreign source income. This proposal is estimated to increase receipts by $0.9 billion in 1980, and $0.7 billion in 1981, 1982, and Cash management. The receipts estimates reflect several initiatives to require taxpayers to make income tax payments closer to the time when tax liabilities are incurred, to require employers to deposit taxes withheld from employees on a more timely basis, and to accelerate the payment schedule of customs duties and tobacco excise taxes. It is estimated that these cash management initiatives, which are described in more detail below, will increase receipts by $4.5 billion in 1981, $5.6 billion in 1982, and $2.2 billion in Employer deposits of taxes. Under current law, the times at which withheld income and payroll taxes and the employer's share of payroll taxes must be remitted to the Treasury depend on the amount of such taxes withheld by the employer. The larger the accumulated taxes, the sooner they must be paid. The proposed changes, which can be accomplished by administrative action, will accelerate the deposits by large employers. At the same time, the 1 This exemption reduces the receipts of the Highway trust fund.

24 THE BUDGET FOR FISCAL YEAR 1981 changes will give relief to about 550,000 very small employers (quarterly withheld taxes of less than $1,000), who will pay their entire liability in one quarterly payment; and the frequency of required deposits will be reduced for an additional 980,000 employers. Employers with quarterly withheld taxes of $1,000 to $13,000 will be required to make only one deposit per month. These changes, which will be phased in during calendar years 1981 and 1982, are expected to increase receipts by $2.6 billion in 1981, $1,8 billion in 1982, and $0.6 billion in Individuals 1 payments of estimated taxes. Under current law, individuals whose tax liabilities exceed withheld taxes by $100 or more are required to make estimated tax payments 4 times a year. Because these quarterly payments are only estimated, a substantial deviation is permitted before penalties are applied for underpayment. Generally, there is no penalty so long as estimated tax payments plus withheld taxes exceed 80% of tax liabilities shown on the tax return. Taxpayers who make estimated tax payments pay their taxes substantially later than they would if their liabilities were withheld. In addition, such taxpayers need to pay only 80% of their liabilities in the year in which they accrue. To reduce the advantages of paying taxes through estimated payments and at the same time avoid burdening the taxpayer with paying small amounts of estimated tax, the following legislative changes are proposed: Increase the minimum percentage of liabilities to be met by withheld and. estimated payments from 80 to 85%. Increase from $100 to $300 the amount by which liabilities must exceed withheld payments before estimated payments are required. Eliminate penalties for underestimation of tax when estimated tax payments are not required. These proposed changes are estimated to increase receipts by $0.1 billion in 1981, $0.3 billion in 1982, and $0.1 billion in Corporation income tax payments. Corporations are generally required to pay 80% of their corporate income tax liability through estimated tax payments. For corporations that keep accounts on a calendar year basis, the estimated tax payments are due on the fifteenth of April, June, September, and December. The remainder of the tax liability is due in two equal installments after the close of the year, payable on March 15 and June 15. The required level of estimated tax payments has several exceptions. A major one is that corporations can make estimated payments on the basis of the previous year's tax liability. Thus, a corporation with a loss in the preceding year need not pay any estimated tax.

25 1981 BUDGET RECEIPTS 65 The receipts estimates for 1981 and beyond reflect several proposed changes to require tax payments closer to the time the liabilities occur and to make tax payments conform more closely to actual liabilities. These proposed changes, which require legislation, include: Raising the required level of estimated tax payments from 80 to 85%. Requiring corporations with calendar year accounting to pay the liability remaining at the end of the year in a single payment due on March 15. Modifying the provision that allows corporations to make estimated payments on the basis of the prior year's tax liability. Large corporations will be required to make estimated payments that are at least 60% of the current year liability, if that amount exceeds the prior year liability. In addition, to meet better the cash needs of the Treasury, which are heaviest at the beginning of each month, it is proposed that estimated corporate tax payments be made on the first of the month rather than the 15th. This will be achieved by accelerating two of the estimated payments by one-half month and by delaying the other two by one-half month. These changes will be phased in during calendar years 1981 and 1982 and are estimated to add $1.4 billion to receipts in 1981, $3.4 billion in 1982, and $1.4 billion in Other cash management initiatives. The administration is also proposing to accelerate the collections of customs duties and tobacco excise taxes beginning in Importers and brokers currently have 10 days to submit customs duties after they have been collected. The administration is reviewing several options to reduce this delay. The collection of tobacco excise taxes from large manufacturers will also be accelerated. Currently, these taxes are due within 15 days after each semimonthly collection period. The revised regulations will require payment within 3 days after each weekly collection period. These changes, which can be accomplished by administrative action, will increase receipts by $0.4 billion in 1981, but will have no significant effect on receipts in subsequent years. Restrictions on tax-exempt housing bonds. State and local governments use some of the proceeds from tax-exempt borrowing to provide mortgage funds for private housing. The tax exemption of interest on State and local securities makes it possible to provide such funds at interest rates well below the rates for private mortgages. At first, tax-exempt housing bonds were used mainly to assist low-income, multifamily housing; recently, there has been a dramatic increase in the use of such bonds for owner-occupied

26 THE BUDGET FOR FISCAL YEAR 1981 housing, including housing purchased by middle and upper income families. To halt this abuse of the tax-exempt borrowing privilege and to stem a huge potential loss in tax revenues, the administration supports legislation to ban the use of tax-exempt bonds for owneroccupied housing. The ban would apply to such bonds issued after April 25, 1979, with exceptions allowed for bonds in process as of that date. The administration is also proposing to restrict the use of tax-exempt bonds for multifamily housing to projects in which at least 20% of the residents qualify as low-income under present HUD definitions. This proposal is estimated to increase receipts by $0.1 billion in 1980, $0.8 billion in 1981, $2.5 billion in 1982, and $5.2 billion in Other receipts proposals The administration is proposing a number of other actions to improve resource allocation and the overall efficiency and equity of the tax structure. Tax distinction between employees and independent contractors. Under current law, a worker classified as an "independent contractor" rather than as an "employee" receives favorable withholding and employment tax treatment: An employer is required to withhold income and social security taxes on wages paid to an employee. Withholding of these taxes is not required on payments made to an independent contractor. Thus, tax compliance by independent contractors is extremely poor. The combined employer-employee social security tax rate (12.26% in 1980 and 13.3% in 1981) is higher than the selfemployed rate paid by independent contractors (8.1% in 1980 and 9.3% in 1981). There is no clear method to distinguish between employees and independent contractors under current law. As a result, this unclear distinction has become a frequent source of controversy between taxpayers and the Internal Revenue Service and has resulted in substantial revenue losses to the Treasury each year. To prevent tax noncompliance by independent contractors, the administration is proposing that effective January 1, 1981, 10% be withheld from compensation for services paid to certain independent contractors. It is estimated that this proposal would increase revenues by $0.6 billion in 1981, $0.6 billion in 1982, and $0.7 billion in Railroad retirement taxes The budget estimates reflect proposed legislation to increase railroad retirement payroll taxes to alleviate funding problems of the Railroad Retirement trust fund.

27 1981 BUDGET RECEIPTS 67 The largest part of the increase in receipts results from the elimination of the taxable earnings maximum (currently $1,850 per month) on the employer portion of the tax. This legislation is proposed to become effective January 1, 1981, and would increase receipts by $0.3 billion in each of the years 1981 through Airport and airway trust fund taxes. These taxes are generally scheduled to expire on June 30, Legislation has been proposed to extend the current freight waybill and passenger ticket taxes, and certain other taxes, at their present rates. The legislation also changes the current 7 cents per gallon tax on aviation fuel to an ad valorem tax of 10% of the price of aviation fuel effective July 1, A 6% tax on new aircraft and avionics is also being proposed to become effective October 1, In comparison to extending the current tax rates beyond their June 30, 1980 expiration date, these proposals are estimated to increase receipts by a relatively small amount in 1980, $0.2 billion in 1981, $0.3 billion in 1982, and $0.3 billion in Employer social security tax on tips. Under current law, employers pay social security taxes on a limited part of the cash tips received by their employees, whereas employees pay social security taxes on all cash tips. Legislation is being proposed, to become effective January 1, 1981, to require employer social security tax payments on all tips now subject to employee social security taxes. This legislation is expected to increase receipts by a small amount beginning in Oil and hazardous substance cleanup. The administration is proposing legislation to establish a fund to assure adequate and timely cleanup of oil and hazardous substances which significantly threaten public health and the environment. This new fund, which will replace several existing pollution control funds, will also be used to address the problems of uncontrolled chemical dumpsites which contain hazardous wastes threatening public health and the environment. The fund will be financed primarily by fees paid by industry. This legislation, proposed to become effective October 1, 1980, is estimated to increase receipts by $0.2 billion in 1981, $0.3 billion in 1982, and $0.4 billion in Reduction in premiums of uninsured individuals. Individuals not insured under social security may obtain supplementary medical insurance (medicare) coverage by paying a monthly premium based on hospital costs of the previous 2 years. In an effort to restrain inflation in health care costs, the administration is proposing hospital cost-containment legislation to limit increases in revenues for inpatient care. This legislation, proposed to become effec-

28 THE BUDGET FOR FISCAL YEAR 1981 tive October 1, 1980, will have no effect on receipts in 1981 and 1982 and an insignificant impact in Withholding tax on interest paid to foreigners. Current law requires a withholding tax of 30% on interest (and other payments, such as dividends, rents, royalties, etc.) paid to nonresident foreigners. However, because of numerous statutory and treaty exemptions, collections are very small. The administration proposes to eliminate withholding on all portfolio interest paid to nonresident foreigners. This is expected to encourage foreign investment in the United States, help the balance of payments and the value of the dollar, and spur domestic capital formation. It is estimated that this proposal will reduce receipts by relatively small amounts through Taxation of foreign investment in U.S. real estate. Most nonresident foreign investors in U.S. real estate are able to avoid capital gains taxation when they sell their investments. This reduction in receipts results not from any specific exemption, but rather from opportunities for tax avoidance inherent in current law. The administration proposes taxing all capital gains realized by foreign investors on real estate effective January 1, A withholding mechanism to aid the enforcement is also proposed. The proposal is expected to increase receipts by relatively small amounts through 1982, and by $0.1 billion in Tax-exempt public housing bonds. Local housing authorities have traditionally borrowed from the public on a tax-exempt basis to obtain financing for the construction of public housing. The Federal Government then makes annual payments to amortize the debt. The administration proposes that beginning in 1980 a portion of short-term, tax-exempt notes now sold by local housing authorities directly to the public would be converted into long-term bonds to be purchased by the Federal Financing Bank (FFB), an entity of the Treasury Department. To pay for these purchases, taxable Treasury debt instruments would be issued. The interest differential between the taxable rate and the tax-exempt rate would be paid to the FFB by the Department of Housing and Urban Development. This proposal can be accomplished by administrative action. Historic preservation. Under the Tax Reform Act of 1976, expenditures to rehabilitate structures certified by the Department of the Interior to be historic became eligible for special accelerated methods of depreciation; the demolition of such structures became subject to special tax disincentives. These provisions are generally scheduled to expire on June 30, 1981, and December 31, 1980, respectively.

29 1981 BUDGET RECEIPTS 69 Because tax returns on projects using these tax incentives have been filed relatively recently, information has not been available for assessing the impact, usefulness, and efficiency of these provisions. With data now becoming available, the administration will undertake an evaluation of the operation of these provisions during the coming year. The administration, therefore, is proposing a 1- year extension of these provisions, which is estimated to reduce receipts by relatively small amounts through EFFECT OF ADMINISTRATIVE ACTIONS AND PROPOSED LEGISLATION 1 (In billions of dollars) Individual income taxes: Cash management initiatives Energy program Tax-exempt housing bonds Other Subtotal, individuals Corporation income taxes: Cash management initiatives Energy program Tax-exempt housing bonds Other Subtotal, corporations Social insurance taxes and contributions: Cash management initiatives Railroad retirement tax increase Other Subtotal, social insurance Excise taxes: Windfall profit tax Airport and airway trust fund taxes Oil and hazardous substance cleanup Cash management initiatives 0.2 Other Subtotal, excise taxes Other.- Cash management initiatives 0.2 Other Subtotal, other» _ 0.2 Total million or less. 1 These estimates are based on the direct effect only of legislative changes at a given level of economic activity. Induced effects are taken into account (or forecasting incomes, however, and in this way affect the receipts estimates by major source and in total. These reductions art in large part due to the deduct&iity of the windfall profit tax in determining income tax liability. 3 These estimates are for increases in airport and airway tax receipts over and above those that would result from extending the current tax rates beyond their June 30, 19S0 expiratw date The extension of current tax rates would add $0.1 billion to receipts in 1980, $0.9 billion in 1981, $0.9 tuition in 1982, and $1.0 billion in 1983.

30 THE BUDGET FOR FISCAL YEAR 1981 CHANGES IN BUDGET RECEIPTS Budget receipts are estimated to rise by $57.9 billion in 1980 and $76,2 billion in The year-to-year changes can be divided between the part due to growth in the tax base and the part due to revisions in the tax structure. Under the tax rates and structure in effect on January 1, 1978, receipts would have risen by $58.4 billion in 1980 and $50.8 billion in Thus, the combined effect of administrative actions and enacted and proposed tax law changes, which is shown in the accompanying table, decreases the growth in receipts by $0.5 billion in 1980 and increases the growth in receipts by $25.4 billion in The corresponding increases for 1982 and 1983 are $17.1 billion and $9.0 billion, respectively Growth in receipts (in billions of dollars): Under existing law and administrative actions and proposed legislation Under tax rates and structure in effect Jan. 1,1978 Difference RO 98J

31 1981 BUDGET RECEIPTS 71 CHANGES IN BUDGET RECEIPTS {In billions of dollars) Receipts under tax rates and structure in effect January 1, Administrative actions: Acceleration of State and local deposits of social security taxes effective July 1, 1980 Sugar import proclamation Waiver of import duties and fees on crude oil and petroleum products Enacted legislative changes: Revenue Act of Energy Tax Act of Foreign Earned Income Act of Social security taxable earnings base increases: 5 $17,700 to $22,900 effective Jan. 1, $22,900 to $25,900 effective Jan. 1, $25,900 to $29,700 effective Jan. 1, $29,700 to $32,400 effective Jan. 1, $32,400 to $35,400 effective Jan. 1, Social security tax rate increases: % to 12.26% effective Jan. 1, % to 13.3% effective Jan. 1, % to 13.4% effective Jan. 1,1982 Increase in SMI (medicare) premium.2.5 Other -O. -^ Total, receipts under existing legislation Proposed changes: Energy program Cash management initiative Tax-exempt mortgage bonds Other Total, receipts under existing and proposed legislation > These figures assume a social security taxable earnings base of J17,700. Pursuant to Presidential Proclamation No. 4655, fees and customs duties on imported crude oil and petroleum products may be waived by the Secretary of Energy through June 30,1980. For budget purposes, it is assumed that such fees and duties will be waived until that date. As of the time this budget was completed, no determination had been made as to whether the authority granted under Proclamation No would be extended beyond June 30, 1980, and this budget includes for periods beyond that date revenues received from such import fees and customs duties. «If the taxaite eanwgs base were not changed to reflect increased earnings, the effective social security tax rate on earnings would fall. The amounts included in legisiatrve changes that can be attributed to keeping taxes and average earnings in the same relationship that existed in 1978 are: S0.9 billion in 1979, 4.1 Mian m J8.6 billion in 1981, billion in 1982, and $23.9 billion in «These estimates include both the direct and indirect effects of administrative action and legislative changes, Technical note: When the tax rate and the taxane earnings base increase at the same time, dividing up the total effect on receipts is arbitrary to some small extent because of an interaction effect. The increase in receipts due to this interaction effect is attributed to the rate and base changes in proportion to the increases in receipts than would occur if the rate and base were each changed separately.

32 THE BUDGET FOR FISCAL YEAR 1981 RECEIPTS BY SOURCE Individual income taxes. Individual income tax receipts are estimated at $238.7 billion in 1980 and $274.4 billion in 1981, an increase of $35.6 billion. The major proposal affecting individual income taxes in 1981 is the cash management initiative, which is estimated to increase receipts by $1.8 billion. The proposed energy program reduces individual income tax receipts by an estimated $0.4 billion in 1980 and $1.1 billion in Individual income taxes in 1982 and 1983 are projected at $318.7 billion and $381.4 billion, respectively. These figures reflect a rise in the average tax rate on personal income as inflation and real growth move taxpayers into higher tax brackets. The administration is extremely concerned about the significant rise in tax burdens implied in these estimates, and is committed to reducing these burdens as soon as economic conditions allow. However, as discussed earlier, the timing, form, and size of any future legislated tax reductions depends on the future performance of the economy, especially progress in reducing inflation. Corporation income taxes. Corporation income tax receipts are estimated at $72.3 billion in 1980 and $71.6 billion in The proposed energy program, primarily the deductibility of the proposed windfall profit tax, reduces estimated receipts by $1.1 billion Budget Receipts:

33 1981 BUDGET RECEIPTS 73 in 1980 and $5.3 billion in These estimates reflect other proposed changes, which add $0.1 billion to receipts in 1980 and $2.2 billion in Corporation income tax receipts in 1982 and 1983 are estimated at $80.6 billion and $91.8 billion, respectively. These estimates reflect reductions of $8.3 billion in 1982 and $9.8 billion in 1983 due to the proposed energy program. Other proposed changes, primarily the cash management initiatives and the restrictions on tax-exempt housing bonds, are estimated to increase receipts by $5.4 billion in 1982 and $5.6 billion in Social insurance taxes and contributions. This category includes social security and railroad retirement taxes, unemployment insurance taxes and deposits, Federal employee retirement contributions, and premium payments for supplementary medical insurance. Receipts from this source are expected to be $162.2 billion in 1980 and $187.4 billion in These figures reflect the scheduled increase in the combined employer-employee social security tax rate from to 13.3% on January 1, 1981, and annual increases in the social security taxable earnings base from $22,900 in 1979 to $25,900 in 1980 and $29,700 in The 1980 estimate also includes $2.2 billion from an administrative action announced in November 1978 to accelerate State and local deposits of social security taxes effective July 1, The 1981 estimate reflects an increase of $0.9 billion from the cash management proposals. The estimates for 1982 and 1983 are $215.9 billion and $243.4 billion, respectively. These estimates reflect a scheduled rise in the combined employer-employee social security tax rate from 13.3 to 13.4% on January 1, 1982 and annual increases in the taxable earnings base. Excise taxes. Excise taxes are levied on a variety of products, services, and activities. Receipts from these taxes are estimated at $26.3 billion in 1980 and $40.2 billion in These estimates reflect the proposed windfall profit tax, which is estimated to increase receipts by $7.7 billion in 1980 and $20.9 billion in These estimates also reflect the continued phase-out of the telephone excise tax that is scheduled under current law, and proposed legislation to continue in a modified form the airport and airway taxes that are currently scheduled to expire on June 30, The 1981 estimate includes an additional $30 million attributable to enactment of the Inland Waterways Revenue Act of 1978, which levied a tax on liquid fuel used in vessels engaged in commercial waterway transportation, effective October 1, 1980.

34 THE BUDGET FOR FISCAL YEAR 1981 The estimates for 1982 and 1983 are $48.0 billion and $51.7 billion, respectively. These estimates include $28.4 billion from the proposed windfall profit tax in 1982 and $31.5 billion in Other receipts. Estate and gift taxes, customs duties, and miscellaneous receipts (the largest of which are deposits of earnings by the Federal Reserve System) are estimated to total $24.3 billion in 1980, $26.4 billion in 1981, $28.0 billion in 1982, and $30.5 billion in Proprietary receipts. In addition to budget receipts, the Government receives significant proprietary income from the public. This income is derived from various market-oriented activities such as interest, rents, royalties, and the sale of Government property, products, and services. Since this income arises from business-type transactions rather than from taxation, it is treated as an offset to related outlays and budget authority rather than as budget receipts. Proprietary receipts from the public are shown in table 11 of Part 9.

35 1982 BUDGET RECEIPTS This section of the budget discusses budget receipts for 1980 to 1984 and the President's proposed tax program. 1 The economic assumptions on which the receipts estimates are based are presented in Part 2 together with estimates of receipts for and estimates of what receipts would be under conditions of high employment. Part 6 contains an analysis of the difference between actual receipts for 1980 and the budget estimates for 1980 made 2 years ago. Part 7 explains the conceptual basis for classifying certain amounts collected by the Federal Government as budget receipts and other amounts as offsetting collections. SUMMARY Total budget receipts in 1982 are estimated to be $711.8 billion, an increase of $104.3 billion from the $607.5 billion estimated for Receipts in 1983 and 1984 are estimated to be $809.2 billion and $922.3 billion, respectively. These estimates include the effects of: increases in the social security tax rate and taxable earnings base scheduled under current law; the proposed economic revitalization program, as modified in this budget; the proposed motor fuels tax; and other receipts measures that are included in the President's budget proposals. The estimates of receipts for 1983 and 1984 are based on current tax law as modified by the proposals in this budget. They do not include provision for reductions beyond those proposed as part of the economic revitalization program. The higher burdens associated with these longer-range estimates are undesirable and should be reduced through further periodic reductions; however, the timing, size and structure of reductions in these years should be decided later in accordance with the state of the economy, especially progress in reducing inflation. Because the reduction in inflation is a critical goal, cuts in these years should be designed in ways that directly moderate wage and price increases. The amount of reductions that would be required to hold the ratio of receipts to GNP at the 1982 level, and the effect of such an adjustment on the current estimates, are shown in the addendum to the following table. 'Detailed estimates of budget receipts by source are shown in tables 10 and 18 of Part 9. 64

36 1982 BUDGET RECEIPTS 65 BUDGET RECEIPTS BY SOURCE (In billions of dollars) Source 1980 actual 1981 estimate 1982 estimate 1983 estimate 1984 estimate Individual income taxes Corporation income taxes Social insurance taxes and contributions Excise taxes Estate and gift taxes Custoitis duties Miscellaneous receipts Total, budget receipts ADDENDUM Reductions required to hold burdens to the 1982 level (22.1% of GNP) Receipts with burdens at the 1982 level Composition of budget receipts. The Federal tax system relies predominantly on income and payroll taxes. In 1982: Income taxes paid by individuals and corporations are estimated at $331.7 billion and $64.6 billion, respectively. These sources combined account for 56% of estimated budget receipts. Social insurance taxes and contributions composed largely of payroll taxes levied on wages and salaries, most of which are paid in equal amounts by employers and employees will yield an estimated $214.7 billion, 30% of the total. Excise taxes imposed on selected products, services, and activities are expected to provide $69.6 billion, 10% of the total. Estate and gift taxes, customs duties, and miscellaneous receipts are estimated at $31.2 billion, the remaining 4% of the total. Under the tax policy assumptions presented in this budget, the income tax share of total receipts is projected to rise to 59% by 1984, 3 percentage points more than projected for Social insurance taxes and contributions are projected to fall as a share of total receipts from 30% in 1982 to 29% in The projected share of all other receipts declines by 2 percentage points between 1982 and ENACTED LEGISLATION AND ADMINISTRATIVE ACTION Three major tax laws were passed last year that affect receipts in 1981 and subsequent years: the Crude Oil Windfall Profit Tax Act of 1980, the Omnibus Reconciliation Act of 1980, and the Comprehensive Environmental Response, Compensation, and Liability Act of In addition, the administration published regula-

37 THE BUDGET FOR FISCAL YEAR 1982 tions that accelerate employer payments to the Treasury of withheld income and payroll taxes. THE CRUDE OIL WINDFALL PROFIT TAX ACT OF 1980 Under this Act (Public Law ), which was enacted on April 2, 1980, a windfall profit tax is levied on domestic producers of crude oil and several income tax credits are provided to encourage the production and conservation of energy. The Act also provides a partial exclusion of interest and dividend income from income tax, retains the basis under existing law for determining the gain or loss on the sale of inherited property, and changes the tax treatment of the gains realized on the sale or transfer of certain inventories. Windfall profit tax. This tax is a temporary excise tax levied on domestic producers of crude oil. There are three tiers of taxable oil: the first generally includes oil that has been subject to price controls; the second consists of stripper oil; and the third consists of newly discovered, incremental tertiary, and heavy oil. The tax base is equal to the amount a producer receives for domestically produced crude oil in excess of his base price and any State excise taxes attributed to the excess. Each tier has a different base price, which is adjusted quarterly for inflation. For most producers the tax rates are 70%, 60%, ai^d 30%, for the first, second, and third tiers, respectively. For independent producers the rates are lower for tiers one and two. Exemptions from the tax are provided for State and local governments, Indian tribes, certain charitable organizations, and oil produced in certain areas of Alaska. The gross windfall profit tax is estimated to increase excise tax receipts by $22.2 billion in 1981, $34.7 billion in 1982, $36.8 billion in 1983, and $38.6 billion in Since excise taxes are deductible when calculating income taxes, the net increase in receipts taking into account the reduction in individual and corporation income taxes is $13.5 billion in 1981, $20.9 billion in 1982, $21.0 billion in 1983, and $22.1 billion in The windfall profit tax is scheduled to phase out during the 33 months after aggregate net receipts exceed $227.3 billion. However, in no event is the phase-out to begin before December 1987 or after December Energy tax credits. A number of income tax credits and incentives to stimulate the production and conservation of energy are included in the Act. These are estimated to reduce receipts by $0.2 billion in 1981, $0.3 billion in 1982, $0.7 billion in 1983, and $1.1 billion in The major credits are described briefly below: Residential tax credit for renewable energy source equipment. The tax credit for the cost of installing solar, wind, or geother-

38 1982 BUDGET RECEIPTS 67 mal energy equipment in a principal residence is increased to 40% of the first $10,000 of total expenditures, effective January 1,1980. Under prior law the credit was equal to 30% of the first $2,000 and 20% of the next $8,000 in qualifying expenditures, for a maximum total credit of $2,200. Business tax credit for solar and wind energy property. The investment tax credit for equipment that uses solar or wind power to generate or save energy for a structure is increased from 10% to 15% effective January 1, The credit also is extended to equipment that uses solar power for industrial, agricultural and commercial applications. Tax credit for small-scale hydroelectric facilities. An 11% business energy credit is provided for investments in equipment and structures used in the production of hydroelectric power made between January 1, 1980 and December 31, Tax credit for biomass property. The 10% credit provided for expenditures for equipment that primarily use organic substances other than oil, natural gas, or coal (waste, sewage, wood, crops) as a fuel or to produce a synthetic fuel is extended through December 31, The credit has been scheduled to expire December 31, Repeal of carryover of basis provisions. In general, the gain or loss on the sale or exchange of property is measured by the difference between the cost (basis) and the selling price. Before 1977 the basis of inherited property was the value on the date of the decedent's death (or 6 months later). The Tax Reform Act of 1976 changed the basis for property inherited after December 31, For assets purchased after December 31, 1976, the basis of property was to be "carried over" from the decedent. Assets acquired before this date were subject to a transition rule. The Revenue Act of 1978 postponed the effective date of the carryover provision for 3 years. Current tax law (Public Law ) repeals the 1976 provision; therefore, the basis of inherited property generally will be its market value at the date of the decedent's death. This provision is estimated to reduce receipts by a small amount in 1982, $0.1 billion in 1983, and $0.2 billion in Partial exclusion of interest and dividend income. Under prior law, a single taxpayer was allowed to exclude up to $100 in annual dividend income from tax. For a married couple filing a joint return the exclusion was $200, provided each spouse had at least $100 in dividends. This Act increases the exclusion to $200 for a single taxpayer and $400 for a married couple filing a joint return and extends the exclusion to most interest income. This provision,

39 THE BUDGET FOR FISCAL YEAR 1982 which only applies to interest and dividend income received after December 31, 1980 and before January 1, 1983, is estimated to reduce receipts by $0.3 billion in 1981, $2.3 billion in 1982, and $1.7 billion in OMNIBUS RECONCILIATION ACT OF 1980 This Act (Public Law ) provides for spending reductions and revenue increases pursuant to section 3 of the First Concurrent Resolution on the Budget for fiscal year The revenue provisions of this Act, which are described below, are estimated to increase receipts by $3.4 billion in 1981, $3.2 billion in 1982, $5.1 billion in 1983 and $8.3 billion in Restrictions on tax-exempt mortgage subsidy bonds. State and local governments use the proceeds from some tax-exempt borrowings to provide mortgage funds for private housing. The tax exemption of interest on State and local securities makes it possible to lend these funds at interest rates well below the rates for private mortgages. This Act imposes a number of restrictions on the use of mortgage subsidy bonds, the most important of which are: A ceiling in each State on the annual volume of mortgage subsidy bonds for single family housing equal to 9% of the average of all mortgages originated in the State during the preceding three years or $200 million, whichever is greater. A total ban on mortgage subsidy bonds for single family housing effective January 1, A restriction on the use of tax-exempt bonds for multi-family rental housing to projects that include a substantial number of units for low and moderate income individuals. These restrictions apply to bonds issued after April 25, 1979, with exceptions allowed for bonds in process as of that date. Corporation payments of estimated tax. Corporations are generally required to pay 80% of their income tax liability in estimated payments during the taxable year. For corporations that keep accounts on a calendar year basis, the estimated payments are due on the fifteenth of April, June, September and December. The remainder of the liability is due in two equal installments after the close of the year, payable on March 15 and June 15. The required level of estimated tax payments has several exceptions, including one that allows corporations to make estimated payments on the basis of the previous year's tax liability. Under this exception, a corporation with a loss in the preceding year need not pay any estimated tax. This Act requires corporations with taxable income exceeding $1 million in any of the three preceding taxable years to

40 1982 BUDGET RECEIPTS 69 make estimated payments equal to at least 60% of their current year's liability. Taxation of foreign investment in U.S. real estate. A tax is imposed on all capital gains realized by foreign investors in U.S. real estate effective June 19, In the past, most non-resident foreign investors in U.S. real estate could avoid capital gains taxation on their investments. Windfall profit tax royalty credit (or refund). Royalty owners are provided a credit (or refund) of up to $1,000 against the windfall profit tax imposed on royalty oil removed during calendar year Inclusion in wages of payroll taxes paid by employers. Under prior law, an employer's payment of an employee's social security taxes or State unemployment compensation taxes was excluded from wages when determining an employee's liability for social security and Federal unemployment taxes and the employee's social security benefits. Under this Act, such employer payments generally are defined as wages for these purposes effective January 1, Extension of telephone excise tax. This Act delays for one year the scheduled reduction and expiration of the excise tax on telephone and teletypewriter services. Under the new law, the tax rate will be 2% in calendar year 1981, 1% in calendar year 1982, and will expire December 31, Increased duties on imported alcohol To encourage domestic alcohol production for use in gasohol, the duty on imported ethyl alcohol used in or as a fuel is increased by 10 cents per gallon in 1981, 20 cents in 1982, and 40 cents in This increase in effect denies such imported alcohol the benefits of the exemption from the 4 cents per gallon Federal excise tax on gasoline allowed for gasohol. COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION, AND LIABILITY ACT OF 1980 This Act (Public Law ) establishes a fund to assure adequate and timely cleanup of hazardous substances spills and uncontrolled hazardous waste dumps that significantly threaten public health and the environment. The fund will be financed primarily by excise taxes paid by industry. This Act is estimated to increase receipts by $0.1 billion in 1981, $0.3 billion in 1982 and 1983, and $0.4 billion in 1984.

41 THE BUDGET FOR FISCAL YEAR 1982 EMPLOYER DEPOSITS OF TAXES (CASH MANAGEMENT) The times at which withheld income and payroll taxes and the employer's share of payroll taxes must be remitted to the Treasury depend on the amount of such taxes held by the employer. The larger the employer and hence the accumulated taxes, the sooner they must be paid. Last year the administration published regulations to accelerate the deposits by large employers and to reduce the frequency of deposits by employers with quarterly withheld taxes of $13,000 or less. These changes are estimated to increase receipts by $2.5 billion in 1981, $2.0 billion in 1982, $0.7 billion in 1983, and $0.7 billion in 1984.

42 1982 EFFECT OF MAJOR TAX LEGISLATION AND ADMINISTRATIVE ACTION 1 (In billions of dollars) Calendar year liabilities Fiscal year receipts Crude Oil Windfall Profit Tax Act of 1980: Windfall profit tax: Individual income taxes Corporation income taxes Excise taxes Subtotal, windfall profit tax Energy tax credits: Individual income taxes Corporation income taxes Excise taxes Subtotal, energy tax credits L td I Repeal of carryover basis (individual income taxes) Interest and dividend exclusion (individual income taxes) Inventory accounting changes (corporation income taxes) Total, Crude Oil Windfall Profit Tax Act of Omnibus Reconciliation Act of 1980: Individual income taxes: Tax-exempt mortgage bonds Other Subtotal, individual income taxes Corporation income taxes: Tax-exempt mortgage bonds Payment of estimated tax

43 1982 EFFECT OF MAJOR TAX LEGISLATION AND ADMINISTRATIVE ACTION 1 Continued (In billions of dollars) Calendar year liabilities Fiscal year receipts Other Subtotal, corporation income taxes He Social insurance taxes and contributions Excise taxes Other W Total, Omnibus Reconciliation Act of 1980 Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (excise taxes) Acceleration of employer deposits of withheld income and FICA taxes: Individual income taxes Social insurance taxes and contributions Total, Acceleration of employer deposits ADDENDUM Effect of major legislation and administrative action on receipts by source: Individual income taxes... Corporation income taxes Social insurance taxes and contributions Excise taxes Other CO 00 to Total $50 million or less. 1 These estimates are based on the direct effect only of legislative changes at a given level of economic activity. Induced effects are taken into account for forecasting incomes, however, and in this way affect the receipts estimates by major source and in total.

44 1982 BUDGET RECEIPTS 73 RECEIPTS PROPOSALS Economic revitalization program. On August 28, 1980, President Carter announced his economic revitalization program. Through a series of tax and spending initiatives, this program is designed to increase employment and restore growth without increasing inflation. In light of recent strength in the economy and persistent inflationary pressures, some of the tax measures included in this program are to be delayed and phased in over a longer period than announced in August. The tax program is designed to increase productivity, lower unemployment, and reduce inflation. These tax proposals, which are described below, are estimated to reduce receipts by $3.1 billion in 1981, $18.3 billion in 1982, $32.0 billion in 1983 and $42.1 billion in Several of the provisions of this program are refundable to taxpayers with no tax liability. Since payments in excess of liability are treated as outlays, these tax provisions are estimated to increase outlays by $0.2 billion in 1981, $4.2 billion in 1982, $6.4 billion in 1983 and $7.2 billion in Constant rate depreciation. Under present law depreciation is computed either under the asset depreciation range system (ADR) or according to facts and circumstances established by each taxpayer. A new system of depreciation allowances is proposed to encourage business to expand investment, modernize capacity, and provide new jobs. This program provides for a constant annual rate of depreciation (CRD) for each asset class, reduces the number of asset classes, simplifies depreciation procedures, and increases allowable depreciation rates by approximately 40%. It also makes the full 10% investment tax credit available for all eligible machinery and equipment lasting more than 1 year. The CRD system, which is proposed to be fully effective and required for all assets placed in service after December 31, 1980, is estimated to reduce receipts by $2.9 billion in 1981 and $9.0 billion in Refundable investment tax credit. The 10% investment tax credit that is permitted under current law is of limited value to firms that have little or no earnings, yet make substantial investments. To provide investment incentives for such firms equivalent to those provided for other firms, and to assist new firms and those experiencing structural adjustment problems, the President has proposed a refundable investment tax credit. Under the administration's proposal, up to 30% of the earned but unused credit for investments placed in service after December 31, 1980, would be refundable. The portion of the credit not made refundable would be available for carryback or carryforward as under present law. This proposal is estimated to reduce receipts by $66 million in 1981 and

45 THE BUDGET FOR FISCAL YEAR 1982 $4 million in Most of the budget effect of this proposal is reflected in outlays, which are increased by an estimated $0.2 billion in 1981 and $2.3 billion in Tax credit for social security taxes paid. An income tax credit equal to 8% of social security taxes paid is proposed. The credit would be nonrefundable to individuals, but refundable to State and local governments, nonprofit organizations and businesses. This provision, proposed to become effective January 1, 1982, is estimated to reduce receipts by $8.5 billion in 1982 and to increase outlays due to the refundability of the credit by $1.9 billion in that year. Expanded earned income tax credit Under present law, lowincome taxpayers with dependent children are eligible for the earned income tax credit, which is 10% of the first $5,000 of earnings and phases out at the rate of 12.5% for earned income above $6,000. Under this proposal the credit is increased to 12% of the first $5,000 of earnings and phases out at the rate of 15% for earned income above $7,000. This increase in the earned income tax credit, proposed to become effective January 1, 1982, is estimated to reduce receipts by $8 million in Although the credit is refundable, outlays will not be affected until Working spouse deduction. Under present law married couples with two earners often pay higher taxes than if they were single. As a result, two-earner families are subject to a work disincentive or marriage disincentive created by the tax law. To reduce this "marriage penalty/' a tax deduction equal to 5% of the first $30,000 of earnings of the spouse with the lower earnings, with a maximum deduction of $1,500, is proposed for calendar year This deduction would increase to 10% in 1983 and subsequent years, with a maximum deduction of $3,000. This provision is estimated to reduce receipts in 1982 by $0.4 billion. Exclusion for Americans working abroad. Americans working abroad in certain areas would be exempt from tax on the first $25,000 of foreign earned income plus 60% of the next $60,000, for a maximum exemption of $61,000. The exemption would be allowed for areas where the State Department authorizes a hardship allowance of 10% or more for U.S. Government employees. The special deductions under present law would continue for Americans working abroad in other areas of the world. More generous and less complex tax treatment for Americans working in foreign countries is designed to assist the competitiveness of American exports. This 1 Low-income individuals with dependent children would be eligible for the proposed expanded earned income tax credit, which would be refundable.

46 1982 BUDGET RECEIPTS 75 proposal is estimated to reduce receipts by $0.1 billion in 1981 and $0.3 billion in each of the next three years. Motor fuels and highway use taxes. The administration's proposal would replace the current 4 cents per gallon excise tax on gasoline and diesel fuels with a 14 cents per gallon tax effective June 1, The tax rate would be adjusted quarterly thereafter in accordance with changes in producers' prices. This proposal is estimated to increase receipts by $3.5 billion in 1981 and $13.1 billion in Since motor fuel tax receipts now go to the Highway Trust Fund, receipts equivalent to 4 cents a gallon would continue to be transferred to this Fund. Effective October 1, 1981, it is proposed that this transfer increase to the equivalent of about 6 cents per gallon. The administration proposes to increase certain other excise taxes that support the Highway Trust Fund. These increases are estimated to add $1.4 billion to receipts in The additional revenues to the trust fund from the motor fuels and other excise tax increases are designed to provide the receipts necessary to support the administration's proposed Federal highway program. These changes would retain the current relative tax burden imposed on the users of the Nation's highway system. Withholding of taxes on interest and dividend income. No tax is currently withheld on payments of interest and dividends to domestic taxpayers, although taxes are withheld from wages. To remedy this inequity, the administration proposes withholding on dividend and interest payments at a rate of 15%. Individuals who reasonably believe they would owe no tax and tax exempt organizations would not be subject to withholding if they file exemption certificates. For this reason, and because the lowest tax rate bracket is 14%, few individuals would be deprived of the use of over-withheld funds. This change, which is proposed to become effective January 1, 1982, is estimated to add $3.9 billion to receipts in 1982, $2.8 billion in 1983, and $3.1 billion in These revenue increases result in large part from an expected increase in compliance, except in the first year, when much of the increase reflects the acceleration of payments. Other receipts proposals. The budget estimates reflect a number of other proposed actions to improve resource allocation and the overall efficiency and equity of the tax structure. Foreign tax credit on oil and gas extraction. Under present law, foreign income taxes may be offset dollar for dollar against U.S. income taxes. In general, foreign income taxes may be used to offset U.S. income taxes only on foreign source income. The admin-

47 THE BUDGET FOR FISCAL YEAR 1982 istration's proposal would assure that foreign taxes on income from oil and gas extraction in a particular country be used to offset U.S. taxes on only that income, rather than U.S. taxes on any foreign source income. This change, proposed to be effective for income earned beginning January 1, 1979, is estimated to increase receipts by $1.4 billion in 1981 and $0.5 billion in Tax distinction between employees and independent contractors. Under current law, a worker classified as an "independent contractor' ' rather than as an "employee" receives favorable withholding and employment tax treatment: An employer is required to withhold income and social security taxes on wages paid to an employee, but not on payments made to an independent contractor. Thus, tax compliance by independent contractors is extremely poor. The combined employer-employee social security tax rate (13.3% in 1981) is higher than the self-employed rate paid by independent contractors (9.3% in 1981). There is no clear method to distinguish between employees and independent contractors under present law. As a result, this distinction has become a frequent source of controversy between taxpayers and the Internal Revenue Service and has resulted in substantial revenue losses to the Treasury each year. To prevent tax evasion by independent contractors, the administration recommends that effective January 1, 1982, 10% be withheld from compensation for services paid to certain independent contractors. Enactment of this proposal is expected to increase receipts by $0.7 billion in Railroad retirement taxes. The budget estimates reflect a proposal to increase railroad retirement payroll taxes to alleviate funding problems of the Railroad Retirement trust fund. The largest part of the increase in receipts results from the elimination of the taxable earnings maximum (currently $2,000 per month) on the employer portion of the tax. This increase in payroll taxes is proposed to become effective October 1, 1981, and is estimated to add $0.3 billion to receipts in each of the years 1982 through Unemployment insurance coverage of CETA public service employees. -The Omnibus Reconciliation Act of 1980 phased out Federal reimbursement to States for unemployment benefits paid to former public service employees funded under the Comprehensive Employment and Training Act. The administration proposes to complete this action by making unemployment compensation coverage of these workers optional rather than mandatory and by prohibiting the use of Federal public service employment funds to pay such

48 1982 BUDGET RECEIPTS benefits. This proposal is estimated to reduce State deposits to the unemployment insurance trust fund by $57 million in Airport and airway trust fund taxes. The airport and airway trust fund expired on September 30, The administration's proposal would reinstate the freight waybill and passenger ticket taxes, and certain other taxes, at their former rates. It would also change the 7 cents per gallon tax on aviation fuel to an ad valorem tax of 10% and would impose a 6% tax on new aircraft and avionics. These taxes, proposed to become effective July 1, 1981, are estimated to increase receipts by $0.2 billion in 1981 and $1.4 billion in Employer social security tax on tips. Under current law, employers pay social security taxes on a limited part of the cash tips received by their employees, whereas employees are required to pay social security taxes on all cash tips. The administration's proposal would require employer social security tax payments on all tips now subject to employee social security taxes, effective January 1, Enactment of the proposal would increase receipts by a small amount beginning in Withholding tax on interest paid to foreigners. Current law requires a withholding tax of 30% on interest (and other periodic payments, such as dividends, rents, royalties, etc.) paid to foreign corporations and nonresident foreign persons. However, because of numerous statutory and treaty exemptions, collections are very small. The administration recommends eliminating withholding on all portfolio interest paid to nonresident foreigners. This is expected to encourage foreign investment in the United States, help the balance of payments and the value of the dollar, and spur domestic capital formation. This proposal is expected to reduce receipts by relatively small amounts. Increase in passport and visa fees. The administration recommends an increase in passport fees from $14 to $30 effective October 1, An increase in visa fees from $25 to $100, effective April 1, 1981, is also proposed. While the increase in passport fees requires legislation, the change in visa fees can be accomplished by administrative action. Together, these proposals are estimated to increase receipts by a relatively small amount in 1981 and $0.1 billion in Restrictions on tax-exempt bonds for private purposes. The use of tax-exempt bonds to finance private projects has grown rapidly in recent years. Tax-exempt financing adversely affects the efficient allocation of scarce capital resources and the control of the Federal budget. The administration supports a proposal to restrict : QL 3

49 THE BUDGET FOR FISCAL YEAR 1982 the use of tax-exempt financing for certain private purpose activities. The following changes are proposed: Eliminate the exemption allowing tax-exempt bonds to finance student loans. Eliminate the exemption allowing non-governmental taxexempt organizations the use of tax-exempt financing. The largest use of such financing is for hospital construction. Restrict the use of the "small-issue" exemption to small industrial businesses or to targeted areas, and require a State or local government matching payment to the issuer and a report to the Treasury on the volume of bonds issued. These proposed changes are estimated to increase receipts by $0.1 billion in 1981 and $0.5 billion in Tax status of the U.S. Territories. The U.S. Internal Revenue Code is in effect in the Virgin Islands, Guam, American Samoa, and the Northern Marianas but the Code is administered by the territories. These territorial tax systems contain major ambiguities, inconsistencies, and inequities, and have generally suffered from a decline in the level of compliance and enforcement. The administration recommends that the IRS administer the Code in the four territories but that the revenues be returned to the territories through quarterly payments. The repeal of the tax exemption for income earned by U.S. citizens in Johnston, Midway, and other nonself-governing U.S. territories is also being proposed. The repeal of this exemption is expected to increase receipts by $1 million annually. Taxation of commodity straddles and futures contracts. Many taxpayers currently are engaged in financial schemes to defer taxation on income already earned and to convert short-term capital gains and ordinary income (taxable at a maximum 70% rate) into long-term capital gains (taxable at a maximum 28% rate). Many of these schemes involve commodity futures contracts held in balanced positions; that is, each contract to buy is matched with a contract to sell (the commodity straddle). Related schemes involve the direct purchase of commodities with borrowed dollars ("cash and carry transactions") and the use of Treasury bill futures, which, as capital assets, are accorded different tax treatment than are Treasury bills, which are treated as assets producing ordinary income. The administration's proposal would disallow losses incurred in commodity straddles and spread transactions where the taxpayer remains in a balanced position. Rules with respect to futures contracts in financial markets are also proposed. Together, these changes are estimated to increase receipts by $0.1 billion in 1981 and $1.3 billion in 1982.

50 1982 BUDGET RECEIPTS 79 Charitable contributions of tangible personal property. Under current law a taxpayer can deduct charitable contributions subject to certain restrictions. A taxpayer making a contribution of tangible personal property held for more than one year may claim the fair market value of the property, instead of being limited to deducting its cost. However, charitable deductions in any given taxable year may not exceed 30% of the taxpayer's adjusted gross income. The unused portion of the deduction may be carried over to the 5 succeeding taxable years. To prevent taxpayers from claiming excessive valuation for contributions of tangible personal property, the administration recommends that the deduction be limited to the taxpayer's adjusted basis (that is, cost plus improvements) in the property on the date of the contribution. No change would be made in the case of intangible property such as stocks and bonds. This proposal is estimated to increase receipts by a small amount in 1981 and by $0.2 billion in Extension of "at risk" to the investment tax credit. Individuals, electing small business corporations, and certain other closely held corporations are limited in the amount of losses they may take from business activities to their amounts "at risk" in the activity at the close of the taxable year. In general, a taxpayer's amount "at risk" in an activity is the aggregate of the amount contributed to the activity by the taxpayer and loans to the activity for which the taxpayer is. personally liable. Losses that are disallowed because of the "at risk" limitation may be carried over to future years. However, a taxpayer is able to claim investment tax credits for property for which losses are disallowed by this limit. The administration recommends that only amounts "at risk" be included in the basis of property for purposes of computing the investment tax credit; amounts not "at risk" will be excluded from the basis. This would reduce the investment tax credit available to a taxpayer who has used nonrecourse loans (loans for which the taxpayer is not personally liable) to finance property that would otherwise qualify for the credit. This proposal is estimated to increase receipts by a small amount in 1981 and $0.1 billion in Audit of partnerships. Partnerships are not subject to Federal income taxation. Although the items of income, gain, loss, deduction and credit are computed at the partnership level, they are included on the tax returns of each of the member partners, where they are combined with the income and other items from any other sources. The partners are liable for any Federal income tax shown on their own returns. Partnerships are required only to file an annual information return, which sets forth the items of income, deduction, and credit and includes the names, addresses, and dis-

51 THE BUDGET FOR FISCAL YEAR 1982 tributive shares of the partners, as well as any other required information. Since the partnership is not a taxable entity, there is no administrative mechanism for making adjustments at the partnership level. The Internal Revenue Service must audit each partner separately with respect to that partner's share of partnership items, even though each such audit may involve the same substantive partnership determinations. A settlement arrived at by one partner with the IRS is not binding on any other partner or on the agent who deals with another partner. Similarly, a judicial determination of a partnership issue may be conclusive only as to those partners who are parties to the proceeding. The administration recommends that all partnerships be treated as entities for purposes of audit, including administrative settlement and judicial review. The revenue impact of this proposal is negligible. Electronic fund transfer for alcohol and tobacco taxes. The administration has proposed regulations to require alcohol and tobacco products taxpayers to transmit excise tax payments by use of electronic fund transfer. This is estimated to increase receipts by $0.2 billion in 1981 and $0.1 billion in EFFECT OF PROPOSALS ON RECEIPTS The summary table shows the effect of the President's proposals on receipts. These are estimates of the direct effects of the proposals on gross receipts, based on levels of corporate and individual income that reflect enactment of the proposals. The total of these effects on receipts are $2.5 billion in 1981, $5.3 billion in 1982, -$7.9 billion in 1983, and -$15.0 billion in 1984.

52 1982 BUDGET RECEIPTS 81 EFFECT OF ADMINISTRATIVE ACTION AND PROPOSED LEGISLATION 1 (In billions of dollars) Economic revitalization program.- Constant rate depreciation Refundable investment tax credit Social security tax credit Earned income tax credit Marriage penalty relief Exclusion for Americans working abroad. Other Subtotal, economic revitalization program. Motor fuels and highway use taxes Withholding on interest and dividends Foreign tax credit Independent contractors Railroad retirement taxes Airport and airway trust fund Commodity straddles Tax exempt bonds Other Total ADDENDUM Effect of proposals on receipts by source: Individual income taxes Corporation income taxes Social insurance taxes and contributions.. Excise taxes Other ! ' Total Effect of proposals on outlays: 2 Refundable investment tax credit. Social security tax credit Earned income tax credit Total million or less. 1 These estimates are based on the direct effect only of legislative changes at a given level of economic activity. Induced effects are taken into account for forecasting incomes, however, and in this way affect the receipts estimates by major source and in total. 2 These estimates reflect payments in excess of tax liabilities, which are recorded as outlays in the budget. The estimated indirect, or "feedback," effects on receipts resulting from induced changes in income are not included in the above estimates because they are already included in gross receipts. These indirect effects are shown in the following table. This table compares total receipts without the administration's proposals with total receipts under those proposals. The estimates shown for receipts without the administration's proposals are based on levels of economic activity that would prevail if no policy changes were made. These amounts are $605.9 billion in 1981, $708.8 billion in 1982, $817.1 billion in 1983 and $932.4 billion in The direct effect of administrative actions and proposed legislation is the same as shown in the previous table. The indirect effect on receipts is the change in receipts due only to the effects of the administra-

53 THE BUDGET FOR FISCAL YEAR 1982 tion's proposals on income levels. The net change in receipts combines the direct and indirect effects of the proposals and is equal to the difference between total receipts under the administration's proposals and total receipts without those proposals. These net changes are $1.6 billion in 1981, $3.0 billion in 1982, -$7.9 billion in 1983 and -$10.1 billion in DIRECT AND INDIRECT EFFECTS OF ADMINISTRATIVE ACTION AND PROPOSED LEGISLATION ON RECEIPTS (In billions of dollars) Receipts without administrative action and proposed legislation... Direct effect on receipts of administrative action and proposed legislation Indirect effect on receipts from induced changes in income Net effect on receipts Receipts under existing and proposed legislation $50 million or less. CHANGES IN BUDGET RECEIPTS Budget receipts are estimated to rise by $87.5 billion in 1981 and $104.3 billion in The year-to-year changes can be divided between changes due to growth in the tax base and changes due to revisions in the tax structure. Under the tax rates and structure in effect on January 1, 1979, receipts would have risen by $58.7 billion in 1981 and $85.7 billion in Thus, the combined effect of administrative actions and enacted and proposed tax law changes, which is shown in the accompanying table, increases the growth in receipts by $28.8 billion in 1981, $18.5 billion in 1982, and $8.1 billion in The corresponding decrease for 1983 is $4.4 billion Growth in receipts Under existing legislation Under tax rates Difference (in law billions of dollars): and administrative actions and proposed and structure in effect Jan. 1,

54 1982 BUDGET RECEIPTS 83 CHANGES IN BUDGET RECEIPTS (In billions of dollars) Receipts under tax rates and structure in effect January 1, 1979 Administrative actions: Acceleration of State and local deposits of social security taxes effective July 1,1980 Acceleration of employer deposits of withheld income and FICA taxes effective January 1, 1981 Waiver of import duties and fees on crude oil and petroleum products Other Enacted legislative changes: Crude Oil Windfall Profit Tax Act of 1980 Omnibus Reconciliation Act of 1980 Comprehensive Environmental Response, Compensation, and Liability Act of 1980 Social security taxable earnings base increases: 2 4 $22,900 to $25,900 effective Jan. 1, 1980 $25,900 to $29,700 effective Jan. 1,1981 $29,700 to $32,100 effective Jan. 1, 1982 $ to $ effective Jan $ to $ effective Jan 1, Social security tax rate increases: % to 13.3% effective Jan. 1, % to 13 4% effective Jan Other Total, receipts under existing legislation Proposed changes: Economic revitalization program Motor fuels and highway use taxes Withholding on interest and dividends Other , Total, receipts under existing and proposed legislation These figures assume a social security taxable earnings base of $22, If the taxable earnings base were not changed to reflect increased earnings, the effective social security tax rate on earnings would fall. The amounts included in legislative changes that can be attributed to keeping taxes and average earnings in the same relationship that existed in 1979 are: $0.8 billion in 1980, $3.9 billion in 1981, $8.5 billion in 1982, $14.7 billion in 1983, and $23.0 billion in These estimates include both the direct and indirect effects of administrative action and legislative changes. 4 Technical note: When the tax rate and the taxable earnings base increase at the same time, dividing up the total effect on receipts is arbitrary to some small extent because of an interaction effect. The increase in receipts due to this interaction effect is attributed to the rate and base changes in proportion to the increases in receipts than would occur if the rate and base were each changed separately. RECEIPTS BY SOURCE Individual income taxes. Individual income tax receipts are estimated at $284.0 billion in 1981 and $331.7 billion in These estimates reflect the proposed economic revitalization program, which is estimated to reduce individual income taxes in 1981 and 1982 by $0.7 billion and $8.6 billion, respectively. The proposed

55 THE BUDGET FOR FISCAL YEAR 1982 withholding of taxes on interest and dividend income increases individual income taxes by an estimated $3.9 billion in Individual income taxes in 1983 and 1984 are projected at $384.6 billion and $451.2 billion, respectively. These figures reflect a rise in the average tax rate on personal income as inflation and real growth push taxpayers into higher tax brackets. These rising tax burdens should be offset by judicious tax cuts in future years. However, the timing, size, and structure of any future legislated tax reductions should depend on the future performance of the economy, especially progress in reducing inflation. Budget Receipts, teutons Excise and Other Social Insurance Taxes and Contributions Individual Income Taxes Corporation Income Taxes M Fiscal Y#ars.,/' Estimate Corporation income taxes. Corporation income tax receipts are estimated at $66.0 billion in 1981 and $64.6 billion in These estimates reflect the deductibility of the windfall profit tax, which is estimated to reduce corporation income tax receipts in 1981 and 1982 by $7.1 billion and $11.0 billion, respectively. The proposed economic revitalization program, primarily the constant rate depreciation provision and the 8% tax credit for social security taxes paid, reduces estimated corporation income tax receipts by $2.4 billion in 1981 and $9.7 billion in Other proposed changes add $1.5 billion to receipts in 1981 and $1.1 billion in Corporation income tax receipts in 1983 and 1984 are estimated at $77.6 billion and $91.0 billion, respectively. These estimates re-

56 1982 BUDGET RECEIPTS 85 fleet reductions of $14.7 billion in 1983 and $18.0 billion in 1984 due to the proposed economic revitalization program. Other proposed changes, primarily the limitation on the foreign tax credit for oil and gas extractions, are estimated to increase corporation income taxes by $1.4 billion in 1983 and $1.9 billion in Social insurance taxes and contributions. This category includes social security and railroad retirement taxes, unemployment insurance taxes and deposits, Federal employee retirement contributions, and premium payments for supplementary medical insurance. Receipts from this source are expected to be $184.8 billion in 1981 and $214.7 billion in These figures reflect the scheduled increase in the combined employer-employee social security tax rate from 12.26% to 13.3% on January 1, 1981 and to 13.4% on January 1, 1982, and annual increases in the social security taxable earnings base from $25,900 in 1980 to $29,700 in 1981 and to $32,100 in These estimates also reflect $0.8 billion in 1981 and $0.6 billion in 1982 from an administrative action to accelerate deposits of withheld FICA taxes effective January 1, The estimates for 1983 and 1984 are $239.5 billion and $264.2 billion, respectively. These estimates reflect annual increases in the taxable earnings base to $38,700 in Excise taxes. Excise taxes are levied on a variety of products, services, and activities. Receipts from these taxes are estimated at $44.4 billion in 1981 and $69.6 billion in These estimates include the windfall profit tax, which is estimated at $22.2 billion in 1981 and $34.7 billion in An additional $30 million in 1981 and $58 million in 1982 is attributable to enactment of the Inland Waterways Revenue Act of 1978, which levied a tax on liquid fuel used in vessels engaged in commercial waterway transportation, effective October 1, The proposed increase in the motor fuels tax and other highway use taxes raises receipts in 1981 and 1982 by an additional $3.5 billion and $14.6 billion, respectively. These estimates also reflect proposed legislation to restore in a modified form the airport and airway taxes that expired September 30, The estimates for 1983 and 1984 are $73.4 billion and $77.1 billion, respectively. These estimates include $36.8 billion from the windfall profit tax in 1983 and $38.6 billion in The proposed increase in the motor fuels tax and other highway use taxes adds an additional $16.1 billion to receipts in 1983 and $17.7 billion in Other receipts. Estate and gift taxes, customs duties, and miscellaneous receipts (the largest of which are deposits of earnings by the Federal Reserve System) are estimated to total $28.3 billion in

57 THE BUDGET FOR FISCAL YEAR , $31.2 billion in 1982, $34.1 billion in 1983, and $38.9 billion in Proprietary receipts. In addition to budget receipts, the Government receives significant proprietary income from the public. This income is derived from various market-oriented activities and takes the form of interest, rents, royalties, and the sale of Government property, products, and services. Because this income arises from business-type transactions rather than from taxation, it is treated as an offset to related outlays and budget authority rather than as budget receipts. Proprietary receipts from the public are shown in table 11 of Part 9.

58 1983 BUDGET RECEIPTS This section of the budget discusses budget receipts for 1981 to 1985 and the legislative proposals and administrative actions affecting them. 1 The economic assumptions on which the receipts estimates are based are presented in Part 2, and estimates of receipts for are presented in Part 3. Part 6 contains an analysis of the difference between actual receipts for 1981 and the budget estimates for 1981 made 2 years ago. Part 7 explains the conceptual basis for classifying certain amounts collected by the Federal Government as budget receipts and other amounts as offsetting collections. SUMMARY Total budget receipts in 1983 are estimated to be $666.1 billion, an increase of $39.4 billion from the $626.8 billion estimated for Receipts in 1984 and 1985 are estimated to be $723.0 billion and $796.6 billion, respectively. These estimates include the effects of: the income tax reductions and other tax changes provided in the Economic Recovery Tax Act of 1981; the increases in the social security tax rate and taxable earnings base scheduled under current law; the proposed tax revisions and improvements in tax collection and enforcement; and other receipts changes currently being proposed. BUDGET RECEIPTS BY SOURCE (In billions of dollars) Source 1981 actual 1982 estimate 1983 estimate 1984 estimate 1985 estimate Individual income taxes Corporation income taxes Social insurance taxes and contributions... Excise taxes... Estate and gift taxes Customs duties.. Miscellaneous receipts Total, budget receipts Detailed estimates of budget receipts by source are shown in tables 10 and 18 of Part

59 1983 BUDGET RECEIPTS 4-3 Composition of budget receipts. The Federal tax system relies predominantly on income and payroll taxes. In 1983: Income taxes paid by individuals and corporations are estimated at $304.5 billion and $65.3 billion, respectively. These sources combined account for 55.5% of estimated budget receipts. Social insurance taxes and contributions composed largely of payroll taxes levied on wages and salaries, most of which are paid in equal amounts by employers and employees will yield an estimated $222.5 billion, 33.4% of the total. Excise taxes imposed on selected products, services, and activities are expected to provide $41.7 billion, 6.3% of the total. Estate and gift taxes, customs duties, and miscellaneous receipts are estimated at $32.1 billion, the remaining 4.8% of budget receipts. Under the tax policy assumptions presented in this budget, the income tax share of total receipts is projected to decline to 56.5% by 1985, 1.4 percentage points less than for This decline is the net effect of a 2.3 percentage point decline in the individual income tax share that is partially offset by a 0.9 percentage point rise in the corporation income tax share from 10.2% in 1981 to 11.1% in Social insurance taxes and contributions are projected to rise as a share of total receipts from 30.5% in 1981 to 34.3% in The projected share of all other receipts declines by 2.4 percentage points between 1981 and ENACTED LEGISLATION The Economic Recovery Tax Act of 1981, signed by President Reagan on August 13, 1981, is an integral part of the administration's economic recovery program. This Act, which provides incentives for work, saving, and investment, is estimated to reduce receipts by $38.3 billion in 1982, $91.6 billion in 1983, $139.0 billion in 1984, and $176.7 billion in The major provisions of the Act are described briefly below. Individual income tax provisions. A number of provisions to reduce individual income tax liabilities are included in the Act. These provisions, which are estimated to reduce receipts by $26.0 billion in 1982, $69.8 billion in 1983, $104.2 billion in 1984, and $127.1 billion in 1985, include the following: Individual income tax rate reductions. Marginal tax rates for individuals were reduced by 5% effective October 1, 1981, and will be reduced an additional 10% effective July 1, 1982, and an additional 8% effective July 1, Compared with prior law, this translates into a reduction in marginal tax rates for individuals of 1.25% for calendar year 1981, 10%

60 THE BUDGET FOR FISCAL YEAR 1983 for calendar year 1982, 19% for calendar year 1983, and 23% for calendar year 1984 and subsequent years. Withholding rates, which were reduced by 5% on October 1, 1981, will be reduced by an additional 10% on July 1, 1982 and 8% on July 1, Reduction in the maximum individual income tax rate. The maximum marginal tax rate on individual income was reduced from 70% to 50% effective January 1, Since 60% of long-term capital gains are excluded from tax, this provision reduces the maximum effective tax rate on capital gains from 28% (a 70% rate times the 40% included in taxable income) to 20% (a 50% rate times the 40% included in taxable income). The 20% maximum rate applies to all sales or exchanges occurring after June 9, Deduction for two-earner married couples. Married couples with two earners often pay higher taxes than if they were single. To reduce this penalty, the Act allows couples a tax deduction equal to 5% of the first $30,000 of earnings of the spouse with the lower earnings in calendar year In 1983 and subsequent years, the deduction increases to 10%. Indexing. Beginning with calendar year 1985, the individual income tax brackets, the zero bracket amount, and the personal exemption will be adjusted annually for inflation as measured by the Consumer Price Index for all urban households (CPI-U). The adjustment for a given calendar year will be the increase in the CPI-U between fiscal year 1983 and the preceding fiscal year. The 1985 adjustment therefore will be based on the increase in the CPI-U between fiscal years 1983 and Charitable contributions deduction for nonitemizers. Taxpayers who do not itemize deductions are provided a deduction for charitable contributions made after December 31, 1981 and before January 1, For 1982 and 1983, the deduction is limited to 25% of the first $100 of contributions. For 1984, the deduction will increase to 25% of the first $300 of contributions. The deduction will increase to 50% of all charitable contributions in 1985 and to 100% of contributions in Taxation of foreign earned income. Under prior law, U.S. taxpayers who had foreign earned income were allowed a variety of deductions and exclusions for expenses incurred abroad. This Act replaces these allowances for expenses with a partial exclusion of foreign earned income from tax. Beginning in 1982, each taxpayer may exclude up to $75,000 of foreign earned income from tax. The exclusion will increase by $5,000 annually through 1986, to a maximum exclusion of

61 1983 BUDGET RECEIPTS 4-5 $95,000. In the case of a married couple, the exclusion is computed separately for each qualifying individual. An exclusion for excess housing costs is also provided. Capital cost recovery provisions. Taxpayers may claim depreciation deductions for tangible property used in a trade or business. Under prior law, these deductions were determined by the particular "facts and circumstances" of the anticipated use of the property, or according to a system of guidelines known as the Asset Depreciation Range System (ADR). The Economic Recovery Tax Act of 1981 replaces these methods of depreciation with the Accelerated Cost Recovery System (ACRS), which provides for a faster write-off of capital expenditures under simplified and standardized rules. This system of accelerated depreciation, which generally applies to all new and used property placed in service after December 31, 1980, is estimated to reduce receipts by $10.5 billion in 1982, $16.5 billion in 1983, $25.8 billion in 1984, and $37.1 billion in Depreciation of personal property. Under this Act, the cost of personal property may be written-off in 3, 5, 10, or 15 years. The 3-year class includes automobiles, light trucks, and machinery and equipment used in research and development. Most other machinery and equipment is classified as 5-year property. The 10-year class includes mobile homes and public utility property for which previous guidelines did not exceed 25 years. Public utility property for which previous guidelines exceeded 25 years is classified as 15-year property. All personal property placed in service after December 31, 1980 and before January 1, 1985 may be depreciated using rates that approximate the 150% declining balance method. This percentage increases to 175% for property placed in service in 1985 and to 200% in subsequent years. As an option, taxpayers may elect to recover the cost of each class of personal property on a straight-line basis over the designated recovery period or over one of two longer periods provided in the Act. Depreciation of real property. Real property, other than lowincome housing, may be written-off in 15 years using the 175% declining balance method of depreciation. Low-income housing may be depreciated over 15 years using the 200% declining balance method. As an option, taxpayers may elect to recover the cost of any real property on a straight-line basis over 15, 35, or 45 years. Leasing. This Act liberalizes the rules under which firms may transfer unused investment tax credits and depreciation deductions on new investments to profitable firms through leasing transactions.

62 THE BUDGET FOR FISCAL YEAR 1983 Windfall profit tax provisions. Windfall profit taxes for certain producers and types of oil are reduced by several provisions in the Act. These provisions are estimated to reduce windfall profit tax receipts by $0.9 billion in 1982, $1.6 billion in 1983, $1.9 billion in 1984, and $2.2 billion in Since the windfall profit tax is an excise tax, it is deductible when calculating taxable income. As a result, the net reduction in total budget receipts taking into account the increase in individual and corporation income taxes is $1.2 billion in 1982, $1.1 billion in 1983, $1.2 billion in 1984, and $1.4 billion in Corporation income tax rate reductions. The Economic Recovery Tax Act of 1981 reduces the tax rate on the first $50,000 of taxable corporate income as shown in the table below. These reductions in corporation income tax rates are estimated to reduce receipts by $0.1 billion in 1982, $0.3 billion in 1983, and $0.5 billion in 1984 and Taxable corporate income Prior law Tax Rate 1982 Current law 1983 and beyond First $25, Second $25,000 Third $25, Fourth $25,000. Over $100, Saving incentive provisions. In addition to the across-the-board reductions in marginal tax rates, several other provisions to encourage saving by individual taxpayers are provided. These provisions, which are estimated to reduce receipts by $0.2 billion in 1982, $2.1 billion in 1983, $3.7 billion in 1984, and $3.5 billion in 1985, are: Partial exclusion of interest and dividend income from tax. Under prior law, a single taxpayer was allowed to exclude up to $200 in annual interest and dividend income from tax in 1981 and For a married couple filing a joint return, the exclusion was $400. Beginning in 1983, the exclusion would have been limited to $100 in annual dividend income per taxpayer. The Economic Recovery Tax Act of 1981 replaces the $400/$200 interest and dividend exclusion with a $200/ $100 dividend exclusion, effective January 1, The Act also provides that beginning in 1985, 15% of annual interest income may be excluded from tax, up to a maximum exclusion of $450 for a single taxpayer and $900 for a married couple filing a joint return. For taxpayers who itemize deduc-

63 1983 BUDGET RECEIPTS 4-7 tions, only interest income in excess of the taxpayer's interest deductions (excluding interest paid on a home mortgage or in connection with a trade or business) is eligible for the deduction. Tax-exempt savings certificates. Under this Act, financial institutions that invest in residential or agricultural loans are allowed to igjsue tax-exempt savings certificates between October 1, 1981 and December 31, These certificates, which must pay a rate equal to 70% of the rate on the most recently issued 52-week Treasury bill, must be issued for a period of 1 year. Married couples filing a joint return may exclude up to $2,000 in interest earned on a qualified savings certificate from tax. For a single taxpayer, the maximum allowable exclusion is $1,000. Individual retirement accounts (IRAs). Beginning January 1, 1982, eligibility for an IRA is extended to all active participants in a tax-qualified employer-sponsored pension plan. In addition, the maximum annual contribution to an IRA established by a working individual for him/herself is increased to $2,000 or 100% of compensation, whichever is less. The maximum annual contribution to an IRA established by a worker for him/herself and a nonworking spouse is increased to the lesser of $2,250 or 100% of compensation. Self-employed retirement savings (Keogh plans). The maximum annual contribution to a Keogh plan by a self-employed individual is increased from $7,500 to $15,000, effective January 1, Estate and gift tax provisions. Several provisions to reduce estate and gift taxes are provided in the Act. These provisions, which are estimated to reduce receipts by $0.2 billion in 1982, $2.3 billion in 1983, $3.6 billion in 1984, and $4.6 billion in 1985, include the following: Marital deduction. Effective January 1, 1982, a surviving spouse is permitted to inherit an unlimited amount without paying tax. Under prior law, the marital deduction was limited to the greater of one-half the adjusted gross estate or $250,000. Estate and gift tax credit The maximum credit against estate and gift taxes was $47,000 under prior law. Since $47,000 is the amount of tax owed on an estate or gift of $175,625, estates or gifts of $175,625 or less were exempt from tax. This Act increases the credit annually to $192,800 in 1987 and subsequent years, which will exempt from tax all estates of $600,000 or less.

64 THE BUDGET FOR FISCAL YEAR 1983 Rate reduction. The maximum tax rate on estates and gifts is reduced by 5 percentage points a year from 70% in 1981 to 50% in 1985 and subsequent years. Gift tax exclusion. The annual gift tax exclusion is increased from $3,000 to $10,000 per donee, effective January 1, In addition, an unlimited exclusion is provided amounts paid for certain medical expenses and school tuition. Tax straddles. Under this act the market value of all regulated commodity futures contracts must be determined at year end. Gains and losses on these contracts are to be treated as if 60% of the capital gains and losses are long-term and 40% are short term. Net losses under this rule may be carried back 3 years against corresponding gains. This provision, which applies to property acquired after June 23, 1981, is estimated to increase receipts by $0.6 billion in 1982, $0.9 billion in 1983, $1.0 billion in 1984, and $1.1 billion in Corporation estimated tax payments. Corporations are generally required to pay 80% of their income tax liability in estimated payments during the taxable year. The required level of estimated payments has several exceptions, including one that allows corporations to make estimated payments on the basis of the previous year's tax liability. However, under prior law, corporations with taxable income exceeding $1 million in any of the three preceding taxable years were required to make estimated payments equal to at least 60% of their current year's liability, regardless of the previous year's liability. Under this Act, the required level of estimated payments for such corporations is increased to 65% of the current year's liability in 1982, 75% in 1983, and 80% in 1984 and subsequent years. It is estimated that this provision will increase receipts by $0.5 billion in 1982, $1.4 billion in 1983, $1.3 billion in 1984, and $0.3 billion in 1985.

65 1983 EFFECT ON RECEIPTS OF THE ECONOMIC RECOVERY TAX ACT OF 1981 ] (In billions of dollars) Calendar year liabilities Fiscal year receipts Individual income tax provisions Capital cost recovery provisions-. Individual income taxes Corporation income taxes Subtotal, capital cost recovery provisions Windfall profit tax and other energy provisions: Individual income taxes Corporation income taxes Excise taxes Corporation income tax rate reductions Saving incentive provisions Subtotal, windfall profit tax and other energy provisions i a Estate and gift tax provisions Tax straddles: Individual income taxes Corporation income taxes Subtotal, tax straddles l.oj Corporation estimated tax payments Other: Individual income taxes ID

66 1983 EFFECT ON RECEIPTS OF THE ECONOMIC RECOVERY TAX ACT OF 1981 Continued (In billions of dollars) I O Calendar year liabilities Fiscal year receipts Corporation income taxes. Social insurance taxes and contributions Excise Subtotal, other Total ADDENDUM Effect on receipts by source: Individual income taxes Corporation income taxes Social insurance taxes and contributions Excise taxes Estate and gift taxes Total so 2 I $50 million or less. 1 These estimates are based on the direct effect only of legislative changes at a given level of economic activity. Induced effects are taken into account for forecasting incomes, however, and in this way affect the receipts estimates by major source and in total. I

67 1983 BUDGET RECEIPTS 4-11 RECEIPTS PROPOSALS Tax revisions. The administration is proposing a variety of tax changes designed to eliminate abuses and remove obsolete incentives. These changes, which are described briefly below, are estimated to increase receipts by $7.2 billion in 1983, and $13.5 billion in 1984 and Completed contract method of accounting. Current regulations allow contractors to defer tax on income from long-term contracts until the year that the contract is completed. This completed contract method of tax accounting permits full deferral of tax even when income is received by the contractor throughout the term of the contract and certain costs are deducted when they are incurred. The administration proposes to disallow the use of the completed contract method of tax accounting effective January 1, Taxpayers will be required to use either the percentage of completion method or the progress payment method of accounting for long-term contracts. The percentage of completion method permits current deductions for allowable costs but requires that income be reported according to the percentage of the contract completed in the tax year. The progress payment method defers the deduction of costs until payment is received. Business energy tax credits. Under current law, businesses are allowed investment tax credits for energy saving equipment and structures, in addition to the regular investment tax credit. Some energy tax credits expire at the end of 1982, but others extend through 1985 and beyond. Current law also provides an excise tax exemption, or an equivalent tax credit, for gasohol. With decontrol of oil and natural gas prices, businesses no longer need additional investment incentives for energy conservation and the development of alternative energy sources. Such subsidies interfere with business decisions by preempting free market resource allocations. Effective January 1, 1983, the administration proposes to repeal all business energy tax subsidies and to repeal special provisions allowing States and localities to issue tax-exempt industrial development bonds to finance certain energy property. Tax-exempt revenue bonds for private activities. Current law permits States and localities to issue tax-exempt revenue bonds for industrial development, housing, and other specific purposes. The volume of tax-exempt revenue bonds issued for use by private business has grown rapidly over the past few years, raising the cost of financing traditional public projects such as schools and roads. In addition, tax-exempt financing, combined with the Accelerated Cost Recovery System and the investment tax credit, can result in unintended tax shelter

68 THE BUDGET FOR FISCAL YEAR 1983 benefits. The administration proposes that assets financed with tax-exempt revenue bonds issued after 1982 must be depreciated using the straight-line method over an extended recovery period. Tax-exempt revenue bond financing will be limited to bonds that are publicly approved by local governments and that, after 1985, receive a financial contribution, commitment, or obligation from the local government. Small issue industrial development bonds will not be allowed for large businesses. Modified coinsurance. Under current tax accounting rules, insurance companies are permitted to enter into modified coinsurance arrangements that result in a reduction in their tax liability. Such arrangements serve no purpose other than tax avoidance, since little, if any, insurance risk is actually transferred between companies. Use of modified coinsurance enables life insurance companies to convert taxable investment income, which is subject to tax at a 46% rate, into underwriting income, which is subject to tax at a maximum rate of 23%. For many life insurance companies, the underwriting income generated under modified coinsurance is not subject to tax. The administration proposes to eliminate the unintended tax benefits resulting from the use of modified coinsurance. In addition, the tax treatment of other forms of coinsurance will be changed to prevent insurance companies from obtaining similar benefits through other provisions of the law. Construction period interest and taxes. Individual taxpayers must amortize interest and taxes incurred during the construction of commercial buildings over 10 years. The amortization period for rental housing is 8 years, but is scheduled to become 10 years by Corporations are allowed an immediate write-off of these costs. The substantial acceleration of cost recovery provided by the Economic Recovery Tax Act of 1981 makes it unnecessary to grant corporations an immediate deduction for a portion of construction costs. The administration proposes that construction period interest and taxes incurred by corporations to develop nonresidential real property after December 31, 1982 be amortized over 10 years. Corporate minimum tax. Corporations currently must pay a minimum tax, in addition to regular income tax, equal to 15% of certain tax preferences. This "add-on" minimum tax may apply to any corporation that has reduced its tax liability through the use of designated tax preferences. The administration proposes to repeal the add-on minimum tax effective January 1, 1983, and to replace it with an alternative minimum tax that would apply only to those corporations that pay

69 1983 BUDGET RECEIPTS 4-13 very low regular rates of tax. Corporations will be required to pay the greater of their regular income tax or an alternative tax equal to 15% of their alternative tax base in excess of $50,000. This alternative tax base consists of regular taxable income plus certain tax preferences. The investment tax credit will not be allowed against the alternative tax. Other tax code changes. Technical changes will be proposed to close other tax loopholes. Improved Tax Collection and Enforcement Several improvements in tax collection and enforcement are proposed. These initiatives, which will ensure that the taxes due the Government are paid and that they are collected on a more timely basis, are estimated to increase receipts by $0.2 billion in 1982, $5.5 billion in 1983, $5.5 billion in 1984 and $4.7 billion in Withholding on interest and dividends. Currently no tax is withheld on interest and dividends paid to domestic taxpayers, although taxes are withheld from wages. About 9% to 16% of taxable interest and dividends currently is not reported; the comparable figure for wages and salaries is 2% to 3%. The administration proposes withholding on interest and dividend payments at the rate of 5% effective January 1, Where feasible, withholding would be extended to U.S. Government securities. Corporations and nontaxable individuals filing exemption certificates would be exempt from withholding. Taxpayers aged 65 or older with a tax liability of $500 ($1,000 on a joint return) or less would also be exempt. Acceleration of corporate income tax payments. Corporations generally are required to pay at least 80% of their current year's tax liability in estimated payments. The remaining liability is payable in two equal installments due on the 15th day of the 3rd and 6th months following the close of their taxable year. An exception to these rules permits corporations to base their estimated tax payments on the full amount of their prior year's tax liability. For large corporations, the estimated payments must be at least 65% of their current year's liability (75% in 1983 and 80% thereafter). In order to collect corporate taxes on a more current basis, the administration proposes, for tax years beginning after 1982, to increase the required estimated tax payment from 80% to 90% of the current year's liability and to require that all remaining liability be paid in one payment on the 15th day of the 3rd month following the close of the tax year. In addition, large corporations making estimated tax payments based on their prior year's liability will be required to pay at least 85% of their current year's liability in 1985 and 90% thereafter.

70 THE BUDGET FOR FISCAL YEAR 1983 Internal Revenue Service staff increases. In order to improve the efficiency of enforcement and collection activities, the administration proposes to increase the IRS enforcement staff by more than 5,000 persons. Other provisions. Additional measures will be proposed to facilitate IRS collection and enforcement efforts. Enterprise zone tax incentives. Under current law, no special tax incentives are provided for the redevelopment of depressed areas. The administration therefore proposes that beginning January 1, 1984, up to 25 small urban areas per year (not to exceed 75 in total) may be designated as "enterprise zones." Special tax incentives and relief from regulation, designed to increase investment and employment, will be provided businesses and individuals locating in these areas. These incentives, which will be applicable for 20 years, are estimated to reduce receipts in 1984 and 1985 by $0.1 billion and $0.5 billion, respectively. Airport and airway trust fund taxes. Statutory authority for the airport and airway trust fund expired on September 30, Since then, revenue from a 5% passenger ticket tax has been deposited in the general fund. The only other aviation taxes currently being levied a 4 cents per gallon tax on general aviation gasoline and a tire and tube tax are deposited in the highway trust fund. The administration proposes to reinstate statutory authority for the airport and airway trust fund effective July 1, The general aviation gasoline tax is proposed to be increased to 12 cents per gallon on July 1, 1982, to 14 cents per gallon on October 1, 1983, and annually thereafter to 20 cents per gallon on October 1, The administration also proposes to increase the passenger ticket tax to 8% effective July 1, 1982, and to levy a general aviation jet fuel tax that rises annually from 14 cents per gallon on July 1, 1982 to 22 cents per gallon on October 1, A 5% freight waybill tax and a $3.00 international departure tax also are being proposed. These taxes are estimated to increase receipts by $0.1 billion in 1982, $1.2 billion in 1983, $1.4 billion in 1984, and $1.5 billion in Increases in passport and visa fees. The administration has proposed an increase in passport fees from $15 to $30 effective April 1, An increase in immigrant visa fees from $25 to $100, effective March 1, 1982, is also proposed. While the increase in passport fees requires the passage of legislation currently pending before the Congress, the change in visa fees can be accomplished by administrative action. Together, these proposals are estimated to increase receipts by $41 million in 1982 and by $0.1 billion in each year,

71 1983 BUDGET RECEIPTS 4-15 Change in railroad retirement system. The railroad retirement system, which is currently administered by the Federal Railroad Retirement Board and embedded in Federal statute, provides coverage generally equivalent to a combination of social security and a multi-employer industry pension plan. Railroad employees and employers make contributions to railroad retirement that are generally equivalent to social security payroll taxes. These contributions are subsequently transferred to the social security trust funds. Rail industry employers also contribute 11.75% of monthly taxable compensation ($2,025 in 1982) to the industry plan; the employee contribution is 2%. Beginning October 1, 1982, the administration proposes to extend full social security coverage to railroad workers; payroll taxes would be deposited directly in the social security trust funds. The administration also proposes to return the rail industry's plan to the private sector. This proposal is estimated to reduce receipts by $1.7 billion in 1983, $1.8 billion in 1984, and $1.9 billion in Extension of highway trust fund taxes. Under current law, the 4 cents per gallon tax on gasoline and diesels fuels will decline to 1.5 cents per gallon on October 1, Several other taxes that are deposited in the highway trust fund will be reduced or expire at the same time. The administration proposes to extend these taxes at their present rates, which is estimated to increase 1985 receipts by $4.2 billion. Extension of social security hospital insurance taxes to Federal employees. Most Federal civilian employees currently are exempt from social security taxes. Under this proposal, Federal employees would be required to pay the employee portion of the social security hospital insurance tax (1.3% in 1983 and 1984, and 1.35% in 1985). This change, proposed to become effective January 1, 1983, is estimated to increase budget receipts by $0.6 billion in 1983, $0.8 billion in 1984, and $0.9 billion in Federalism initiative. The administration's federalism initiative provides for the eventual transfer of revenue sources to States and localities as they assume responsibility for programs that are now administered and funded by the Federal Government. During the first phase of this initiative ( ), some existing excise taxes will be dedicated to a special fund. This fund will be used to continue interim financing of the programs selected to be returned to the States and localities, or will provide payments to the States equal to the cost of these programs. The choice will be made by the States. The establishment of this fund will have no effect on receipts. For a more detailed discussion of this initiative, see Part 3 of this budget

72 THE BUDGET FOR FISCAL YEAR 1983 EFFECT OF ADMINISTRATIVE ACTION AND PROPOSED LEGISLATION 1 (In billions of dollars) Tax revisions: Completed contract accounting Business energy tax credits Tax-exempt revenue bonds Modified coinsurance Construction period interest and taxes Corporate minimum tax Subtotal tax revisions Improved tax collection and enforcement: Withholding on interest and dividends Acceleration of corporate tax payments Internal Revenue Service staff increases Subtotal, improved tax collection and enforcement Enterprise zones Airport and Airway Trust Fund Highway Trust Fund Railroad retirement Federal employee hospital insurance taxes Other Total ADDENDUM Effect of proposals on receipts by source: Individual income taxes Corporation income taxes.... Social insurance taxes and contributions Excise taxes Other Total $50 million or less. 1 These estimates are based on the direct effect only of legislative changes at a given level of economic activity. Induced effects are taken into account for forecasting incomes, however, and in this way affect the receipts estimates by major source and in total EFFECT OF ENACTED AND PROPOSED CHANGES ON RECEIPTS The actual change in receipts that will result from an enacted or proposed tax revision will depend on both the direct effect of the tax change and the indirect or "feedback" effect. The direct effect is the increase or decrease in receipts due only to the tax change. The indirect or feedback effect is the increase or decrease in receipts due to the effect of the tax change on income levels. The estimates of the effect of enacted and proposed tax changes shown in this budget represent the direct effect of these changes on receipts, based on levels of corporate and individual income that reflect enactment of the tax change. The estimated indirect or feedback effect on receipts due to the tax-induced change in in-

73 1983 BUDGET RECEIPTS 4-17 comes is not included in these estimates because it is already included in gross receipts. For example, the estimates of the effect of the Economic Recovery Tax Act of 1981 shown in this budget represent only the direct effect of the changes provided in the Act. The increased receipts resulting from the tax-induced increase in incomes are included in gross receipts. The estimates of the direct effect of the Economic Recovery Tax Act of 1981 on receipts therefore overstate the net loss to the Treasury of the income tax reductions and other tax changes provided in the Act. The estimates in this budget of the effect of the administration's proposals on receipts also represent the direct effect of these changes. The indirect effect of these proposals, which is small, is included in gross receipts. CHANGES IN BUDGET RECEIPTS Budget receipts are estimated to rise by $27.5 billion in 1982 and $39.4 billion in The year-to-year changes can be divided between changes due to growth in the tax base and changes due to revisions in the tax structure. Under the tax rates and structure in effect on January 1, 1980, receipts would have risen by $56.5 billion in 1982 and $75.1 billion in Thus, the combined effect of administrative actions and enacted and proposed tax law changes, which is shown in the accompanying table, reduces the growth in receipts by $29.0 billion in 1982 and $35.7 billion in The corresponding decrease for 1984 and 1985 is $33.5 billion and $18.1 billion, respectively Growth in receipts (in billions of dollars): Under existing law and administrative actions and proposed legislation Under tax rates and structure in effect Jan. 1, 1980 Difference

74 THE BUDGET FOR FISCAL YEAR 1983 CHANGES IN BUDGET RECEIPTS (In billions of dollars) Receipts under tax rates and structure in effect January 1, 1980» Administrative actions: Acceleration of State and local deposits of social security taxes effective July 1,1980 Acceleration of employer deposits of withheld income and FICA taxes effective January 1, Other Enacted legislative changes: Crude Oil Windfall Profit Tax Act of 1980 Omnibus Reconciliation Act of 1980 Comprehensive Environmental Response, Compensation, and Liability Act of 1980 Economic Recovery Tax Act of 1981 Social security taxable earnings base increases: 2 4 $25,900 to $29,700 effective Jan. 1,1981 $29,700 to $32,400 effective Jan. 1, 1982 $32,400 to $35,100 effective Jan. 1,1983. $35,100 to $38,100 effective Jan. 1, 1984 $38,100 to $40,500 effective Jan. 1,1985 Social security tax rate increases % to 13.3% effective Jan. 1, % to 13.4% effective Jan. 1, % to 14.1% effective Jan. 1, 1985 Other Total, receipts under existing legislation Proposed changes: Tax revisions Improved tax collection and enforcement Enterprise zones Airport and Airway Trust Fund Highway Trust Fund Federal employee hospital insurance taxes Railroad retirement Other Total, receipts under existing and proposed legislation L $50 million or less. 1 These figures assume a social security taxable earnings base of $25, If the taxable earnings base were not changed to reflect increased earnings, the effective social security tax rate on earnings would fall. The amounts included in legislative changes that can be attributed to keeping taxes and average earnings in the same relationship that existed in 1980 are: $1.0 billion in 1981, $4.3 billion in 1982, $8.4 billion in 1983, $13.3 billion in 1984, and $19.2 billion in These estimates include both the direct and indirect effects of administrative action and legislative changes. 4 Technical note: When the tax rate and the taxable earnings base increase at the same time, dividing up the total effect on receipts is arbitrary to some small extent because of an interaction effect. The increase in receipts due to this interaction effect is attributed to the rate and base changes in proportion to the increases in receipts that would occur if the rate and base were each changed separately

75 1983 BUDGET RECEIPTS 4-19 RECEIPTS BY SOURCE Individual income taxes. Individual income tax receipts are estimated at $298.6 billion in 1982 and $304.5 billion in These estimates reflect the individual income tax reductions provided in the Economic Recovery Tax Act of 1981, which reduce individual income tax receipts in 1982 and 1983 by $28.2 billion and $75.4 billion, respectively. The proposed tax revisions and improvements in tax collection and enforcement increase individual income taxes by an estimated $0.1 billion in 1982 and $3.5 billion in Individual income taxes in 1984 and 1985 are projected at $322.9 billion and $362.0 billion, respectively. The individual income tax reductions provided in the Economic Recovery Tax Act of 1981 reduce individual income tax receipts by $113.1 billion in 1984 and $137.6 billion in The tax revisions and other proposed changes offset these reductions in 1984 and 1985 by an estimated $2.6 billion and $2.7 billion, respectively. Corporation income taxes. Corporation income tax receipts are estimated at $46.8 billion in 1982 and $65.3 billion in These estimates reflect the Accelerated Cost Recovery System and other provisions of the Economic Recovery Tax Act of 1981, which are estimated to reduce corporation income tax receipts in 1982 and 1983 by $9.3 billion and $13.1 billion, respectively. The proposed tax revisions and improvements in tax collection and enforcement add $0.1 billion to receipts in 1982 and $9.1 billion in Corporation income tax receipts in 1984 and 1985 are estimated at $83.7 billion and $88.2 billion, respectively. These estimates reflect reductions of $21.6 billion in 1984 and $33.1 billion in 1985 due to enactment of the Economic Recovery Tax Act of The proposed tax revisions and other proposed changes are estimated to increase corporation income tax receipts in 1984 and 1985 by $16.1 billion and $14.9 billion, respectively. Social insurance taxes and contributions. This category includes social security and railroad retirement taxes, unemployment insurance taxes and deposits, and other retirement contributions. Supplemental medical insurance premiums (SMI) and voluntary hospital insurance premiums, previously included in this category, have been reclassified as proprietary receipts. Receipts from this source are expected to be $206.5 billion in 1982 and $222.5 billion in These estimates reflect the administration's proposal to convert the rail industry's multi-employer pension from a public to a private system, and a proposal requiring Federal employees to pay the employee portion of the social security hospital insurance tax. The recent increase in the combined employer-employee social security tax rate from 13.3% to 13.4% on

76 THE BUDGET FOR FISCAL YEAR 1983 January 1, 1982, and annual increases in the social security taxable earnings base from $29,700 in 1981 to $32,400 in 1982 and to $35,100 in 1983, also are reflected in these estimates. The estimates for 1984 and 1985 are $242.5 billion and $273.1 billion, respectively. These estimates reflect an increase in the combined employer-employee social security tax rate from 13.4% to 14.1% on January 1, 1985 and annual increases in the taxable earnings base to $40,500 in Excise taxes. Excise taxes are levied on a variety of products, services, and activities. Receipts from these taxes are estimated at $43.0 billion in 1982 and $41.7 billion in These estimates include the windfall profit tax, which is estimated at $24.1 billion in 1982 and $21.2 billion in The estimates also reflect enactment of the Economic Recovery Tax Act of 1981, which reduces excise taxes by $0.9 billion in 1982 and $1.2 billion in The Black Lung Benefits Revenue Act of 1981, which doubled the taxes that finance the black lung disability trust fund effective January 1, 1982, increases excise tax receipts by $0.2 billion in 1982 and $0.3 billion in The proposed increases in airport and airway user taxes are estimated to add an additional $0.1 billion to excise taxes in 1982 and $1.2 billion in The estimates for 1984 and 1985 are $41.5 billion and $40.8 billion, respectively. These estimates include $20.0 billion from the windfall profit tax in 1984 and $19.0 billion in The provisions of the Economic Recovery Tax Act of 1981 result in a net decrease in excise taxes of $1.2 billion in 1984 and $1.9 billion in The proposed increases in airport and airway user taxes and the extension of highway trust fund taxes at their current rates increase excise taxes by $1.4 billion in 1984 and $5.7 billion in Estate and gift faxes. Estate and gift taxes are estimated at $7.2 billion in 1982, $5.9 billion in 1983, $5.4 billion in 1984 and $5.1 billion in These estimates reflect reductions due to enactment of the Economic Recovery Tax Act of 1981 that start at $0.2 billion in 1982 and increase annually to $4.6 billion in Other receipts. Customs duties and miscellaneous receipts (the largest of which are deposits of earnings by the Federal Reserve System) are estimated to total $24.8 billion in 1982, $26.2 billion in 1983, $27.0 billion in 1984, and $27.5 billion in Proprietary receipts. In addition to budget receipts, the Government receives significant proprietary income from the public. This income is derived from various market-oriented activities and takes the form of interest, rents, royalties, and the sale of Government property, products, and services. Because this income arises from business-type transactions rather than from taxation, it is treated

77 1983 BUDGET RECEIPTS 4-21 Excise and Other Social Insurance Taxes and Contributions Individual Income Taxes Corporation Income Taxes :r> >,m>. ^ihsaiafiwfiki;^^;ss^ as an offset to related outlays and budget authority rather than as budget receipts. Proprietary receipts from the public are explained further in Part 7 and are shown in table 11 of Part 9.

78 1984 BUDGET RECEIPTS This section of the budget discusses budget receipts for 1982 to 1986 and the legislative proposals and administrative actions affecting them. 1 The economic assumptions on which the receipts estimates are based are presented in Part 2, and estimates of receipts for are presented in Part 3 and table 2 of Part 9. Part 6 contains an analysis of the difference between actual receipts for 1982 and the estimates for 1982 in the fiscal year 1982 Budget Revisions, transmitted to the Congress in March Part 7 explains the conceptual basis for classifying certain amounts collected by the Federal Government as budget receipts and other amounts as offsetting collections. SUMMARY Total budget receipts in 1984 are estimated to be $659.7 billion, an increase of $62.2 billion from the $597.5 billion estimated for Receipts in 1985 and 1986 are estimated to be $724.3 billion and $841.9 billion, respectively. These estimates include the effects of: the income tax reductions and other tax changes provided in the Economic Recovery Tax Act of 1981; the tax revisions and improvements in compliance and collection provided in the Tax Equity and Fiscal Responsibility Act of 1982; the 5 cent a gallon increase in the motor fuels tax and other tax changes provided in the Highway Revenue Act of 1982; the contingency tax plan proposed to become effective October 1, 1985 if economic growth sufficient to hold the deficit to 2%% of GNP does not materialize; the proposed bi-partisan social security plan, designed to ensure the future solvency of the social security trust funds; and the other receipts proposals in this budget. Composition of budget receipts. The Federal tax system relies predominantly on income and payroll taxes. In 1984: Income taxes paid by individuals and corporations are estimated at $295.6 billion and $51.8 billion, respectively. These Detailed estimates of budget receipts by source for 1982 to 1984 are shown in Tables 12 and 19 of Part 9.

79 1984 BUDGET RECEIPTS 4-3 BUDGET RECEIPTS BY SOURCE (In billions of dollars) Source 1982 actual 1983 estimate 1984 estimate 1985 estimate 1986 estimate Individual income taxes Corporation income taxes Social insurance taxes and contributions Excise taxes Estate and gift taxes Customs duties Miscellaneous receipts Total, budget receipts sources combined account for 52.7% of estimated budget receipts. Social insurance taxes and contributions composed largely of payroll taxes levied on wages and salaries, most of which are paid in equal amounts by employers and employees will yield an estimated $242.9 billion, 36.8% of the total. Excise taxes imposed on selected products, services, and activities are expected to provide $40.4 billion, 6.1% of the total. Estate and gift taxes, customs duties, and miscellaneous receipts are estimated at $29.1 billion, the remaining 4.4% of budget receipts. Under the tax policy and economic assumptions presented in this budget, the income tax share of total receipts is projected to decline to 51.4% by 1986, 4.8 percentage points less than for This decline is the net effect of a 5.6 percentage point decline in the individual income tax share that is partially offset by a 0.8 percentage point rise in the corporation income tax share to 8.8%. Social insurance taxes and contributions are projected to rise as a share of total receipts from 32.6% in 1982 to 36.2% in The excise tax share is projected to rise to 8.9% in 1986, 3.0 percentage points greater than for The projected share of all other receipts declines by 1.8 percentage points between 1982 and ENACTED LEGISLATION Three major tax laws have been enacted since this administration took office in January The first, the Economic Recovery Tax Act of 1981 (ERTA), provides incentives for work, saving, and investment. The substantial reductions in income taxes and other changes provided in the Act are estimated to reduce receipts by $82.6 billion in 1983, $130.3 billion in 1984, $158.2 billion in 1985, and $202.3 billion in The second major tax law, the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), improves the fairness of the tax system : QL 3

80 THE BUDGET FOR FISCAL YEAR 1984 while preserving the incentives for work, saving, and investment enacted in This Act increases receipts primarily by eliminating unintended benefits and obsolete incentives, and providing mechanisms to increase taxpayer compliance and improve collection techniques. The provisions of this Act are estimated to increase receipts by $17.3 billion in 1983, $38.3 billion in 1984, $42.2 billion in 1985, and $52.1 billion in The Highway Revenue Act of 1982 is the third major tax law enacted since January The main revenue provision of this Act increases the existing excise tax on gasoline and diesel fuel from 4 to 9 cents a gallon effective April 1, The Act also restructures other highway-related taxes to make the taxes paid by various highway users correspond more equitably to the damage that such users cause to the highway system. The increased receipts to the Highway Trust Fund, which are estimated at $2.1 billion in 1983, $4.8 billion in 1984, $5.1 billion in 1985, and $5.2 billion in 1986, will be used to finance highway, bridge, and transit construction and repair. Since increased excise taxes reduce incomes, the net increase in receipts taking into account the direct reduction in individual and corporation income taxes is estimated at $1.7 billion in 1983, $3.8 billion in 1984, and $3.9 billion in 1985 and Despite the increases provided in the Tax Equity and Fiscal Responsibility Act of 1982 and the Highway Revenue Act of 1982, taxes have been reduced by $445.9 billion over the period, relative to pre-erta tax law. As shown in the following table, there is a net tax reduction every year during this period, ranging from $35.6 billion in 1982 to $146.3 billion in NET EFFECT ON RECEIPTS OF ENACTED LEGISLATION ' (In billions of dollars) Economic Recovery Tax Act of 1981 Tax Equity and Fiscal Responsibility Act of 1982 Highway Revenue Act of 1982 Net tax reduction $50 million or less. 1 These estimates are based on the direct effect only of legislative changes at a given level of economic activity. Induced effects are taken into account for forecasting incomes, however, and in this way affect the receipts estimates by major source and in total. The major provisions of each Act are described briefly below. ECONOMIC RECOVERY TAX ACT OF Individual income tax provisions. A number of provisions of the Economic Recovery Tax Act of 1981 (ERTA) substantially reduce 2 For a more detailed discussion of the provisions of the Economic Recovery Tax Act of 1981, see Part 4 of the 1983 Budget.

81 1984 BUDGET RECEIPTS 4-5 individual income tax liabilities. These provisions, which are estimated to reduce receipts by $61.3 billion in 1983, $97.2 billion in 1984, $105.1 billion in 1985, and $120.4 billion in 1986, include the following: Individual income tax rate reductions. Compared with prior law, tax rates for individuals were reduced across-the-board by 1.25% for calendar year 1981 and 10% for calendar year 1982, and will be reduced by 19% for calendar year 1983 and 23% for calendar year 1984 and subsequent years. Reduction in the maximum individual income tax rate. The maximum marginal tax rate on individual income was reduced from 70% to 50% effective January 1, This change reduced the maximum effective tax rate on long-term capital gains from 28% to 20%. Deduction for two-earner married couples. Married couples with two earners often pay higher taxes than if they were single. To reduce this penalty, ERTA allowed couples a tax deduction equal to 5% of the first $30,000 of earnings of the spouse with the lower earnings in calendar year In 1983 and subsequent years, the deduction increases to 10%. Indexing. Beginning with calendar year 1985, the individual income tax brackets, the zero bracket amount, and the personal exemption will be adjusted annually for inflation as measured by the Consumer Price Index for all urban households (CPI-U). The adjustment for a given calendar year will be the percentage increase in the CPI-U between fiscal year 1983 and the fiscal year ending prior to such calendar year. The 1985 adjustment, therefore, will be based on the percentage increase in the CPI-U between fiscal years 1983 and Capital cost recovery provisions. Taxpayers may claim depreciation deductions for tangible property used in a trade or business. Under prior law, these deductions were allowed over the anticipated useful life of the property, or over guideline lives under the Asset Depreciation Range (ADR) system. ERTA replaces these methods of depreciation with the Accelerated Cost Recovery System (ACRS), which generally provides for a faster write off of capital expenditures under simplified and standardized rules. This system of accelerated cost recovery is estimated to reduce receipts by $16.7 billion in 1983, $25.6 billion in 1984, $34.9 billion in 1985, and $48.3 billion in Saving incentive provisions. In addition to the across-the-board reductions in marginal tax rates, several other provisions encourage saving by individual taxpayers. These provisions, which include partial exclusion of interest income from tax and liberalized treatment of retirement contributions, are estimated to reduce receipts

82 THE BUDGET FOR FISCAL YEAR 1984 by $1.0 billion in 1983, $2.1 billion in 1984, $3.5 billion in 1985, and $5.9 billion in Estate and gift tax provisions. Several provisions reduce estate and gift taxes by providing an unlimited marital deduction for transfers to spouses; reducing the maximum tax rate on estates and gifts; increasing the annual gift tax exclusion; and increasing annually the unified credit against estate and gift taxes to reach a credit of $192,800 in 1987, which exempts from tax estates of $600,000 or less. These provisions are estimated to reduce receipts by $2.4 billion in 1983, $3.7 billion in 1984, $4.9 billion in 1985, and $6.5 billion in TAX EQUITY AND FISCAL RESPONSIBILITY ACT OF 1982 Improvements in compliance and collection. The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) includes a number of provisions designed to ensure that the taxes owed the Government are collected, and that they are collected on a more timely basis. These provisions, which are estimated to increase receipts by $5.4 billion in 1983, $14.4 billion in 1984, $11.3 billion in 1985, and $12.4 billion in 1986, include the following: Withholding on interest and dividends. Interest and dividend income received by domestic taxpayers was exempt from withholding under prior law, although taxes were withheld from wages. To ensure that taxes are collected from all taxable recipients of interest and dividend income and not just those who report such income to the IRS, withholding at the rate of 10% will be required on interest and dividend payments made after June 30, Individuals with tax liability in the prior year of $600 or less ($1,000 on a joint return), individuals aged 65 and older with prior year tax liability of $1,500 or less ($2,500 on a joint return), and annual interest payments of $150 or less are exempt. Exemptions from withholding also are provided for payments to corporations, financial intermediaries, and tax-exempt entities. Acceleration of corporate income tax payments. Under prior law, corporations generally were required to pay at least 80% of their current year's tax liability in estimated payments. The remaining liability was payable in two equal installments due on the 15th day of the third and sixth months following the close of the taxable year. To ensure that corporations pay taxes on as timely a basis as most individuals, TEFRA increases the required estimated payment to 90% of the current year's liability for tax years beginning after December 31, All remaining liability must be paid in one payment on the 15th day of the third month following the close of the taxable year.

83 1984 BUDGET RECEIPTS 4-7 Other compliance provisions. TEFRA contains a number of other provisions that improve and expand information reporting to the IRS, increase penalties for noncompliance, modify pension withholding, and allow more effective partnership audits. Reductions in unintended benefits and obsolete incentives. Provisions to reduce unintended benefits and obsolete incentives are estimated to increase receipts by $6.9 billion in 1983, $16.6 billion in 1984, $22.9 billion in 1985, and $34.7 billion in The major provisions are described briefly below: Strengthening of the individual minimum tax. TEFRA repeals the add-on individual minimum tax. It also strengthens the alternative minimum tax on individuals by expanding the tax base to include the preference items previously subject to the add-on minimum tax and several additional preference items. A tax of 20% is imposed on the amount by which this expanded base exceeds a specified exemption ($30,000 for a single taxpayer, $40,000 for married taxpayers filing a joint return). The tax is payable only to the extent that it exceeds the individual's regular tax liability. This provision, which will ensure that individuals who make extensive use of tax preferences do not avoid tax, is generally effective January 1, Modification of casualty and medical expense deductions. Casualty and medical deductions originally were intended to apply only to extraordinary expenses. TEFRA strengthens this principle, while simplifying the treatment of such expenses. Effective January 1, 1983, TEFRA repeals the deduction for one-half of annual health insurance premiums (up to a maximum of $150), and raises the floor for allowable medical deductions from 3% to 5% of adjusted gross income. It also eliminates the 1% floor for deductible drug expenditures effective January 1, 1984, but limits deductible expenditures to insulin and prescription drugs. Non-business casualty and theft losses occurring after December 31, 1982 are deductible only to the extent that they exceed 10% of adjusted gross income. As under prior law, the deduction for any one casualty is allowed only to the extent it exceeds $100. Changes in Accelerated Cost Recovery System (ACRS) and basis adjustment for investment tax credit. Under the Accelerated Cost Recovery System enacted in ERTA, personal property placed in service after December 31, 1980, and before January 1, 1985, could be depreciated using cost recovery schedules that approximate the 150% declining balance method. The schedules accelerated to reflect the 175% declining balance method for property placed in service in 1985 and

84 THE BUDGET FOR FISCAL YEAR 1984 the 200% declining balance method for property placed in service in subsequent years. TEFRA repeals the accelerations in the depreciation schedules for 1985 and In addition, the cost basis of depreciable assets placed in service after December 31, 1982 is reduced by 50% of the amount of applicable investment tax credits. These provisions ensure that the combination of depreciation deductions and tax credits does not result in treatment more favorable than expensing. Modification of leasing rules. ERTA liberalized the rules under which corporations may transfer unused investment tax credits and depreciation deductions on new investments to profitable corporations through leasing transactions referred to as safe-harbor leases. TEFRA repeals these liberalized rules for leases entered into after December 31, For safeharbor leases entered into before 1984, the Act limits the type of eligible property and the amount of tax benefit available to the lessor. Regular leasing rules generally are liberalized effective January 1, Modification of completed contract method of accounting. Prior regulations allowed contractors to defer tax on income from long-term contracts until the year the contract was completed. Certain costs, known as "period" costs, were deducted when they were incurred; the remaining costs were allocated to the contract and deducted when the contract was completed. Under TEFRA, new rules are provided for determining when contracts are to be considered complete and the income recognized. These rules are effective for taxable years ending after December 31, In addition, some costs previously treated as period costs will be deducted only when the contract is completed. The new period cost rules, which are phased in over a 3-year period, generally apply to contracts that exceed 24 months and are entered into after December 31, Change in taxation of life insurance companies. Under prior law, life insurance companies were permitted to account for modified coinsurance arrangements under special rules. These arrangements served no purpose other than tax avoidance, since little, if any, insurance risk was actually transferred between companies. TEFRA disallows the use of the special modified coinsurance rules, generally effective January 1, In addition, several provisions are changed to reduce the taxes of life insurance companies for a 2-year period ending December 31, Modification of existing excise taxes. TEFRA makes a number of changes in excise taxes, which are estimated to increase receipts

85 1984 BUDGET RECEIPTS 4-9 by $3.6 billion in 1983, $5.2 billion in 1984, $6.0 billion in 1985, and $2.6 billion in These changes include the following: Increase in airport and airway trust fund taxes. Statutory authority for the transfer of revenue from aviation excise taxes to the airport and airway trust fund expired on September 30, After that date, revenue from the 5% passenger ticket tax was deposited in the general fund; revenues from the 4 cent per gallon tax on general aviation gasoline and the tire and tube taxes were deposited into the highway trust fund. Other aviation taxes expired on September 30, TEFRA reinstates statutory authority for the deposit of aviation excise taxes into the airport and airway trust fund effective September 1, 1982 through December 31, The Act also increases the domestic air passenger ticket tax to 8%; reimposes the 5% tax on air freight waybills and the $3 per person international departure tax; increases the tax on noncommercial aviation gasoline to 12 cents per gallon; and imposes a 14 cent per gallon tax on other noncommercial aviation fuels. These changes apply to tickets, waybills, and fuels purchased after August 31, 1982 and before January 1, Increase in cigarette excise taxes. TEFRA temporarily doubles the excise tax on packages of cigarettes to 16 cents effective January 1, 1983 through September 30, Increase in telephone excise tax. The telephone excise tax is increased from 1% to 3% effective January 1, 1983 through December 31, The tax terminates effective January 1, Changes in employment taxes. The Act includes a number of revisions in employment taxes that are estimated to increase receipts by $2.6 billion in 1983, $3.9 billion in 1984, $4.0 billion in 1985, and $3.3 billion in The major provisions include the following: Modification of Federal unemployment tax (FUTA) rate and wage base. Both the Federal and State governments levy unemployment payroll taxes on employers. These taxes are deposited in the Federal unemployment insurance trust fund. Under prior law, employers were subject to a Federal unemployment tax of 3.4% on the first $6,000 of annual wages per employee. If a State's unemployment insurance law met requirements of Federal law, employers in the State generally received a 2.7% credit against the tax, for a net Federal tax of 0.7%. Employers also were required to pay a State unemployment tax. Although State tax rates varied, all States had a wage base greater than or equal to the $6,000 Federal wage base. TEFRA increases the Federal wage base to $7,000 and

86 THE BUDGET FOR FISCAL YEAR 1984 increases the tax rate to 3.5%, for a net Federal tax of 0.8%. In order for their employers to qualify for the full 2.7% credit, States will have to increase their unemployment tax wage base to at least the new $7,000 Federal level. These changes apply to wages paid after December 31, For wages paid after December 31, 1984, the Act increases the Federal tax rate to 6.2% and the credit to 5.4%, maintaining the net Federal tax at 0.8%, while encouraging States to widen the range of tax rates levied on employers depending on their use of the unemployment insurance system. Extension of social security hospital insurance taxes to Federal employees. Federal employees are required to pay the hospital insurance portion of the social security tax effective January 1, This rate is currently 1.3% for both employees and employers. Most Federal civilian employees were exempt from social security taxes under prior law. HIGHWAY REVENUE ACT OF 1982 The major revenue provision of this Act increases the existing excise tax on gasoline and diesel fuel from 4 to 9 cents per gallon effective April 1, 1983 through September 30, Other provisions eliminate existing taxes on automobile and small truck tires; tires for non-highway use; and tubes and tread rubber. The Act also repeals existing taxes on lubricating oil, and retail sales of lightweight trailers and trucks; but raises fees on heavy duty trucks and trailers. Together, the provisions of this Act are estimated to increase receipts by $1.7 billion in 1983, $3.8 billion in 1984, and $3.9 billion in 1985 and 1986.

87 1984 BUDGET RECEIPTS 4-11 EFFECT ON RECEIPTS OF ENACTED LEGISLATION (In billions of dollars) Economic Recovery Tax Act of 1981 Individual income tax provisions Capital cost recovery provisions: Individual income taxes Corporation income taxes Subtotal, capital cost recovery provisions Saving incentive provisions Estate and gift tax provisions Other: Individual income taxes Corporation income taxes Social insurance taxes and contributions Excise taxes Subtotal, other Total, Economic Recovery Tax Act of Tax Equity and Fiscal Responsibility Act of 1982 Compliance and collection: Individual income taxes. Corporation income taxes Employment taxes and contributions Subtotal, compliance and collection Unintended benefits and obsolete incentives: Individual income taxes Corporation income taxes Estate and gift taxes Subtotal, unintended benefits and obsolete incentives Excise tax provisions Employment tax provisions: Individual income taxes Social insurance taxes and contributions Subtotal, employment tax provisions Other: Individual income taxes Corporation income taxes Subtotal, other Total, Tax Equity and Fiscal Responsibility Act of Highway Revenue Act of 1982 Individual income taxes... Corporation income taxes Excise taxes Total, Highway Revenue Act of

88 THE BUDGET FOR FISCAL YEAR 1984 EFFECT ON RECEIPTS OF ENACTED LEGISLATION 1 Continued ADDENDUM Effect on receipts by source: Individual income taxes Corporation income taxes Social insurance taxes and contributions... Excise taxes Estate and gift taxes (In billions of dollars) Total $50 million or less. 'These estimates are based on the direct effect only of legislative changes at a given level of economic activity. Induced effects are taken into account for forecasting incomes, however, and in this way affect the receipts estimates by major source and in total. RECEIPTS PROPOSALS Bi-partisan social security plan. The administration supports the proposed bi-partisan plan to restore social security reserves to safer levels. The proposed plan ensures the future solvency of the trust funds through a combination of revenue increases and benefit reductions over the next seven years. This plan is estimated to increase governmental receipts by $8.2 billion in 1984, $5.8 billion in 1985, and $8.9 billion in The provisions of the plan include the following: Expansion of coverage. Federal civilian employees and employees of State and local governments and non-profit organizations currently are exempt from mandatory social security coverage. Under the proposed plan, mandatory coverage will be extended to all new Federal civilian employees and to employees of non-profit organizations effective January 1, State and local governments currently participating in the social security system will no longer be allowed to withdraw. Acceleration of scheduled increases in the Old Age and Survivors and Disability Insurance (OASDI) payroll tax rate. The combined employer-employee OASDI tax rate is currently scheduled to increase from 10.8% to 11.4% on January 1, 1985 and to 12.4% on January 1, Under the proposed plan the rate will increase to 11.4% on January 1, 1984, 12.12% on January 1, 1988, and 12.4% on January 1, For 1984, employees would be provided a refundable tax credit equal to 0.3%, the rescheduled portion of the employee tax rate. Comparability of self-employment OASDI payroll tax rate. Self-employed individuals currently pay 75% of the combined employer-employee OASDI tax rate. Under the proposed plan self-employed individuals will be required to pay the combined employer-employee rate effective January 1, How-

89 1984 BUDGET RECEIPTS 4-13 ever, one-half of the combined rate will be deductible as a business cost in calculating taxable income. Taxation of social security benefits. Social security benefits currently are exempt from the Federal income tax. Under the proposed plan, single taxpayers with more than $20,000 ($25,000 for married couples filing a joint return) of adjusted gross income from non-social security sources will be required to include 50% of their social security benefits in adjusted gross income. Contingency tax plan. The administration proposes a contingency tax plan for enactment in calendar year This plan is designed as a stand-by measure to ensure that budget deficits for fiscal years 1986 and beyond will be reduced (by about one percent of GNP) in the event that economic growth sufficient to hold those deficits to two and one-half percent (or less) of GNP does not materialize. The contingency taxes consist of a surcharge on individuals and corporations approximately equivalent to 1% of taxable income, plus an excise tax on oil, both domestically produced and imported, that will raise revenues of about $5 per barrel. Such contingency taxes will become effective October 1, 1985, only if three conditions are met: Congress adopts the administration's deficit reduction measures; the unified budget deficit for fiscal year 1986 is forecasted by the administration, on July 1, 1985, to be above two and one-half percent of GNP; and, on July 1, 1985, the economy is growing. If the contingency tax plan becomes effective, it will remain for up to 36 months. Contingency taxes are estimated to increase receipts by $46.0 billion in Tax incentives for higher education. The administration proposes to exclude from tax earnings on savings deposited in special accounts to pay future higher education expenses of dependent children. The maximum annual contribution to these accounts will be $1,000 per child. However, the $1,000 per child maximum will be reduced 5 cents for each dollar that the taxpayer's adjusted gross income exceeds $40,000, so that any taxpayer with adjusted gross income in excess of $60,000 will be ineligible to make deposits to these accounts. Eligible expenses are tuition and room and board paid directly to a university or college. The university or college must verify that payments received directly from these accounts were spent for courses or for room and board of a full-time undergraduate degree student. Expenses of students in degree programs (but not trade schools) would be eligible. Special savings accounts will qualify only if the dependent children on whose behalf the savings are made are under age 18. In no case may an account be kept open for a child over the age of 25. Withdrawn savings will be reported to the IRS by the financial institution and by the taxpay-

90 THE BUDGET FOR FISCAL YEAR 1984 er on his tax return. If there is no accompanying statement from the college or university indicating that the savings were spent on eligible expenses, the tax otherwise due on the earnings in these accounts will be recaptured with a penalty. An exemption from this penalty will be made in the case of the dependent's death and for withdrawals made to pay for certain medical expenses of the dependent. Eligible expenses will not include amounts paid to schools that follow a racially discriminatory policy. This proposal will be effective January 1, 1984 and is estimated to reduce receipts by a negligible amount in 1984, $0.1 billion in 1985, and $0.2 billion in Enterprise zone tax incentives. Under current law the only tax incentive for the redevelopment of economically distressed areas is a relaxation of limitations on tax-exempt financing for facilities receiving assistance under the Urban Development Action Grant (UDAG) program. The administration proposes that beginning in 1983 up to 25 small areas per year (not to exceed 75 in total) be designated "enterprise zones/' Effective January 1, 1984, the following tax incentives will be available for economic redevelopment in the zones: an exemption from tax of capital gains on certain qualified property, a tax credit for employees equal to 5 percent of the first $10,500 of wages earned, a tax credit for employers equal to 10 percent of any increases in their payrolls, a separate tax credit for employers of certain disadvantaged individuals equal to 50 percent of the wages of such persons for the first three years of employment (the percentage declines by 10 points in the fourth year and each year thereafter), an increase of 50 percent in the regular investment tax credit for investment in equipment, a 10 percent investment tax credit for new construction and reconstruction of buildings, and continued availability of tax-exempt bond financing beyond the 1986 sunset date for small issue bonds. These incentives, which generally will remain fully in effect for 20 years and be phased out over the succeeding four years, are estimated to reduce receipts by $0.1 billion in 1984, $0.4 billion in 1985, and $0.8 billion in Tuition tax credit The administration proposes to provide taxpayers a nonrefundable credit for 50 percent of tuition expenses paid to private elementary and secondary schools for certain qualified dependents. The maximum credit allowable for each dependent is $100 in 1983, $200 in 1984, and $300 thereafter, with the maximum amount in each year phased out for taxpayers with adjusted gross incomes between $40,000 and $60,000. Credits will not be allowed for expenses paid to private schools that follow a racially discriminatory policy. This proposal, which will be effective for expenses incurred after July 31, 1983, is estimated to reduce re-

91 1984 BUDGET RECEIPTS 4-15 ceipts by $0.2 billion in 1984, $0.5 billion in 1985, and $0.8 billion in Tax treatment of health insurance premiums. Under current law, compensation paid in cash is fully taxable for both social security and income tax purposes, while compensation paid in the form of health insurance benefits is nontaxable. The administration proposes that effective January 1, 1984, employees be required to pay social security and income taxes on employer-paid health insurance premiums in excess of $175 per month or $2,100 per year for a family plan, and $70 per month or $840 per year for a single plan. Employer-paid health insurance premiums below these amounts still will be excluded from taxation. The $175 and $70 amounts will be indexed to rise with inflation. This proposal is estimated to increase receipts by $2.3 billion in 1984, $4.4 billion in 1985, and $6.0 billion in Jobs tax credit for the long-term unemployed. Under current law no special tax incentives are provided for hiring the long-term unemployed. The administration proposes a six month extension and modification of the Federal Supplemental Compensation program with an option for recipients to receive assistance in securing work through a system of tax credits to employers. To be qualified, individuals must have exhausted their regular, and, where available, extended Unemployment Insurance benefits. Effective April 1, 1983, individuals who meet the eligibility requirements for the additional unemployment payments may elect to receive vouchers equivalent in value to the unemploj'ment payments. These vouchers will entitle an employer hiring qualified individuals for full-time employment within six months of their eligibility to receive the credit. Although payment of the additional benefits will end on September 30, 1983, individuals will be able to become eligible for vouchers until March 31, Employers will be able to receive a tax credit for any qualified individuals hired before April 1, This proposal is estimated to reduce receipts by a negligible amount in 1983, $0.2 billion in 1984, $0.2 billion in 1985, and $0.1 billion in Caribbean Basin Initiative (CBI). Under current law, expenses incurred in attending business conventions outside the North American area are deductible only if it is as reasonable to hold the convention outside the North American area as within it. The administration supports the Caribbean Basin Initiative as passed by the House of Representatives last year. This initiative provides that effective January 1, 1983, expenses incurred in attending a business convention in a qualifying Caribbean Basin country (in-

92 THE BUDGET FOR FISCAL YEAR 1984 eluding, for this purpose, Bermuda) will be deductible, provided they meet the standards for deductibility of North American business expenses. A qualifying Caribbean Basin country is a country that is designated by the President as entitled to the benefits of the Caribbean Basin Initiative and enters into a bilateral executive agreement with the United States providing for the exchange of such information as is necessary for carrying out the tax laws of the United States and the other country. The CBI also provides that effective April 1, 1983, all excise taxes collected on rum imported into the United States, wherever produced, be paid into the Treasuries of Puerto Rico and the U.S. Virgin Islands. Under present law, only taxes collected on rum produced in Puerto Rico or the U.S. Virgin Islands and transported to the United States are transferred to Puerto Rico or the U.S. Virgin Islands. The revenue impact of the proposal is negligible. Changes in contributions to civil service retirement (CSR). Civil service retirement currently costs 35% of payroll. Employees contribute 7% of wages and salaries to CSR, employing agencies contribute 7%, and the general fund of the Federal Government contributes the remaining 21%. The administration is proposing several reforms that would reduce the cost of civil service retirement to 22% of payroll. In keeping with the principle that employees and employers should each pay 50% of retirement costs, several changes in contributions to CSR also are being proposed. These changes, which are estimated to increase governmental receipts by $1.2 billion in 1984, $2.3 billion in 1985, and $2.1 billion in 1986, include the following: Increase in the employee contribution. The administration proposes that the employee contribution be increased from 7% of wages and salaries to 9% effective October 1, 1983, and to 11% effective October 1, Increase in the District of Columbia employer contribution. The District of Columbia (D.C.) currently contributes 7% of employee wages and salaries to the civil service retirement fund; the Federal Government contributes an amount equal to 21% of the D.C. government payroll to meet the full cost of the system. This constitutes a hidden subsidy to the D.C. government one that is not intended. To rectify this situation, the administration proposes that the contribution of the District of Columbia be increased to 9% effective October 1, 1983 and to 11% effective October 1, A corresponding increase in the employer contribution is proposed; however, employer contributions are shown on the outlay side of the budget and do not affect governmental receipts. The administration proposes to increase the contributions of the Postal Service by the same amount. Contributions of the Postal Service to CSR are shown on the outlay side of the budget and do not affect governmental receipts.

93 1984 BUDGET RECEIPTS 4-17 EFFECT ON RECEIPTS OF PROPOSED LEGISLATION 1 (In billions of dollars) Bi-partisan social security plan Taxation of health insurance premiums Contributions to civil service retirement Higher education tax incentive Enterprise zone tax incentives Tuition tax credit Jobs tax credit Caribbean Basin Initiative Other Subtotal Contingency tax plan Total ADDENDUM Effect of proposals on receipts by source: Individual income taxes Corporation income taxes Social insurance taxes and contributions Excise taxes Other Total $50 million or less. 1 These estimates are based on the direct effect only of legislative changes at a given level of economic activity. Induced effects are taken into account for forecasting incomes, however, and in this way affect the receipts estimates by major source and in total. EFFECT OF ENACTED AND PROPOSED CHANGES ON RECEIPTS The actual change in receipts that will result from an enacted or proposed tax revision will depend on both the direct effect of the tax change and the indirect or "feedback" effect. The direct effect is the increase or decrease in receipts due only to the tax change at given levels of income. The indirect or feedback effect is the increase or decrease in receipts due to the effect of the tax change on income levels. The estimates of the effect of enacted and proposed tax changes shown in this budget represent the direct effect of these changes on receipts, based on levels of corporate and individual income that reflect enactment of the tax change. The estimated indirect or feedback effect on receipts due to the tax-induced change in incomes is not included in these estimates because it is already included in gross receipts. For example, the estimates of the effect of the Economic Recovery Tax Act of 1981 shown in this budget represent only the direct effect of the changes provided in the Act. The increased receipts resulting from the tax-induced increase in incomes are included in gross receipts. The estimates of the direct effect of the Economic Recovery Tax Act of 1981 on receipts therefore overstate the net

94 THE BUDGET FOR FISCAL YEAR 1984 loss to the Treasury of the income tax reductions and other tax changes provided in the Act. The estimates in this budget of the effect of the administration's proposals on receipts also represent the direct effect of these changes. The indirect effect of these proposals is included in gross receipts. CHANGES IN BUDGET RECEIPTS Budget receipts are estimated to decline by $20.3 billion in 1983 and to increase by $62.2 billion in The year-to-year changes can be divided between changes due to growth in the tax base and changes due to revisions in the tax structure. Under the tax rates and structure in effect on January 1, 1981, receipts would have risen by $5.1 billion in 1983 and $71.6 billion in Thus, the combined effect of administrative action and enacted and proposed tax law changes, which is shown in the accompanying table, reduces the growth in receipts by $25.4 billion in 1983, $9.4 billion in 1984, and $12.5 billion in The corresponding increase for 1986 is $25.8 billion Growth in receipts Under existing legislation... Under tax rates Difference (in law billions of dollars): and administrative action and proposed and structure in effect Jan. 1,

95 1984 BUDGET RECEIPTS 4-19 CHANGES IN BUDGET RECEIPTS (In billions of dollars) Receipts under tax rates and structure in effect January l f 1981» Administrative action Enacted legislative changes: Economic Recovery Tax Act of 1981 Tax Equity and Fiscal Responsibility Act of Highway Revenue Act of 1982 Social security taxable earnings base increases: 4 $29,700 to $32,400 effective Jan. 1, 1982 $32,400 to $35,700 effective Jan. 1,1983 $ to $ effective Jan $ to $ effective Jan $ to $ effective Jan Social security (OASDHI) tax rate increases % to 13.4% effective Jan. 1, % to 14 1% effective Jan % to 14 3% effective Jan Other Total, receipts under existing legislation Proposed legislative changes: Bi-partisan social security plan Taxation of health insurance premiums Contingency tax plan Contributions to civil service retirement Higher education tax incentive Enterprise zone tax incentives Tuition tax credit Jobs tax credit Caribbean Basin Initiative Other Total, receipts under existing and proposed legislation $50 million or less. 1 These figures assume a social security taxable earnings base of $29, The combined employer-employee old age and survivors, disability, and hospital insurance (OASDHI) tax rate. 3 These estimates include both the direct and indirect effects of administrative action and legislative changes. 4 Technical note: When the tax rate and the taxable earnings base increase at the same time, dividing up the total effect on receipts is arbitrary to some small extent because of an interaction effect. The increase in receipts due to this interaction effect is attributed to the rate and base changes in proportion to the increases in receipts that would occur if the rate and base were each changed separately : QL 3

96 THE BUDGET FOR FISCAL YEAR 1984 RECEIPTS BY SOURCE Individual income taxes. Individual income tax receipts are estimated at $285.2 billion in 1983 and $295.6 billion in These estimates reflect the individual income tax reductions provided in the Economic Recovery Tax Act of 1981, which reduce individual income tax receipts in 1983 and 1984 by $65.9 billion and $104.5 billion, respectively. These reductions are partially offset by the tax revisions and improvements in compliance and collection provided in the Tax Equity and Fiscal Responsibility Act of 1982, which increase individual income taxes by an estimated $4.3 billion in 1983 and $13.3 billion in The proposed changes in this budget are estimated to reduce individual income taxes by $0.2 billion in Individual income taxes in 1985 and 1986 are projected at $317.9 billion and $358.6 billion, respectively. The changes in individual income taxes provided in ERTA and TEFRA result in a net reduction in individual income tax receipts of $108.6 billion in 1985 and $135.8 billion in The administration's proposals, including the proposed contingency tax to become effective October 1, 1985, are estimated to reduce individual income taxes by $3.5 billion in 1985 and increase them by $10.6 billion in Corporation income taxes. Corporation income tax receipts are estimated at $35.3 billion in 1983 and $51.8 billion in These estimates reflect the Accelerated Cost Recovery System and other provisions of ERTA, which are estimated to reduce corporation income tax receipts in 1983 and 1984 by $14.0 billion and $22.0 billion, respectively. The tax revisions and improvements in tax collection and enforcement provided in TEFRA add $7.5 billion to corporation income tax receipts in 1983 and $16.2 billion in Corporation income tax receipts in 1985 and 1986 are estimated at $60.5 billion and $74.0 billion, respectively. These estimates reflect net reductions of $11.9 billion in 1985 and $13.1 billion in 1986 due to enactment of ERTA and TEFRA. The administration's proposals are expected to reduce corporation income taxes in 1985 and 1986 by $0.3 billion and $1.7 billion, respectively. Social insurance taxes and contributions. This category includes social security and railroad retirement taxes, unemployment insurance taxes and deposits, and other retirement contributions. Receipts from this source are expected to be $210.3 billion in 1983 and $242.9 billion in These estimates reflect the changes in employment taxes and contributions provided in ERTA and TEFRA, which are estimated to increase receipts by $2.5 billion in 1983 and $4.0 billion in The proposed bi-partisan social security plan is estimated to increase these receipts by an additional

97 1984 BUDGET RECEIPTS 4-21 $9.8 billion in Scheduled increases in the social security taxable earnings base from $32,400 in 1982 to $35,700 in 1983 and to $37,800 in 1984 also are reflected in these estimates. The estimates for 1985 and 1986 are $275.5 billion and $304.9 billion, respectively. These estimates reflect scheduled increases in the combined employer-employee social security (OASDHI) tax rate from 13.4% to 14.1% on January 1, 1985, and to 14.3% on January 1, 1986, and annual increases in the taxable earnings base to $42,000 in The increases in social insurance taxes and contributions provided in ERTA and TEFRA add $4.3 billion to receipts in 1985 and $3.9 billion in These receipts are increased by an additional $11.6 billion in 1985 and $10.6 billion in 1986 due to the proposed bi-partisan social security plan. Excise taxes. Excise taxes are levied on a variety of products, services, and activities. Receipts from these taxes are estimated at $37.3 billion in 1983 and $40.4 billion in These estimates include the windfall profit tax, which is estimated at $13.8 billion in 1983 and $12.2 billion in The estimates also reflect enactment of ERTA, which reduces excise taxes by $0.8 billion in 1983 and $0.6 billion in TEFRA, which increased excise taxes on airport and airway users, cigarettes, and telephone service increases excise taxes in 1983 and 1984 by an estimated $3.6 billion and $5.2 billion, respectively. The 5 cent per gallon increase in the excise tax on gasoline and diesel fuel, and other provisions of the Highway Revenue Act of 1982 add an additional $2.2 billion to excise taxes in 1983 and $4.8 billion in The estimates for 1985 and 1986 are $40.8 billion and $74.8 billion, respectively. These estimates include $11.3 billion from the windfall profit tax in 1985 and $10.5 billion in They also reflect a net increase of $10.0 billion in 1985 and $6.2 billion in 1986 due to the provisions of ERTA, TEFRA, and the Highway Revenue Act. The proposed contingency tax plan is estimated to increase excise taxes in 1986 by an additional $38.1 billion. Estate and gift taxes. Estate and gift taxes are estimated at $6.1 billion in 1983, $5.9 billion in 1984, $5.6 billion in 1985, and $5.0 billion in These estimates reflect reductions due to enactment of ERTA and partially offsetting increases due to enactment of TEFRA. Other receipts. Customs duties and miscellaneous receipts (the largest of which are deposits of earnings by the Federal Reserve System) are estimated to total $23.3 billion in 1983, $23.2 billion in 1984, $24.0 billion in 1985, and $24.5 billion in Proprietary receipts. In addition to budget receipts, the Government receives significant proprietary income from the public. This

98 THE BUDGET FOR FISCAL YEAR 1984 income is derived from various market-oriented activities and takes the form of interest, rents, royalties, and the sale of Government property, products, and services. Because this income arises from business-type transactions rather than from taxation, it is treated as an offset to related outlays and budget authority rather than as budget receipts. Proprietary receipts from the public are explained further in Part 7 and are shown in Table 13 of Part 9. Budget Receipts $ Billions BOO MM Social Insurance i!;!lllill!!l;llll and Contributions::;;!:: S, ; FiseaJYears..'. \-'"