NUES OF THE BILL AND VOTE OF THE COMMITTEE IN REPORTING THE BILL

In compliance with clause 7 of rule XIII of the Rules of the House of Representatives, the following statement is made relative to the effect on the revenues of this bill. Your committee estimates that the bill will reduce tax liability by $19.8 billion in calendar year 1975, $1.5 billion in 1976, and $130 million in 1977. The Treasury Department agrees with this statement. Part III of this report contains a more detailed statement of the revenue effect of the bill.

In compliance with clause 2(1) (2) (B) of Rule XI of the Rules of the House of Representatives, the following statement is made relative to the record vote by the committee on the motion to report the bill. The bill was ordered reported by a roll call vote of 29 in favor and 6 opposed.

Senate Report No. 94-36
1st Session

[Bracketed numerals indicate official report page numbers]

TAX REDUCTION ACT OF 1975

March 17, 1975

Mr. LONG, from the Committee on Finance, submitted the following report to accompany H.R. 2166.1

The Committee on Finance, to which was referred the bill (H.R. 2166) to amend the Internal Revenue Code of 1954 to provide for a refund of 1974 individual income taxes, to increase the low income allowance and the percentage standard deduction, to provide a credit for certain earned income, to increase the investment credit and the surtax exemption, and for other purposes, having considered same, reports favorably with an amendment and recommends that the bill as amended do

pass.

1 Public Law 94-12, page 545.

The United States economy has experienced its sharpest decline since the 1930's. The unemployment rate in January was 8.2 percent, the highest since 1941, and the unemployment rate in February would have increased above that level but for the fact that many had despaired in looking for jobs and left the labor market. In addition, actual gross national output is over $200 billion below the potential output. The Finance Committee version of this bill deals with these problems by providing a $29.2 billion tax reduction in 1975.

In providing this reduction, the Finance Committee version of the bill

Reduces taxes for individuals in the middle and lower income brackets, by providing a 4-percentage-point tax reduction and by providing a tax credit in lieu of exemptions for those in the low and middle income brackets.

[2] Removes from the income tax rolls families with income below the poverty level.

Provides relief to earners with dependent children who pay little or no income taxes by providing a refundable tax credit based on earned income.

Stimulates the depressed housing industry by providing a 5-cent credit (up to a maximum of $2,000) for the purchase of personal residences during the remainder of 1975.

Encourages immediate increased investment in equipment by increasing the investment tax credit on a permanent basis to 10 percent. In addition, for a 2-year period the investment credit is increased to 12 percent, subject in certain cases to the condition that half of this 2-percentage-point increase is invested in employee stock ownership plans.

Aids public utilities by allowing them the same investment credit rate as other taxpayers and by increasing the fraction of their income tax liabil

ity which can be offset by the investment credit from 50 to 100 percent for a temporary period.

Helps small business by increasing

$25,000 to $50,000 and by reducing the rate of tax on the first $50,000 to 18 percent.

Provides tax relief to companies with large losses by allowing an extended net operating loss carryback in lieu of the regular carryback and carryforward period provided under present law.

Assists the hard-hit automobile industry by repealing the excise tax on trucks and buses and related parts.

The Finance Committee bill provides tax reductions of $9.5 billion above those available under comparable provisions of the House bill. Of this, $4 billion represents individual income tax decreases and $5.5 billion represents business tax decreases. The increase in the case of individual taxes is attributable to a special tax credit provided by the Finance Committee for home purchases, a 4-percentagepoint rate reduction, and a tax credit in lieu of exemptions for those in the middle and lower-income brackets. In the case of businesses, the additional tax reduction under the Finance Committee bill is largely attributable to increases in the investment credit above the House provision (particularly the 2-year increase of the credit to 12 percent), the provision for an optional net operating loss carryback, lowering the corporate tax rate primarily for small businesses, and repealing the excise tax on new trucks.

More specifically, the Finance ver sion of the bill provides the following tax reductions:

Refund on 1974 tax liability.-The bill provides a refund on 1974 tax liability to be paid in one installment beginning in May 1975. It will generally equal 10 percent of tax liability up to a maximum of $200. However, each taxpayer is to receive a refund of at least $100 (or the full amount of his or her actual tax liability if less than $100). The refund is to be phased down from the maximum of $200 to $100 as the taxpayer's income rises from $20,000 to $30,000. The revenue

loss from the 1974 refund is estimated to be $8.1 billion.

$200 personal exemption tax credit. -In lieu of raising the standard deduction, as would the House bill, the committee bill provides a $200 tax credit as an alternative to the $750 personal exemption deduction. [3] The tax credit is more generous than the personal exemption in all cases where individuals are subject to tax under present law below a 27-percent tax rate. This change involves a revenue loss of $6.3 billion, or approximately $1 billion more than the increase in the standard deduction which would have been provided by the House bill.

Rate reduction on the first $4,000 of income. The committee bill lowers by one percentage point the tax rate applying to the first $4,000 of taxable income in the case of individuals. This reduction for those with higher incomes means a reduction of $40 in each case. This change will result in a revenue loss of $2.3 billion in 1975.

Refundable credit on earned income or work bonus.-The bill provides for a refundable credit of 10 percent of earned income up to a maximum of $400

closely matching the employee and employer social security tax on the first $4,000 of income. This credit is to be available only to those with dependent children. The credit is to be phased out from the maximum of $400 to zero as adjusted gross income rises from $4,000 to $8,000. This change involves a revenue loss of $1.5 billion, or about one-half of the provision in the House bill. Federal welfare costs will be reduced by an estimated $0.1 billion.

Credit for home purchases.-The committee bill provides a tax credit for the purchase of homes (both new and old homes) which are used as principal residences, where the settlement occurs after March 12, 1975. Generally, the house must be purchased in 1975, except that in limited types of situations purchases begun earlier may be eligible for the credit. even if they were not completed until 1976. It is estimated that this provi

sion will result in a revenue loss of $3.0 billion in 1975.

Capital loss carrybacks.-The bill provides a 3-year capital loss carryback for individuals where their capital losses on a cumulative basis amounts to $30,000 or more. This carryback may be offset in these prior 3 years only to the extent of capital gains realized in those years. This provision is expected to result in a loss of revenue of $110 million in 1975 and smaller amounts thereafter.

Increase in the investment credit.— The investment tax credit rate is increased for all taxpayers (including public utilities) to a permanent rate of 10 percent from the present rate of 7 percent (4 percent in the case of public utilities). In addition, for a 2year period taxpayers may claim a 12percent investment tax credit. However, if the taxpayer's qualified qualified investment for a taxable year is more than $10 million, an employer must contribute one-half of the additional 2 percent to employee stock ownership plans. In addition, in the case of public utilities, the limitation on the amount of tax liability that may be offset by the investment credit in a year is increased from 50 percent to 100 percent for a 2-year period and then is gradually reduced back to the 50 percent level over a 5-year period. In the case of long lead-time property, the bill provides that the investment credit is to be available to the extent that progress payments are made during the construction period. Finally, the $50,000 limitation in present law on the amount of used property eligible for the investment credit is eliminated. The revenue loss from these changes in the investment credit is estimated at $4.3 billion with respect to 1975 liabilities, or $1.9 billion more than the House provision.

[4] Net operating loss carryback. The bill provides that businesses generally may elect to substitute for their present 3-year carryback and 5-year carryforward of net operating losses an 8-year carryback and no carryforward. This is to apply for loss years back to

1970. Once such a carryback is elected, a carryforward is not to be available unless the taxpayer revokes his election and in effect recomputes his tax for all of the years involved on the basis of the 3-year carryback and the 5-year carryforward. To be eligible for this treatment initially (except in cases where the tax benefit is small), 25 percent of the tax benefit realized from the first use of the extended loss carryback is to be placed in an employee stock ownership plan or in some cases to a limited extent, in a supplemental unemployment benefit plan. It is estimated that the initial revenue loss from this provision will be $1 billion.

Decrease in tax to help small business. To aid small businesses, the surtax exemption (the amount to which the 22-percent corporate rate presently applies rather than the 48percent rate) is increased from the present $25,000 to $50,000. In addition, the 22-percent rate applying to this first $50,000 of income is reduced to 18 percent, although no change is made in the 48-percent rate on income above $50,000. Finally, the accumulation credit under the accumulated earnings tax is increased from $100,000 to $150,000. It is estimated that these changes will result in a revenue loss of $1.9 billion, or $700 million more than under the House bill.

Repeal of truck excise tax.-The committee bill repeals the 10-percent manufacturers' excise tax on new trucks and buses and also the 8-percent manufacturers' excise tax on truck parts. It is estimated that this will result in a revenue loss of $700 million in 1975.

WIN tax credit.-The present tax credit of 20 percent of wages paid to employees hired under the Work Incentive Program is to be available with respect to the hiring of former welfare recipients, even though they have not been in the WIN program, by both business and non-business employers. This supplement to the WIN credit is to be available until July 1, 1976.

Effective date.-Most of the provi

sions included in the committee version of this bill apply only for 1975. However, the increase in the individual rates by 4 percentage points is to apply for 2 years, the investment credit is increased to 10 percent on a permanent basis and to 12 percent for 2 years, and the net operating loss provision for business and the capital loss carryback for individuals are permanent changes. The possibility of making the other changes permanent will be reviewed in subsequent legislation.

[5] II. REASONS FOR THE
BILL

The committee agrees with the House that it is imperative to provide a substantial tax reduction at this time to check the drastic downward slide in our economy and to restore a rate of economic growth that will move us closer to full employment. The Finance Committee version of the Tax Reduction Act of 1975 does this by providing appropriate tax reductions -substantially larger than those provided by the House bill-designed to increase purchasing power and investment incentives. There is widespread agreement among economists that such

action is urgently needed at this time. to avoid great hardship for large numbers of people and huge waste in unused human resources. Before adopting this bill, the committee held hearings in which it had the benefit of the views of Administration witnesses and eminent economists, businessmen, and labor experts, representing a broad spectrum of our political and economic institutions. Virtually all recommended quick action to cut taxes.

This is not surprising in view of the sharp decline in economic activity which has taken place recently. Although characterized by marked inflation, 1974 was clearly a recession year.

In 1974, real gross national product (that is, GNP in constant prices) registered the largest decline since 1946. (See table 1.) For the year as a whole, money GNP rose to $1,397 billion7.9 percent over 1973-but this increase merely reflected higher prices. Real GNP fell 2.2 percent. The decline in output and the rise in prices was especially marked in the fourth quarter of 1974, when real GNP fell at an annual rate of 9.1 percent and prices rose at an annual rate of 14.4 percent.

TABLE 1.-GROSS NATIONAL PRODUCT 1929-74 [In billions of dollars]

sons for the weakness in consumer expenditures were falling disposable ircome, inflation, and lack of consumer confidence.

Real gross private investment fell 8.2 percent in 1974. The decline in housing starts was even sharper. Housing starts totaled only 1.4 million compared with 2.4 million in 1972 and 2.1 million in 1973. By January 1975, housing starts were running at an annual rate of well under 1 million.

As the economic situation deterio

rated, unemployment rates rose-from. 5.2 percent in January 1974 to 8.2 percent in February 1975. This compares with average unemployment rates of 4.9 percent in 1973, 5.6 percent in 1972, 5.9 percent in 1971, and rates averaging 3.8 percent or less from 1966 through 1969. The February unemployinent rate was the highest since 1941.

In the absence of remedial action to cut taxes, the outlook is that the current recession will continue and deepen. Growth in business investment was one of the prime forces fueling the upward movement of our econom prior to the current downturn. However, after adjustment for price changes, capital expenditures for new plant and equipment are expected : fall significantly in 1975, according the most recent survey of the Commerce Department.1

Economic forecasters are practically unanimous in predicting that in 1975 the economy will continue to operate far below its potential. While the precise figure varies with different forecasters, real GNP in 1975 is generally expected to be substantially lower than in 1974, although many forecasters anticipate a modest recovery beginning in mid-1975.

In view of these further expected sharp declines in economic activity. the committee concluded that appropriate tax reductions to stimulate the economy should be enacted promptly In arriving at this conclusion, the

1U.S. Department of Commerce News. March 7, 1975.

committee gave careful consideration to the large budgetary deficits that are expected in the fiscal years 1975 and 1976 and the prevalence of a rapid rate of inflation despite the economic downturn.

Similarly, the committee does not view with equanimity the fact that in 1974 the consumer price index rose 12.2 percent and the wholesale price index rose 23.5 percent. Although in December 1974 and January 1975 the rate of growth of the consumer price index moderated and the wholesale price index dropped slightly in December 1974 and the early months of 1975, inflationary pressures are still very strong.

However, the committee believes that the present economic situation requires the adoption of an appropriate tax reduction measure now. Without such timely tax reduction, there is the grave risk that the present recession will be prolonged and intensified, resulting in huge waste of resources and human hardship.

The substantial budget deficits in prospect for fiscal years 1975 and 1976 are due in large measure to the economic downturn which has shrunk the tax base and cut tax receipts drastically. This is shown by the fact that if the economy were operating at its full potential, sufficient revenue would be collected with present law taxes to produce [7] a budget surplus running at an annual rate of about $30 billion in the second quarter of 1975. The committee believes that the best way to reduce the anticipated large budget deficits would be to take action to restore economic growth and thereby increase tax receipts.

2.4 percent and 3.2 percent of the gross national product, respectively. In other recession years the budget deficit amounted to 3.7 percent of gross national product in fiscal 1948, 2.7 percent in fiscal 1959 and 2.3 percent in fiscal 1971.

Furthermore, under present conditions, the adoption of an appropriate tax reduction program will help to revive the economy and increase employment without adding significantly to inflationary pressures. This is because there are now large amounts of available unused resources which can

be gainfully employed to add to our output. As the tax reductions stimulate the economy, these at present idle resources will be brought back into use, thus adding more goods and services to match the added purchasing power made available by the tax cut. The size of these unused resources is shown in table 2 which sets forth estimates indicating that in 1975 the actual GNP may be as much as 14 percent below the potential GNP, assuming the present budgetary picture with no tax cut. This gap would amount to $250 billion, or over $1,000 per capita.

1 The increase of potential GNP assumes a growth rate in real terms of 4 percent each year, composed of an increase in the labor force of 1.8 percent, a decline in hours worked of 0.3 percent and a rise of output per man-hour of 2.5 percent. These trends may not be an accurate reflection of conditions during the oil embargo of late 1973 and early 1974. Like all measures of capacity, these are subject to a wide margin of error. Forecasts of Chase Econometrics, Inc., assuming no tax reduction.

3 Staff estimates using the methodology of the Council of Economic Advisers. Source: Business Conditions Digest.

Appropriate tax reductions will also increase incomes, both directly and through the multiplier effect, and the increased saving from this additional income will provide the flow of funds needed to purchase [8] the government securities issued to finance the increase in the deficit resulting from the tax

cut.

In view of these considerations, the committee provided tax reductions, totaling $29.2 billion in the calendar year 1975. Of this amount $21.2 bil

lion, or 73 percent, is to go to individuals in their personal capacity. This reduction is designed to restore purchasing power and in this way to stimulate the economy. The remaining $8 billion of tax reductions, or 27 percent, is to go to businesses (both corporate and other) and is designed to stimulate investment.

The committee's bill is similar in a number of important respects to the House-passed bill, reflecting the basic similarity in objectives. However, the