Congress Sends $70 Billion Tax Package to President

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The U.S. Congress passes a $70 billion tax-cut package that would extend lower capital gains rates for investors. President Bush says he will gladly sign the bill into law. John Ydstie talks about the tax package with Len Burman of the Tax Policy Center.

RENEE MONTAGNE, host:

On Fridays, our business report focuses on your money. Today: tax savings.

President Bush is praising yesterday's Senate approval of a $70 billion tax cut bill. It extends the reduced 15 percent tax rate for capital gains and dividends. It also helps the millions of taxpayers facing the alternative minimum tax.

JOHN YDSTIE, host:

Joining us is Len Berman, Director of the Tax Policy Center, a joint venture of the Urban Institute and The Brookings Institution.

You've done some analysis on who will benefit from this tax bill, and what did you find?

Mr. LEN BERMAN (Director, Urban Institute's Tax Policy Center): Most of the benefits go to very high-income taxpayers. The major provisions, extending relief from the individual alternative minimum tax, lower tax rates on capital gains and dividends, and a provision that allows high-income people to roll over their IRA balances into these things called Roth IRAs, all benefit people with incomes over $100,000.

We estimated that the average person in the middle of the income distribution, earning between $47,000 and $67,000 for a family, would get about a $20 tax cut. By comparison, millionaires would get a tax cut of about $42,000 from all these provisions together.

And the richest one in a thousand taxpayers would get an $84,000 tax cut.

YDSTIE: Now, Democrats are criticizing the bill as being skewed to the rich. Republicans argue that extending, for instance, the low 15 percent tax rates on investment income is justified, because those low rates have helped to boost economic growth. Do they have a point?

Mr. BERMAN: Not really. Actually, I wrote a book about taxation of capital gains, and I looked at all of the arguments for and against low tax rates very carefully. And my conclusion was that it was a mixed bag. Lower tax rates do encourage people to save more. The effect that has on overall investment is pretty modest. A large part of our savings now comes from foreigners and pension funds who aren't effected by tax rates in the U.S.

YDSTIE: The other big provision in this tax bill does a temporary fix to the alternative minimum tax. And the AMT was enacted in 1969 to ensure that the wealthy would be sure to pay some tax, at least. But it wasn't adjusted for inflation. So we've got middle class Americans paying the AMT now.

Mr. BERMAN: It is creeping down the income levels. This year, if Congress doesn't change the law, 19 million households will be subject to the AMT. They're still mostly high-income households. Most of the benefits from the AMT relief provision go to families earning over $100,000.

However, because the AMT isn't indexed, every year, more and more lower-income households become subject to it. You know, by the end of the decade, if the law doesn't change, there'll be 30 million households subject to the AMT; almost the same proportion as take the Mortgage Interest Deduction.

YDSTIE: Len Berman is Director of the Tax Policy Center in Washington, D.C.

Thanks very much for joining us.

Mr. BERMAN: My pleasure, John.

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