The President's 1978 Tax Program 
E~~~rgoed for Release 

~~2:00 noon, EST 

~a turday, January 21, 1978 

CONTENTS 

I The President's Message 

II Fact Sheets 

III. 

1. 

2. 

3. 

4. 

5. 

SA. 

6. 

7. 

8. 

9. 

10. 

11. 

12. 

13. 

14. 

15. 

16. 

17. 

18. 

19. 

20. 

21. 

22. 

23. 

24. 

25. 

26. 

27. 

28. 

29. 

30. 

31. 

32. 

33. 

1. 

2. 

3. 

Overview of the Tax Reduction and Reform Act of 1978 

Effects of the Tax Program on the Economy 

Effect on Total Tax Burden 

Effect on the Distribution of Taxes 

Effect on Individual Tax Burdens 

Effect on Individual Tax Burdens by Specific Income 

Individual Tax Rates 

Per Capita Tax Credit 

Deductions for State and Local Taxes 

Political Contributions 

Medical and Casualty Deductions 

Entertainment Expenses 

Foreign Conventions 

First Class Air Fare 

Minimum Tax 

Real Estate Depreciation 

Tax Shelters 

Capital Gains 

Medical, Disability and Life Insurance 

Employee Death Benefits 

Qualified Retirement Plans 

Unemployment Compensation Benefits 

State and Local Taxable Bond Opt1on 

Industrial Development Bonds 

Accrual Accounting for Agricultural Corporations 

Taxation of Financial Institutions 

Elimination of DISC 

Terminating Foreign Tax Deferral 

Communications Taxes 

Unemployment Tax Rate Reduction 

Reduction of the Corporate Tax Rates 

The Investment Credit 

Simplification of the Asset Depreciation Range 

Small Business 

Tables 

Summary of Tax Proposals, with Overview Fact Sheet (1) 

The Effect of Tax Proposals on Calendar year Tax 

Liability with Overview Fact Sheet (1) · 

Summary of Revenue Effects of Income Tax Reductions, 

Tax Reforms and Telephone Excise and Unemployment 

Insurance Tax Reductions, with Overview Fact Sheet (1) 

'>. 
EHBARGOED FOR SUNDAY AHs January 20, 1978 

Office of the Hhite House Press Secretary 

THE HHITE HOUSE 

TO THE CONGRESS OF THE UNITED STATES: 

I recommend that Congress enact a series of proposals 

that will reform our tax system and provide $25 billion 

in net tax reductions for individuals and businesses. 

Fundamental reform of our tax laws is essential and 

should begin now. Tax relief and the maintenance of a 

strong economy are essential as well. The enactment of 

these proposals will constitute a major step towards sustaining our economic recovery and making our tax system fairer and simpler. 

The Need for Tax Reduction 

I propose net tax reductions consisting of: 

$17 billion in net income tax cuts for individuals, 

through across-the-board rate reductions and a new 

personal credit, focused primarily on low and 

middle-income taxpayers. 

$6 billion in net income tax cuts for small and 

large corporations, through reductions in the 

corporate tax rates and extensions of the 

investment tax credit. 

$2 billion for elimination of the excise tax on 

telephone calls and a reduction in the payroll 

tax for unemployment insurance. 

These tax reductions are a central part of the 

Administration's overall economic strategy, which will rely 

principally upon growth in the private sector to create the 

new jobs we need to achieve our high-employment objective. 

The tax reductions will more than offset the recent increase 

in social security taxes and will provide the consumer pur- chasing power and business investment strength we need to 

keep our economy growing strongly and unemployment moving 

down. 

Together with the programs that I will outline in my 

Budget Hessage, these tax cuts should assure that our economy 

will grow at a 4-1/2 to 5 percent pace through 1979, with 

unemployment declining to between 5-1/2 and 6 percent by 

the end of 1979. Hithout the tax cuts, economic growth would slow markedly toward the end of 1978 and fall to about 

3-1/2 percent in 1979. Unemployment would be unlikely to 

fall below 6 percent and, by the end of 1979, might be 

moving upward. 

This tax program will mean up to one million additional 

jobs for American workers. It should lead to a pattern 

of economic growth which is steady, sustainable, and noninflationary. 
3 

Ensure that the tax preferences available for 

fringe benefits assist rank~and-file workers as 

well as executive officers. 

Eliminate the special bad debt deduction for 

commercial banks, reduce the bad debt deduction 

available to savings and loan associations, and 

remove the tax exemption for credit unions. 

Phase out the tax subsidies for Domestic 

International Sales Corporations (DISCs) and the 

deferral of tax on foreign profits. 

These reforms will make our tax system both fairer 

and simpler. Many of them are targeted at tax preferences and subsidies for activities that do not deserve special 

treatment and that largely benefit those who have no need 

for financial assistance. The average working man and 

woman pay for the loopholes and the special provisions ·in our tax laws -- because when some do not pay their fair 

share, the majority must pay higher taxes to make up the 

difference. 

Low and middle-income workers, struggling to make ends 

meet, are discouraged by tax laws that permit a few individuals to live extravagantly at the expense of government 

tax revenues. The privileged few are being subsidized by 

the rest of the taxpaying public when they routinely deduct 

the cost of country club dues, hunting lodges, elegant meals, 

theater and sports tickets, and night club shows. But the 

average worker's rare "night on the town11 is paid for out of his~ pocket with after-tax dollars. 

Likewise, individuals who pay taxes on nearly every 

penny of earnings are treated unfairly compared to the few 

who are able to 11 shelter 11 their high incomes from taxes. 

Some persons with incomes exceeding $200,000 have little 

or no tax liability, while other high-income individuals 

return to the Federal government nearly 60 cents of every 

dollar received. There is n~.good reason for next-door 

neighbors, in the same economic circumstances, to have 

vastly different tax bills because one has found tax shelters 

and loopholes. 

In addition to the preferences for expense account items 

and tax shelter activities, there are a number of equally 

inappropriate and inefficient corporate tax subsidies. For 

example, there is no justification for the DISC export subsidy under whicn we pay over $1 billion a· year in foregone 

tax revenue (mostly to our largest corporations) to encourage 

our firms to do what they would do anyway -- export to 

profitable foreign markets. Nor can we rationalize proposals 

to reduce business taxes to increase investment at home 

nhile ~he deferral subsidy encourages ~ult:national corporations to invest overseas by letting them pay lower taxes 

on their foreign profits than they pay on money earned in 

the United States. 

I ask Congress to join with me to end these unwarranted 

subsidies and return the revenue to the vast majority of 

our taxpayers who want no more or less than to pay their 

fair share. 
5 

Judged by this standard, the current tax structure 

is seriously defective. Millions of honest and intelligent Americans find themselves confused and frustrated by its 

complexity. The cost of this complexity is enormous in 

terms of hours and dollars spent. 

Accordingly, tax simplification has been a goal of 

this Administration from the outset. The tax return individuals will file between now and April 15 has been simplified 

as a result of the Tax Reduction and Simplification Act 

which I proposed and Congress enacted last year. The short 

form 1040A has been reduced from 25 lines to 15 lines. 

Form 1040 has been restructured so that it can be completed 

more systematically. Tax tables have been revised to reduce 

arithmetic computations. The language of the tax forms 

and the instructions has been made more understandable. 

The simplification efforts that were begun in 1977 

will be continued and expanded in the tax program· I am 

presenting today. The replacement of the existing personal ~xemption anctogeneral tax credits by the $240 personal credit will simplify return preparation for taxpayers and 

enable millions of individuals at or below the poverty level 

to file no tax return. Changes in itemized deductions (which 

will be more than offset by the rate cuts) will increase 

the number of nonitemizers to 84 percent of all taxpayers. Six million Americans will be able to switch to the standard 

deduction and avoid keeping detailed records for tax purposes. The preparation of returns by itemizers will be simplified, 

and the tax program will reduce recordkeeping burdens on 

small businesses. 

Business and Anti-Inflation Tax Reductions 

Our Nation's employment and anti-inflation goals cannot 

be met without a strengthening of private business investment. In recent years, capital spending in the United States 

has been inadequate.· Capacity growth in manufacturing has 

declined from a growth rate of about 4.5 percent during 

the period 1948-1969, to 3.5 percent from 1969-1973, and 

to 3 percent from 1973-1976. Real business fixed investment 

in the third quarter of 1977 was 5 percent below its 1974 

peak. 

In order to encourage needed capital outlays in the 

period ahead, my tax program contains annual net businesS 

tax reductions of approximately $6 billion. The corporate 

tax rate will be reduced on October 1, 1978 from 20 percent 

to 18 percent on the first $25,000 of income and from 

22 percent to 20 percent on the second $25,000 -- this will 

result in a 10 percent reduction in tax liability for most 

small corporations. The tax rate for large corporations 

will be cut from 48 percent to 45 percent on October 1, 

1978 and to 44 percent on January 1, 1980. 

I also recommend several important changes in the 

existing 10 percent investment tax credit: the 10 percent credit should be made permanent; liberalized to cover up 

to 90 percent of tax liability; made fully applicable to 

qualified pollution control facilities; and extended to 

investments in industrial and utility structures (including rehabilitation of existing structures). These changes should 

be particularly beneficial to developing businesses that 

are seeking to expand their productive facilities and should 

help to increase expenditures for the construction of new 

factories. 
7 

(l) Rate Cuts. The proposed rate schedule will range 

from a lowest bracket of 12 percent to a top bracket of 

68 percent, compared with the current 14 to 70 percent range. 

As under current law, the top rate bracket will apply with 

respect to income in excess of $200,000 for joint returns 

and $100,000 for single returns. The entire schedules are 

set forth in Tables ll and 12. This new rate structure 

will, in and of itself, increase the overall progressivity 

of the individual income tax because the cuts are proportionately larger in the low and middle-income brackets. 

( 2) Per Capita Tax Credit. The tax benefits for dependents currently favor the weal~thy over persons with modest 

incomes. A taxpayer is now entitled to a $750 exemption 

for each family member in addition to a general tax credit, 

which is equal to the greater of $35 per family member or 

2 percent of the first $9,000 of taxable income. The net 

effect of the complicated series of exemptions and credits 

is this: a family of four in the 50 percent tax bracket 

enjoys a tax savings of $1,680 for dependents while families 

earning $10,000 save about one-third of that amount. 

I propose that the existing exemption and general 

credits be replaced with a single credit of $240 per family member. Unlike the current structure, the new credit will 

provide the same benefit at all income levels; for a family 

with four members, the per capita credit will be worth $960 

whether that family is middle class or wealthy. The $240 

credit will ensure that most families at or near the poverty 

level will pay no taxes. Also, a single tax credit will 

simplify tax return preparation by eliminating the confusion 

caused by the existing combination of exemptions and alternative credits. 

Changes in Itemized Deductions 

The primary source of complexity in the tax laws for 

many middle-income individuals is itemized deductions. 

Average taxpayers have to maintain burdensome records in 

order to substantiate the deductions and are required to 

decipher complex tax rules to complete their tax returns. 

Restructuring of itemized deductions is essential if the 

tax· laws are to be simplified for typical, middle-class 

individuals and families. 

I am recommending changes in itemized deductions that 

will enable approximately 6 million taxpayers to switch 

to the simple standard deduction. The number of taxpayers who use the standard deduction will be increased from 77 

percent to 84 percent. And the calculation of the deductions 

for itemizers will be simplified greatly. 

The deductions that will be curtailed are ones that 

add complexity and inequity to the tax system without advancing significant objectives of public policy. We will 

have a simpler, more efficient tax system if we eliminate 
_j 

9 

But, as a result of the changing relationship between medical 

costs and income, that standard is no longer satisfied. 

Substantial recordkeeping burdens and administrative problems 

can be eliminated through the proposed simplification of 

the deduction and the redefinition of "extraordinary" in 

the light of current experience among taxpayers. 

PROPOSALS TO CURTAIL INAPPROPRIATE SUBSIDIES, SPECIAL 

PRIVILEGES, INEQUITIES AND ABUSES OF THE TAX SYSTEM 

Entertainment and Other Expenditures for Personal Consumption 

_ One feature of the current tax system that is most 

disheartening to average taxpayers is the favorable tax 

treatment accorded extravagant entertainment expenses that 

are claimed to be business-related. Some individuals are 

able to deduct expenditures that provide personal enjoyment 

with little or no business benefit. And, even where entertainment expenditures may have some relationship to the 

production of income, they provide untaxed personal benefits 

to the participants. More than $2 billion of tax revenue 

is lost every year through these tax preferences. 

For example, one person claimed a deduction of $17,000 

for the cost of entertaining other members of his profession 

at his home, at a country club, at sporting events, at 

restaurants, and at a rental cottage. Another individual 

wrote off the cost of business lunches 338 days of the year 

at an average cost far exceeding $20 for each lunch, But 

there is no deduction in the tax laws for the factory worker's 

ticket to a football game or the secretary's lunch with 

fellow workers. 

These special tax advantages for the privileged few 

undermine confidence in our Nation's tax system. The disparity 

mus-t be eliminated by denying a deduction for expenditures 

to the extent they provide the participants with such untaxed 

personal enjoyment and benefits. 

(l) Theater and Sporting Events,_ No deduction will 

be permitted for purchases of tickets to theater and sporting 

events. Present law, by allowing a deduction for the purchase 

of such tickets, provides a "two for the price of one" bargain 

to some taxpayers. As long as an individual is in the 50 

percent tax bracket or above, he may be able to invite a 

business friend at no cost to himself by having the Federal 

government pay for at least one-half of the total ticket 

costs. The overwhelming majority of our citizens pay for 

their theater and sports tickets out of their own aftertax dollars. No taxpayer should be asked to help subsidize 

someone else's personal entertainment. 

(2) Other Entertainment Expenses, The tax reform 

program will also deny deductibility of any expenses of 

maintaining facilities such as yachts, hunting lodges and 

swimming pools and for fees paid to social, athletic, or 

sporting clubs. During a recent tax year, one small 

corporation deducted $67,000 for yacht expenses incurred 

in entertaining customers and potential customers on cruises 

and fishing trips. Another small company deducts over 

$100,000 a year to maintain hunting and fishing lodges to 

entertain employees of customers. Asking taxpayers to subsidize 

these kinds of activities for a tiny minority of our citizens 

strikes at the fairness and integrity of the tax system. 
ll 

dollars away from profit-seeking businesses and into ventures 

designed only for tax write-offs; legitimate businesses 

suffer competitive disadvantages as a result. 

In the Tax Reform Act of 1976, Congress enacted reforms 

intended to restrict tax shelter abuses. The principal methods used in that legislation were revisions of the 

minimum tax and the adoption of an "at risk" rule to limit 

the deductibility of certain tax shelter losses. 

However, some promoters have now adapted their 

operations to provide shelters in forms that were not 

specifically covered by the 1976 Act. In fact, shelter 

activity in 1977 may have surpassed the level reached in 

1976. Form letters, addressed to "All of Us Who Wish to 

Reduce Our Taxes," boldly promise tax write-offs several 

times larger than the amount invested, and persons are urged 

to pass the message along 11 to anyone you think may have 

interest in tax reduction." Tax shelter experts promote 

their services in large and expensive advertisements in 

the financial sections of our Sunday papers. 

Such flagrant manipulation of the tax laws should not 

be tolerated. I recommend action that will build upon the 

1976 reforms and further reduce tax shelter abuses. 

(1) Strengthening of the Minimum Tax. The minimum 

tax has proved to be one of the most useful devices to limit 

the attractiveness of tax shelter schemes, and it should 

be made still more effective. In its current form, the 

minimum tax is imposed at a rate of 15 percent on the amount 

of certain tax preference items enjoyed by a taxpayer. 

But the total amount of tax preferences can be reduced by 

the greater of $10,000 or one-half of regular tax liability (in the case of individuals) before the minimum tax is 

applied. 

I recommend that the minimum tax for individuals be 

strengthened by eliminating the offset of one-half of 

regular tax liability against preference income. This 

change will make the minimum tax more progressive and a 

more sharply focused deterrent to the use of tax shelters. 

Persons making excessive use of preferences will be taxed 

on their preference income without regard.to regular tax 

liability. On the other hand, those individuals with modest 

preference income will still be totally exempted from the 

minimum tax by the $10,000 preference offset, and the minimum 

tax will not be applied to capital gain realized on the 

sale of a personal residence. Ninety-eight percent of the 

$284 million in revenue raised by this proposal will come 

from taxpayers with incomes exceeding $100,000 and more 

than 77 percent will come from the income class over $200,000. 

(2) Extension of "at risk" Rule. One of the 1976 

reforms that should be toughened is the "at risk" rule. 

That rule denies deductibility for a shelter investor's 

paper losses that exceed his cash investment and indebtedness 

for which he has personal liability. My tax reform plan 

will generally extend the "at risk" provisions to cover 

all activities (except real estate) carried on individually, 

through partnerships, or by corporations controlled by five 

or fewer persons. 

(3) Changes in Real Estate Depreciation. Reform of 

real estate depreciation practices is needed to reduce much 

of the wasteful tax shelter investment that has led to overbuilding of commercial real estate in such forms as shopping 
13 

(6) Tax Audit of Partnerships. Tax shelter partnerships 

are not themselves subject to the tax assessment mechanism 

of the Internal Revenue Service; therefore, each individual 

partner must be audited separately even though the same 

substantive determinations may be involved. I recommend 

that legislation be enacted to permit a partnership to be 

treated as an entity for the purpose of determining tax 

issues. Tax shelters based on illegitimate deductions should 

not be permitted to succeed merely because of the difficulties 

involved in conducting an IRS examination of their activities. 

Termination of Alternative Tax for Ca ital Gains 

he wages o most workers are fully sub ect to tax 

at the rates contained in the published tax tables. But 

persons whose income arises from the sale of assets such 

as stock or land generally receive preferred treatment; 

a deduction for long-term capital gains has .the effect of 

taxing these gains at a rate that is one-half of the rate f~r ordinary income. This preference results in an annual 

revenue loss to the Treasury of $8 billion. 

Taxpayers in the highest income brackets are granted 

an additional tax preference over and above the special capital gains deduction. Individuals above the 50 percent 

tax bracket can take advantage of a 25 percent tax ceiling 

on the first $50,000 of capital gains, a provision known 

as the "alternative tax." The benefits of this provision 

go exclusively to persons with taxable incomes exceeding $52,000 (if filing a joint return) or $38,000 (if filing 

a single return) -- less than one percent of all taxpayers. 

Through the alternative tax, a wealthy investor can 

shield nearly 65 percent of his capital gains from taxation -- a benefit that is grossly inequitable when middleclass investors are taxed on one-half of such gains, and 

most workers are taxed on every cent of their wages and 

salaries. The alternative tax costs the Treasury over $100 

million every year, almost 90 percent of which goes to taxpayers in income classes above $100,000. I propose the repeal of this unfair and complicated tax benefit. 

Fringe Benefits Unavailable to Rank-and-File Workers 

Our tax system generally operates under the principle that employees should be taxed on their compensation no 

matter what form that compensation assumes. A worker who 

receives cash wages that he uses to provide benefits for 

his family should not ordinarily be taxed more heavily than 

the employee who receives those benefits directly from his 

employer. There are now exceptions to this general rule 

for certain types of employee benefits. I urge Congress 

:o set so ~hat ~hese tax prefe~ences benefl~ ~snk-and-fila 

workers as well as the executive officers. 

(1) Non-discrimination Requirement for Health and 

Group Life Plans_. An example of a tax-preferred employee benefit is a health or group life insurance plan. If an 

individual purchases medical insurance, the premiums are 

deductible only within the limits applicable to the medical 

expense deduction. However, if an employer establishes 

a medical insurance program for its employees, the premium 

payments by the employer are deductible while neither the 

premiums nor the benefits are taxable to the employee. 
15 

Taxable Bond Option and Industrial Development Bonds 

Present law exempts from Federal taxation the interest 

on certain bonds issued by state and local governments. 

There are now two general categories of tax~exempt bonds: 

obligations issued for the benefit of the state and local 

government itself, and industrial development bonds issued 

by the government to provide facilities such as pollution 

control equipment, sports facilities, waste disposal facilities, 

industrial parks, and facilities (including hospitals) of 

private, non-profit organizations. Also, there is a "small 

issue" exemption for certain industrial development bonds 

with face amounts that do not exceed $1 million, or $5 million 

where the total cost of capital expenditures on the financed 

facility does not exceed the $5 million amount. 

My tax program preserves the freedom of state and local 

governments to issue tax-exempt bonds. I am recommending peforms that will restrict the tax avoidance opportunities 

available to the wealthy in the tax-exempt market while, 

at the same time, increasing the ability of state and local 

governments to obtain low-cost financing. In particular, 

I propose the following: 

(1) Option for Bonds Benefitting Governmental Units. 

State and local governments will be given the option of 

continuing to issue tax-exempt bonds or issuing fully taxable 

bonds, accompanied by a direct Federal interest subsidy 

to the governmental units. For bonds issued in 1979 and 

1980, the subsidy will be equal to 35 percent of the interest 

cost; the subsidy will rise to 40 percent for bonds issued 

after 1980. The Federal government will exercise no control 

over the purposes for which state and local governments 

use subsidized financing. State and locar governments will 

benefit under the taxable bond o·ption regardless of whether 

they decide to issue taxable or tax-exempt bonds: those 

issuing taxable bonds will benefit directly from the interest 

subsidy, and those continuing to issue tax-exempt bonds 

will benefit because the reduced supply of such bonds will 

allow governments to sell them at lower interest rates. 

(2) Pollution Control Bonds, Bonds for the Development 

of Industrial Parks, and Private Hospital Bonds. The tax 

exemptiOn will be removed for interest on pollution control 

bonds and bonds for the development of industrial parks. Also, the exemption will be removed for bonds issued to 

finance construction of hospital facilities for private, non-profit institutions unless there is a certification 

by the state that a new hospital is needed. These activities 

are essentially for the benefit of private users, and the 

tax exemption for the bonds has the effect of undermining the financing of governmental functions. Moreover, the 

general exempti 0n ~0r hospital bonds encour3.ges excess t •re 

expansion of unneeded hospital facilities and runs counter 

to the Administration's Hospital Cost Containment proposal. 

(3) Small Issue Exemation. The existing "small issue" 

exemptions will be retaine only for economically distressed 

areas; and, with respect to those areas, the $5 million 

exemption ;rill be raised to $10 million. 

254-2\8 0- 78 - 2 
17 

deduction is scheduled for elimination after 1987. I propose that the effective date for repeal be accelerated so that 

beginning in 1979 banks, like other businesses, will base 

their bad debt reserves on their own experience in the 

current and 5 preceding years. 

(2) Mutual Savings Banks and Savings and Loan Associations. 

Mutual savings banks and savings and loan associations are 

also permitted a special bad debt deduction that bears no 

relationship to actual experience. These thrift institutions 

are generally entitled to deduct 40 percent of their net 

income (this percentage is scheduled to apply in 1979) as 

a bad debt reserve as long as a significant portion of their 

deposits is invested in real estate loans. My tax program will reduce the percentage to 30 percent over a 5-year period. 

(3) Credit Unions. Credit unions are tax-exempt. Yet, their powers and functions are defined so broadly that 

the term 11 credi t union11 can include financial institutions 

that are functionally identical to a savings and loan ~ssociation. The tax exemption provides them with an unfair 

financial advantage over their competitors. I propose that 

the percentage of exempt income be phased out over a 4-year 

period, and that credit unions be taxed in the same manner as 

mutual savings banks and savings and loan associations after 1982. 

Domestic International Sales Corporation (DISC) 

Business incentives form an integral part of my tax 

program. I am recommending measures that will encourage American businesses to invest in productive facilities and 

to create jobs. However, adoption of those incentives must 

be accompanied by the elimination of tax preferences that 

have proved to be wasteful. The so-called "DISC" provision 

is a prime examPle. 

In 1971, Congress enacted a special tax program for 

exports. This program permitted tax benefits for exports 

channeled through a company's specially created subsidiary, 

usually a paper organization, known as a domestic international sales corporation (DISC). Artificial pricing rules 

on transactions between the parent company and its DISC 

permit a favorable allocation o( export profits to the DISC, 

and the taxation of one-half of eligible DISC income is deferred 

as long as these profits are invested in export related 

assets. 

DISC has proved to be a very ineffict'ent and wasteful 

export subsidy in the current international monetary system. 

A recent Treasury study indicates that DISC may have contributed 

only $1 to $3 billion to U.S. exports in 1974 -- an increase 

of less than 3 percent in total exports -- at a tax revenue 

cost of $1.2 billion. In the long run, even these increased 

exoorts are 9robably offset by rising imoorts that result 

from the operation of the flexible exchange rate system. 

DISC does nothing for, and may even disadvantage, our import sensitive industries and, our exporters not using the DISC 

provision. Independent !)Xperts believe that DISC may have had~ positive effect or our balance of payments. 

Congress has recognized the wasteful nature of DISC 

and, in 1976, limited its applicability. However, DISC 

continues to cost U.s. taxpayers over ·$1 billion per year, 

with 65 percent of DISC benefits going to corporations with 

more than $250 million in assets. 
19 

I recommend complete repeal of this tax as of October 1, 

1978. This action will reduce the cost of living directly. It will also lower consumer prices indirectly through a 

reduction of the business cost associated with telephone 

services. 

Federal Unemployment Insurance Tax 

I recommend a reduction in the Federal unemployment 

insurance tax to reduce the payroll costs of employers. On January 1, 1978, the unemployment insurance tax rate 

rose from 0.5 percent to 0.1 percent of an employer's taxable wage base. This tax increase was instituted in 

order to replenish general revenue funds that have been 

loaned to the unemployment insurance trust fund during recent 

periods of high unemployment. But the issue of unemployment 

compensation financing requires a thorough reexamination 

to determine the best means of providing future benefits. 

To this end, I will soon appoint the National Commission 

on Unemployment Insurance which the Congress established 

to make this study and to offer recommendations. In the meantime, I am guided by my concerns about inflation. I propose 

that the tax rate be reduced to the 0.5 percent level as 

of January 1, 1979. 

RECOMMENDED BUSINESS INCENTIVES TO FOSTER 

GROWTH OF THE ECONOMY 

Corporate Rate Cut 

I recommend a corporate rate cut that will reduce 

business taxes by $6 billion. Tax relief in this form is 

sizable, easily understood by taxpayers, and applicable 

across the board. 

The corporate tax rate is now 20 percent on the first 

$25,000 of income, 22 percent on the next $25,000, and 48 

percent on corporate income exceeding $50,000. Effective 

October 1, 1978, this ,program will reduce the first two 

rate brackets to 18 and 20 percent, respectively, and the 

rate to 45 percent on xaxable income in excess of $50,000. 

The top rate will be reduced an additional point, to 44 

percent, on January 1, 1980. Small as well as large corporations will benefit from these rate cuts. 

A corporate rate reduction of this magnitude will 

increase capital formation and help to assure a sustained 

economic recovery. In recent years, the level of business 

fixed investment has been unsatisfactory. One of the primary 

causes of this inadequate investment performance has been 

the low rate of return businesses receive on their investments -- after tax liability is taken into consideration. 

The lower tax rates ! r~commend t.~:'..ll ~nha~ce r.he ~ntt~iryatad 

after-tax profits on corporate investment projects and increase cash flow immediately. Businesses will thereby be 

encouraged to increase capital spending and to create jobs for 

American workers. Corporate rate cuts this large are made 

possible by, and depend upon, passage of the revenue-raising 

business tax reforms I have described earlier. 
21 

Revision and Simplification of Regulations Under the Asset 

Depreciation Range System 

The asset depreciation range (ADR) system provides substantial tax- benefits to businesses. Under ADR, generous 

class lives are prescribed for categories of assets, and 

a taxpayer can select useful lives for depreciation purposes 

within a range that extends from 20 percent below to 20 

percent above the designated class life, However, certain 

complexities in the ADR regulations discourage most businesses, 

especially small ones, from electing this depreciation system and impose administrative burdens on those businesses that 

do use ADR. 

I recommend legislation expressly permitting the Treasury Department to issue regulations that will simplify the.ADR 

system. Included among the changes will be a termination 

of the annual reporting requirement. 

Proposals ·Focused on Small Business 

The tax reductions I recommend will provide significant 

benefits for small businesses. For example, a small corporation with annual income of $50,000 will save $1,000 

in taxes due to corporate rate reductions. For that corporation, tax liability will be reduced by nearly 10 percent. 

Moreover, those small businesses conducted in partnership 

or sole proprietorship form will benefit substantially from 

the rate cuts I have proposed for individuals. 

But in addition to providing these general tax incentives, 

I recommend three proposals designed specifically to assist 

small businesses. First,-my tax program will simplify and 

liberalize the rules (Subchapter S) that treat certain small 

corporations as partnerships; the number of permissible shareholders will generally be increased from 10· to 15, 

and the rules governing subchapter S elections will be made 

less stringent. Second, a simplified method of depreciation will be authorized for small businesses that will provide 

tax benefits similar to the current ·ADR system without 

complex recordkeeping requirements. And third, risk-taking will be encouraged by doubling the amount of a small 

corporation's stock (from $500,000 to $1 million) that can 

qualify for special ordinary loss treatment and by eliminating several technical requirements that needlessly restrict 

the ability of small businesses to use this provision. 

CONCLUSION 

Enactment of these recommendations will effect major reform of our tax laws, provide significant tax relief, 

and sustain our economic recov~ry. 

This program will eliminate a number of the inequities 

that undermine the integrity of the tax system. It will make 

preparation of returns simpler and more understandable for 

millions of taxpayers. Prompt passage will strengthen the 

confidence of consumers and businesses in our growing economy 

and lead to the creation of up to one million new jobs for 

workers.who need them. 

I look forward to working in partnership with Congress 

to enact this program of tax reform and tax reduction. 

THE WHITE HOUSE, 

January 20, 1978. 

JIMHY CARTER 
Table 2 

The Effect of Tax Prop~als on Calendar Year Tax Liability 

$240 credit and reduced tax 

Full 

year 

1976 1978 1979 

Calendar Years 

1980 1981 1982 1983 

rates ,,,,,,,,,,,,,,,,,,,,,,, -17,305 -6.067 -23,538 -26,583 -30,272 -34,732 -40,110 

Itemized deduction changes: 

Repeal gasoline tax deductions 

Repeal sales tax deductions •• 

Repeal miscellaneous tax 

deductions ••••••••••••••••• Deduction for·medical and 

casualty expenses ••.•••••• , 

Repeal political contributions 

deduction •••••••••••••••••• Repeal capital gains alternate 

tax •••• , •••••••••••••••••••• ,. 

Individual real estate tax 

582 

1,672 

384 

1,396 

2 

ll3 

shelters • , , , , , , , , •• , , • • • . • • •• 320 

Taxation of unemployment benefits 275 

Tax interest element of annuity 

contracts • • . • • • • • . • • • • • • • • • • • 320 

Minimum tax change ••••••••••••• 229 

Taxable borid option (individual) 255 

Extend 10 percent investment tax 

credit to structures (indiv.), -36 

Limit individual tax credits to 

90 percent of tax before 

credits •••••••••••••••••••••• 38 

Tax qualified retirement plans 

and employee death benefits •• 30 

Corporate real estate shelters 180 

Corporate family farm accounting 30 

Bad debt reserves: 

Commercial banks ••••••••••••• 196 

Mutual savings banks and 

savings and loans •••••••••• 82 

Credit unions ••••.•• , • • • • • • • • 82 

Entertainment expenses ••••••••• 1,125 

Taxable bond option (corporationi) -24 

Phase-out DISC over 3 years •••• 852 

Phase-out deferral of tax on 

foreign source income •••.•••• 523 

Corporate tax rate reduction ••• -5,718 

At risk limitation (corporations) 10 

Increase investment tax credit 

limit to 90 percent •••••••••• ~71 

Extend 10 percent investment tax 

credit to structures 

(corporations) ••••••••••••••• -1,055 

Nondiscrimination rule for 

health and group term life 

plans • • • • • • • • • • • • • • • • • • • . • • • • 29 

Full investment tax credit for 

pollution abatement facilities ~ 

Total individual •••·•••••• -11,725 

Total corporate ••••••··••• -3.849 

Subtotal tax reform ••••• -15,574 

Repeal telephone excise tax 

Reduce unemployment payroll 

tax rate ••• , •••••••••••• 

Total 

Office of the Secretary of the Treasury 

Office of Tax Analysis 

-47 

193 

-1,349 

-1,100 

-142 

-6' 114 

-2,398 

-8,512 

-355 

862 

2,477 

569 

1,909 

2 

140 

61 

212 

12 

284 

197 

-54 

52 

32 

40 

40 

227 

37 

22 

1,476 

-IS 

664 

88 

-5,965 

14 

-882 

-1,389 

32 

-16,783 

-5,704 

-22,487 

-850 

-24,537 

983 

2,824 

649 

2, ll9 

4 

151 

181 

207 

26 

306 

592 

-65 

58 

32 

ll8 

25 

232 

85 

50 

1,633 

-47 

1,228 

280 

-8,516 

10 

-576 

-1,649 

33 

-18,516 

-7,201 

-25' 717 

-900 

-900 

1,121 

3,219 

739 

2,352 

2 

162 

296 

204 

40 

329 

1,080 

-73 

64 

33 

194 

10 

232 

145 

83 

1, 771 

-79. 

1,513 

768 

-9,228 

8 

-ll4 

-1,869 

34 

-20,704 

-6,659 

·27 ,363 

-500 

1,277 

3,670 

843 

2,611 

3 

174 

407 

204 

57 

353 

1,666 

-79 

71 

33 

265 

5 

23 

221 

123 

1,932 

-113 

1,613 

830 

-10,010 

s 

-194 

-2,074 

35 

-=.ill. 

-23,442 

-7 454 

-30,896 

·950 -1,000 

-31,896 

1,456 

4,184 

961 

2,898 

3 

187 

514 

214 

80 

380 

2,218 

-86 

79 

34 

335 

7 

316 

171 

2,107 

·ISO 

1,751 

897 

-10,764 

6 

-205 

-2,268 

36 

---=ill. 

-26,988 

-7, 90S 

-34,893 

-1,050 

-3'5,97iJ 

January 21, 1978 
Table 4 

Income Tax Liabilities: Present Law and Administration Proposal 

(Personal Income Only) 

(1976 Levels of Income) 

Present Law : 

Expanded 

Income : Tax : Percentage : 

Class : Liability :Distribution : 

: 

($000) ($ millions) 

Less than 5 141 

5 - 10 8,227 

10 - 15 18,071 

15 - 20 23,009 

20 - 30 32,778 

30 - 50 22,017 

50 - 100 16,492 

100 - 200 8,084 

200 and over 6,476 

Total $135,293 

Office of the Secretary of the Treasury 

Office of Tax Analysis 

: 

(percent) 

0.1% 

6.1 

13.4 

17.0 

24.2 

16.3 

12.2 

6.0 

4.8 

100.0% 

Administration Pro2osal 

Tax : Percentage 

Liability :Distribution 

: 

($ millions) (percent) 

-251 -0.2% 

6,368 5.2 

15,361 12.4 

20,148 16.3 

29,593 23.9 

20,971 17.0 

16,344 13.2 

8,261 6.7 

6,838 5.5 

$123,633 100.0% 

Note: Details may not add to totals due to rounding. 

Tax Chan~ 

Change as 

Tax : Percent of 

Liability : Present Law 

Tax 

($ millions) (percent) 

-392 •278. 0% 

-1,859 -22.6 

-2,710 -15.0 

-2,861 -12.4 

-3,185 -9.7 

-1,046 -4.8 

-148 -0.9 

177 2.2 

362 5.6 

$-11,660 -8.6% 

January 21, 1978 
Expanded 

income 

class 

Table 6 

Burden Table 

Joint Returns 

No Dependents 

(1976 Levels of Income) 

Average tax 

present law 

Average 

tax under 

proposal 

Average 

tax 

change 

($000) ( ................. . dollars .................. ) (.. 

Less than 10 168 95 

10 - 15 1,104 983 

15 - 20 2,084 1, 906 

20 - 30 3,615 3,308 

30 - 50 6,921 6,535 

50 - 100 17,020 16,647 

100 - 200 40,403 40,956 

200 and over 132,121 137,140 

Office of the Secretary of the Treasury 

Office of Tax Analysis 

-73 

-121 

-178 

-307 

-386 

-373 

553 

5,020 

January 

Percentage 

change 

percent •• ) 

-43.6~ 

-11.0 

-8.5 

-8.5 

-5.6 

-2.2 

1.4 

3.8 

21, 1978 
Table 8 

Burden Table 

Joint Returns 

Two Dependents 

(1976 Levels of Income) 

Expanded Average tax Average Average 

income tax under tax 

class present law 2ro2osal change· 

($000) ( .................. dollars .................. ) ( .. Less than 10 9 -79 -88 

10 - 15 867 589 -278 

15 - 20 1,739 1,461 -278 

20 - 30 3,117 2,780 -337 

30 - 50 6,287 5,979 -308 

50 - 100 16,336 16,088 -248 

100 - 200 40,885 41,087 202 

200 and over 127,666 130,473 2,807 

Office of the Secretary of the Treasury January 

Office of Tax Analysis 

Percentage 

change 

percent . . ) 

-975.6~ 

-32.1 

-16,0 

-10,8 

-4.9 

-1.5 

o.s 

2.2 

21, 1978 
Table 10 

Income Tax and FICA Tax Changes 

Four Person, One-earner Families 

Wage income I income Tax Y I FICA Tax Y 

--

$ 5,000 0 14 

10,000 -312' 28 

15,000 -258 42 

20,000 -270 120 

25,000 -320 298 

30,000 -322 298 

40,000 -218 298 

50,000 -80 298 

100,000 590 298 

I Total Tax 

14 

-284 

-216 

-150 

-22 

-24 

80 

218 

888 

Y Assumes deductible expenses equal to 23 percent of income under present law and 20 percent 

under the proposal. 

Y Change in FICA tax calculated assuming present law rate and base for 1979 (6.13 percent and 

$22,900), employees' share only and assuming prior law rate for 1977 (5.85 percent) and prior 

law estimated base for 1979 ($18,900). 
Table 12 

Individual Tax Rate Schedules For 

Single Returns 

Present Law Tax Proposal 

:Tax At :Tax Rate Tax At :Tax Rate 

Taxable Income :Low End :on Income Low End :on Income 

Bracket l/ :of Bracket :In Bracket: of Bracket :In Bracket 

0 - 500 

500 - 1,000 

1,000 - 1,500 

1,500 - 2,000 

2,000 - 3,000 

3,000 - 4,000 

4,000 - 6,000 

6,000 - 8,000 

8,000 -10,000 

10,000 -12,QOO 

12,000 -14,000 

14 '000 -16 • 000 

16,000 -18,000 

18,000 -20,000 

20,000 -22,000 

22,000 -24,000 

24,000 -26,000 

26,000 -28,000 

28,000 -32,000 

32,000 -36,000 

36,000 -38,000 

38,000 -40,000 

40,000 -44,000 

44,000 -48,000 

48,000 -50,000 

50,000 -52,000 

52,000 -54,000 

54,000 -60,000 

60,000 -62,000 

62,000 -64,000 

64,000 -70,000 

70,000 -76,000 

76,000 -80,000 

80,000 -88,000 

88,000 -90,000 

90' 000 -100,000 

100,000 and over 

0 

70 

145 

225 

310 

500 

690 

1,110 

1,590 

2,090 

2,630 

3,210 

3,830 

4,510 

5,230 

5,990 

6,790 

7,590 

8,490 

10,290 

12,290 

13,290 

14,390 

16,590 

18,990 

20,190 

21,430 

22,670 

26,390 

27,670 

28' 950 

32,790 

36' 750 

39,390 

44,830 

46,190 

53,090 

14 

15 

16 

17 

19 

19 

21 

24 

25 

27 

29 

31 

34 

36 

38 

40 

40 

45 

45 

50 

50 

55 

55 

60 

60 

62 

62 

62 

64 

64 

64 

66 

66 

68 

68 

69 

70 

0 

60 

125 

200 

275 

455 

645 

1,045 

1,445 

1,885 

2,345 

2,845 

3,345 

3, 925 

4,505 

5' 165 

5,825 

6,585 

7,345 

8,985 

10,825 

11,825 

12,825 

14,865 

17,145 

18,305 

19,465 

20,665 

24,265 

25,465 

26' 725 

30,505 

34,285 

36.925 

42,205 

43 ,'5 25 

50,225 

12 

13 

15 

15 

18 

19 

20 

20 

22 

23 

25 

25 

29 

29 

33 

33 

38 

38 

41 

46 

50 

50 

51 

57 

58 

58 

60 

60 

60 

63 

63 

63 

66-

66 

66 

67 

68 

Office of the Secretary of the Treasury January 21, 1978 

Office of Tax Analysis 1/ The zero bracket is not shown in this table. TQ include the zero - bracket, increase all taxable incomes shown by ~2,200. 
Embargoed for Release Fact Sheet 1 

January 211 1978 

at 12:00 noon, EST 

Saturday, January 21, 1978 

FACT SHEET 

Overview of The Tax Reduction and Reform Act of 1978 

The President's 

Proposal: 

Objectives 

Tax Cuts 

A major tax cut for individuals and 

business is combined with a major 

package of tax reforms. 

The proposal will: 

o reduce taxes for most Americans, 

even after the recently legislated 

increase in social security taxes; 

o help sustain the economic expansion 

and move the economy toward full 

employment; 

o provide incentives for increased 

investment in productive fac~lities 

and for ~ncreased efficiency in the 

American economy; 

0 increase tax fairness by making the 

taxes actually paid more progressive 

and by reducing differences in 

taxes levied on taxpayers with like 

incomes; 

0 make the tax system simpler for 

individuals and business by making 

it easier for the average person to 

complete his or her tax return, 

making tax rules more understandable 

and removing special provisions. 

For individuals, the President proposes 

cuts in individual tax rates and the 

ado tion of a $240 er ca ita tax credit, ~n place o the ex~st~ng 7 0 exempt~on 

and general tax credit, that will reduce 

taxes by $23.5 billion in calendar year 

1979. 
- 3 -

The investment credit changes will 

generally be effective as of January 1, 

1978. The rate cuts will be effective 

beginning October 1, 1978. The tax 

reform proposals will generally take 

effect in 1979 and will not affect 1978 

tax liabilities. 

oOo 
The Effect of Tax Proposals on Calendar Year Tax Liability 

$240 credit and reduced tax 

Full 

year 

1976 1978 

Calendar Yeare 

1979 1980 1981 1982 1983 

rates ....................... ·17,30S -6.,067 ·23,S38 ·26,S83 ·30,272 ·34,732 -40,110 

Itemized deduction changes: 

Repeal gasoline tax deductions 

Repeal sales tax deductions •• 

Repeal miscellaneous tax 

deductions , • , • , , , • , • , , , , , , , 

Deduction for medical and 

582 

1,672 

384 

casualty expenses,,,,,,,,,, 1,396 

Repeal polifical contributions 

deduction •••••••••••••••••• 2 

Repeal capital gains alternate 

tax , , , , . , , , , •• , • , , • , , • , , • , , , • 113 

Individual real estate tax 

she 1 ters , • , , , • , •• , , o , • , , , , , , • 320 

Taxation of unemployment benefits 27.S 

Tax interest element of annuity 

contracts , , o.,.,,., o,, o,.,.,. 

Minimum tax change oo••••••••••• 

Taxable borid option (individual) 

Extend 10 percent investment tax 

credit to structures (indiv,), 

Limit individual tax credits to 

90 percent of tax before 

credits , , • , • , , • , o,,.,.,, •• , .• 

Tax qualified retirement plane 

and employee death benefits , , 

Corporate real estate shelters , 

Corporate family farm accounting 

Bad debt reserves: 

320 

229 

zss 

-36 

38 

30 

180 

30 

Cor!lnercial banks • , • , • , , • , , , , , 196 

Hutual savings banks and 

savings and loans o,.,,,,,,, 82 

Credit unions • o,,. o,,,.,,,,,, 82 

Entertainment expenses , • , o,,,,, 1,125 

Taxable bond option (corporatiom) -24 

Phase-out DISC over 3 years ,,,, 852 

PhaseHout deferral of tax on 

foreign source income , o,,,, ,, 523 

Corporate tax rate reduction,,, -5,718 

At risk limitation (corporations) 10 

Increase investment tax credit 

limit to 90 percent •••••••••• ~11 

F.xtend 10 percent investment tax 

credit to structures 

(corporations) •o••o•••••••••• -l,OSS 

Nondiscrimlnatton rule for 

health and group ter~ life 

plans •• , • o •• ,, •• o.,.,,, •• ,.,. 29 

Full investment tax credit for 

pollution abatement facilities ____:.2Q 

Total individual •o•••••••• -11,725 

Total corporate , •• , o,,,, ,, .::1J~f,g 

Subtotal tax reform,,,,, -15 1 574 

Repeal telephone excise tax 

Reduce unemployment payroll 

tax rate o., •• ,,,,.,,., •• 

Total ••••• o ••••••••••• -15,574 

Office of the Secretary of the Treasury 

Office of Tax Analysis 

-47 

193 

-1,349 

-1,100 

-142 

-6,114 

-2,398 

-8,512 

862 

2,477 

569 

1,909 

2 

140 

61 

212 

12 

284 

197 

·S4 

52 

32 

40 

40 

227 

37 

22 

1,476 

·1S 

664 

88 

-5,965 

14 

-882 

-1,389 

-16,783 

:1.704 

-22,487 

-355 -1,200 

-850 

-8,867 -24,T37 

983 

2,824 

649 

2,119 

4 

1Sl 

181 

207 

26 

306 

592 

-65 

S8 

32 

118 

25 

232 

85 

50 

1,633 

-47 

1,228 

280 

-8,516 

10 

-576 

-1,649 

33 

-=:lQI 

-18,516 

.:LJ01 

-25,717 

-900 

-900 

1,121 

3,219 

739 

2,352 

2 

162 

296 

204 

40 

329 

1,080 

-73 

64 

33 

194 

10 

232 

145 

83 

1,771 

-79. 

1,513 

768 

-9,228 

8 

-114 

-1,869 

34 

--=.ill 

-20,704 

:!o..._6_~ 

-27,363 

-500 

1,277 

3,670 

843 

2,611 

3 

174 

407 

204 

57 

353 

1,666 

-79 

71 

33 

265 

s 

23 

221 

123 

1,932 

-113 

1,613 

830 

-10,010 

5 

-194 

-2,074 

.. 23 ,1142 

::__?J.!!_~ 

-30,896 

-950 -1,000 

1,456 

4,184 

961 

2,898 

3 

187 

S14 

214 

80 

380 

2,218 

-86 

79 

34 

335 

7 

316 

171 e 

2,107 

-150 

1,751 

897 

-10,764 

6 

-20S 

-2,268 

36 

-11•4 

-26,988 

.::}_.205 

-34,893 
Embargoed for Release 

at 12:00 noon, EST 

Saturday, January 21, 1978 

Fact Sheet 2 

January 21, 1978 

FACT SHEET 

Effects of the Tax Program on the Economy 

This has been summarized by the President's Tax 

Message of January 21, 1978: 

"These tax reductions are a central part of the 

Administration's overall economic strategy, which will 

rely principally upon growth in the private sector to 

create the new jobs we need to achieve our high-employment 

objective. The tax reductions will more than offset 

the recent increase in social security taxes and will 

provide the consumer purchasing power and business investment strength we need to keep our economy growing 

strongly and unemployment moving down. " 

"Together with the programs that I will outline 

in my Budget Message, these tax cuts should assure that 

our economy will grow at a 4-1/2 to 5 percent pace through 

1979, with unemployment declining to between 5-1/2 and 

6 percent by the end of 1979. Without the tax cuts, 

economic growth would slow markedly toward the end of 

1978 and fall to about 3-1/2 percent in 1979. Unemployment would be unlikely to fall below 6 percent and, by 

the end of 1979, might be moving up\vard. " 

"This tax program will 

jobs for American workers. 

of economic growth which is 

noninflationary.'' 

mean up to 1,000,000 additional 

It should lead to a pattern 

steady, sustainable, and 

oOo 
Embargoed for Release Fact Sheet 3 

at 12:00 noon, EST 

Saturday, January 21, 1978 January 21, 1978 

FACT SHEET 

Effect on Total Tax Burden 

The President's 

Proposal: 

Effect of 

Inflation: 

Relation to 

Other Taxes: 

Social Security 

The percentage of total personal income 

that Americans nm~ pay in Federal 

individual income taxes is 10.7 percent 

and rising. With the President's tax 

program, the burden will be 10.3 percent 

in 1978 and 10.5 in 1979. In contrast, 

without the program, the share of their 

personal income that Americans will pay 

in Federal individual income taxes will 

rise from its current level of 10.7 

percent to 11.4 percent in 1979. 

As personal income rises because of 

inflation, the proportion of total 

income paid in income taxes also increases. 

This is due to the progressive tax rate 

structure which imposes higher tax rates 

as taxpayers move into successively 

higher tax brackets. This structure is 

based on the sound principle that taxation 

should be based on ability to pay. But 

when an increase in income reflects only 

inflation, a taxpayer's ability to pay 

is not actually increased. Tax increases 

in these circumstances reduce after-tax 

income adjusted for inflation. 

Historically, when inflation has increased 

the income tax burden of Americans, 

taxes have been reduced. It is now time 

for another tax reduction to offset the 

tax effects of inflation. 

The need for increased financing for 

the nation's social security system 

will mean increased social security 

payroll taxes for most workers. A large 

part of the increased social security 

funding results from increasing the 

amount of wages and salary on \~hich 

social security taxes are paid by workers. 

As a result, the largest increases in 

social security taxes, relative to 

income, \dll occur at incomes between 

$20,000 and $25,000. 
Individual Income Taxes as a Percent of 

Personal Income, 1960-1982 

(Arrows Identify Years of Major Effect of Significant Tax Legislation) 

Percent 

14-------------------------------------------------

Projected Assuming 

No Tax Program 

• 

12 Revenue Act \ "-,./.- A • • of 1964 ~ .!'• ••• • 

Revenue Act 

of 1971 

10--- I 

Tax Reform 

Act of 1969 

• •• •• • " .. ... fliP.. , ...... . 

\ 

Projected 

Assuming 

Tax Program 

8-------------------------------+---------------

Tax Reduction 

Act of 1975 

6 I I I I I I I I I I I I I I I I I I I I I I 

1960 '65 '70 '75 '81 

Year 
Embargoed for Release Fact Sheet 4 

at 12:00 noon, EST 

Saturday, January 21, 1978 January 21, 1978 

FACT SHEET 

Effect on the Distribution of Taxes 

The President's 

Proposal: 

Tax Reductions 

by Income Level: 

254·218 0- 78 - 4. 

These tax reform proposals have been 

structured to give the greatest percentage tax cuts to the lowest income 

classes, the next greatest to middle 

income classes, and the smallest cuts to 

upper income classes. Also, several 

provisions of this program are designed 

to equalize the tax treatment of taxpayers with equal ability to pay. 

The American tax system has always been 

designed so that higher income individuals pay a larger share of their 

income in tax than individuals with 

lower incomes. The specific proposals 

that would reinforce the progressive 

nature of the tax system are (1) replacement of the personal exemption with a 

per capita credit, (2) changes in the 

tax rates, and (3) limitations on 

deductions. 

The attached table shows by income 

classes the total taxes paid under 

present law, the total taxes under these 

reform proposals, and the net change. 

For example, taxpayers in the $5,000 to 

$10,000 income class paid $8.2 billion 

under present law. However, under these 

proposals they will pay $6.4 billion, a 

decrease of 23 percent. Taxpayers in 

the $30,000 to $50,000 income class 

receive a tax cut of only 5 percent. 

Thus, the tax reductions as a percent of 

tax liabilitiee under present law decline 

as income rises. In the $100,000 to 

$200,000 and $200,000 or more classes, 

there is a tax increase resulting from 

these proposals for those taxpayers who 

take advantage of various tax preferences 

being eliminated or curtailed. 
Expanded Income and Tax Liability Under Present Law 

And Tax Proposals (Personal Only) 

(1976 Levels of Income) 

~~ millions~ 

Expanded : Number of : : Present Law 

Income : Returns : Expanded 

Class : ~thousands~: Income 

($000) 

Less than 5 25,474 57,557 

5 - 10 20,109 149,590 

10 - 15 16,106 201,036 

15 - 20 11,824 205,086 

20 - 30 9,907 237,041 

30 - 50 3,347 124,836 

50 - 100 985 67,484 

100 - 200 198 27,371 

200 and over 49 21.573 

Total 87,998 1,091,573 

Office of the Secretary of the Treasury 

~ffiee of Tax Analysis 

: 'lax 

: Liabilit:z: 

141 

8,227 

18,071 

23,009 

32,778 

22,017 

16,492 

8,084 

6 476 

135,293 

Note: Deti'i1s may cnot add to tot;als due ~to roundin_g. 

: Effective 

: Tax Rate 

0.2% 

5.5% 

9. 0"1. 

11.2% 

13.8% 

17.6'7. 

24. 47. 

29 .57. 

30. 07. 

12.47. 

: 

: 

: 

Administration Proeosal 

Tax : Effective 

Liabilit:z: : Tax Rate 

-251 -0.4% 

6,368 4.3% 

15,361 7.6% 

20,148 9.8% 

29,593 12.5% 

20,971 16. 8'7. 

16,344 24.2% 

8,261 30.2% 

6,838 31.7% 

123,633 11.3% 

January 21, 1978 
Tax Program: 

Effective Individual Tax Rates -- Taxes as a Percent of 

Expanded Income. 1976 level of Income. 

Effective tax rate (percent)----------------

30 

20 

10 

0 

01977 Law 

b/?l Proposed Law ~it~ ao.o§ 

24.4 24 2 II~~~1 ~1~1~: 

31.7 

11.2 

,!:.Q. r-'-' 9.8 

···= 

~ ~ I ~~ ... ~ 

0.2 !i!I!i!i! lilllll:!~ll ... 

-0.4 

~~~()() r:,'i:> ,_~­ '0 -:.1 

0\$ 0° 0\$ 0° 0\$0° 0\$ 0° 0\$0° 0\$ 0° 0\$0° 0\$ 0 

Cl C'l Cl Cl Cl Cl Cl Cl Cl Cl Cl Cl Cl Cl Cl ~p ~- o- o- ~- ~r,O' o- !:)- !:)' !:)- !:)- 0- 0- 0- 0- 1'8 

l'i:si 5sl" 5sl" 5sl" 5sl" "si., 5sl <V 5sl0 5sl0 ~0 5sl0 "a "a :It a :Ita ~o 5sl 5sl 5sl 5sl 1'8 

Expanded income class 
Embargoed for Release Fact Sheet 5 

at 12:00 noon, EST 

Saturday, January 21, 1978 January 21, 1978 

FACT SHEET 

Effect on Individual Tax Burdens 

Tables: 

Chart: 

Assumptions: 

Attached are 6 tables shm1ing tax burdens 

for 8 income levels for single returns and 

joint returns with up to 4 dependents. The 

burdens shown are the average tax per return 

under present law, the average tax under the 

President's proposal, and the average change 

in tax liability in dollars and as a percent 

of present law liability. 

The attached chart displays the data from 

the burden table for joint returns with 2 

dependents. 

The distribution of tax burdens under current 

and proposed law have been estimated on the 

Treasury Tax Model, which is based on a 

random sample of tax returns. The data base 

has been aged to the 1976 level of income. 

The estimates for each income class are, 

therefore, based on the average incomes, 

deductions, and credits for all taxpayers in 

that income class. Since the tables and chart 

are based on sampling techniques they should 

not be regarded as accurate in detail but 

rather as representing the general order of 

magnitude and relationships among the changes 

contained in the President's proposal. 

oOo 
Expanded 

income 

class 

($000) 

Less than 10 

10 - 15 

15 - 20 

20 - 30 

30 - 50 

50 - 100 

100 - 200 

200 and over 

Office of the 

Burden Table 

Joint Returns 

No Dependents 

(1976 Levels of Income) 

Average tax Average Average 

present law tax under tax 

.J'.!O~osal change 

(. 0 ••••••••• 0 0 • 0 ••• dollars .................. ) ( .. 

168 95 -73 

1,104 983 -121 

2,084 1,906 -178 

3,615 3,308 -307 

6,921 6,535 -386 

17,020 16,647 -373 

40,403 40,956 553 

132,121 137,140 5,020 

Secretary of the Treasury January 

Office of Tax Analysis 

Percentage 

change 

percent .. ) 

-!13. 6'7. 

-11.0 

-8.5 

-8,5 

-5.6 

-2.2 

1.4 

3.8 

10, 1978 
Expanded 

income 

class 

($000) 

Less than 10 

10 - 15 

15 - 20 

20 - 30 

30 - 50 

so - 100 

100 - 200 

200 and over 

Burden Table 

Joint Returns 

Two Dependents 

(1976 Levels of Income) 

Average tax 

present law 

( o o o o o o I o o 0 o o o o 0 o o o 

9 

867 

1,739 

3,117 

6,287 

16,336 

40,885 

127,666 

Average Average 

tax under tax 

roposal chan e 

dollars , , ................ ) 

-79 -88 

589 -278 

1,461 -278 

2,780 -337 

5,979 -308 

16,088 -248 

'•1,087 202 

130,1•73 2,807 

Percentage 

change 

( •• percent •• ) 

-975.61. 

-32.1 

-16.0 

-10.8 ,, 

,·,, -4.9 

-1.5 !{I 

o.s 

2.2 

Office of the Secretary of the Treasury 

Office of Tax Analysis 

January 10, 1978 
Expanded 

income 

class 

($000) 

Less than 10 

10 - 15 

15 - 20 

20 - 30 

30 - 50 

50 - 100 

100 - 200 

200 and over 

Burden Table 

Joint Returns 

Four Dependents 

(1976 Levels of Income) 

Average tax 

present law 

Average Average 

tax under tax Percentage change proposal chanz~e--~--------------

( .............. 0 •••• dollars , , ................ ) ( .. percent •• ) 

-64 -70 -6 -9.9'1. 

526 177) -349 -66.3 

1,375 985 -390 ~28,3 

2,590 2,248 -342 -n.2 

5,720 5,521 -199 -3,5 

, I 

16,529 16,593 64 0.4 

42,090 42,707 617 1,5 

127,755 131,298 3,543 2~8 

Office of the Secretary of the Treasury 

Office of Tax Analysis 

January 10, 1978 
Embargoed for Release Fact Sheet SA 

at 12:00 noon, EST 

Saturday, January 21, 1978 January 21, 1978 

Department of the Treasury 

FACT SHEET 

Effect on Individual Tax Burdens by Specific Income Level 

Tables: 

Assumptions: 

Attached are 6 tables showing tax burdens 

for specific levels of income for single 

returns and joint returns with up to 4 

dependents. In contrast, burden tables 

attached to Fact Sheet 5 show tax burdens for 

income classes based on expanded income. 

Expanded 1ncome is equal to adJusted gross 

income plus preference income included in the 

minimum tax less investment interest to the 

extent of investment income. It more nearly 

approximates total economic income. 

The specific income burden tables assume that 

all income is fully taxable, as it would be 

if it were all derived from, say, wages and 

salaries. Itemized deductions are assumed to 

total 23 percent of income under present law 

and 20 percent under the President's proposal. 

Taxpayers are assumed to begin itemizing 

their deductions at the income level at which 

they benefit from doing so. At lower income 

levels taxes are calculated on the basis of 

the zero tax bracket amount -- usually called 

the standard deduction. 

Not included in these tables are the effects 

of a number of the tax reform proposals which 

would affect income that currently is not 

fully taxed, such as the proposals restricting 

tax shelters and the elimination of the 

alternate tax on long-term capital gains. 

The examples are more representative of the 

tax burdens that would apply to lower and 

middle income taxpayers than of the taxes 

paid by those with large incomes. As income 

rises, taxpayers are more likely to have tax 

preferences that may be reduced by the 

President's proposal. The amounts of itemized 

deductions also tend to vary more widely at 

higher income levels. 

oOo 
Present 

Income law 

tax 1/ 

Burden Table 

Joint Returns 

No Dependents 

Tax 

under 

proposal 2/ 

Tax Percentage 

change change 

(. . • . . • . . • . • . • . . • • . . . • • . • • . . • . dollars .............................. ) ( ... percent 

5,000 0 

10,000 761 

15 '000 1,651 

20,000 2,555 

25,000 3,570 

30,000 4, 712 

40,000 7,427 

Office of the Secretary of the Treasury 

Office of Tax Analysis 

0 

614 

1,552 

2,390 

3,310 

4,390 

7' 110 

!/ Assumes deductible expenses equal to 23 percent 

of income under present law. 

11 Assumes deductible expenses equal to 20 percent 

of income under proposed law. 

254-218 0-78-5 

0 0.0 

-147 -19.3 

-99 -6.0 

-165 -6.5 

-260 -7.3 

-322 -6.8 

-317 -4.3 

January 20, 1978 

... ) 
Present 

Income law 

tax 1/ 

Burden Table 

Joint Returns 

Two Dependents 

Tax 

under 

proposal 2/ 

Tax Percentage 

change change 

(. . • . • • . • . . • • . . . • . • . . • . . • . . • . . dollars .............................. ) ( ... percent 

5,000 -300 

10,000 446 

15 '000 1,330 

20,000 2,180 

25,000 3,150 

30,000 4,232 

40,000 6,848 

Office of the Secretary of the Treasury 

Office of Tax Analysis 

-300 

134 

1,072 

1,910 

2,830 

3,910 

6,630 

11 Assumes deductible expenses equal to 23 percent 

of income under present la'iY. 

11 Assumes deductible expenses equal to 20 percent 

of income unPer proposed law. 

0 o.o 

-312 -70.0 

-258 -19.4 

-270 -12.4 

-320 -10.2 

-322 -7.6 

-218 -3.2 

January 20, 1978 

... ) 
Present 

Income law 

tax 1/ 

Burden Table 

Joint Returns 

Four Dependents 

Tax 

under 

proposal 2/ 

Tax 

change 

Percentage 

change 

( ............................ . dollars ••••.••. , •••.••.•..•.••.•..•.• ) ( .• , percent ••• ) 

5,000 -300 

10,000 128 

15,000 989 

20,000 1,808 

25,000 2,737 

30,000 3, 778 

40,000 6,278 

Office of the Secretary of the Treasury 

Office of Tax Analysis 

-300 

0 

592 

1,430 

2,350 

3,430 

6,150 

!/ Assumes deductible expenses equal to 23 percent 

of income under present law. 

~/ Assumes deductible expenses equal to 20 percent 

of income under proposed law. 

0 o.o 

-128 -100.0 

-397 -40.1 

-378 -20.9 

-387 -14.1 

-348 -9.2 

-128 -2.0 

January 20, 1978 
Embargoed for Release Fact Sheet 6 

at 12:00 noon, EST 

Saturday, January 21, 1978 

January 21, 1978 

FACT SHEET 

Individual Tax Rates 

The President's 

Proposal: 

Present Law: 

Reasons for the 

Recommendation: 

The marginal tax rates for all taxpayers will be reduced to a range of 12 

percent to 68 percent for 1979 and later 

years. 

A change in the rate schedules also will 

occur 1n 1978. This will allow a tax 

reduction for 1978 of approximately onefourth the 1979 reduction. The 1978 

reduction will be reflected in withholding beginning October 1. 

Marginal tax rates range from 14 percent 

to 70 percent. 

The reduction of the tax rates represents 

the major reduction in taxes in the tax 

reform package. The lower tax rates in 

concert with the proposed $240 per capita 

tax credit assures the progressivity of · 

the tax system by providing the largest 

percentage reduction in tax at the 

lowest income levels, and the least at 

upper income levels. The reduced amount 

of income taxes collected will help 

stimulate the economy, more than offsetting any dampening effect of the 

increase in social security taxes. 

Other parts of the tax package propose 

changes designed to simplify the calculations of taxes for most taxpayers. 

These changes by themselves would increase 

taxes. The proposed rate reductions 

take these changes into account, and for 

almost all taxpayers will provide net 

decreases in taxes. 
Individual Tax Rate Schedules For 

Joint Returns 

Present Law Tax 

:Tax At :Tax Rate :Tax At 

Taxable Income :Low End :on Income : Lm~ End 

Proeosal 

:Tax Rate 

:on Income 

Bracket lf :of Bracket :In Bracket :of Bracket :In Bracket 

0 - 500 0 147, 0 127, 

500 - 1,000 70 14 60 12 

1,000 - 2,000 140 15 120 14 

2,000 - 3,000 290 16 260 16 

3,000 - 4,000 450 17 420 17 

4,000 - 8,000 620 19 590 18 

8,000 - 12,000 1,380 22 1,310 19 

12,000 - 16,000 2,260 25 2,070 20 

16,000 - 20,000 3,260 28 2,870 23 

20,000 - 24,000 4,380 32 3,790 27 

24,000 - 28,000 5,660 36 4,870 32 

28,000 - 32,000 7,100 39 6,150 36 

32,000 - 36,000 8,660 42 7,590 39 

36,000 - 40,000 10,340 45 9,150 42 

40,000 - 44,000 12,140 48 10,830 44 

44,000 - 48,000 14,060 50 12,590 48 

48,000 - 52,000 16,060 50 14,510 48 

52,000 - 54,000 18,060 53 16,430 51 

54,000 - 62,000 19,120 53 17,450 51 

62,000 - 64,000 23,360 53 21,530 51 

64,000 - 76,000 24,420 55 22,550 54 

76,000 - 88,000 31,020 58 29,030 57 

88,000 - 90,000 37,980 60 35,870 57 

90,000 -100,000 39,180 60 37,010 60 

100,000 -110.000 45,180 62 43,010 60 

110,000 -120,000 51,380 62 49.010 62 

120,000 -130,000 57,580 64 55,210 62 

130,000 -140,000 63,980 64 61,410 64 

140,000 -150,000 70,380 66 67,810 64 

150,000 -160,000 76,980 66 74,210 65 

160,000 -175,000 83,580 68 80.710 65 

175,000 -180,000 98;780 68 90,460 66 

180,000 -200,000 97,180 69 93,760 66 

200,000 and over 110.980 70 106,960 68 

Office of the Secretary of the Treasury January 17, 1978 

Office of Tax Analysis 

ll The zero bracket is not shown in this table, To include the 

zero bracket, increase all taxable incomes shown by $3,200, 
Embargoed for Release Fact Sheet 7 

at 12:00 noon, EST 

Saturday, January 21, 1978 January 21, 1978 

FACT SHEET 

Per Capita Tax Credit 

The President's 

Proposal: 

Present Law: 

Reasons for the 

Recommendation: 

A personal tax credit of $240 will be 

allowed for each taxpayer or dependent. 

An additional $240 credit will be 

allowed for taxpayers who are aged or 

blind. 

A personal exemption of $750 is allowed 

for the taxpayer and each dependent. An 

additional exemption is allowed for 

taxpayers who are aged or blind. Also, 

taxpayers are permitted a general tax 

credit of $35 per exemption, or 2 percent 

of taxable income up to a credit of 

$180, whichever is greater. (The 

personal exemption and general tax 

credit will be replaced by the proposed 

personal tax credit.) 

A personal credit rather than a deduction 

for each exemption will reduce taxes by 

the same dollar amount for each family 

member regardless of a taxpayer's income. 

The proposed credit and the rate schedule 

are designed to increase the progressivity 

of the tax system and to increase the 

level of income at 1~hich individuals 

first begin to pay taxes on their earnings. 

The personal tax credit is an important 

step toward simplifying the tax system. 

Having both a credit which may be 

calculated in two different ways and an 

exemption is confusing and the source of 

many taxpayer errors. Assuming that 

either the existing exemption or the 

general credit should be eliminated, a 

credit is more consistent with other 

government programs. For example, per 

capita rebates of energy taxes can 

readily be added to the credit. 
Embargoed for Release Fact Sheet 8 

at 12:00 noon, EST 

Saturday, January 21, 1978 January 21, 1978 

FACT SHEET 

Deductions for State and Local Taxes 

The President's 

Proposal: 

Present Law: 

Reasons for the 

Recommendation: 

The only state and local taxes that 

may be itemized as a personal deduction 

will be income and real property taxes. 

In addition to state and local income 

and real property taxes, deductions are 

currently allowed for sales, personal 

property and gasoline taxes, if a 

taxpayer itemizes personal deductions. 

Eliminating sales, personal property 

and gasoline taxes as itemized deductions 

will simplify preparation of tax returns 

and reduce both record-keeping burdens 

and errors that result in costly and 

time-consuming audits of tax returns. 

More taxpayers would take the standard 

deduction if there were fewer deductions 

to itemize. The proposal will not 

adversely affect the sales tax as a tool 

of state and local governments, since 

over three quarters of all taxpayers do 

not claim the deduction, and the tax 

benefit of the average deduction for 

those who do is not significant. The 

deduction for gasoline taxes runs counter 

to the country's energy goals. Both 

deductions complicate tax collection by 

generating substantial numbers of 

errors. There is no direct relationship 

between the amount of the deduction and 

the amount of taxes actually paid since 

most sales and gasoline tax deductions 

are determined from tables. Much the 

same result can be obtained by lowering 

tax rates and eliminating these deductions. 
Fact Sheet 9 

Embargoed for Release 

at 12:00 noon, EST 

Saturday, January 21, 1978 January 21, 1978 

FACT SHEET 

Political Contributions 

The President's 

Proposal: 

Present Law: 

Reasons for the 

Recommendation: 

Effect on 

Taxpayers: 

The deduction for political contributions will be repealed, but the 

alternative credit will be retained. 

Either an itemized deduction of up to 

$200 or a credit of half of the first 

$100 is allowable for political contributions on a joint return. 

These provisions provide a windfall for 

those who would contribute anyway. The 

deduction provides a larger benefit to 

high tax bracket contributors than to 

those in low tax brackets. The credit 

treats taxpayers at all income levels 

uniformly. Having the alternative of a 

credit or a deduction complicates tax 

returns and causes confusion. 

Higher income taxpayers will obtain 

slightly less tax benefit from the first 

$200 of their political contributions. 

Effect on Revenue: Tax liabilities will increase by less 

than $5 million per year. 

oOo 
Embargoed for Release Fact Sheet 10 

at 12:00 noon, EST 

Saturday, January 21, l9-7S,_ January 21., 1978 

FACT SHEET 

Medical and Casualty Deductions 

The President's 

Proposal: 

Present Law: 

Reasons for the 

Reconunendation: 

Medical expenses and casualty losses 

will be deductible only to the extent 

that, when combined, they exceed 10 

percent of adjusted gross income. 

Health insurance premiums and drug 

expenses will be treated like all other 

medical expenses. In addition, medical 

expenses will include only expenditures 

customarily made primarily for medical 

purposes. 

If a taxpayer itemizes his or her personal 

deductions, 50 percent of the first $300 

of health insurance premiums is fully 

deductible. Also deductible are medical 

expenses over 3 percent of adjusted 

gross income. Medicines and drugs over 

1 percent of adjusted gross income and 

the remaining portion of health insurance 

premiums may be counted toward the 3 

percent floor. 

Uninsured casualty losses in excess of 

$100 are also deductible. 

This proposal will make the tax system 

simpler and fairer. Present la\q requires 

burdensome record-keeping, and complex 

regulations govern the specific items 

that are deductible. Both the medical 

and casualty loss deductions were 

originally intended to provide relief 

for extraordinary expenses which reduced 

the taxpayer's ability to pay. 

The changing relationship between medical 

costs and income has resulted in many 

taxpayers deducting normal expenses. 

Similarly, many of the casualty losses 

under present law do not involve extraordinary 

losses which impair the taxpayer's 

ability to pay. Higher income taxpayers 

particularly are able to use the deductibility of casualty claims to self-insure 

through the tax system. 
Fact Sheet 11 

Embargoed for Release 

at 12:00 noon, EST 

Saturday, January 21, 1978 January 21, 1978 

FACT SHEET 

Entertainment Expenses 

The President's 

Proposal: 

Present Law: 

Reasons for the 

Recommendation: 

Deductions will be totally disallowed 

for entertainment facilities such as 

yachts, hunting lodges, and club dues. 

Deductions for one-half the cost of 

meals now allowed as a business expense 

will be disallowed. Deductions for 

entertainment activities, such as the 

cost of tickets to theatre and sports 

events, will be disallowed. 

Relatively few restrictions are imposed 

by present law on the deductibility of 

entertainment expenses. Under present 

law, costs of country club memberships, 

lunches, dinners, world series or super 

bowl tickets, and vacation trips have 

all been claimed as deductions on the 

ground that such entertainment is 

ordinary and necessary in the taxpayer's 

business. While Congress in 1962 enacted 

some restrictions on entertainment 

deductions, the experience since then is 

that most of such entertainment is still 

being deducted. Thus, the cost of 

tickets to theatres and sports events is 

deductible under present law merely 

because the previous morning or the 

next day the parties talk business. The 

cost of meals eaten by people who happen 

to have business relationships are 

deductible even though no business is 

done or discussed. 

As the tax law exists today, deductibility 

of entertainment expenses is an open 

invitation to charge personal expenses 

to Uncle Sam, to the detriment of the 

vast majority of taxpayers not able to 
Embargoed for Release Fact Sheet 12 

at 12:00 noon, EST 

Saturday, January 21, 1978 January 21, 1978 

The President's 

Proposal: 

Present Law: 

FACT SHEET 

Foreign Conventions 

Expenses incurred to attend a convention, 

seminar, or other meeting held outside 

of the United States and possessions may 

not be claimed as a business expense 

deduction unless it is reasonable for 

the meeting to be held outside of the 

United States because of the composition 

of the membership or the specific 

purposes of the organization. For 

qualified foreign meetings the deductions 

allowed for subsistence may not exceed 

125 percent of the government per diem 

for the area. 

In 1976, Congress provided that business 

expense deductions can be taken for no 

more than two foreign conventions per 

year. Deductions are not allowed unless 

the individual attends approximately 

two-thirds of the scheduled business 

activities of the convention and these 

activities must cover most of the time 

the individual is not in transit to or 

from the site. The time spent by the 

individual at the convention sessions 

must be verified (under oath) by a 

convention official. Also, the subsistence 

expenses for which deductions are taken 

cannot exceed the per diem rates which 

are available to Federal employees for 

government trips to the same locations. 

Finally, the deduction for transportation 

expenses outside of the United States 

cannot exceed the lowest coach, or 

economy, rate charged by a commercial 

airline. 
Embargoed for Release Fact Sheet 13 

at 12:00 noon, EST 

Saturday, January 21, 1978 January 21, 1978 

The President's 

Proposal: 

Present Law: 

Reasons for the 

Recommendation: 

Effect on 

FACT SHEET 

First Class Air Fare 

Deductions for first class air fare will 

be disallowed to the extent that they 

exceed coach fare for the same flight. 

Except in the case of travel to foreign 

conventions, first class air fare is 

deductible if incurred in connection 

with the taxpayer's travel away from 

home on business. 

The proposal would make the tax system 

fairer. For most people, first class 

air fare is a luxury. Present law 

requires the many taxpayers who cannot 

afford first class fare for themselves 

to subsidize such travel by others. The 

additional personal comfort provided by 

first class accommodations is not 

necessary for the conduct of business. 

Both ends of the plane arrive at the 

same time. 

Taxpayers: Taxpayers who continue to use first 

class air fare will have to pay for the 

additional cost out of after-tax dollars. 

Effect on Revenue: This proposal will increase tax liabilities 

by $0.3 billion in calendar year 1979. 

oOo 
Fact Sheet 14 

Embargoed for Release 

at 12:00 noon, EST 

Saturday, January 21, 1978 January 21, 1978 

The President's 

Proposal: 

Present Law: 

Reasons for the 

Recommendation: 

FACT SHEET 

Minimum Tax 

The provision that allows half of an 

individual taxpayer's regular tax 

liability to be deducted from preference 

income before the 1'5 percent minimum tax 

is imposed will be eliminated. Capital 

gain on the sale of a personal residence 

1vill not be subject to minimum tax. The 

minimum tax for corporations will not be 

changed. 

A 15 percent minimum tax is imposed on 

certain preference income in excess of 

$10,000 or half of an individual's 

regular tax liability, whichever is 

greater. Preference income subject to 

the minimum tax includes income that 

would otherwise escape current taxation 

because of provisions which, for example, 

exclude from income one half of capital 

gains, permit accelerated depreciation 

on real estate, and allow deductions for 

depletion of minerals in excess of the 

amounts that would be allowed on the 

basis of cost. 

The proposal will make the tax system 

fairer, by raising the effective tax on 

those with substantial preference 

income. Tax preferences may serve a 

purpose in encouraging investment in 

some activity. However, they reflect 

adversely on the fairness of the tax 

system when they are used excessively by 

high income individuals to eliminate the 

tax on a substantial amount of their 

other income. The minimum tax serves to 

reduce this inequity. Under present 

law, however, two persons with equal 

amounts of tax preferences can pay 

vastly different amounts of 
Embargoed for Release Fact Sheet 15 

at 12:00 noon, EST 

Saturday, January 21, 1978 January 21, 1978 

FACT SHEET 

Real Estate Depreciation 

The President's 

Proposal: 

Present Law: 

Reasons for the 

Recommendation: 

Taxpayers generally will be required 

to base their depreciation deductions 

for buildings on the average depreciable 

lives now in use by all taxpayers[is 

reported in surveys conducted by the 

Treasuri:J Deductions generally will be 

computed under the straight-line method. 

However, the 150 percent declining 

balance method will be permitted for new 

multi-family housing through 1982, when 

depreciation will be limited to the 

straight-line method. Low-income housing 

will be depreciated under the most 

accelerated methods through 1982 when 

it will be limited to the 150 percent 

declining balance method. 

Each building mmer claims depreciation 

based on his or her own estimate of the 

building's useful life under the facts 

and circumstances. Taxpayers are 

allowed depreciation deductions over 

these lives using the 200 percent 

declining balance method for new residential rental properties and the 150 

percent declining balance method for new 

nonresidential properties. These 

accelerated methods permit taxpayers to 

recover their costs more rapidly than 

under the straight-line method. 

Depreciation claimed under existing 

methods is not uniform and clearly 

overstates the true decline in real 

estate value. The lack of uniformity 

favors sophisticated, high-income 

taxpayers. 
Embargoed for Release Fact Sheet 16 

at 12:00 noon, EST 

Saturday, January 21, 1978 

The President's 

Proposal: 

Present Law: 

January 21, 1978 

FACT SHEET 

Tax Shelters 

The use of tax shelters to avoid or 

reduce income taxes will be restricted 

by: 

extending to closely held corporations 

and to all activities except real 

estate the rule limiting losses that 

can be used to offset other taxable 

income to the amount the taxpayer 

actually has "at risk" in the activity; 

treating as corporations for tax 

purposes limited partnerships with 

more than 15 limited partners, other 

than those primarily engaged in 

residential real estate; 

authorizing the IRS to carry out tax 

audits of partnerships and to determine 

taxable income at the partnership 

level; 

limiting the amount of tax liability 

which can be offset by the investment 

credit to 90 percent of tax liability; 

imposing taxes currently on the 

earnings of most deferred annuities 

not purchased under qualified retirement plans. 

Taxpayers continue to invest in tax 

shelters through loans for which they 

are not personally liable and deduct 

paper losses which exceed any actual 

losses that they might incur. A taxpayer 

is considered to be at risk to the 

extent of cash and other property the 

taxpayer contributes to the activity and 

also to the extent of any borrowings 

with respect to which the taxpayer has 

personal liability. 
Effect on 

- 3 -

Taxpayers seeking to avoid paying their 

fair share of the tax burden should not 

benefit from large limited partnerships 

that have the characteristics of corporations or from the difficulties in 

carrying out tax examinations of tax 

shelter activities. Allowing the IRS to 

audit partnerships as a distinct economic 

unit would result in more efficient and 

effective review of questionable tax 

shelters. 

Taxpayers should not be able to use 

deferred annuities to avoid current 

taxation of regularly recurring investment income. 

Taxpayers: Taxpayers, chiefly with high incomes, 

who are able to use tax shelters to 

avoid or reduce their tax payments, will 

pay higher taxes. 

Effect on Revenue: These proposals will increase tax 

liabilities $0,1 billion in calendar 

year 1979, rising to $0,2 billion in 

1983. 

oOo 
Fact Sheet 17 

Embargoed for Release 

at 12:00 noon, EST 

Saturday, January 21, 1978 January 21, 1978 

The President's 

Proposal: 

Present Law: 

Reasons for the 

Recommendation: 

FACT SHEET 

Capital Gains 

Fifty percent of long-term capital 

gains will contine to be excluded from 

an individual taxpayer's taxable income, 

but the special 25 percent alternative 

tax on the first $50,000 of capital 

gains will be repealed. 

One-half of a long-term capital gain is 

included in an individual's tax base 

(thus the effective rate of tax ranqes 

from 7 to 35 Percent). A special limit 

provides that $50,000 of these qains 

each vear are not to be taxed at over 25 

percent. A taxpayer in the 70 percent 

taxMbracket with $50,000 of capital 

gains can use the alternative tax to 

reduce his or her tax on the capital 

gains by nearly 30 percent of the 

capital gains tax otherwise due. 

The elimination of the 25 percent alternative 

tax on capital gains of up to $50,000 in 

any one year will end an unjustified 

benefit for taxpayers whose marginal tax 

rates exceed 50 percent -- single taxpayers 

with taxable incomes of more than $38,000 

and married taxpayers filing a joint 

return with taxable incomes over $52,000. 

Thus, the proposal will make the tax 

treatment of capital gains more equitable 

without disturbing the favorable treatment 

of capital gains in general. 

The alternative tax introduces significant 

additional complexity into an individual's 

tax planning and its repeal will simplify 

the tax laws. 
Embargoed for Release Fact Sheet 18 

at 12:00 noon, EST 

Saturday, January 21, 1978 January 21, 1978 

FACT SHEET 

Medical, Disability, and Life Insurance 

The President's 

Proposal: 

Present Law: 

Reasons for the 

Recommendation: 

The present tax exemption for premiums 

paid and benefits received under employer 

established health, accident and disability 

plans will continue to be given only for 

such plans which do not discriminate in 

favor of officers, shareholders, and 

higher paid employees. Tax-free status 

also will continue for employer-paid 

premiums on the first $50,000 of group 

life insurance coverage, but only if the 

plan which provides the coverage does 

not discriminate in favor of officers, 

shareholders, and higher paid employees. 

Tax exemption is permitted for plans 

that discriminate against lower paid 

employees. Existing provisions of law, 

which will be retained for non-discriminatory plans, favor employer-paid 

coverage over insurance purchased by an 

individual. Premiums paid by an employer 

are deductible by the employer and are 

not recognized as income to the employee. 

The premiums paid by an individual for 

disability insurance and life insurance 

are not deductible by the individual and 

those for medical insurance are deductible 

only to a limited extent. Thus, individual 

premiums are generally paid out of 

taxable income, while employer-paid 

premiums are paid, in effect, with taxfree funds. 

The proposal will increase tax fairness 

by making tax incentives more effective 

in fostering the social objective of 

more comprehensive health, disability, 

and life insurance for Americans. 
Embargoed for Release Fact Sheet 19 

at 12:00 noon, EST 

Saturday, January 21, 1978 January 21, 1978 

FACT SHEET 

Employee Death Benefits 

The President's 

Proposal: 

Present Law: 

' 

Reasons for the 

Recommendation: 

Effect on 

Taxpayers: 

The $5,000 employee death benefit 

exclusion will be repealed. 

The first $5,000 paid by an employer on 

account of the death of an employee is 

not included in taxable income. 

Tax exemption is of greater benefit to 

those subject to tax at high marginal 

rates. Death benefit plans frequently 

discriminate in favor of officers, 

shareholders, and higher paid employees. 

The payments by employers that are 

covered by the current provision are 

typically deferred wages owed to high 

income taxpayers. There is no reason 

for favoring these high income employees 

and their heirs at the expense of other 

taxpayers. 

Adequate tax relief for the heirs of 

employees at all income levels will 

continue to be provided through the tax 

exemption for insurance proceeds. 

The heirs of some taxpayers, chiefly 

people with high incomes, will pay 

higher taxes. 

Effect on Revenue: This proposal will increase tax liabilities 

less than $50 million in calendar year 

1979. 

oOo 
Embargoed for Release Fact Sheet 20 

at 12:00 noon, EST 

Saturday, January 21, 1978 January 21, 1978 

FACT SHEET 

Qualified Retirement Plans 

The President's 

Proposal: 

Present Law: 

Reasons for the 

Recommendation: 

"Qualified" retirement plans will no 

longer be permitted to exclude entirely 

lower paid employees whose total wages 

are below the social security wage base. 

For every l. 8 percent in contributions 

or benefits provided under a retirement 

plan on compensation above the wage 

base, at least 1 percent in contributions 

or benefits will be required on compensation 

below the wage base. 

"Qualified" retirement plans receive 

preferential tax treatment. Contributions 

for an employee and the earnings on them 

are not taxed until the employee receives 

these amounts, usually as pension benefits 

on ret~rement. Also, employer contributions 

to the plan are immediately tax deductible. 

Qualified plans are not permitted to 

discriminate in favor of officers, 

shareholders or higher paid employees. 

But, under present law, the non-discrimination requirement can be met by a plan 

that is "integrated" with social security 

so that it provides no coverage for 

employees below the social security wage 

base. The wage base is the amount of 

wages or salary on which social security 

taxes are paid and benefits are calculated. 

It is set at $17,700 in 1978 and is 

scheduled to rise to $29,700 by 1981 

1dth automatic inflation adjustments 

thereafter. 

Special tax treatment of qualified plans 

is justified because social security 

alone does not provide adequately for 

retirement. In view of this, lower paid 

employees should not be subject to 

exclusion from private pension plans on 

the ground that they are covered by 

social security. 
Embargoed for Release Fact Sheet 21 

at 12:00 noon, EST 

Saturday, January 21, 1978 January 21, 1978 

FACT SHEET 

Unemployment Compensation Benefits 

The President's 

Proposal: 

Present Law: 

Reasons for the 

Recommendation: 

Effect on 

Taxpayers: 

Unemployment compensation benefits 

will be included in taxable income of 

taxpayers with income from all sources 

(including unemployment compensation) in 

excess of $20,000 if single or $25,000 

if married. Fifty cents of unemployment 

compensation benefits will be included 

in taxable income for each dollar of 

total income in excess of $20,000 for 

single taxpayers and $25,000 for married 

taxpayers. 

Unemployment compensation benefits paid 

under government programs are not now 

taxable. 

The exclusion of unemployment benefits 

is worth more to taxpayers in higher 

marginal tax brackets than to those in 

lower brackets. Thus, unemployment 

compensation is particularly attractive 

to those who work part of the year at 

high wages and pursue personal interests 

while drawing unemployment benefits in 

the remaining months. It is also attractive 

to those who have substantial property 

income, or have a spouse with earnings. 

Families and individuals with high 

income from all sources should be taxed 

on unemployment benefits. These benefits 

replace wages which are themselves 

taxable. Not taxing these benefits 

creates undesirable work disincentives. 

Taxpayers receiving unemployment compensation benefits who have more than 

$20,000 of income (including unemployment 

compensation) if single, or $25,000 if 

married, will pay higher taxes. 
Embargoed for Release Fact Sheet 22 

at 12:00 noon, EST 

Saturday, January 21, 1978 January 21, 1978 

FACT SHEET 

State and Local Taxable Bond Option 

The President's 

Proposal: 

Present Law: 

Reasons for the 

Recommendation: 

State and local governments will have 

the option of issuing either conventional 

tax-exempt bonds or taxable bonds which 

will receive a subsidy from the Treasury 

for a fixed percentage of their interest 

costs. The choice will be entirely a 

matter for the state or local government 

to decide. For 1979 and 1980, the 

Federal Government will pay 35 percent 

of the interest costs on taxable bonds 

issued by state and local governments. 

For bonds issued thereafter, the interest 

subsidy will be 40 percent of the 

interest costs. 

Interest payments received from debt 

obligations issued by state and local 

governments and their instrumentalities 

are exempt from Federal taxes. In 

contrast, all debt obligations issued by 

the Federal Government are subject to 

Federal income tax. 

The proposal will make an important 

contribution to tax fairness and increased 

efficiency in the use of public resources. 

The tax exemption of interest on state 

and local bonds is essential to local 

government and should not be interfered 

with in any way. At the same time the 

windfall to higher inco~e persons 

who do not pay tax on such interest can 

be reduced. 

The tax exemption on state and local 

bonds is also an inefficient means of 

aiding state and local governments, 

since less than three quarters of the 

tax loss to the Treasury actually accrues 

to state and local governments through 
Embargoed for Release Fact Sheet 23 

at 12:00 noon, EST 

Saturday, January 21, 1978 January 21, 1978 

FACT SHEET 

Industrial Development Bonds 

The President's 

Proposal: 

Present Law: 

254-2\8 0- 78 - 8 

Interest on industrial development bonds 

issued for pollution control and industrial 

parks will no longer be tax exempt. 

Also, bonds issued by state and local 

governments to finance hospital construction 

for private non-profit institutions will 

no lohger be tax exempt unless there is 

a certification by the State that a new 

hospital is needed. 

The size of projects which may be 

financed with tax exempt "small issues" 

of industrial development bonds will be 

increased from $5 million to $10 million, 

but the tax exemption will only be 

allowed for facilities constructed in 

economically distressed areas. Industrial 

development bonds that continue to 

qualify for tax exemption may be issued 

as taxable bonds with the Federal Government subsidizing 35 percent of the 

interest costs of taxable bonds issued 

in 1979 and 1980 and 40 percent of the 

interest costs of bonds issued thereafter. 

Industrial development bonds are securities 

issued by state and local governments 

for the benefit of private borrowers. 

Under current law, interest on these 

bonds are tax exempt only in the following 

cases: 

bonds issued to provide financing for 

certain facilities such as pollution 

control equipment, sports arenas and 

convention halls, airports,and 

industrial parks; 

small issues where the amount of 

the bonds sold does not exceed $1 

million or the total capital expenses 

on the facility being financed do not 

exceed $5 million; and 
- 3 -

Effect on 

Taxpayers: Restricting the use of tax exempt 

industrial development bonds will limit 

the amount of interest income which 

escapes taxation. It will also curtail 

the use of tax exempt financing by 

private borrowers. 

Effect on Revenue: This proposal will increase tax liabilities 

less than $50 million in calendar year 

1979, rising to $0.3 billion in 1983. 

oOo 
Embargoed for Release Fact Sheet 24 

at 12:00 noon, EST 

Saturday, January 21, 1978 January 21, 1978 

FACT SHEET 

Accrual Accounting for Agricultural Corporations 

The President's 

Proposal: 

Present Law: 

Reasons for the 

Recommendation: 

All farm corporations will be required 

to use accrual accounting methods except 

those taxed like partnerships (Subchapter 

S Corporations) and those with less than 

$1 million of gross receipts. Noncorporate 

syndicates will also be required to use 

accrual accounting. 

The 1976 Tax Reform Act required accrual 

accounting methods for farm corporations 

except ''family farms,'' regardless of 

s~ze, which may use the cash method. A 

"family farm" is a corporation in which 

at least 50 percent of the stock is 

owned by members of the same family, 

including distant relatives. Farm 

syndicates were made subject to some, 

but not all, of the restrictions on use 

of the cash method. Prior to the 1976 

Act, all farms generally could use the 

cash accounting method. 

Apart from farming, the tax rules generally 

require taxpayers who sell products to 

report their income by the accrual 

method, and thereby accumulate their 

production costs in inventory until the 

product is sold. Cash accounting 

permits immediate deduction of expenses 

incurred whether or not the product is 

sold. Absentee, or non-active, farm 

owners have enjoyed unfair competitive 

advantages over the active farmer through 

this tax shelter, which permits them to 

claim artificial losses. This proposal 

will deal with the principal remaining 

tax shelters where "losses" from farm 

corporations or syndicates attributable 

to the treatment of capital costs and 
Effect on 

- 3 -

Also, these provisions will lessen the 

incentives U.S. corporations now have to 

manipulate their international operations 

to avoid U.S. taxes. 

The current tax laws and regulations 

relating to foreign corporations and 

international business transactions are 

so complicated that only the largest 

companies can afford the cost of sophisticated tax planning. This creates a 

definite competitive disadvantage for 

the smaller companies and those more 

oriented toward operations within the 

United States. 

Taxpayers: The incentive for U.S. companies to 

invest in foreign countries simply 

because they provide special tax advantages will be greatly reduced. Generally, 

taxpayers will no longer be required to 

interpret the extremely difficult 

sections of the tax laws and regulations 

relating to foreign corporations. 

Effect on Revenue: The proposed change will increase tax 

liabilities $0.1 billion in calendar 

year 1979, rising to $0.9 billion in 

calendar year 1983. 

oOo 
Embargoed for Release Fact Sheet 25 at 12:00 noon, EST 

Saturday, January 21, 1978 January 21, 1978 

FACT SHEET 

Taxation of Financial Institutions 

The President's 

Proposal: 

Present Law: 

Commercial banks will be required to 

base future additions to their bad debt 

reserves on their own actual experience 

in the current and 5 preceding years. 

In effect, this accelerates the transition 

rule enacted in 1969. 

Mutual savings banks and savings and 

loan associations will be required to 

reduce their special bad debt deduction 

of 40 percent of net taxable income to 30 

percent over a 5-year transition period. 

Credit unions will be taxed on their 

1ncome for the first time. After a 5-

year transition period, they will be 

taxed on the same basis as savings and 

loan associations. 

Commercial banks may claim a deduction 

for bad debts based on a fixed percentage 

of their eligible loans, regardless of 

their actual losses. The deduction is 

now at the level of 1. 2 percent, and 

will drop to 0.6 percent in 1982. Not 

until 1988 will banks be required to 

base their bad debt deduction on actual 

loss experience. 

Mutual savings banks and savings and 

loan associations which invest a significant portion of their deposits in real 

estate loans are entitled to a special 

deduction (known as an addition to a 

reserve for bad debts) equal to 41 

percent of their taxable income in 1978. 

This deduction has been phased down from 

higher levels, and will phase down to a 

permanent level of 40 percent in 1979. 

Credit unions are exempt from income 

tax. 
Effect on 

- 3 -

that they are no longer truly mutual 

institutions with limited common bonds. 

Credit unions are most analogous to 

thrift institutions in the functions 

they perform and thus should be taxed on 

the same basis. 

Taxpayers: The changes, by themselves, will increase 

the taxes paid by the affected financial 

institutions. 

Effect on Revenue: These changes will increase tax liabilities 

$0.3 billion in calendar year 1979. 

oOo 
Embargoed for Release Fact Sheet 26 

at 12:00 noon, EST 

Saturday, January 21, 1978 January 21, 1978 

The President's 

Proposal: 

Present Law: 

Reasons for the 

Recommendation: 

FACT SHEET 

Elimination of DISC 

DISC tax benefits will be reduced by 

one-third in 1979, two-thirds in 1980, 

and 100 percent in 1981 and thereafter. 

U.S. corporations may defer tax on a 

portion of their export-related income 

by channeling it through a domestic 

subsidiary, usually a paper company, 

called a Domestic International Sales 

Corporation (DISC). Special pricing 

rules on transactions between the parent 

and its DISC permit a favorable allocation 

of profit to a DISC. Prior to 1976, the 

taxation of half of a DISC's income was 

deferred as long as these profits were 

invested in export-related assets. In 

1976 the portion of the income eligible 

for deferral was further limited to 

income in excess of 67 percent of the 

company's average export income in a 

moving base period. The purpose was to 

limit the benefits to increased export 

activity and to deny them where the 

exports would clearly have occurred 

anyway. 

DISC has turned out to be a far more 

costly and less effective program than 

originally claimed. There are more 

effective and evenhanded means of 

providing tax relief to business. A 

recent Treasury study indicates that 

DISC may have contributed only $1 

billion to $3 billion to u.s. exports in 

1974 (less than 3 percent of u.s. exports 

for that year) at a tax revenue cost of 

$1.2 billion. DISC was conceived as a 

means of reducing American export costs 

when exchange rates were fixed. Changes 

in flexible exchange rates now provide a 

far better means of adjusting to changes 

in the competitive position of u.s. 

exports. 
Embargoed for Release Fact Sheet 27 

at 12:00 noon, EST 

Saturday, January 21, 1978 January 21, 1978 

The President's 

Proposal: 

FACT SHEET 

Terminating Deferral 

"Tax deferral'' of earnings of u.s.-

controlled foreign corporations will be 

phased out over a 3 year period by 

treating an appropriate fraction -- onethird in 1979, t\qo-thirds in 1980, and 

the entire amount in 1981 and thereafter 

of a controlled foreign corporation's 

gross income, deductions, and taxes 

eligible for the foreign tax credit as 

having been earned or incurred directly 

by the U.S. shareholder. The earnings 

of a u.s.-controlled foreign corporation 

will be taxed currently whether or not 

those earnings are paid to the U.S. 

shareholders (usually parent companies) 

as dividends. 

Foreign taxes in excess of the amounts 

that may be credited against U.S. taxes 

in any one year will be usable to offset 

U.S. taxes imposed for 3 years in the 

past. They may also be carried forward 

to offset U.S. taxes for 7 years in the 

future. (The carryback and carryforward 

periods are now 2 and 5 years respectively.) 

U.S. shareholders will be allowed to 

claim losses incurred by their controlled 

foreign corporations. 

Unrealized gains and losses, resulting 

from changes in the value of the U.S. 

dollar as compared to other currencies, 

will not be taken into account unless 

the U.S. shareholder elects. That 

election may be revoked 10 years after 

it is made with respect to future tax 

years only. 
Embargoed for Release Fact Sheet 28 

at 12:00 noon, EST 

Saturday, January 21, 1978 January 21, 1978 

The President's 

Proposal: 

Present Law: 

Reasons for the 

Recommendation: 

Effect on 

FACT SHEET 

Communication Taxes 

The excise tax on communications --

chiefly telephone services -- will be 

repealed as of October 1, 1978. 

Amounts paid for telephone services 

and teletypewriter exchange services 

generally are subject to a communications 

excise tax. The rate for 1978 is 4 

percent. Exemptions are provided for 

private communications services if they 

are charged for separately. The tax is 

being phased out by reducing the rate 1 

percent a year through 1981. 

Repeal of the tax will continue the 

comprehensive overhaul of the exicse tax 

system that began with the Excise Tax 

Reduction Act of 1965. It will reduce 

the cost of living both directly and by 

lowering business costs. The reduction 

of business costs, if passed through in 

the form of price cuts, will reduce 

inflation through lower consumer prices 

and through the effect of these lower 

prices on cost-of-living adjustments in 

wages. Repeal will be particularly 

beneficial to lower and middle income 

individuals who bear a disproportionate 

share of the present excise tax. 

Taxpayers: Repeal will save individual telephone users 

about $650 million in 1979. Businesses 

will save about $550 million on their 

communication costs. 

Effect on Revenue: This proposal will decrease tax liabilities 

$1.2 billion in calendar year 1979. 

oOo 

254~218 0- 78 - 9 
Embargoed for Release Fact Sheet 29 

at 12:00 noon, EST 

Saturday, January 21, 1978 January 21, 1978 

FACT SHEET 

Unemployment Tax Rate Reduction 

The President's 

Proposal: 

Present Law: 

Reasons for the 

Recommendation: 

The Federal unemployment insurance 

tax will be reduced from 0.7 percent to 

0.5 percent, effective January 1, 1979. 

The unemployment compensation program 

is a Federal-state insurance system 

designed to provide temporary compensation for the loss of wages by unemployed workers. Funds accumulated from 

payroll taxes paid by the employer on 

the first $6,000 of earnings of each 

worker permit payment of benefits to 

unemployed insured workers. 

To help defray the costs of Federal 

supplements to the regular unemployment 

compensation program, the net Federal 

tax was increased to 0.7 percent beginning 

January 1, 1977. That rate will continue 

until certain general revenue advances 

to the unemployment trust fund have been 

repaid. The tax rate would then revert 

to 0.5 percent. 

Reduction of the Federal employer payroll 

tax for unemployment insurance will 

assist in reducing inflation. The rate 

reduction will reduce employer wage 

costs, which, if passed through in the 

form of price cuts, will reduce inflation 

directly through lower consumer prices 

and, indirectly, as these lower prlces 

work through cost-of-living-adjustment 

clauses to smaller wage increases. 

The tax cut will be greatest, as a 

percent of wages for low-wage workers, 

thus partially offsetting the increased 

employer costs associated with recent 

minimum-wage legislation and increasing 

demand for low-skilled labor. 
Embargoed for Release Fact Sheet 30 

at 12:00 noon, EST 

Saturday, January 21, 1978 January 21, 1978 

FACT SHEET 

Reduction of the Corporate Tax Rates 

The President's 

Proposal: 

Present Law: 

Reasons for the 

Recommendation: 

The corporate tax rate on taxable 

income in excess of $50,000 will be 

reduced permanently by three percentage 

points to 45 percent effective October 1, 

1978, with an additional reduction of 

one percentage point on January 1, 1980. 

The rate applied to the first $50,000 of 

taxable income will be reduced by two 

percentage points effective October 1, 

1978. 

The present corporate tax rates are 20 

percent on the first $25,000 of taxable 

income, 22 percent on income in excess 

of $25,000 up to $50,000, and 48 percent 

on all income in excess of $50,000. 

These tax reductions, together with the 

extension of the investment credit, will 

assure the continuance and strengthening 

of the present economic.recovery and 

will promote long-term capital formation. 

Increased capital formation can contribute 

both to economic demand needed for 

continued economic expansion and to 

increased productive capacity that will 

help avoid bottlenecks and inflationary 

pressures as the economy moves ahead. 

The portion of GNP devoted to investment 

needs to be increased in the years 

ahead. Moreover, the efficient use of 

new capital needs to be assured. Additional 

jobs are needed for a growing labor 

force, to meet the goals of the National 

Energy Plan and to provide a cleaner 

environment and safer workplaces. The 

real income of workers can grow over the 

long run only if productivity is enhanced 

with new machinery and more efficient 

plants. Dependence on foreign oil can 
Fact She~t 31 

Embargoed for Release 

at 12:00 noon, EST 

Saturday, January 21, 1978 January 21, 1978 

The President's 

Proposal: 

Present Law: 

FACT SHEET 

The Investment Credit 

The temporary 10 percent investment 

credit will be made permanent. 

The investment credit will be extended 

to new industrial buildings and to 

investments made to rehabilitate existing 

industrial buildings. Generally only 

manufacturing and utility buildings will 

be eligible for the credit. Industrial 

structures placed in service after 

December 31, 1977 will be eligible for 

the credit to the extent of construction 

costs incurred after that date. Expenditures 

made after December 31, 1977 to 

rehabilitate existing industrial structures 

will be eligible for the credit. 

Investment credits will be allowed to 

offset 90 percent of tax liability in 

any year. They will not be permitted to 

offset a taxpayer's complete tax liability. 

The full 10 percent investment credit 

will be extended to pollution control 

equipment that now qualifies for the 

special 5-year amortization. 

The 10 percent rate of the investment 

credit is scheduled to revert to 7 (4 

for utilities) percent on January 1, 

1981. 

The investment credit is available for 

investment in business machinery and 

equipment but not for investment in 

buildings or their structural components. 

Investment credits may be used to offset 

all of the first $25,000 of tax liability, 

but no more than 50 percent of the 

remainder. 
Effect on 

Taxpayers: 

- 3 -

caused by the need to distinguish 

between equipment, for which the credit 

is available, and buildings and their 

structural components, for which it is 

not. 

New businesses and businesses facing 

temporary setbacks or the need to make 

major adjustments to economic changes 

cannot fully use the investment credit 

because of the 50 percent limit on 

offseting current tax liability. 

The proposal will reduce the overall 

tax burden on business. 

Increasing the percentage of tax liability 

that can be offset by investment credits 

to 90 percent will aid companies with 

large investment needs and relatively 

low taxable incomes. 

Taxpayers with tax liabilities of less 

than $25,000 will no longer be able to 

use investment credits to offset their 

entire tax liability. 

The increased investment credit for 

certain pollution control equipment will 

reduce the costs of compliance with 

environmental standards in the case of 

existing plants, many of which were 

constructed when pollution control 

standards were less stringent. 

Effect on Revenue: These proposals will reduce tax liabilities 

approximately $2.4 billion in calendar 

year 1979, the first full year of the 

proposed changes. 

By 1983, it is estimated that the 

proposed changes will reduce tax liabilities $7.2 billion, of which $4.5 

billion is attributable to permanent 

extension of the 10 percent credit. 

oOo 
Embargoed for Release Fact Sheet 32 

at 12:00 noon, EST 

Saturday, January 21, 1978 January 21, 1978 

The President's 

Proposal: 

Present Law: 

FACT SHEET 

Simplification of ADR 

The Asset Depreciation Range (ADR) 

system, which establishes procedures for 

taxpayers to depreciate their assets, 

will be simplified. 

Salvage value will be disregarded under 

the revised system. Elaborate reporting 

requirements will be replaced by Treasury 

surveys which wili require responses 

from only a small number of taxpayers 

each year. Only the straight-line and 

declining balance methods of depreciation will be allowed under ADR. 

Under the ADR system, the IRS prescribes 

a .range of guideline lives which taxpayers can use in setting the useful 

lives of their assets. Use of these 

lives by a taxpayer avoids disagreements 

between the taxpayer and IRS agents on 

audit as to what are the proper useful 

lives of the taxpayer's assets. Estimated 

salvage value in excess of 20 percent of 

cost limits the extent to which depreciation can be taken under ADR. 

Taxpayers electing ADR are required each 

year to file detailed information about 

.their assets. 

Taxpayers electing ADR are permitted to 

use the sum of the years' digits, the 

200 percent declining balance, and the 

straight-line methods of depreciation. 

The ADR system, which was intended to 

simplify depreciation, occupies twenty 

pages in the printed regulations. Part 

of this length is due to the elections 

available to taxpayers in computing 

depreciation. 
Embargoed for Release Fact Sheet 33 

at 12:00 noon, EST 

Saturday, January 21, 1978 January 21, 1978 

The President's 

Proposal: 

FACT SHEET 

Small Business 

Taxes on small business will be reduced 

and the rules governing Subchapter S 

corporations, depreciation, and losses 

on investments in small businesses will 

be made simpler and more liberal. 

Tax Cuts. Corporate tax rates will be 

reduced permanently to 18 percent on the 

first $25,000 of income, 20 percent on 

the next $25,000, and 44 percent (45 

percent, from October 1978 through 1979) 

on any additional income. For example, 

if a small corporation makes $50,000 in 

1979, it will pay only $9,500 in taxes, 

or almost 10 percent less than in 1977. 

Subchapter S. A Subchapter S corporation 

will be allowed to have as many as 15 

shareholders, and it will be easier for 

shareholders to deduct Subchapter S 

losses. Also some technical rules that 

now apply to Subchapter S corporations 

will be simplified. 

Depreciation. A simple table of useful 

lives of equipment will be prepared for 

use by small business. The table will 

permit small businesses to take allowances 

for depreciation that are similar to 

those now available to larger businesses 

under the Asset Depreciation Range (ADR) 

system. These changes are in addition 

to a proposal that will simplify the ADR 

system for all businesses. 

Stock in a Small Business. An exception 

in present law (section 1244 of the 

Internal Revenue Code) that treats a 

loss on certain stock in a small business 
Reasons for the 

Recommendation: 

- 3 -

Stock in a Small Business. Generally, a 

loss on stock is a capital loss and is 

thus treated less favorably than an 

ordinary loss. However, an exception in 

present law (section 1244 of the Internal 

Revenue Code) treats a loss on certain 

stock in a small business as an ordinary 

loss. 

Economic Stimulus. Today, many small 

businesses badly need equity capital to 

modernize and expand. The largest 

source of equity capital for small 

businesses is retained earnings, or 

profits left over after taxes. Therefore, the proposal will allow small 

businesses to retain more earnings after 

taxes in order to assist them to modernize 

and expand. 

In addition, the proposal will make it 

easier for small businesses to attract 

outside equity capital. An investor in 

a small business takes a great many 

risks. Change in technology and market 

conditions, larger competitors, and, in 

many cases, imports pose a continuing 

threat to the survival of a small 

business. These risks discourage 

potential investors and make it difficult 

for a small business to raise outside 

equity capital. The proposal 1~ill 

change the tax law so that if an investor 

loses money on stock in small business, 

it will be easier to deduct the loss. 

This change will reduce the risk of 

investment in a small business and 

therefore will make it easier for small 

businesses to attract outside equity 

capital. Small business will on balance 

benefit from the modifications of the 

investment credit. 
Department of the Treasury 

Office of the Secretary Washington, D.C. 20220 

Official Business Penalty for Private Use $300 

~ 

Postage and Fees Paid 

Department of the Treasury 

TREAS-551 

First Class 00