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Clinton Holds Door Open on Capital Gains Tax Cut

Tuesday, January 28, 1997

OnLine

President Clinton Tuesday held the door open to the possibility of accepting a capital gains cut during the fiscal 1998 budget negotiations with congressional Republicans, and presented an outline of the tax-cut proposals likely to be included in the plan he will present to Congress Feb. 6.

Asked during a nationally televised press conference if he is willing to go beyond his targeted homeowners’ capital gains proposal, Clinton said, "Yes, my homeowners’ capital gains exemption is in the budget. Everything I talked about at Chicago is in the budget." Clinton explained that, "the capital gains issue has never been a particularly high priority for me because I have never seen it demonstrated as a big engine of economic growth overall."

"The proposal the Republicans made in their budget was entirely excessive and would really almost squander money by having it be retroactive," Clinton said, referring to the capital gains 50% exclusion approved by Congress in 1995. He vetoed that bill.

Clinton refrained from criticizing any new GOP tax-cut proposals, including a 50% capital gains deduction very similar to last year’s plan that Senate GOP leaders introduced last week.

"I have tried to practice what I preach here," Clinton said, referring to his withholding criticism of Republican budget proposals at this early stage in the process. "I want to keep our powder dry and I want them to keep their powder dry. I know what my priorities are. I know what their priorities are on the taxes and then what we need to do is meet each other in good faith. This and other issues can best be resolved by an early attempt to work through to a balanced budget," he added.

Among other issues discussed during the press conference:

• Corporate Welfare: Asked if the budget would include a net increase in taxes, the President said, "I believe that is incorrect. We have a net tax cut." Without specifying which corporate tax provisions he proposes to eliminate from the tax code, Clinton confirmed his budget will contain many of the same proposals included in last year’s budget.
  
  "I believe that virtually all of the corporate loophole closers are ones that we had discussed with and reached at least general agreement with the congressional leadership last year," Clinton said. These agreements never were publicized.
  
• Education Incentives: In an effort to command the headlines, Clinton used the nationally televised press conference to promote his educational incentives, including the $1,500 tax credit, his $10,000 tax deduction for certain post-secondary education tuition, and an expanded individual retirement account that allows for withdrawals for education expenses. "With the IRA plan most families will be able to save for college tuition without ever having to pay a penny of taxes," Clinton said.
  
  Clinton also discussed a proposal to provide tax credits to businesses that hire long-term welfare recipients. The credit would be equal to 50% of the first $10,000 in wages paid to employers "for people who are clearly, provably hired and put in a new job," Clinton explained.

First Budget Hearings Set For Early February: House Ways and Means Committee Chairman Bill Archer, R-Texas, announced Monday that his committee will hold the first hearings on those aspects of President Clinton’s 1998 budget proposal that fall under its jurisdiction, including taxes, beginning Tuesday, Feb. 11.

"These hearings are the first of many opportunities the Administration will have to present their plan to balance the budget. I am eager to hear the President’s proposal for ending decades of deficit spending. I am hopeful these hearings will mark the start of a bipartisan commitment to get our job done," Archer said in a press release.

Treasury Secretary Robert Rubin is scheduled to testify Feb. 11, and Don Lubick, acting Assistant Secretary of the Treasury for Tax Policy will testify on Feb. 12.

Ways And Means Members Criticize Clinton’s S Corporation Conversion Proposal: House Ways and Means Committee members Reps. Clay Shaw, R-Fla., and Robert Matsui, D-Calif., urged President Clinton not to re-submit a proposal he offered originally in his fiscal 1997 budget that would repeal Internal Revenue Code Section 1374, which addresses the tax treatment of C corporations that convert to S corporation status.

In a Jan. 24 letter to Secretary Rubin, the two members wrote that such a proposal "could negatively impact family-owned businesses, including many in the agricultural community, and would penalize and discourage small business activity."

Shaw and Matsui contend that reversal of Section 1374 would result in an implicit liquidation tax on C corporations who opt to convert to S corporation status. Additionally, such a tax would decrease the flexibility of C corporations to undertake S conversion thereby pre-empting them from taking advantage of the favorable tax options offered to S corporations under the Small Business Job Protection Act enacted last summer.

Aside from the problematic substance of the proposal, Shaw and Matsui cite the retroactive nature of the bill as potentially having a "chilling effect on those corporations otherwise entitled to make S Corporation elections."

Democrats To Offer Foreign Corporate Loophole Closers: Sen. Tom Harkin, D-Iowa, and Rep. Lane Evans, D-Ill., announced Jan. 27 their plan to introduce jointly legislation during the week of Feb. 3 that is aimed at a number of loopholes in the Internal Revenue Code, which they claim currently allow foreign corporation to evade payment of U.S. taxes.

"These loopholes allow multinational corporations to hide income and provide incentives to invest overseas in a way that hurts us at home," Evans said in a statement.

Key provisions of their bill are as follows:

• Prevention of multinationals from using transfer pricing rules to lower tax liability;
• Requiring foreign citizens to pay capital gains tax on the sale of stock in U.S. firms and pay tax on the interest they receive from U.S. borrowing;
• Ending the practice of allowing multinational and gas companies to claim foreign tax credits for some of the ordinary costs of doing business in foreign countries;
• Stopping multinationals from being able to accrue foreign tax credits generated by foreign subsidiaries and escape U.S. taxation through the so-called title passage rule; and
• Ending the practice whereby corporations effectively pocket taxable income when sending workers to countries with low or no income tax.

Additionally, the bill earmarks revenue raised to be used for deficit reduction and export promotion programs for small and mid-size U.S. firms.

IRS Responds To Congressional Concern on Deferred Crop Payment Issue: Responding to proposed legislation (S.181) introduced last week by Sen. Charles Grassley, R-Iowa, the Internal Revenue Service Tuesday announced its intention to make it easier for farmers who receive deferred crop payments to change their accounting method for alternative minimum tax purposes. The change will begin with the 1997 tax returns, will not require payment of a user fee, and will provide audit protection for previous years’ returns to those who have not received an audit letter on this issue before today, according to an IRS release.