2 Estimate does not include revenue reduction attributable to possible BAMT credits (for FICA, income tax liability, and NOLs) or to possible other revenue offsets, such as a capital gains exclusion, 5-percent investment credit, or repeal of the alternative minimum tax. C. Securities Transfer Excise Tax Present Law Under present law, no tax is imposed upon the transfer of corporate stock or any other security, other than income taxes attributable to any gain realized by the transferor. Transfer taxes were imposed, however, on transfers of certain securities from 1918 to 1965. Immediately prior to repeal in 1965, the transfer tax was imposed at a rate of 0.1 percent of value on the original issue and 0.04 percent on subsequent transfers of stock, and was imposed at a rate of 0.05 percent on the original issue and 0.05 percent on the subsequent trading of certificates of indebtedness. Possible Proposals 1. A securities transfer excise tax ("STET") could be imposed at a rate of 0.5 percent of value upon transfers of certain securities. The securities subject to the tax could include stock and debt securities, whether or not publicly traded, options, futures, forward contracts, and other items, such as limited partnership interests, that are close substitutes to the above securities. The transfers subject to the STET could include sales or exchanges, gifts, transfers at death, transfers pursuant to divorce, transfers to a trust, transfers pursuant to mergers or acquisitions, and transfers upon issuance or redemption of a security. Special rules would apply to transactions with certain elements and to pass-through entities. 2. The rate of tax in possible proposal 1 could be 1.0 percent of value. Arguments for the proposal Pros and Cons 1. If revenues are to be raised by increasing Federal excise taxes, a STET should be preferred to other options because the likely high concentration of securities ownership among higher income taxpayers would make a STET more progressive than many other Federal excise taxes. 2. Because the STET would not be paid directly by the population at large (unlike, e.g., the income tax), there may be less opposition to the STET than to an increase in certain other taxes. 3. A reduction in securities trading, especially short-term trading, that is likely to occur as a result of the imposition of a STET, would be beneficial because large amounts of stock in the hands of investors with short-term investment objectives place undue pressure on corporate managers to achieve short-term results at the expense of more effective long-term strategies. 4. Imposition of a STET would discourage speculative, short-term, high-risk trading by managers of pension funds; these risks are inappropriate for the management of funds intended for retirement use. 5. Imposition of a STET would reduce merger and acquisition activity which has resulted in insider trading abuses as well as the diversion of managerial efforts. Arguments against the proposal 1. The progressivity of a STET would be limited because a significant amount of wealth is held by pension funds on behalf of lowerand middle-income individuals. 2. Imposition of a STET would increase the cost of capital to firms if pre-tax yields on securities issued after the effective date are increased to compensate for the additional tax burden. 3. The reduction in short-term trading that may be attributable to a STET may be undesirable because active short-term trading provides valuable signals to management regarding shareholder perceptions of corporate strategies, and also increases liquidity and decreases volatility of security prices. 4. A STET imposed in the United States could encourage some participants in U.S. capital markets to transfer their securities to foreign exchanges which had no such tax or a tax with a lower rate. Revenue Effect The revenue effect of a STET would be heavily dependent on precisely how the tax is structured. In the absence of a specific proposal and in order to provide some indication of the order of magnitude of the revenue effect, the following is presented for a reasonable broad based securities transfer tax of 0.5 percent. D. Income Tax Provisions 1. Individual and Corporate Tax Rates and Surtaxes Individuals Present Law In the Tax Reform Act of 1986, tax structures for each of the four filing classifications, which had 14 or 15 marginal tax rates and taxable income brackets, were replaced by a five-step marginal rate structure for 1987 and by two marginal rates and a phaseout rate for 1988 and later years. The zero bracket amounts of prior law have been replaced by the standard deduction, which is deducted from adjusted gross income in the process of determining taxable income. In 1987, the marginal tax rates are 11 percent, 15 percent, 28 percent, 35 percent, and 38.5 percent. The maximum tax rate on long-term capital gain in 1987 is 28 percent. There are two marginal tax rate brackets-15 percent and 28 percent for each filing classification for 1988 and later years. In addition, some taxpayers in effect will be subject to a 33-percent tax rate on taxable income above specified amounts; this phaseout tax rate will apply as income rises until the tax benefits of the 15percent bracket and the personal exemption amount deductions have been phased out. The 33-percent phaseout rate reverts to 28 percent for income levels above that at which the phaseout has been completed. Beginning in 1988, long-term capital gain will be taxed as ordinary income; a transitional maximum capital gains rate of 28 percent applies in 1987. Corporations Through June 30, 1987, the corporate income tax rate structure has a top rate of 46 percent, which applies to taxable income in excess of $100,000. Lower marginal tax rates apply to taxable income less than $100,000, but the tax benefit of the lower rates is phased out (beginning at taxable income above $1 million). The lower marginal rate structure is 15 percent on taxable income to $25,000; 18 percent between $25,000 and $50,000; 30 percent between $50,000 and $75,000; and 40 percent between $75,000 and $100,000. Under the Tax Reform Act of 1986, a new corporate tax rate structure will become effective on July 1, 1987. This structure has a top corporate tax rate of 34 percent, which applies to taxable income in excess of $75,000. Below $75,000, a 15-percent rate applies to taxable income to $50,000, and 25 percent to $75,000. A phaseout of the 15- and 25-percent tax rates begins at taxable income above $100,000. For taxable years that include parts of both tax rate structure periods, taxpayers will apply the two tax rate structures in proportion to the number of days in the taxable year that includes each of the tax structures. For example, in the case of a calendar year corporate taxpayer with $2 million of ordinary taxable income, the tax for 1987 is computed by first determining a tentative tax under prior law of $920,000 (46 percent of $2 million) and a tentative tax under the amended law of $680,000 (34 percent of $2 million). The actual tax equals the sum of $456,219.18 (181/365 of $920,000) and $342,794.52 (184/365 of $680,000) or $799,013.70, for a total tax rate of approximately 40 percent. Corporate net capital gain properly taken into account after December 31, 1986, is taxed at a 34-percent rate. Possible Proposals 1. Provide a five-percent surtax on individual and corporate income tax liabilities, including individual and corporate minimum tax liabilities. 2. Provide a five-percent surtax on individual and corporate income tax liabilities, including individual and corporate minimum tax liabilities, above $10,000. 3. Extend the 1987 tax rate schedules for both individuals and corporations for one year through 1988, for a longer period (with indexing), or indefinitely (with indexing). 4. Create an third marginal tax rate of 33 percent for individuals that would apply to taxable income at and above the level at which the phaseout of the tax benefits of the 15-percent rate bracket and personal exemptions applies. 5. The same as (4) above, except add a 38.5-percent tax bracket that begins at taxable income above $225,000 (on a joint return) and retain the maximum capital gains tax rate at 28 percent. Pros and Cons Arguments for the proposals 1. Taking into account the provisions of the 1986 Act that broadened the income tax base and provided fairer treatment of all taxpayers, the relative income tax burden of each taxpayer would not be disturbed if the income tax liabilities of all taxpayers are increased by the same proportion. 2. Compared to many excise tax options, an income tax surcharge would not discriminate among products or geographic regions. 3. A surtax would involve little additional compliance or collection costs because withholding and estimated payments simply would be increased by the amount of the surtax. 4. A precedent for an income tax surtax was established in the Revenue and Expenditure Control Act of 1968 (enacted on June 28, 1968) in which a 10-percent surtax was imposed on individual tax liabilities (effective as of April 1, 1968) and on corporate tax liabilities (effective as of January 1, 1968). The surtax expired on June 30, 1970. 5. If a surtax or an increase in marginal tax rates were enacted, a surtax on minimum tax liability or a proportionate increase in |