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Clinton's economic package.

As his State of the Union address drew to a close on February 17, President Clinton noted, "The test of our program cannot be: 'What's in it for me?' The question must be: 'What's in it for us?'

Tax practitioners, however, must ask another question, and that is, "How will these proposals affect my clients?" The president's economic package will affect NSPA members and their clients through its effect on the economy as a whole and through its targeted proposals directed at specific areas of the economy.

To date, economists have reacted to the package with a variety of opinions ranging from unqualified approval to fierce disagreement, but the median response seems to be an acknowledgement that this program will make a good first step toward the goals of deficit reduction and a healthier economy. This leaves NSPA members with the important task of defining how these proposals will affect the businesses and individuals that make up their client lists.

Federal Reserve Board Concerns

The government's chief independent economist, Federal Reserve Board Chairman Alan Greenspan, appeared before Congress three times in the seven days following President Clinton's State of the Union address. Mr. Greenspan chose his words carefully, acknowledging the plan will begin to reduce the deficit but refusing to wholeheartedly endorse the package. His concern stemmed from the fact that the package proposed by the president relies primarily on new taxes to reduce the deficit, whereas he believes deficit reduction is more permanent when achieved by spending cuts.

This short-term focus causes many to stop short of hearty endorsement. As proposed, the package will increase the deficit for the current fiscal year, decrease the deficit in each of the following four years and then begin to increase it again in 1998. While the president maintains that his health care reform package will decrease the deficit annually through 1998, the current numbers bear Greenspan out, reinforcing the idea that permanent deficit reduction requires further spending cuts.

Overall, the economic community generally praises the plan--with some reservations. Many economists agree with Greenspan that the overall goal of deficit reduction shows this plan is on the right track but that achieving deficit reduction through new taxes may not go quite far enough. Greenspan also commended the president's "Vision of Change for America" for the detail and specificity it provides in describing each spending cut. He disagreed with Republican criticisms that the Clinton plan would stunt the current economic growth by imposing higher taxes on corporations and individuals, noting that deficit reduction brought about by the plan will lower interest rates and spur growth. He also reassured members of Congress that the Federal Reserve Board would not cancel out the effects of the Clinton fiscal policy by enacting a countercyclical credit policy.

Impact on Manufacturing

According to economists, while the economy as a whole will see some benefit from the proposals, the manufacturing sector seems slightly favored under President Clinton's economic plan. By proposing an investment tax credit to jump-start the economy, the president implicitly plans to put Americans back to work in manufacturing positions. While this may be an effective plan to create new jobs, many anticipate that it will spur a sudden and sharp increase in plant modernization. The potential rush to modernize will be intensified by the fact that, for moderate- and large-sized corporations, the credit will only be available for two years. This, in turn, could lead to a new round of layoffs and a continuation of the trend toward increased productivity without new job creation. As Sen. Byron Dorgan (D-ND) pointed out to the chairwoman of the president's Council of Economic Advisors, Laura Tyson, a choice between purchasing a machine or hiring a person at an equal price will go toward the machine because of the tax incentives.

Impact on Your Clients

What remains to be answered, though, is this month's burning question: "How will these proposals affect my clients?" We will now focus on the effects of the current package (current, that is, as of press time) on individuals, farmers and small businesses. Please note the bill that eventually passes through Congress and up to the president may not include all of the provisions discussed herein and that some new provisions may be added after the writing of this column and before you read it.

President Clinton's economic plan has been devised to impact wealthy individuals proportionately harder than middle and lower income individuals. Throughout the planning process, however, the definition of "wealthy" has repeatedly been lowered. The plan will impose a new top individual rate of 36%, which kicks in at taxable income of $140,000 for married couples filing jointly, $127,500 for head of household and $115,000 for single individuals. In addition, annual income in excess of $250,000 will be subject to a 10% surtax. This paints a pretty bleak figure for clients earning above these limits.

Tax planning for these individuals will focus on creating capital gains, which will still be taxed at the rate of 28%. A current proposal in the package would provide targeted capital gains exclusion to investment in small business. To qualify, individuals must hold qualified small business stock for at least five years. Upon sale of the stock, they can exclude 50% of the resulting gain. The problem lies in the definition of "qualified small business stock," which, among other conditions, only allows C corporation stock to qualify. Many have criticized this provision, as S corporation status is the first choice of many small business.

Farm Subsidies Reduced

The president's economic proposals will affect farmers twice, through increased taxes and reduced subsidies from the Federal government. The proposed increase in energy taxes will weigh heavily on farmers, who rely on energy sources to plant and harvest the crops they put into the economic pipeline. In addition, the president's revenue proposals increase the fees for meat and poultry inspection, further adding to the costs farmers will have to pass on to consumers.

The proposals will also reduce numerous subsidies to farmers, such as subsidies to honey and wool producers, and cut funding to programs that assist farmers, such as the Rural Electrification Administration and the Tennessee Valley Authority. The number of provisions that affect farmers in the Clinton package has led to a feeling on the part of many farmers that they are being asked to bear a disproportionate burden in the administration's new plan.

Small Business Benefits

Finally, President Clinton's plan will create a myriad of opportunities for entrepreneurs working with small businesses. The plan will retroactively extend many of last summer's expiring provisions, most notably the research and development credit and the self-employed health insurance deduction. The health insurance deduction remains at only 25%, perpetuating a bias that NSPA continues to work to overcome. It will be extended only through the end of 1993, by which time the president plans to create a more permanent solution with his health care reform package.

As mentioned previously, the program proposes a targeted capital gains incentive for small business investment that should encourage carefully planned investment in qualifying companies. On a happy note for all practitioners caught in the vise pictured on the NPA's January, 1993, cover, AMT depreciation rules will be simplified somewhat by using regular tax depreciation lives for all calculations. The plan also proposes, as noted above, an investment tax credit--permanent for small businesses, temporary and marginal for medium and large operations. The down side of the Clinton proposals is the increase in the corporate tax rate to match the highest individual rate of 36%.

President Clinton's economic plan has been carefully crafted to affect a wide variety of businesses and individuals, and in many areas it will provide new incentives as it takes money away. This has caused many groups to offer qualified endorsements of the plan, praising some aspects while criticizing others.

With the number of groups affected, it appears unlikely that the plan will pass through Congress intact. However, the attempt to balance the impact of the proposals has left special interest subject to the criticism that they are just not willing to do their fair share for recovery. This should make for interesting debate as the package works its way from Capitol Hill back to the White House. Please be sure to watch your NSPA publications, as we intend to keep you as up-to-date as possible on the changes that are sure to come.
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Title Annotation:Capitol Corridors
Author:Lear, Jeffrey
Publication:The National Public Accountant
Article Type:Column
Date:May 1, 1993
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