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AN ECONOMIC ANALYSIS OF THE TAXPAYER RELIEF ACT OF 1997
 
 
April 2000
 
 
NOTES

Some of the provisions discussed in this paper were enacted in the Balanced Budget Act of 1997, a companion bill to the Taxpayer Relief Act of 1997 (TRA-97). For simplicity, this paper refers to all provisions as though they were part of TRA-97.

In discussions of taxpayers, the paper uses the word "family" to denote a taxpaying unit, regardless of whether that unit consists of a single person or a married couple, with or without children.

Numbers in the text and tables may not add up to totals because of rounding.

ERRATA

The revenue estimates shown in Table 1 of Chapter 1 are those developed by the Joint Committee on Taxation and the Congressional Budget Office (CBO) at the time that the Taxpayer Relief Act of 1997 (TRA-97) was enacted. Revenue estimates based on more recent information could differ substantially from those provided in this paper.

Furthermore, this analysis considers only information available at the time of enactment. Data from the first tax returns affected by TRA-97 have only recently become available; those data will provide the basis for future analysis by CBO.

The final paragraph of Chapter 3 has also been corrected in this electronic version.

 
 
PREFACE

This Congressional Budget Office (CBO) paper analyzes the economic impact of the Taxpayer Relief Act of 1997 (and related tax provisions of the Balanced Budget Act of 1997). It assesses how that legislation will affect a variety of economic incentives for individuals and corporations, including incentives to save for postsecondary education and other purposes and to invest, work, and hire low-wage employees. The analysis also looks at how the act affects the tax burdens of taxpayers in different income and demographic groups and the complexity of the tax code.

The paper was prepared by the staff of CBO's Tax Analysis Division under the direction of Rosemary Marcuss, Tom Woodward, Rick Kasten, Frank Sammartino, and Bob Williams. The contributors were Mark Booth, Pam Greene, Rob McClelland, Paul Menchik, Noah Meyerson, Larry Ozanne, Pearl Richardson, Diane Rogers, John Sabelhaus, Sean Schofield, Alyssa Trzeszkowski, David Weiner, and Bob Williams. Richard Farmer, John Cogan, and Tim Muris provided useful comments on earlier drafts.

Chris Spoor edited the manuscript, and Leah Mazade proofread it. Simone Thomas prepared the paper for publication, and Laurie Brown prepared the electronic versions for CBO's World Wide Web site (www.cbo.gov).
 

Dan L. Crippen
Director
April 2000
 
 

CONTENTS
 

SUMMARY

I - PROVISIONS OF THE TAXPAYER RELIEF ACT AND THEIR EFFECTS ON REVENUES

II - EFFECTS ON INCENTIVES TO PAY FOR COLLEGE EDUCATION

III - EFFECTS ON INCENTIVES TO SAVE AND INVEST

IV - EFFECTS ON INCENTIVES TO WORK

V - EFFECTS ON TAX BURDENS

VI - EFFECTS ON THE COMPLEXITY OF THE TAX CODE AND COMPREHENSIVE TAX REFORM

APPENDIXES

A - The Budgetary Effects of the Taxpayer Relief Act from a Historical Perspective
B - Effective Federal Tax Rates Under Alternative Measures of Income
 
TABLES
 
1.  Effects of the Taxpayer Relief Act on Federal Revenues
2.  Average Undergraduate Tuition and Fees Paid by Students, by Type of College, 1976-1999
3.  Changes in Eligibility for Deductible IRAs
4.  IRA Participation, by Taxpayer's Filing Status and Adjusted Gross Income, 1985
5.  Distribution and Tax Treatment of Capital Gains, by Holding Period
6.  Distribution and Tax Treatment of Taxable Estates, 1995
7.  Tax Thresholds and Federal Tax Liabilities of Families at the Poverty Level in 1999, by Filing Status and Size of Family, With and Without the Taxpayer Relief Act
8.  Total Federal Tax Burdens Before and After the Taxpayer Relief Act, Measured at 1998 Income Levels
9.  Effective Total Federal Tax Rates Before and After the Taxpayer Relief Act, by Type of Family and Adjusted Family Income
10.  Comparison of Various Methods of Saving for College
11.  Hypothetical Regular and Alternative Minimum Tax for a Married Couple with Two Children in 2005
A-1.  Revenue Effects of Major Federal Tax Legislation Passed Between 1981 and 1997, as Estimated at the Time of Enactment
B-1.  Effective Total Federal Tax Rates Before and After the Taxpayer Relief Act, by Type of Family and Family's Cash Income
 
FIGURES
 
1.  College Enrollment Rate of People Ages 16 to 24 Who Graduated from High School the Previous Year, 1960-1997
2.  Ranges of Income Over Which Taxpayers Qualify for Education Tax Provisions, by Filing Status
3.  Does It Pay to Use an IRA for Nonqualified Saving?
4.  Marginal Tax Rates for a Single Head of Household with Two Children Under Age 17
5.  Marginal Tax Rates for a Couple with Three Children Under Age 17
6.  Marginal Tax Rates for a Couple with Two Children in College, One Eligible for a HOPE Credit and the Other Eligible for a Lifetime Learning Credit
7.  Earned Income Tax Credit in 1999, by Number of Children and Earnings
8.  Effective Rates for Federal Individual Income Taxes and Total Federal Taxes, by Income Quintile, Before and After the Taxpayer Relief Act
 
BOX
 
1.  The Alternative Minimum Tax

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