The Senate Finance Committee voted yesterday to repeal the present "minimum tax" for high-income individuals, and replace it with a new "alternative tax" that would go easier on most investors but would crack down on a few with large amounts of sheltered income.
The proposal, approved by voice vote, would raise an estimated $1.4 billion offsetting one-third of the $4.2 billion cost of the committee's earlier decision to slash capital gains taxes - the levy on profits from the sale of stocks or other property.
At the same time, in an election-year gesture to older Americans, the committee voted to liberalize their retirement income credit, effective next January, by raising the maximum benefits to $3,000 for single persons and $4,500 for couples, from $2,500 and $3,750 now.
It also voted to defer until 1980 a twice-postponed provision in the 1976 Tax Reform Act that would have raised federal income taxes on profits from the sale by heirs of inherited assets. The provision had been touted as a major victory for "tax reform" advocates that year.
The committee's proposal to replace the minimum tax was somewhat tougher on high-income investors than a House provision passed in August, which would except the excluded portion of a capital gain from any tax at all however, it still would substantially dilute the present minimum tax.
Under present law, only half a capital gain is included in the regular income tax. The rest, above $10,000, is subject to a 15 percent minimum tax, which is added to an individual's regular income tax. The tax was enacted in 1969 to prevent high-income investors from escaping taxes.
The committee would include only 30 percent of a capital gain in the regular income tax. Of the remaining 70 percent, the first $20,000 would be tax-exempt, and the rest would be subject to rates ranging between 10 percent and 25 percent.
However, in a new twist, the committee provided that the taxpayer would not have to pay any alternative tax unless it exceeded his regular income tax, whichever is higher.
Together with its proposal to cut capital gains taxes, the panel's decision would have the effect of trimming the maximum tax on capital gains, now paid by only a handful of very high-income investors, to 21 percent, down from 49.1 percent. The House bill would lower it to 35 percent.
The impact would vary, depending on the deductions and tax preferences of individual taxpayers. However, in general, it would trim capital gains taxes for 4.3 million investors, while increasing taxes for 32,000, mostly with large amounts of tax preferences.
Yesterday's developments came as the committee sidestepped further action on major tax cuts for individuals and low-income persons and instead turned its attention to a spate of narrow-interest amendments, providing tax breaks for special industries and sectors of the economy.
The panel already is behind schedule in its drive to finish the bill in time for action by the full Senate and a conference with the House before Congress' slated Oct. 14 adjournment. Many observers now are becoming skeptical that the lawmakers will complete their work on time.
The provision to liberalize the retirement income credit also would raise the income level at which the benefit is reduced and eventually phased out. Those levels, now $7,500 for single persons and $10,000 for couples, would rise to $15,000 and $17,500.
Others committee votes yesterday would:
Double the present tax credit for contributions to political campaigns, to a maximum of $50 a taxpayer or $100 for joint returns.
Expand the tax breaks for individual retirement accounts (IRAs) by allowing an employe to make up the difference himself if his company's standard pension fund falls short of the legal maximum IRA contribution.
Overturn an Internal Revenue Service ruling that requires restaurant and hotel managers to report any tips their employes receive on services charged to credit card holders; the Treaasury has warned that the shift would invite widespread tax cheating.
Strike down a requirement that state and municipal government employes decide a year in advance whether they want to take advantage of deferred compensation arrangements; yesterday's proposal would allow them to decide up until the day before any deferral deadline.
The panel also approved a provision in the House bill which would impose a new, graduated income tax on small businesses to replace the previous two-stage small business tax.The rate would range from 17 percent for the first $25,000 in income to 40 percent for the fourth $25,000.
The proposal involving the minimum tax would establish these rates on preference income subject to the new alternative tax:
The first $20.000 would be tax-free; the next $40,000 would be taxed at a 10 percent rate; the next $40,000 at 20 percent; and the remaining amount at 25 percent. The tax could be offset by use of the foreign tax credit.