Tax Policy

JEC Study: Benefits Of An Interest Exclusion

To reduce the bias against saving in the tax code, it has been proposed that taxpayers be allowed an exemption from taxation for the first $200 -- and $400 for joint tax filers -- of interest ordividend income earned. A new Joint Economic Committee study finds that because of the low exclusion caps, such a proposal would primarily benefit low- and middle-income taxpayers.

  • Based on 1995 tax data 57 percent of all taxpayers could have taken advantage of an interest or dividend exclusion.

  • Of these taxpayers, 23 percent had adjusted gross incomes (AGI) between $1 and $15,000; 67 percent had AGI between $1 and $50,000.

  • The Joint Committee on Taxation estimates half of all taxpayers who reported taxable interest income and 35 percent of all taxpayers who reported dividend income would not have paid any taxes on that income if a $200/$400 exclusion were allowed.

  • Overall, 30 million taxpayers would not have paid any taxes on their interest and dividend income.

Because high-income taxpayers receive high levels of investment income, they would derive insignificant benefits from an exclusion capped at $200/$400, says the JEC. However, the proposal would interact with other initiatives, such as lower capital gains tax rates and expanded benefits for Individual Retirement Accounts, to create new saving incentives for taxpayers across the income spectrum, thus improving the efficiency and neutrality of the tax code.

For Text http://www.house.gov/jec/fiscal/tx-grwth/
exclude/exclude.htm

Source: Shahira Knight, "The Effects of Allowing an Interest and Dividend Exclusion," Joint Economic Committee Study, February 1998

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