They call them the PEP and Pease provisions of tax law, and they are
on their way out. If you are wealthy, this should make you smile. You could
be a little richer.
PEP and Pease refer to two tax increases adopted in 1990 when President George
H.W. Bush broke his "read my lips" promise against boosting taxes
in order to cut the deficit, angering many in the Republican Party.
But on Sunday, thanks to a law quietly passed in 2001 when his son, George
W. Bush, was in the White House, the PEP and Pease provisions--essentially limitations
on tax exemptions--will begin a five-year phaseout at a cost of $27 billion.
According to the Center on Budget and Policy Priorities, a liberal think tank
here, about 53.5 percent of that money will go to households earning more than
$1 million. Another 43.2 percent will go to those with incomes of $200,000 to
$1 million. The rest will go those earning $100,000 to $200,000.
"It is particularly ironic that these two new tax cuts repeal provisions
of the tax code that President Bush's father signed in 1990 to reduce deficits,"
said Robert Greenstein, executive director of the center.
By contrast, conservative groups said the PEP and Pease tax increases are bad
tax law. PEP stands for "personal exemption phaseout." Basically,
Congress decided in 1990 to slash the personal income exemption (now $3,200)
for high-income Americans. Pease refers to former Rep. Don Pease (D-Ohio), who
sponsored a provision limiting the value of itemized deductions for the wealthy.
By 2010 those provisions will be gone unless Congress reinstates them, and
that does not appear likely.
Millionaires will receive an average tax cut of $19,000 a year when
the two provisions are wiped out, the Center on Budget and Policy Priorities
said. The center added that this comes on top of an average tax cut of $103,000
that millionaires received in 2005 because of other tax cuts adopted since 2001.
Groups like the center, which frequently criticizes the Bush administration, are
outraged that Congress would allow more tax cuts for the wealthy.
But the phaseout of these provisions shows how the political climate has changed
in Washington since 1990. That the wealthy have fared better with tax cuts in
recent years indicates that old "soak the rich" policies no longer
seem to resonate in the nation's capital.
Stephen Entin, president and executive director of the Institute for Research
on the Economics of Taxation, a conservative think tank in Washington, called
the two provisions "very complicated backdoor methods of raising taxes
on the rich" and said they should be repealed.
Any tax increases on wealthier Americans should come in the form of higher
tax rates, not through denying some Americans tax benefits that go to others,
he said. The two tax measures effectively raise the top tax rate from 35 percent
to nearly 40 percent, Entin said.
A Treasury Department tax expert in the Reagan administration, Entin said the
1990 tax increases came about because the first President Bush was under intense
pressure to make a budget deal with Congress to reduce the deficit. "Reaching
arbitrary budget targets nudges Congress into making silly behind-the-scenes
tax changes," he said.
If Congress had kept those tax increases in place, Greenstein said, budget
cuts this year on programs affecting the poor, particularly Medicaid, could
have been prevented. From 2010 to 2019, he said, the cost of these tax cuts
would swell to $146 billion.
Joel Friedman, a tax expert at the Center on Budget and Policy Priorities,
noted that Congress added repeal of the two provisions to Bush's 2001 tax-cut
package that slashed income tax rates across the board.
Entin said the provisions are highly complex. For example, in 2005 the Pease
provision would reduce the value of most itemized deductions for people who
have incomes above $145,950. The value of the covered exemptions would be reduced
by 3 percent for every dollar of earnings above $145,950. Itemized deductions
could not be cut more than 80 percent.
The personal exemption phaseout operates similarly. In 2005 taxpayers lose
2 percent of the personal exemption for every $2,500 by which their income exceeds
$145,950 for singles and $218,950 for married couples.