White House Fact Sheet on the Proposed Savings and Economic Growth Act of 1990

Today President Bush transmitted to the Congress the Savings and Economic Growth Act of 1990. This act will increase family savings, stimulate job-creating long-term investment, and strengthen the competitive position of American business. It contains three parts:

Family Savings Account. This new savings program will give Americans an opportunity to save for their long-term goals in a tax-free manner.

Capital Gains Tax Rate Reduction. This act will provide for a permanent partial exclusion from tax of gains on long-term investments in productive assets.

Home Ownership Initiative. This will allow millions of American families an opportunity to save for their first home through the existing IRA program.

The Savings and Economic Growth Act provides a comprehensive and balanced program to stimulate our domestic savings rate and lower the cost of capital to American business. This, coupled with President Bush's proposed dramatic reduction in the Federal budget deficit, will allow more funds to flow into productive investment in this country.

The President calls upon the Congress for speedy enactment of these provisions. The sooner we can provide incentives for American families to save and for American business to invest for the long term, the more certain we can be that the current recordsetting peacetime recovery will continue.

Family Savings Account (FSA)

Married couples with adjusted gross income (AGI) under $120,000, singles with AGI under $60,000, and taxpayers who are heads of household with AGI under $100,000 are eligible if they have earned income and are not dependents on another return.

Each person may contribute, per year up to $2,500 (couples up to $5,000) or the amount of their compensation that year, whichever is less.

Contributions are not tax deductible when made. The funds deposited in the account must be made in cash (existing securities may not be used) and may be invested in any investment vehicle except for insurance contracts or collectible items such as stamps or artwork.

Contributions are never subject to tax when withdrawn.

Earnings on deposits at least 7 years old may also be withdrawn tax free. Earnings are taxed only if they are attributable to money on deposit less than 7 years. Earnings on deposits at least 3 years old are taxed like regular interest income when withdrawn. Earnings on deposits made less than 3 years prior to withdrawal will be subject to income tax and also to a 10-percent penalty tax when withdrawn.

The Family Savings Account program is particularly beneficial to those who make a habit of saving. A family that contributes $2,500 each year to a Family Savings Account paying 8 percent interest would have over $73,000 saved after 15 years.

Capital Gains Tax Rate Reduction

The President proposes a phased-in exclusion of up to 30 percent of the capital gain on an asset. Eventually only assets held at least 3 years would

(TABLE START)receive the full exclusion.

@h1

@h1Years held@h21@h22@h23

Year sold:

1990 .... 30 percent .... 30 percent .... 30 percent

1991 .... 20 percent .... 30 percent .... 30 percent

1992 .... 10 percent .... 20 percent .... 30 percent

(TABLE END)

A 30-percent exclusion would effectively lower the capital gains tax rate to 19.6 percent for a taxpayer in the 28-percent tax bracket. The effective tax rate would be reduced to 10.5 percent for a taxpayer in the 15-percent tax bracket and to 23.1 percent for a taxpayer in the 33-percent tax bracket.

Corporations would not be eligible for a capital gains tax rate reduction.

In general, all capital assets held by individuals, except for collectibles, will be eligible for the capital gains exclusion.

This reduction benefits a wide cross section of Americans. In 1987, 72 percent of the tax returns with capital gains were filed by taxpayers with other income of less than $50,000. These taxpayers reported fully 41 percent of the net gains reported that year.

The Department of Treasury estimates that this change will permanently increase tax revenue without taking into account the positive effects this change will have on economic growth.

Home Ownership Initiative

Americans will be able to withdraw up to $10,000 from an IRA for a first-time home purchase without penalty. The home must cost less than 110 percent of the median home price in the geographic area in which they are buying.

This could save an American family seeking to buy their first home up to $1,000 compared to current law. Current law imposes a 10-percent excise tax, on top of any regular tax owed, for withdrawals from an IRA account.

This proposal is targeted toward low- and moderate-income families who do not currently own their own home. Higher income families are not eligible for the up front deduction on an IRA under current law unless they are not covered by another pension plan.

More families will make use of the IRA as an investment tool. Evidence indicates that younger families do not make as great a use of the IRA as do older couples. This provides an incentive for taxpayers of all age groups to participate in the IRA system.