House Passes "Financial Freedom Act of 1999"

Washington, DC, July 27, 1999 - The House of Representatives has approved H.R. 2488, the "Financial Freedom Act of 1999." H.R. 2488 contains major tax, pension, and education proposals. President Clinton has indicated that he would veto the bill if it were presented to him in its current form because of the bill's tax cut provisions.

Tax Provisions
Among other tax provisions of interest to mutual fund shareholders, the bill would permit U.S. funds (treated for federal tax purposes as regulated investment companies) to "flow through" the character of interest and short-term capital gains to their foreign shareholders. For these purposes, U.S.-source and foreign-source interest that is free from foreign withholding tax under the domestic laws of the source country (such as interest from "Eurobonds") would be eligible for flow-through treatment. The bill would, however, deny flow-through treatment for interest from any foreign bond on which the source-country tax rate is reduced pursuant to a tax treaty with the United States. The provision would apply to taxable years beginning after December 31, 2004.

The Institute supports this "flow-through" legislation because it would eliminate the U.S. withholding tax barrier to foreign investment in U.S. funds, while containing appropriate safeguards to ensure that (1) flow-through treatment applies only to interest income that would be exempt from U.S. withholding tax if received by a foreign investor directly or through a foreign fund and (2) foreign investors cannot avoid otherwise-applicable foreign tax by investing in U.S. funds that qualify for treaty benefits under the U.S. income tax treaty network.

The bill would also (1) provide a phased-in, partial exclusion from income for dividends and interest and (2) reduce the maximum rate of tax on net capital gains of individuals from 20 percent to 15 percent. The reduced maximum capital gains rates would apply to taxable years ending on or after July 1, 1999. Gains taxed under current law at a 10 percent rate would be taxed under the bill at a 7.5 percent rate.

Pension Provisions
The bill would increase contribution limits for pension plans, eliminate the 25 percent of compensation limitation on contributions to defined contribution plans, increase the Roth IRA conversion limits, and increase the Education IRA contribution limit (and rename these plans Education Savings Accounts). It would also create "catch-up" contributions for participants aged 50 and older, require faster vesting of employer contributions, simplify the minimum required distribution rules, and modify the top-heavy rules.

The bill would facilitate increased portability among various types of plans and IRAs by allowing rollovers to and from 401(k)s, 403(b)s, 457s, and IRAs. Employer acceptance of rollovers would be voluntary.

Finally, the bill would also liberalize qualified tuition programs and Medical Savings Accounts, and make the latter permanent.