Tax-Based Saving Incentives and Qualified Partial Exclusion Plans

This study examines the effect of two types of qualified partial exclusion (QPE) plans on saving incentives, government revenues, and progressivity. In a “pure” QPE Plan, individual taxpayers who do not deduct any interest expenses on their tax returns can partially exclude their interest, dividend, and capital gain income, subject to a maximum exclusion. In an “expansive” QPE Plan, taxpayers can partially exclude their net investment income (reduced by deductible interest other than home mortgage interest and trade or business interest), subject to a maximum exclusion. The paper considers three alternative exclusion ceilings: $10,000, $15,000, and $20,000 for joint returns and $5,000, $7,500, and $10,000, respectively, for other taxpayers. Depending on the size of the maximum exclusion, the percentage of taxpayers who would be eligible to exclude all of their investment income varies between 77 and 81 percent under a pure QPE Plan and 92 and 96 percent under an expansive QPE Plan.