Treasury hands Reagan its tax plan
In revealing the results of its year-long study of the tax system Tuesday, the Reagan administration has launched one of the largest and most complicated trial balloons in recent Washington history.
After surveying various tax reform options, the voluminous Treasury Department study recommends the United States adopt a modified flat-tax approach for raising the money the government needs to pay its bills.
Elements of the plan have been leaked to the public during the past several weeks. It is the third attempt at tax reform in three administrations.
In the proposed tax system, deductions are slashed (while personal exemptions are raised) and the resulting revenue gain is used to cut income-tax rates and reduce the number of tax brackets. The Treasury plan resembles in some respects the modified tax plan sponsored in Congress by Sens. Bill Bradley (D) of New Jersey and Rep. Richard A. Gephardt (D) of Missouri and a similar plan by Rep. Jack F. Kemp (R) of New York and Sen. Bob Kasten (R) of Wisconsin. The White House kept its distance from the Treasury plan, while congressional and business leaders reacted coolly. Consumer groups hailed the plan. And some economists warned that, if adopted, it could dampen business and individual investment, thereby temporarily slowing the economy and increasing unemployment.
The Treasury Department's proposals ''reduce the incentives'' for business and individual investment, notes Robert Gough, senior vice-president of Data Resources Inc., a forecasting firm. The economic slowdown the plan might cause could reduce demand for credit, thereby lowering interest rates and eventually stimulating demand in interest-sensitive sectors of the economy like housing and automobiles, he says.
The Treasury proposals are designed to put the same amount of cash in the government's pocket as the existing tax system. Mr. Reagan has ruled out using tax reform to narrow the federal deficit, which the Office of Management and Budget projects to be $206 billion in fiscal 1986. The President's top budget advisers today are expected to give him a menu of budget-cutting options designed to trim $100 billion from the deficit by 1988.
The Treasury Department estimates that 78 percent of all US households would either get a tax cut or see no increase in their taxes if its plan were adopted. The remaining US households would send more to the Internal Revenue Service each April.
The Treasury Department's proposal would involve sweeping changes in the nation's existing, and much criticized, system of taxation.
For individuals, the plan would slash the top tax rate, collapse the number of tax brackets, boost the amount of income (the zero bracket amount) on which no tax is paid, and limit several popular deductions. Individuals could still deduct the mortgage interest on one home, but deductions for mortgage interest on a second home would be limited.
Businesses would also face sweeping changes in the way they are taxed. The top rate on corporate income would drop from 46 percent to 33 percent, and companies could deduct half of the dividends they pay shareholders. But companies would also lose a tax credit they now get for investing in new equipment. And the period over which buildings and equipment can be written off would be lengthened, thus lowering the amount of depreciation a firm could take in a given year.
White House officials were careful to distance the President from the tax-reform ideas. ''It's certainly a new departure in tax policy,'' White House spokesman Larry Speakes said Tuesday. ''And it should be open and out for people to see and have an opportunity for input.''
He added that the President had not had time to evaluate the plan and would not make any final judgments or offer a plan of his own until after hearing from business and congressional leaders.
Congressional reaction was lukewarm. House Ways and Means Committee chairman Dan Rostenkowski (D) of Illinois noted that a revenue-neutral plan still ''creates winners and losers.'' He added that ''marshaling public opinion for such ambitious change will demand enormous political leadership from the White House.''
Mr. Rostenkowski, whose committee is responsible for writing tax legislation, hinted that deficit reduction was still his top priority. ''Tax reform is a noble cause. Deficit reduction is a demand,'' he said.
Last weekend Sen. Robert Dole (R) of Kansas, chairman of the Senate Finance Committee, told an interviewer that ''we've got a big selling job to do'' if the Treasury Department plan is to have a chance of clearing Capitol Hill.
''There are a lot of people in this town and around the country who like to talk about a flat tax until they get down to specifics,'' he said.
Self-styled consumer organizations reacted warmly to the plan. While noting that it does not address the deficit, ''in terms of tax simplification and reform it is a very fine beginning,'' said Jeff Drumtra, editor of People and Taxes, a newspaper published by Public Citizen, a group founded by consumer advocate Ralph Nader.
Portions of the tax plan have provoked a storm of criticism from the business community. The major concern for heavy industry is the proposed repeal of the investment tax credit, which is expected to save business $26.5 billion this fiscal year, and the scaling back of accelerated depreciation provisions, which are expected to save firms $23.7 billion.
Manufacturing companies would be especially hard hit by these changes because they invest more heavily in machinery than service or high-technology companies. ''I don't think you can take the position that you don't need the smokestack industries,'' says Paul Huard, vice-president of the National Association of Manufacturers.
Kenneth Haggerty, vice-president of the American Electronics Association, charges that doing away with the preferential treatment of capital gains, along with other provisions of the plan, would greatly diminish the ''ability of young high-tech comanies to raise the capital they will need to grow and compete in world markets.''
Chart:Tax Plan Highlights,
* Reduce the number of individual income tax brackets from 16 to three. The old brackets range from 11% to 50% of taxable income. The new brackets would be 15%, 25%, and 35%.
* Raise the personal exemption and exemptions for dependents from $1,090 to $ 2,000.
* Eliminate the deduction for state and local income taxes.
* Retain the current mortgage deduction provision.
* Limit deductions for interest payments on other loans to $5,000 more than an individual's income from investments.
* Tax capital gains at the same rate as an individual's taxable income, rather than at a special lower rate. But the plan would permit taxpayers to adjust the value of their assets to offset inflation.
* Tax unemployment benefits at all levels and tax workers' compensation payments.
* Allow a deduction for contributions to charity only if they exceed 2% of an individual's adjusted gross income.
* Cut the top corporate tax rate from 46% to 33%.
* Scale back the rapid business write-offs on equipment and buildings.
* Eliminate the 10% investment tax credit for corporations.