Burden of new taxes would be only slightly disproportionate, experts testify

October 05, 1990|By Stephen E. Nordlinger | Stephen E. Nordlinger,Washington Bureau of The Sun

WASHINGTON -- Despite widespread congressional criticism that the budget package falls too heavily on poor and middle-income taxpayers, fiscal experts said yesterday that the agreement placed only a slightly disproportionate burden on those groups.

One authority, Isabel Sawhill, senior fellow at the Urban Institute, estimated that the sacrifice imposed by the package on the poor and upper-income groups could be equalized by a transfer of only $75 from the top earners to those with lowest incomes.

While some taxes would be felt by all income groups, those in the higher bracket would pay more in excise taxes because of their higher rate of consumption, and that would even out the sacrifice, Mrs. Sawhill said.

"The agreement distributes the pain widely and is only mildly regressive," she said. "We are not talking about a big difference."

Rudolph G. Penner, former director of the Congressional Budget Office, said, "The tax increases are very small, only 2 [percent] to 3 percent in the overall burden.

"There are relatively few changes, and they are pretty trivial, so it is hard to understand why they are being debated," he said.

The experts said the fairness of the budget package must be considered in terms of broad ramifications, not as an isolated issue.

"A recession or inflation is more regressive than anything being talked about" in the agreement, said David G. Mathiasen, budget expert at the General Accounting Office, the congressional investigative agency.

Without a budget agreement, the experts also said, interest rates would continue to remain high and perhaps rise, which would disproportionately hurt the poor and middle-income groups because of steeper rates on mortgages, auto loans and other consumer borrowing.

"If we don't do anything, interest will keep growing and everybody is going to have to pay," said C. Eugene Steuerle, former deputy assistant treasury secretary for tax analysis. "Economic changes tend to dwarf tax changes." Interest on the federal debt will reach $185 billion next year, the largest budget component after Social Security, health care and defense.

While all taxpayers will pay for the interest cost to the government, the experts said that many in upper-income groups would benefit from higher interest rates because of their purchase of government securities.

Many of the congressional complaints, the experts said, stemmed not from the contents of the budget package but from the failure of the Democrats to achieve their chief goal in budget talks -- making the tax code more progressive after the Reagan years, when taxes become more regressive. A tax is said to be regressive if it takes a larger percentage of the income of people who make less money.

"It is clear that nothing was done to undo the growth of inequality," said Mrs. Sawhill. "That is why so many people are opposing the package."

The budget agreement would increase the taxes on such basic consumer goods as gasoline, tobacco and alcoholic beverages. These higher taxes would affect taxpayers regardless of their income and are, therefore, considered regressive.

The increase in these taxes would reverse a more than 20-year decline in revenue from excise taxes in relation to the size of the economy.

At the same time, the agreement would raise the federal tax bill for most individuals and couples earning more than $100,000 a year.

Items such as mortgage interest and state and local income taxes would no longer be fully deductible. The change would have the effect of adding about a percentage point to income tax rates for those who itemize their tax deductions.

Estimates of the package's tax burden by the congressional Joint Committee on Taxation show that taxes would rise relatively more for people with income under $10,000 a year than for others. For taxpayers with incomes of $20,000 to $50,000 a year, the increases would be larger than for people with annual incomes above $100,000.

Administration officials questioned yesterday the methodology used in that study, which they said underestimated the impact on upper-income taxpayers. The Treasury Department is working up its own analysis of the effect of the budget agreement on various income levels.

In judging the effect of the tax proposals, Mrs. Sawhill said that consumption patterns and not just incomes should be considered.

On this basis, the budget package would impose tax burdens across the board in proportion to income, she said. The wealthy buy more than low-income earners. As a result, the better-off would be paying more in excise taxes under the proposal.

Lower-income taxpayers consume less, she said, because the nation's 33 million elderly tend to fall in that group and their purchasing falls off as they become older.

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