Five Years Ago, There Was Federal Tax Reform--Did It Work?

April 14, 1991|By STEPHEN E. NORDLINGER

There is no way to sugarcoat the April 15 pill.

Americans will be paying about $560 billion in 1990 income taxes to the Treasury in this year's painful ritual culminating at midnight tomorrow.

When taxpayers calculate their tax bite a year from now, the income tax bill is expected to be up a huge $27 billion. It will reflect the first big installment on the largest revenue package ever passed by Congress, raising an additional $164 billion over five years.

Taxpayers on the average worked almost until the end of March just to earn enough to pay this year's federal income and payroll taxes, according to the Tax Foundation.

In the face of this awesome demand for revenue, many taxpayers are wondering what has really been gained from the much ballyhooed landmark tax overhaul passed by Congress nearly five years ago.

Clearly it failed any test based on curbing the federal appetite for funds. The inflow of taxes, though enormous, is still falling far short of expenditures, and this gap is likely to remain far into the future despite tax reform.

But figures accumulating in the federal statistical mill and among private tax experts show that the 1986 law, the boldest revision ++ of the tax code in a half-century, is achieving some of its chief goals.

As a result of the dramatic cut in rates and an end to scores of deductions, exemptions and other tax breaks, a fairer system has emerged with many fewer advantages for affluent taxpayers and corporations -- who were once able to take advantage of special benefits embedded in the tax code to lower or eliminate their taxes.

According to the Citizens for Tax Justice, a labor-backed research group, most middle and low-income families are paying a lower share of their earnings in income taxes as a result of redistributing the tax burden, although this gain is offset by rising Social Security taxes.

Many corporations that managed to avoid taxes for years are paying an equitable share now. More than 130 companies that enjoyed at least one tax-free year between 1981 and 1985 are now paying an average tax rate above 24 percent.

Wealthy individuals can no longer dodge the anguish of the April 15 deadline by investing in cattle ranches or a multitude of other tax shelters. A tough minimum tax applies to all taxpayers.

The number of tax shelters registered with the Internal Revenue Service dropped by 70 percent as a result of the law, and revenue losses from paper transactions used to shelter income from taxes dropped by $40 billion.

Suddenly, as a result of the law, there are more than seven million fewer children being claimed as dependents, bringing more than $2 billion a year to the Treasury.

Apparently parents have changed their child count because they are now required to provide Social Security numbers for claimed dependents over the age of four. According to an Internal Revenue Service investigation, those "dependents" never existed in the first place.

While the law brought new complexity for many businesses and wealthy individuals with complicated tax problems, it also represented for tens of millions of Americans a major stride toward simplifying the tax system.

By knocking out or cutting back on deductions, more than 8 million taxpayers concluded it no longer made sense to go through the laborious task of itemizing deductions. They are now using the the standard deduction.

More than a million poor families stopped filing tax returns entirely because the law placed them out of the reach of the tax collector, and more than 3 million additional taxpayers are now using only the abbreviated return.

But the achievement of the law is more profound than can be shown in just raw numbers. The overhaul of the tax code represents a fundamental shift back toward the original purpose of the tax laws -- to raise revenue.

By scaling back on tax breaks, the government indicated it was stepping away from the policy of recent years of using the revenue code for other purposes, such as raising the savings rate or encouraging certain kinds of business investments.

This change in philosophy clearly dominated the tax package developed by the administration and Congress last fall. Most of the package was devised solely to raise revenue for lowering the budget deficit.

Unfortunately, pressures are building once again from the administration and some members of Congress for special purpose tax relief. President Bush's continuing determination to cut the capital gains tax rate represents a move sharply away from tax reform. Raising the capital gains rate to equal the income tax rate was a cardinal part of the 1986 law.

On another front, Democrats on Capitol Hill are now looking at broadening the tax benefits for retirement accounts and establishing tax exempt savings accounts for low-income families.

None of these proposals is expected to advance beyond rhetoric at a time of mammoth budget deficits since they would all lower revenue and threatened to raise the tax rates.

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