"When there is an income tax," Plato said, "the just man will pay more and the unjust less on the same amount of income."
Twenty-three centuries later, the Treasury Department has concluded much the same. It doesn't buy the Greek philosopher's premise that income taxes and justice are mutually exclusive, of course.
But in its mission of tax reform, the Treasury has acknowledged that injustice runs deep in the tax laws and must be routed out. On the other hand, many taxpayers would pay a heavy price for the reforms.
To translate the Treasury's theories to real-world cases, The Times examined how the taxes of three individuals and two companies would be affected if the agency's tax-simplification proposal were enacted in full. Tax calculations were performed by the Los Angeles office of the Price Waterhouse accounting firm.
The analysis relies on several assumptions: All provisions have been phased in; inflation is at 4%; and the proposed depreciation method was in effect when assets were acquired. To calculate taxes under current law, 1984 tax rates and law are used, even when the taxpayer's most recent available numbers are from the 1983 tax year.
Among the case studies, the individual "winner" has relatively low income while the individual "loser" is a wealthy man with substantial tax shelters. The family for whom the proposed changes would result in a wash, falls somewhere in the middle.
The business "winner" is in retailing, an industry that isn't favored under the current tax system. The corporate "loser" is a high-technology company. Some analysts had speculated that high-tech companies would fare well, especially in comparison to smokestack industries.
As Kenneth W. Ledermann sees it, forking over money to tax shelters is as irresponsible as "taking a bushel of money and pouring it down the sewer." So, it should come as no surprise that the retired Mission Viejo man, an accountant by training, lauds the Treasury's tax-reform efforts.
Pronouncing Treasury Secretary Donald T. Regan's tax-simplification plan "an eminently workable outline for federal income-tax reform," Ledermann said he is particularly pleased that the proposal "strikes hard at . . . those who will pour unlimited funds into any scheme proposed by the tax-shelter boys."
Closer to home, the proposals also would directly--and substantially--benefit the 69-year-old Ledermann, an executive at ITT Corp. until his retirement seven years ago, and his wife Alice, 66. Their tax bill would be reduced by $2,023, or 41.6%, under the Treasury proposal.
The Ledermanns exemplify the taxpayer with a simple tax situation. With two grown children and four grandchildren and a home they own free and clear, the couple claims no dependents and doesn't itemize deductions on their joint tax return.
Together, they have $9,700 in pension income, $11,000 in Social Security benefits, dividends of $3,500, interest income of $17,400 and long-term capital gains of $3,000, for total income of $44,600.
Their gross income for tax purposes is $34,150. Why the difference? Under current law, only 40% of long-term capital gains are taxed. Moreover, each taxpayer is permitted to exclude from taxation the first $100 of certain types of dividend income. And only a portion of some taxpayers' Social Security benefits are subject to taxation ($2,550 in the Ledermanns' case).
Each of the Ledermanns also gets a $1,000 personal deduction and a $1,000 deduction available to people 65 or older, bringing their total income subject to taxation to $30,150.
Based on 1984 tax rates and current law, the Ledermanns would pay $4,860 in federal income taxes, for an effective tax rate of 16.1%. Their marginal tax rate is 28%.
Under the Treasury Department proposals, the couple would pay substantially less in federal income tax--$2,837, for a 41.6% tax cut. Their effective tax rate would decline to 12.5% and their marginal tax rate would be 15%, the lowest bracket under the three-bracket proposal.
Their pension would be the only part of their income unaffected by the Treasury's proposals.
If, as proposed, the provision enabling each taxpayer to exclude from taxation $100 of dividend income were repealed, the Ledermanns' taxable income would increase by $200. Another $1,800 would be added to their taxable income if, as proposed, capital gains were treated as ordinary income. (Both of these changes, incidentally, would further simplify the preparation of their tax return.)
But the extra $2,000 of taxable income would be more than offset by reductions stemming from proposed changes in the taxation of certain types of interest income. On the theory that taxpayers should neither suffer nor prosper from inflation-fueled increases in interest income and expenses, the Treasury proposes to index the inflation-induced portion of such income and expenses.
What that means for taxpayers is this: Less interest income would be taxed, but fewer interest expenses would be deductible.
In the Ledermanns' case, the overall effect is positive. Because they don't itemize deductions, they have no interest expenses to subject to indexing. Conversely, interest income accounts for more than half of their taxable income.
To determine the exact effect indexing would have on their interest income and tax bill, Price Waterhouse tax specialist Steve Kafka assumed a 4% rate of inflation. The Treasury would allow a certain percentage of interest income to be excluded from taxation for various levels of inflation. According to the Treasury's table, 40% of interest income would be excluded from taxation if inflation is 4%.
So, the Ledermanns would be required to pay taxes on only $10,440 of their $17,400 in interest income.
Combining all those changes, the couple's adjusted gross income declines to $26,640 from $31,600.
Adjusted gross income is, and would continue to be, a factor in determining how much in Social Security income is subject to taxation. As a result of the Ledermanns' lower adjusted gross income, the portion of their Social Security payments subject to taxes declines to $70 from $2,550.
Their taxable income would be unaffected by the Treasury's proposal to double the current $1,000 personal exemption allowance because the plan also calls for the repeal of the special personal deductions for age. So, either way, their personal deductions total $4,000.
With all of those changes, the Ledermanns' taxable income would be $22,710 instead of the $30,150 under current law. On that amount, they would pay the federal government $2,837 in income taxes, $2,023 less than under current law.
Ledermann, who is a supporter of Ronald Reagan, says he would make just one change in the Treasury's tax-reform plan were he given the opportunity: He would raise the top tax bracket to 45% for individuals and corporations alike, making this a revenue-raising program instead of a revenue-neutral program. He would contribute the extra money to the cause of reducing the national deficit.