Poorest and Richest Gain Most in Reagan Tax Plan

President Reagan’s proposal to overhaul the nation’s tax system would reduce federal income tax payments for more than half of all families, the White House said Tuesday, with the biggest cuts generally going to the poorest and the most affluent.

Under the long-promised plan that Reagan outlined Tuesday in a televised speech from the Oval Office, individual taxpayers would receive an average tax cut of 7% once the changes became fully effective. And, at every income level, according to the White House, the large majority of families would either receive a tax cut or experience no change in their tax burden.

The White House said that Reagan’s formula would increase taxes for barely one family in five and leave taxes unchanged for about an equal number.

Those most likely to pay more under Reagan’s package are families and individuals who now take advantage of many of the tax breaks that Reagan would abolish--including deductions for state and local income, property and sales taxes, especially in high-tax states such as California, New York, Massachusetts, Michigan, Wisconsin and Maryland.

Because Reagan has pledged to keep overall income tax revenues at the same levels as under current law, his plan would balance the lower average tax burden on individuals by substantially raising federal income tax payments by corporations. Full details of Reagan’s plan will not be disclosed by the Treasury Department until today, and it was not clear how much more corporations would be expected to pay in the first years of the program.

The individual income tax yields more than four times as much revenue as the corporate income tax, so a 30% increase in corporate tax payments would be required to offset a 7% tax cut for individuals and families. But the White House said that the new tax package, “when fully effective,” would raise overall corporate tax payments by only 9%.

For individual taxpayers, the White House said that winners would outnumber losers by nearly 3 to 1.

Taxpayers at the low end of the income spectrum would benefit substantially from the proposed increase in the personal exemption to $2,000 from $1,040. For families with incomes of less than $20,000, the average tax cut would be about 18%.

Windfall for Affluent

And many taxpayers at the high end of the spectrum would receive a windfall from the reduction in the maximum tax rate to 35% from 50%, even though the elimination of some of today’s tax preferences would strike hardest at high-income taxpayers. Those in the $200,000-and-up bracket would receive an average tax cut of almost 11%.

All these averages mask wide variations. For example, taxpayers who now deduct high interest payments on second homes, as well as high state and local taxes, and who benefit from other special provisions of the current tax code could find themselves with significantly larger federal tax bills.

With the biggest winners under the Reagan plan being found at the top and bottom of the income scale, income tax reductions would be relatively modest for most families with incomes between those extremes.

Families earning between $50,000 and $100,000, for example, would get reductions averaging only about 4%.

The White House and a few congressional leaders say that Congress could approve a tax reform package in time to go into effect in 1986, but many other political leaders doubt that the lawmakers will be able to move that fast.

The main elements of the White House tax plan that would affect individuals are similar to the proposal that was announced last November by the Treasury Department. However, under heavy assault by powerful congressional leaders and lobbying organizations, the Administration made several revisions designed to soften the original plan’s impact on businesses, charities, investors and recipients of employer-paid fringe benefits.

Here are some specifics of the proposal for individuals:

--The number of tax brackets would be reduced from as many as 15 to just three. For couples filing jointly, a 15% rate would apply to taxable income of $4,000 to $29,000; a 25% rate would apply to income from $29,000 to $70,000, and all income above $70,000 would be taxed at a 35% rate. For single taxpayers, income from $2,900 to $18,000 would be taxed at a 15% rate; income from $18,000 to $42,000 would be taxed 25%; and all income above $42,000 would be taxed at a 35% rate.

--The personal exemption--adjusted annually for inflation and expected to be $1,080 in 1986 for a taxpayer, spouse, and dependents--would be nearly doubled to $2,000 and would continue to be indexed to inflation. The standard deduction would be increased from $3,670 in 1986 to $4,000 for married couples filing jointly; from $2,480 for single individuals to $2,900; and from $2,480 for heads of households to $3,600. A family of four would not be subject to federal income taxes until its income exceeded $12,000, compared to $7,990 under current law.

--Most employer-paid fringe benefits would continue to be excluded from taxation, but a small part of health insurance premiums paid by employers would be taxed. Income taxes would be paid on the first $10 a month of employer-paid premiums for single taxpayers and the first $25 a month for families.

End to 2-Earner Deduction

--The deduction for state and local taxes, including property taxes, would be repealed. The home mortgage deduction on owner-occupied homes would remain, but the deduction for interest paid on vacation homes and other major loans, such as auto purchases, would be limited to $5,000 above a taxpayer’s investment income. The deduction of up to $3,000 for two-earner families would be abolished.

--For long-term capital gains, 50% of the profits from the sale of stocks and many other assets would be excluded from taxation, yielding an effective top rate of 17.5%. That is a major change from the original Treasury proposal, which would have taxed capital gains as ordinary income, adjusted for inflation. WINNERS AND LOSERS Share of families in each income bracket that would gain or lose from President Reagan’s proposed tax reform package, along with the average tax cut for all families in each bracket.

Families with Families with Families with Avg. Income Bracket tax cut tax increase no change tax cut Less than $10,000 28% 4% 68% 35.5% $10,000-15,000 59 12 29 22.8 $15,000-20,000 64 17 19 13.5 $20,000-30,000 66 22 12 8.7 $30,000-50,000 64 28 8 6.6 $50,000-100,000 62 33 5 4.2 $100,000-200,000 63 34 3 4.1 More than $200,000 71 27 2 10.7

Source: White House