Treasury Secretary James A. Baker III won broad support for tax revision as the House Ways and Means Committee opened congressional hearings Thursday on President Reagan’s tax proposal, but he sparred repeatedly with the panel’s tax writers over details of the plan.
Committee Chairman Dan Rostenkowski (D-Ill.) struck a conciliatory chord, calling the White House tax reform proposal “monumental” and urging Reagan to “turn public anger and frustration against those bent on protecting the status quo.”
But at the same time, Rostenkowski noted that “today the job of shaping tax reform shifts from the White House to Congress,” and he warned: “The crusade will only be as committed as the President’s leadership.”
A Vigorous Defense
Baker vigorously defended the Administration’s comprehensive tax plan against complaints from committee members, who questioned its effect on everything from two-income couples to the insurance industry, vacation home areas, the oil industry and states with high taxes.
The Treasury secretary conceded that the Administration’s new tax package is necessary in part because of flaws in Reagan’s 1981 tax cut, noting that the new proposal calls for higher corporate taxes because the 1981 tax changes were “too generous” to business.
Challenged nonetheless by one Republican lawmaker, who argued that provisions of the White House plan could ruin the equipment leasing industry, Baker replied sarcastically: “I cannot agree that it is the end of Western civilization as we know it.”
Several sharp exchanges between Baker and the lawmakers suggested that members of the committee who will write the House tax-revision bill are going to seek important changes in the proposal Reagan presented Tuesday.
Baker said the Administration would be flexible in accepting alternatives, saying: “We will work with the committee--we will look at anything.” But he objected to several ideas advanced by committee members.
He was particularly adamant in rejecting any compromise on the White House proposal to eliminate the deductibility of state and local taxes. Rep. Thomas J. Downey (D-N.Y.) complained that in New York and other high-tax states, “a lot of middle-class taxpayers are going to be Tories in this revolution.”
But Baker attacked the deduction as a $40-billion subsidy by the large majority of Americans to a much smaller number of taxpayers in high-tax states who itemize their deductions.
Several provisions of the tax proposal could harm certain sectors of the economy, Baker agreed. He acknowledged that apartment rents might increase slightly because of the loss of some tax benefits to the construction industry, that giving to charities could dip because of tightening of deductions for charitable giving and that real estate values in vacation home markets could fall because the deduction for mortgage interest on a second home would be curtailed.
But he argued that such negative effects are relatively minor when weighed against the benefits of a tax system with lower rates and more equitable treatment of different types of business investment. The Administration maintains that adoption of the new tax system would boost the nation’s gross national product 1.5% within a decade.
Curtailing Tax Breaks
The Reagan tax package, in essence, would lower tax rates and widen the personal exemption for individuals, while eliminating or curtailing many existing tax breaks. The top tax rate on business would be cut from 46% to 33%, but certain features of the tax code that benefit particular firms and industries would be eliminated or scaled back.
Several committee members questioned whether the plan would be too generous to rich taxpayers at the expense of middle-income groups. Taxpayers with incomes above $200,000, the Administration said, would receive an average tax cut of 10.7%, while families with incomes between $30,000 and $50,000 would get a smaller 6.6% reduction.
Indeed, Rep. Andrew Jacobs Jr. (D-Ind.), an affluent legislator who does not accept his full congressional salary, ironically complained that his tax payment last year of $79,975 would have dropped by $14,133 if Reagan’s plan had been in effect.
“It looks unfair . . . with respect to my fellow citizens,” Jacobs said.
A Generous Cut
Baker agreed that many wealthy taxpayers who are already paying high taxes would receive a generous tax cut under the plan. But he said the new proposal would eliminate some of the problems of the current system, which allows thousands of high-income taxpayers to escape their fair share of the income tax burden.
In his testimony, Baker disclosed that about 30,000 families making more than $250,000 in 1983--or 11% of the total taxpayers in that group--paid federal income taxes amounting to less than 5% of their real income. Fewer than half of those top taxpayers paid as much as 20% of their income in taxes, Baker said.
“Instead of more tinkering, we should make some very basic, fundamental changes to remodel the code,” Baker said. “The average taxpayer has become convinced that others benefit from this growing complexity and that he or she does not. . . . The time is right for starting anew with the fresh approach that fundamental reform offers.”
Wooing ‘Fair Maiden’
Some members of the committee, though, worried that Reagan’s focus on tax reform would shift the spotlight away from the budget deficit. “Our biggest problem is the deficit,” said Rep. J. J. Pickle (D-Tex.). Congress could “woo the fair maiden of tax reform, but we have to be certain our house doesn’t fall down while we’re romancing this fair lady.”
And Rostenkowski vowed to examine Reagan’s tax package closely to ensure that it does not exacerbate the deficit, which is expected by the Congressional Budget Office to remain above $180 billion for the rest of the decade, even if Congress approves a major spending reduction package.
“The worst that can happen to us is to write a bill only to find that revenue neutrality has been sabotaged by faulty revenue estimates,” he said.