Deductions Die Before Rates Are Cut : Reagan Reforms Contain ‘Time Bomb’ for Taxpayer
Even sharp-eyed economists have overlooked it, but tucked deep within the Reagan Administration’s 460-page tax reform proposal is a multibillion-dollar kicker: While taxpayers would lose most deductions under the proposal next January, they would not reap a cut in tax rates until the following July.
That six-month hiatus, one Administration official estimated Friday, would net the government up to $14 billion in extra personal income tax revenues and billions more in corporate taxes during fiscal 1986.
Notice of the delay in tax rate reductions is contained in scattered sections of the hefty tax proposal, but Administration officials explaining the plan to reporters and tax experts have not taken pains to point out the effect, which went largely unnoticed for three days.
“That’s really sneaky,” said Roger E. Brinner, senior economist with Data Resources, a Lexington, Mass., forecasting firm. Brinner said that two officials who helped write the Reagan proposal, Assistant Treasury Secretary Manuel H. Johnson Jr. and Deputy Assistant Secretary Charles McClure, had assured him this week that the plan contained no such revenue time bombs.
“Either they didn’t know or they didn’t tell me,” Brinner said. “That’s big loads of money.”
However, a senior Treasury Department official said Friday that the delay was deliberately built into the tax plan to meet the President’s pledge that his reforms would be “revenue neutral"--that is, they would raise the same amount of money as do present tax policies.
“Revenue is certainly the answer. We want things to balance in that first year,” said John Wilkins, a special assistant on tax policy in the Treasury Department. “I don’t think there’s anything sneaky at all, since we’ve had this published all over the world.”
One economist said Friday that the delay appears to be a revenue “plug” that allows the Administration to promise a deep cut in tax rates--deemed essential to congressional approval of the tax package--while making up the financial loss elsewhere.
$11-Billion Revenue Loss
The Treasury Department estimates that the proposed cuts in personal income tax rates--to flat 15%, 25% and 35% brackets--would lower income tax revenues by $11.1 billion in fiscal 1986, compared to what would be collected under present tax rates.
But, if the cut in tax rates were made effective next Jan. 1 instead of July 1, the reduction in revenues would total up to $25 billion, according to an Administration official who asked not to be named.
Reductions in corporate tax rates, which are expected to cost the Treasury $10 billion, also would be billions higher without the delay, the official said. He could not provide a specific figure.
The Reagan proposal has other stopgaps as well, said David Ernst, a forecaster with Evans Economics of Washington. The plan promises a 13-percentage-point cut in the maximum business tax rate, to 33%, but tacks on a corporate “windfall” tax on depreciation benefits that would generate $57 billion over five years.
8% Cut Really Only 4%
The six-month delay in tax rate reductions “certainly helps to achieve revenue neutrality in that crucial first year,” Ernst said. “And it certainly isn’t a bad idea, from a political point of view, to say we’ve got an 8% cut in taxes when in fact it’s taking place halfway through the year and is really only a 4% cut.”
It is also nothing new: The Reagan Administration’s last big tax reduction, a three-year cut that began in 1981, started on Oct. 1. The delay effectively reduced that year’s personal income-tax cut from the advertised 5% reduction to 1.25%.
If the Reagan reforms were enacted as proposed, it is unclear how individuals’ taxes would be figured.
The Administration proposal would reduce the current 14 or 15 tax brackets to three and lower overall tax rates. But, if the new tax rates were effective for only half of 1986, taxes could not be precisely calculated without using the old bracket system.
The White House analysis of the reforms says taxes would be calculated by using a “blended” rate for the entire 1986 tax year, although withholding at the lower tax rate would begin after July 1.
That, Ernst said, could mean that 1986 income taxes might be assessed in 19%, 29% and 39% brackets--or some similar formula--instead of the 15%, 25% and 35% brackets proposed under the plan.