Advertisement

White House Seeks to Alter Tax Plan to Benefit More Families

Times Staff Writer

When White House Communications Director Patrick J. Buchanan said earlier this month that the Administration’s tax simplification plan was designed to favor the “traditional” family, he opened the White House to a torrent of criticism that it has so far been unable to staunch.

The tax proposal, a combination of lower tax rates and fewer tax breaks, was introduced by President Reagan last month as the “strongest pro-family initiative in postwar history.” What Reagan did not say--although many others quickly pointed it out--is that the plan would favor certain kinds of families over others.

The biggest tax cuts would go to large families in which the father works and the mother stays at home with the children. But in this era of divorces, unwed mothers, working wives and smaller families, the great majority of American families no longer fit that mold.

Like Rockwell Painting

Advertisement

“The White House image of the world is like a Norman Rockwell painting,” said Rep. Patricia Schroeder (D-Colo.). “Their tax plan is skewed to benefit a traditional family, but that is just not reality. They have really gotten beat up over the issue.”

For the vast number of middle-income families with working wives and few children, Reagan’s tax plan would add up to much smaller tax cuts--or perhaps even small tax increases. Critics quickly objected that the White House was engaging in a bit of social engineering, using the tax code to encourage wives to become full-time homemakers.

“They seemed to be saying there should be no help in the tax code for the much larger number of families where the spouse has to go into the work force,” said Rep. Robert T. Matsui (D-Sacramento), a member of the tax-writing House Ways and Means Committee. “Instead of basing its plan on sound economic principles, we began to see a certain political philosophy emerging. That was very harmful to a bipartisan tax reform effort.”

In the face of such criticism, the Administration beat a hasty retreat, promising last week to modify its plan to aid middle-income families with child-care expenses.

Advertisement

“We’re not trying to pit one family against another,” said Albert Brashear, a White House spokesman. “We’re going to do everything we can to help all families.”

The initial Reagan plan proposed several features designed to spread benefits among families.

The plan would nearly double the personal exemption from this year’s $1,040 to $2,000, a particular boon for large families. It would increase the standard deduction for married couples who do not itemize deductions from $3,670 to $4,000--and boost it even more for single parents, from $2,480 to $3,600.

IRA Contribution

Advertisement

For relatively affluent families with only one earner--Buchanan’s “traditional” family--Reagan’s plan would expand the current maximum tax-deferred contribution to Individual Retirement Accounts from $2,250 to $4,000.

It would also expand eligibility for the earned income tax credit, a device to cut the taxes of low-income earners, to include families earning up to $13,500, compared to $11,000 today.

But for most two-income families, other provisions of the proposal would cut back on tax relief.

The plan would eliminate the two-earner deduction, which enables couples with two working spouses to reduce their taxable income by up to $3,000. Congress enacted the deduction to compensate for the “marriage penalty"--the fact that married couples typically paid more in taxes than two unmarried individuals with the same incomes.

Advertisement

Reagan’s plan would also convert the existing child-care tax credit, which is targeted most sharply on lower-income families, to a tax deduction, which offers the greatest tax relief to those at the top of the income ladder.

To its critics, that set of proposals was trapped in a time warp, failing to take into account the changing nature of American families. The Census Bureau says that only 15% of today’s families--9.6 million out of 62 million--conform to the traditional model in which the husband is the breadwinner while the wife remains home with children.

In contrast, both parents work in nearly 25% of all families, and another 19% are headed by a single parent. Most of the remaining families have no children and, over the last decade, the average household size has dropped from 3.44 persons to 2.71.

Many political analysts agree that the White House made a tactical mistake by narrowly focusing its appeal to “traditional” families--and to conservative groups seeking to preserve them.

Advertisement

Not Enough to Matter

“Guys like (Rep. Jack) Kemp (R-N.Y.) and Buchanan think this tax reform will make the Catholic, blue-collar family of eight dance in the streets of their neighborhoods,” said Republican political consultant Kevin Phillips. “Somebody must have thought they could make a political breakthrough with the Northern ethnic families, but nobody looked at the demographics. There just aren’t enough of those people to matter.”

As the White House hoped, several conservative groups welcomed Reagan’s proposal, arguing that it would simply make up for the fact that, since the end of World War II, the tax burden has increased more for large traditional families than for any other group.

“The Administration plan takes some steps toward correcting discrimination against homemakers that goes back 35 years,” said Jerry Regier, president of the Family Research Council of America. “More and more families have been forced for economic reasons to have both parents working away from home. Maybe this plan would help reverse that trend.”

Advertisement

At the same time, Reagan won over some of his traditional enemies--advocacy groups for the poor and disadvantaged.

Called ‘Quite Hopeful’

“The Reagan plan is quite hopeful for working-poor and other low-income families,” said Robert Greenstein, director of the Center on Budget and Policy Priorities. “And single-parent families would get even more tax relief, helping to reverse most of the massive tax increase that poor families have endured in the past few years.”

Under the Reagan plan, no family living in poverty would pay federal income taxes. For a family of four, which would be subject to tax in 1986 under current law if its income exceeded $9,575, the tax-free income threshold would be raised to $12,798--well above the poverty level of $11,400.

Advertisement

But advocates for the middle class were not so happy. While Reagan’s reshuffling of the tax code would confer its greatest benefits on low-income and high-income families, vast numbers of middle-income families would benefit less and those with two working spouses might actually lose.

That fact was lost in recent Treasury Department statistics suggesting that middle-income families in every state would receive generous tax cuts. The reason: Treasury looked only at one-earner couples.

A California Family

A one-earner California family of four at the state median income level of $36,800 would receive a $345 tax cut, or 10.2% of its $3,375 tax bill under current law, if it took itemized deductions typical of families at that income level, according to Treasury’s calculations.

Advertisement

But if that family depended on two incomes--as do the majority of married couples earning between $30,000 and $40,000--the results would be dramatically different. The elimination of the two-earner deduction would mean that a family at the median income, with one spouse earning roughly twice as much as the other, would receive a tax cut of just $81, or 2.6% of its tax payment under current law.

And if that family also relied on the maximum child-care credit of $960, it would end up paying an additional $159, or 7.4% more than under the current tax code. Even for those families who took only half the maximum child-care credit, the change to the new tax system would still mean a modest $39 tax hike, or a 1.5% increase.

Alternatives Considered

Even before the White House offered to amend its proposal to help overcome some of these disparities, members of the tax-writing committees began considering several other alternatives to provide more benefits to middle-income families.

Advertisement

Both Democrats and Republicans on the House Ways and Means Committee and the Senate Finance Committee are considering converting the personal exemption to a tax credit. A credit, which directly reduces taxes owed to the government, would help both lower- and middle-income families more than a deduction, which reduces taxable income.

Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.) and Finance Committee Chairman Bob Packwood (R-Ore.) have also suggested restoring at least part of the two-earner deduction.

Other ideas under consideration include expanding the standard deduction more than under the Reagan plan while limiting the increase in the personal exemption. That would shift more of the benefits to the 55% of all taxpayers--mostly at the lower end of the income scale--who do not itemize their deductions.

Some legislators are also interested in expanding the earned income tax credit for the working poor and cutting back on the proposal to increase IRAs for non-working spouses, again shifting more of the tax savings toward the bottom of the income scale.

Advertisement


Advertisement