For individual taxpayers, the tax bill approved by the House last week offers something for just about everyone.
An estimated 88% of all taxpayers would come out ahead or at least break even if the bill, which will be considered by the Senate next year, ever became law. The average tax reduction would be about 9% once the plan was fully implemented in 1987, according to the congressional Joint Tax Committee.
Moreover, the House bill would treat most taxpayers more generously than would President Reagan's original tax proposal, which would leave 76% of taxpayers with a tax cut or at least no tax increase.
'Yuppies' Should Beware
However, many "yuppies," among others, should beware of the House bill. Single taxpayers and childless couples are more likely than other groups to pay higher taxes, particularly if they currently rely on both Individual Retirement Accounts and employer-sponsored 401(k) salary-deferral plans to save for retirement. And they could be even worse off if the Senate modifies the bill next year to conform more closely to the White House proposal.
These are among the conclusions of two studies conducted for The Times by accounting firms. The Washington office of Touche Ross & Co. examined the effect of the House bill and Reagan's proposal on a number of hypothetical taxpayers, while the Torrance-based Cal State Associates looked at their impact on more than a dozen actual California tax returns.
Under either the House bill or the Reagan plan, about 6 million "working poor" taxpayers would be dropped from the income tax rolls. For most other taxpayers, the two approaches would parcel out gains and losses in different ways depending on circumstances that are largely beyond the control of most individuals. Although there are numerous exceptions to every rule, some general conclusions are possible:
- Taxpayers with incomes below $75,000 would receive somewhat greater tax savings under the House plan, while those with incomes above $75,000 would, on average, be better off under the Reagan proposal.
- Residents of high-tax states such as New York, California and Wisconsin would receive greater benefits under the House bill; Reagan's proposal would be more generous in low-tax states such as Texas and Arizona.
- Single taxpayers are treated less generously in the House bill than under the White House plan, while single parents with dependent children (heads of households) are granted greater tax benefits by the House plan than by Reagan's proposal.
- Families with only one wage earner would come out ahead of two-earner families under either plan, because of the loss of the two-earner deduction, and childless middle-income couples in which both spouses earn similar salaries would be hit particularly hard.
The House bill, although it follows the outlines of the tax proposal Reagan presented in May, makes changes that would affect millions of taxpayers in a variety of ways.
Contrasted with the White House plan, for example, the House bill would retain the state and local tax deduction, keep 401(k) plans alive (although it would limit their use), allow non-itemizers to continue to deduct most of their contributions to charity, preserve the deduction for interest on second-home mortgages and retain the tax-free status of most employer-paid fringe benefits.
However, the House plan is less generous in some aspects than Reagan's. It would boost the personal exemption from the current $1,040 to the full $2,000 proposed by the White House only for taxpayers who take the standard deduction. Those who itemize--47% of all those who paid income taxes in 1983--would receive a smaller $1,500 exemption for each family member.
And the House bill would lower tax rates considerably less than the White House package. It would cut the top tax rate to 38% instead of 35% and put the proposed 15%, 25% and 35% tax rates into effect at lower income thresholds than Reagan's plan.
Taxes on Corporations
Both tax plans, which are designed theoretically to raise about the same amount of revenue as current law, would pay for the individual tax cuts by boosting taxes on corporations. The Reagan plan would shift about $120 billion of the tax burden from individuals to corporations over the next five years; the House bill would shift $140 billion.
The tax overhaul, which long ago lost its original goal of simplifying the existing tax code, has tax specialists dancing for joy over its hundreds of complex provisions, particularly those aimed at insuring that wealthy individuals and profitable corporations can no longer largely escape paying a fair share of income taxes.
"This would be a truly major shift in the tax system," said Larry Axelrod, a Touche Ross tax attorney. "No matter what happens from here on, there is enough in this 1,400-page document to keep us busy figuring it out for a long, long time."
Reagan Seeks Changes
With the Senate likely to spend months debating tax legislation, any changes are not likely to take effect before 1987, and the final product--if Congress can agree on one--is certain to be somewhat different from the House bill. President Reagan will press for several changes that would bring the bill more into line with his original proposal, but Senate Finance Committee Chairman Bob Packwood (R-Ore.) has warned him that the Senate is likely to hew more closely to the House bill.
The House bill would prove more generous than current law for the great majority of taxpayers who use the standard deduction. Tax rates would be lower for these taxpayers, and the standard deduction would be larger.
Among taxpayers who itemize, some unmarried individuals with substantial tax-deferred retirement savings could end up worse off if the tax code is altered. Under the House bill, anyone who contributed to a 401(k) account would have to reduce individual retirement account contributions by the same amount. That means IRAs, whose annual contributions are limited to $2,000, would become out of bounds for nearly all participants in 401(k) plans, which usually involve employer matching contributions. Reagan's plan would be even tougher because it would abolish 401(k) plans.
Other relatively well-off two-earner couples could also end up paying more tax. Hardest hit would be couples earning salaries of $30,000 each, because they now barely qualify for the maximum $3,000 two-earner deduction.
On the other side, both plans would provide generous tax cuts to so-called "traditional" families in which only one spouse works outside the home. And despite criticism from conservatives that the House bill is "anti-family" because it provides only a $1,500 personal exemption to itemizers compared to Reagan's $2,000 exemption for all, the studies indicate that the House bill is actually more beneficial to many large families.
California taxpayers would generally do well under both plans. Harry Hudson of Cal State Associates checked 12 taxpayers without 401(k) plans and found that 11 would come out ahead under either plan.
Six Would Gain Less
Another six taxpayers with both 401(k) plans and IRAs would generally gain less, and several would be forced to pay more in taxes. Reagan's plan would cost them their 401(k) plans, while the House bill would force them to drop their IRAs.
The differences between the plans would not be particularly large to most of the taxpayers examined by Hudson. One family with an income of about $41,000 would save $1,356 under Reagan's plan; it would save an additional $25 under the House bill. Another with an income of about $47,000 would gain $172 from the White House package, $138 from the House bill.
In some cases, however, the differences could be substantial. A family with an $82,000 income and extra state sales taxes because it purchased a car would benefit from the House's decision to retain the state and local tax deduction. It would save an estimated $1,353 on its federal income taxes under the House bill, compared to $626 under Reagan's plan.
Gains for 'Working Poor'
The chief beneficiaries of both packages would be "working poor" families, many of which have experienced major increases in their tax burdens over the last decade as the Social Security tax rate has risen and inflation has pushed them into higher income tax brackets.
According to the Center on Budget and Policy Priorities, an advocacy group for the poor, a family of four at the poverty line would pay an estimated $1,271 in combined Social Security and federal income taxes in 1987 under current law. The White House plan would cut the family's total federal tax burden to $595, and the House bill would slash it to $399.
At the same time, the House bill would distribute far less of the total tax relief for individuals to upper-income groups than the Reagan plan would.
THE TAX PLANS: A VARIABLE IMPACT
Across the Income Spectrum
The tax plans proposed by President Reagan and approved by the House would have very different impacts on different taxpayers. The following estimates for a variety of taxpayers assume the tax bill takes full effect next year. In general, the examples assume typical income sources and tax deductions for each income and family type, and, except where noted, a state tax burden similar to that of California and other somewhat above-average states.
Change from Total current Plan tax law $20,000 INCOME Single taxpayer, Reagan $2,345 -$489 standard deduction House 2,563 -271
Family of three, one earner, Reagan $1,575 -$255 standard deduction House 1,410 -420
$30,000 INCOME Single taxpayer, $1,000 Reagan $4,620 -$679 individual retirement account, House 4,838 -461 standard deduction.
Childless couple, two wage earners, Reagan $3,240 -$377 $1,000 IRA, standard deduction House 3,075 -542
$40,000 INCOME Childless couple, two wage earners, Reagan $4,324 +$416 $1,000 IRA, itemized deductions of House 3,887 -22 $12,185 under present law
Family of six, one wage earner, Reagan $2,895 -$412 $1,000 IRA, itemized deductions of House 2,125 -1,181 $12,010 under present law
$60,000 INCOME Single taxpayer, $2,000 IRA, Reagan $9,987 +$1,351 $4,000 401(k) contribution*, House 8,965 +330 deductions $17,795
Chidless couple, two wage earners, Reagan $7,550 +$902 $4,000 IRAs, deductions of $17,662 House 6,841 +193
Family of four, one wage earner, Reagan $7,050 +$760 $2,000 IRA, $4,000 401(k) contribu- House 6,085 -205 tion, deductions of $17,578
$75,000 INCOME Family of four, two wage earners, Reagan $9,183 +$479 $2,000 IRA, high-tax state, child-care House 8,229 -475 credit, deductions of $25,949
Family of four, two wage earners, Reagan $9,663 -$434 $2,000 IRA, low-tax state, child-care House 9,715 -382 credit, deductions of $23,183
$150,000 INCOME Childless couple, two wage earners, Reagan $27,666 +$3,508 $4,000 IRAs, $10,000 401(k) contri- House 23,956 -202 bution, relatively large mortgage, deductions of $54,865
Childless couple, two wage earners, Reagan $24,131 -$27 $4,000 IRAs, $10,000 tax-shelter House 22,343 -1,815 loss, relatively large mortgage, deductions of $54,865
$200,000 INCOME Family of four, two wage earners, Reagan $48,230 -$6,310 $4,000 IRAs, relatively small House 45,220 -9,320 mortgage, deductions of $47,155
Percent change $20,000 INCOME Single taxpayer, -17.3% standard deduction -9.6
Family of three, one earner, -13.9% standard deduction -23.0
$30,000 INCOME Single taxpayer, $1,000 -12.8% individual retirement account, -8.7 standard deduction.
Childless couple, two wage earners, -10.4% $1,000 IRA, standard deduction -15.0
$40,000 INCOME Childless couple, two wage earners, +10.6% $1,000 IRA, itemized deductions of -0.6 $12,185 under present law
Family of six, one wage earner, -12.5% $1,000 IRA, itemized deductions of -35.7 $12,010 under present law
$60,000 INCOME Single taxpayer, $2,000 IRA, +15.7% $4,000 401(k) contribution*, +3.8 deductions $17,795
Chidless couple, two wage earners, +13.6% $4,000 IRAs, deductions of $17,662 +2.9
Family of four, one wage earner, +12.8% $2,000 IRA, $4,000 401(k) contribu- -3.3 tion, deductions of $17,578
$75,000 INCOME Family of four, two wage earners, +5.5% $2,000 IRA, high-tax state, child-care -5.5 credit, deductions of $25,949
Family of four, two wage earners, -4.5% $2,000 IRA, low-tax state, child-care -4.0 credit, deductions of $23,183
$150,000 INCOME Childless couple, two wage earners, +14.5% $4,000 IRAs, $10,000 401(k) contri- -0.8 bution, relatively large mortgage, deductions of $54,865
Childless couple, two wage earners, -0.1% $4,000 IRAs, $10,000 tax-shelter -7.5 loss, relatively large mortgage, deductions of $54,865
$200,000 INCOME Family of four, two wage earners, -11.6% $4,000 IRAs, relatively small -17.1 mortgage, deductions of $47,155
* A tax-deferred retirement savings account usually matched by employer contributions.
Closeup of a $50,000 Family Here is a detailed comparison of the impact of the Reagan and the House on a $50,000 family of four with two wage earners
Current law Reagan House INCOME Taxpayer wages $30,000 $30,000 $30,000 Spouse wages 20,000 20,000 20,000 Interest 750 750 750 Employer-paid health insurance 0 300 0 GROSS INCOME 50,750 51,050 50,750 ADJUSTMENTS TO INCOME IRAs 3,000 3,000 3,000 Two-earner deduction 1,900 0 0 Miscellaneous adjustments 0 19 22 ADUSTED GROSS INCOME 45,850 48,031 47,728 DEDUCTIONS Property tax 1,200 0 1,200 Sales tax 500 0 500 State income tax 2,092 0 2,122 Mortgage interest 10,000 10,000 10,000 Other interest 2,500 2,500 2,500 Charitable contribution 1,000 1,000 1,000 Miscellaneous 500 0 0 TOTAL DEDUCTIONS 17,792 13,500 17,322 Less zero bracket 3,670 4,000 0* NET DEDUCTIONS 14,122 9,500 17,322 PERSONAL EXEMPTIONS 4,320 8,000 6,000 TAXABLE INCOME 27,408 30,531 24,405 INCOME TAX 3,954 4,133 3,851 CHANGE FROM CURRENT LAW +178 -103 PERCENT CHANGE +4.5% -2.6%
* The equivalent of a $4,800 zero bracket is reflected in the tax tables.
Note: Because of rounding, components sometimes do not add precisely to totals
Source: Based on computer model prepared by Touche Ross & Co