Most Losers in Upper Brackets : Majority of Taxpayers to Gain in Senate Plan

The sweeping tax overhaul bill approved by the Senate Finance Committee would benefit the great majority of taxpayers--but a substantial number would be worse off than under current law.

In the low and middle tax brackets, nearly all taxpayers would profit under the Finance Committee bill, and about 6 million low-income people would be dropped from the tax rolls altogether. Most of the losers, according to calculations by The Times and private tax experts, would be in the upper brackets.

In the aggregate, the Finance Committee legislation is somewhat less generous to individual taxpayers than the bill passed by the House last December. The Senate bill would cut personal tax payments by an average of 6%, compared to 9% under the House bill.

Reagan Praises Packwood

President Reagan gave the Finance Committee bill a general endorsement Thursday, telling Committee Chairman Bob Packwood: “The American people deserve the type of reform that you have put together.”

But the bill almost surely will not become law in precisely the form approved by the Finance Committee. Many senators already have announced plans to try to amend the bill when it reaches the Senate floor and one of their chief targets will be restoring the full deduction for contributions to individual retirement accounts.

Whatever bill is approved by the Senate then will have to be reconciled with the substantially different House-passed bill. As approved by the Finance Committee, the Senate bill would tax all income at rates of either 15% or 27%, compared with the current maximum rate of 50% and the 38% maximum rate in the House-passed bill.

Under the Finance Committee bill, most ordinary taxpayers would profit more from the lower rates, the increased personal exemption and the beefed-up standard deduction than they would lose from the repeal of various tax breaks. A $20,000 family of three, for example, could save $450, nearly one-quarter of its present tax burden.

Large families that take advantage of few tax preferences would prosper. A $40,000 family with four children could save nearly $700, one-fifth of their current taxes, even if it lost the deduction for its $1,000 IRA.

And even in the top income brackets, taxpayers would save on average 3% to 5% of their tax bill, according to the congressional Joint Tax Committee. Although tax shelters for the very wealthy would be nearly abolished, income from municipal bonds would continue to be entirely tax-free.

The taxpayers most likely to be hit hardest by the Finance Committee bill fall into at least one of these categories, according to tax experts and The Times’ calculations:

--Single taxpayers and couples with no children, who would get relatively little benefit from the increase in the personal exemption from $1,080 to $2,000.

--Two-earner couples, who would lose the deduction of up to $3,000 for couples with two working spouses.

--Taxpayers with individual retirement accounts; annual contributions would no longer be deductible for workers covered by employee pension plans.

--Wealthy taxpayers who participate in limited partnerships and other tax shelters.

A childless $60,000 couple with two working spouses and full IRAs, for example, could pay 15% more in taxes under the Finance Committee’s rules than under today’s tax code. That same couple would pay only 3% more under the House-passed bill, according to the accounting firm of Touche Ross & Co.

But David Keating, executive vice president of the National Taxpayers Union, said that the hypothetical $60,000 couple represents the “worst case” under the Finance Committee bill. His own computer analysis of 48 more nearly typical families showed only four losers.

Keating found only one big loser--a $34,000 family of four with two earners and two IRAs, which would pay 14% more under the Finance Committee’s rules. Among the winners, Keating said, the tax liability of a $41,000 family of four with one earner and no IRAs would fall by more than one-third, from $6,404 to $4,200.

Beyond the direct impact on taxpayers, Keating added, the Finance Committee bill would stimulate economic growth by reducing tax rates and eliminating the economic distortions caused by today’s tax shelters.

“One of the key reasons for tax reform is to get tax rates as low as possible for as many people as possible,” Keating said, “and on those grounds the Senate bill is far better than the House bill.”

Senate More Generous

In many key respects, the Senate Finance Committee bill is more generous than the House-passed legislation, which would leave tax rates higher and increase the personal exemption from today’s $1,080 to only $1,500.

But the Senate bill also would deal more harshly than the House bill with the following tax breaks:

--It would eliminate the deduction for contributions to IRAs by persons covered by pension plans at work. The House bill has no comparable provision, although it would reduce IRA contributions by $1 for each $1 contributed at work to a tax-sheltered 401(k) retirement account.

--It would eliminate the deduction for consumer interest payments.

--It would tax capital gains--profits on the sale of such investments as stocks--like other income. Under the House bill, 58% of capital gains would be taxed, up from 40% under current law.

--It would disallow a host of tax shelters permitted under the House bill.

--It would allow deductions for medical expenses only that exceeded 10% of income. The comparable figure in current law and the House bill is 5%. THE TAX PLANS: HOW THEY MIGHT AFFECT YOU

Some taxpayers would do better under the tax overhaul bill approved Wednesday by the Senate Finance Committee; others would do better under the bill passed by the House in December. The following estimates for a variety of taxpayers assume that the two bills took full effect next year. The hypothetical families generally have typical income sources and tax deductions.

Change from Total current Percent Plan tax law change $20,000 INCOME Single taxpayer, Senate $2,352 -$482 -17.0% standard deduction House 2,563 -271 -9.6 Family of three, one earner, Senate $1,380 -$450 -24.5% standard deduction House 1,410 -420 -23.0 $30,000 INCOME Single taxpayer, $1,000 individual Senate $5,079 -$220 -4.2% retirement account*, standard House 4,838 -461 -8.7 deduction Childless couple, two wage earners, Senate $3,195 -$422 -11.7% $1,000 IRA*,standard deduction House 3,075 -542 -15.0 $40,000 INCOME Childless couple, two wage earners, Senate $3,803 -$105 -2.7% $1,000 IRA*, itemized deductions House 3,887 -22 -0.6 of $12,185 under current law Family of six, one wage earner, Senate $2,629 -$677 -20.5% $1,000 IRA*, itemized deductions House 2,808 -498 -15.1 of $12,010 under current law $60,000 INCOME Single taxpayer, $2,000 IRA*, Senate $8,461 -$175 -2.0% $4,000 401(k) contribution**, House 8,965 +330 +3.8 deductions of $17,795 Childless couple, two wage earners, Senate $7,625 +$977 +14.7% $4,000 IRAs*,deductions of $17,662 House 6,841 +193 +2.9 Family of four, one wage earner, Senate $5,526 -$764 -12.1% $2,000 IRA*, $4,000 401(k) House 6,085 -205 -3.3 contribution**, deductions of $17,578 $150,000 INCOME Childless couple, two wage earners, Senate $22,749 -$1,409 -5.8% $4,000 IRAs*, $10,000 401(k) House 23,956 -202 -0.8 contribution**, deductions of $54,865 Childless couple, two wage earners, Senate $28,189 +$4,031 +14.3% $4,000 IRAs*, $10,000 tax-shelter House 22,343 -1,815 -7.5 loss, deductions of $54,865

* taxpayers also covered by employee pension plans

** tax-deferred retirement account usually matched by employer contribution

Source: Based on computer model prepared by Touche Ross & Co.; Senate figures by The Times