Tax-Bashing the Middle Class : Senate’s ‘Reform’ Bill Would Hit Hardest at Moderate Brackets

President Reagan, applauding Senate passage of a tax-reform bill, said that “the score is taxpayers 1, special interests nothing.” One disheartened business representative was heard to say that the tax bill may prove to be the “Lobbyists’ Retirement Act” of 1986.

That is unlikely. If the measure becomes law, however, it could well turn out to be the Congressional Involuntary Retirement Act when millions of middle-class Americans find out that the bill “reforms” them right into higher taxes.

Existing federal tax laws do need reforming. The system is supposedly based on the ability to pay, with individual Americans paying out an increasingly large share of their incomes to the tax collector as they earn more money. In real life, however, the proliferation of deductions and credits--”loopholes,” in the view of those who don’t benefit from them--created a situation in which most high-income people are able to cut their tax payments far below the theoretical maximum of 50%. Many pay little or no taxes at all.

The corporate income tax underwent a similar distortion. As things stand, one large, profitable company may pay the 46% maximum while another pays nothing.

This is not only unfair, but it is also bad for the economy because vast amounts of capital are channeled into essentially unproductive enterprises for tax considerations. The system awards consumption and penalizes savings--the very opposite of what is needed if the American people are to maintain their living standards in a tough, competitive world.

The House and Senate both have enacted reform bills. Differences between the two measures must now be reconciled.

The approach to reform in both houses of Congress is attractive in principle. The idea is to eliminate the maze of exemptions and credits that have found their way into the tax code, but to offset this loss of deductions by lowering the income tax rates for both individuals and corporations.

There are some good things in both bills. A tough new minimum tax, for example, would ensure that just about everyone above the poverty level pays something.

Under the Senate bill about 6 million poor families would be taken off the tax rolls entirely. It also takes dead aim at real-estate tax shelters, which have caused a disproportionate flow of money into office buildings and apartment complexes that then stand vacant for lack of tenants. But the Senate measure also decimates several provisions of the tax law that are dear to the hearts of middle Americans.

Tax deferment on individual retirement arrangements, better known as IRAs, would no longer be available to people with other pension plans. Married couples where husband and wife both work again would pay higher taxes than a similar family living in sin. Interest payments on consumer purchases--autos, for example--would no longer be deductible.

Deductions for state and local sales taxes would be drastically limited, especially for people in places like California with high state income taxes. The tax break for people with large medical bills not covered by insurance would be wiped out except in the most extreme cases.

Lower tax rates are supposed to offset these seeming drawbacks. The House bill provides for four tax brackets ranging from 15% to a maximum of 38%. The Senate measure provides for two basic tax rates--15% and 27%.

In the aggregate, the reform is indeed tilted to the advantage of individual taxpayers. Once the Senate bill became effective, taxpayers would get an average tax cut of 6%, with the revenue loss being offset by higher taxes on business. But that isn’t the whole story.

To begin with, the elimination or reduction of tax breaks would take effect next Jan. 1, while the lower tax rates would not apply until July 1, 1987. That translates into a whopping net tax boost of $20 billion to $25 billion next year.

The politicians don’t like to talk about this sleight-of-hand, but they can’t hide forever. The 1987 tax increase would be reflected in the returns that the voters will be preparing in April, 1988--6 1/2 months before election time.

Once the reforms become fully effective, the middle class as a whole would get a modest tax break. But fully one-third of the 60 million taxpayers with incomes between $20,000 and $100,000 would pay more than they do now, and the losers are by no means limited to the higher range. According to one estimate, the average childless couple with $30,000 in income would pay almost $900 a year in extra taxes.

House members promise to soften the blow on middle-class taxpayers who would be adversely affected. But as a practical matter they can do so only by hitting business even harder. (The benefit to individual taxpayers would be more apparent than real. Corporate income taxes are really paid by the consumer, to whom business taxes are inevitably passed on.)

Even as things stand, the reform bills are flawed from the standpoint of effect on the overall economy--the golden goose on which we all depend for our livelihoods.

More and more economists agree that U.S. economic prospects depend on a revitalization of the manufacturing sector, which has been hard hit by imports. But the tax-reform bills, instead of encouraging more investment in production facilities, probably would result in less.

Both houses would repeal the 10% investment tax credit, retroactive to Jan. 1, 1986. Capital gains would be taxed at a higher rate. The House bill would also offer less generous depreciation provisions.

Backers of the reform measures say that all this would be more than offset by lower corporate income-tax rates, and many if not most businessmen agree. But several prestigious economic analysts say that the reform bills would cut into economic growth.

Tax reform is a complicated business. But while Congress may deserve an A for effort, the net result hardly merits the self-congratulation on Capitol Hill.

For years the polls have shown that voters are disenchanted with the existing tax system, which they correctly perceive as riddled with injustice. But recent surveys also show that most taxpayers have scant faith that the present reform effort will produce much improvement. Which goes to show that people aren’t stupid.