To Finance Cuts for Others : Affluent Facing Big ’87 Tax Hike
Congressional tax negotiators, competing last week to funnel benefits to the politically important middle class, struck a one-year deal that would reduce the 1987 income tax bite for $20,000- to $50,000-a-year households--and make up the loss with a dramatic tax hike for many of the nation’s more affluent workers.
The result is a tax code that--for 1987--would employ five rate brackets for individuals, compared to only two in succeeding years, and would levy a top tax of 38.5% on income, compared to a nominal top rate of 28% on taxable earnings thereafter.
The one-year arrangement promises a pleasant surprise for about 35 million people with taxable incomes in the $20,000-to-$50,000 range, who would pay lower taxes in their April 15, 1988, filings than in later years. For example, the average tax cut for households with $20,000 to $30,000 a year in total income would be 10.7%, compared to 9.8% in the 1988 tax year.
May Come as Shock
But Congress’ deal may come as a nasty shock to many upper-middle-class and wealthy taxpayers who were savoring the prospect of a 1987 tax cut but, instead, would be socked with average increases of 5.2% to 11.4%.
“There will be--at least next year--a lot of people who are expecting a reduction but will get an increase,” said Ira Shapiro, director of tax policy for Coopers & Lybrand, a major accounting firm.
Corporations face an even more serious jolt. For them in 1987, scores of deductions and other tax preferences would be eliminated immediately, but their tax rates would not be cut for the first six months of the year, meaning that businesses would effectively pay a 40% top tax rate, halfway between the current 46% and the proposed 34% top levy.
That corporate hike, combined with the smaller tax cut for individuals in the new law’s first year, would make 1987 tax collections leap a whopping $11 billion above the amount that would be collected if the current law remained in force.
The extra cash could help avoid another surge in the deficit. In 1988, when the two-bracket tax code would become fully effective, tax collections under the new law would plummet $17 billion below the level that would be collected if current law were kept.
All this does not stem from a statistical quirk but from more than a year of political and mathematical maneuvers by Reagan Administration and congressional tax experts.
Simply put, tax writers were initially unable to draft a politically acceptable tax code that would raise as much money as the current tax law over the next five years and thus avoid aggravating the federal budget deficit. Their solution was to give taxpayers a much smaller rate cut in the first year of the new tax code but to ease the pain by directing almost all of the benefits to the largest group of taxpayers, the middle class.
“They’re giving a decrease in 1987 to middle- and lower-income people,” Shapiro said, “and basically not giving upper-middle and upper-income people the benefits of the tax reduction” until 1988.
“For 1987, more than 40% of people with incomes between $50,000 and $75,000 will have a tax increase. That’ll get better in 1988, of course, but it’s a substantial number,” he said.
For the very wealthiest Americans, the news is even worse: 49% of the 2.3 million households with taxable incomes of more than $100,000 would receive a 1987 tax hike. And calculations by The Times show that even average families in those brackets could easily experience one-year tax increases of 25% and more.
The one-year gyrations in the tax overhaul plan still would reduce the tax burden for four of every five households in 1987, roughly the same as in succeeding years, congressional tax experts noted Sunday.
But, because taxes would rise for those at upper-income levels, the total 1987 tax cut for the nation as a whole would be much smaller: only 1.6%, compared to 6.1% in 1988.
Ill-Kept Secret
The tinier first-year tax cut was an ill-kept secret of the Reagan Administration’s first tax-overhaul proposal, issued in 1984, as well as of the tax bills passed separately by the House and Senate last winter and this spring. But the quirk did not become a genuine political obstacle to a new tax law until this summer, when the House and Senate tax negotiators met to hammer out a compromise bill.
At that point, House negotiators objected to the way in which the first-year tax hike was kept small: a deliberate six-month gap between the time taxpayers’ deductions and preferences were taken away and the date on which tax rates were lowered.
$36-Billion Saving
Senate lawmakers saved $36 billion in tax revenues by building that gap into their bill. But that $36 billion was absorbed largely by middle-class households earning between $20,000 and $50,000 a year.
House tax negotiators, arguing that the gap was unfair to the middle class, made its elimination a key demand once tax talks began in July, but neither side could find a way to make up more than about $17 billion of the $36-billion revenue loss until late in the talks.
Avoiding a Debacle
The five-bracket solution avoided both a political and statistical debacle in the new tax code, congressional tax experts said Sunday. Had the six-month gap been preserved, taxpayers would have figured their 1987 taxes using numbingly complex tables of “blended” rates from the old and new tax laws.
The proposed solution preserves for an additional year the 11% bracket now imposed on low-income taxpayers. And it collects additional money from upper-income households through the one-time use of two higher tax brackets of 35% and 38.5%.
“We just did it as a way of giving more relief to the middle-income taxpayer,” said David Brockway, chief of staff on the Joint Committee on Taxation, the panel that essentially wrote the compromise tax bill. “The two higher rates are in there to save money, essentially.”
“Nobody (among Senate negotiators) really cared much how you did it,” said William Diefenderfer, the chief counsel to the Senate Finance Committee. “The only measure of what was best was the efficiency of it--how you got the most bang for the buck.”
Compromise Succeeds
The 1987 rate compromise succeeds on all those counts. But that success comes largely at the expense of nearly 5 million households that earn more than $50,000 annually, according to tax committee and Times calculations.
The tax committee’s analysis, released Saturday, forecast that 3.1 million households earning between $50,000 and $75,000 would have a tax hike, compared to 4.8 million that would receive a decrease.
One million families with taxable incomes between $75,000 and $100,000 would face tax hikes averaging 5.2%; 815,000 families in the $100,000-to-$200,000 range would pay an average 5.6% larger tax bill, and more than half the 600,000 households making over $200,000 would have increases averaging 11.4%.
Times calculations show that the effects on actual families would vary widely from those averages, with some households experiencing sizable increases and others actually netting a tax decrease.
The middle-class benefits of the one-year system are apparent in some of those figures. For example, a hypothetical two-earner childless couple earning $40,000 (see chart at left) would pay $3,572 in taxes in 1987--a 9% drop from current law--but $3,677 in 1988, only a 6% decrease.
One-Time Increases
The one-time increase for upper-class taxpayers is even more obvious: A single taxpayer earning $60,000 and with a pension plan where he works, an IRA and $18,000 in deductions would sustain a 15% tax hike in 1987 and only a 3% increase in 1988. And a $150,000 childless couple with nearly $55,000 in deductions would be hit with a 14% tax hike in 1987, compared to a 2% rise in 1988.
Families with children would fare somewhat better in the years after 1987 than do single persons and childless couples, in part because the standard deduction and the personal exemption both rise in 1988 and beyond, and tax brackets will be indexed for inflation beginning in 1989.
Tax writers did eliminate one rate quirk in the bill that raised money but aggravated Republicans and Democrats alike: They ordered that the capital gains tax for individuals remain at a flat 28% in 1987, ending the prospect that wealthy taxpayers would pay a 38.5% tax on capital gains.
NEW TAX TABLES
1987
COUPLES FILING JOINTLY
Taxable Pay tax of Plus this percent of amount by which income income exceeds lower end of bracket $0-3,000 $0 11% 3,000-28,000 330 15 28,000-45,000 4,080 28 45,000-90,000 8,840 35 90,000 plus 24,590 38.5
SINGLE TAXPAYERS
Taxable Pay tax of Plus this percent of amount by which income income exceeds lower end of bracket $0-1,800 $0 11% 1,800-16,800 198 15 16,800-27,000 2,448 28 27,000-54,000 5,304 35 54,000 plus 14,754 38.5
1988
COUPLES FILING JOINTLY
Taxable Pay tax of Plus this percent of amount by which income income exceeds lower end of bracket $0-29,750 $0 15% 29,750-71,900 4,462 28 71,900-171,090* 16,264 33 171,090 plus 48,997 28
SINGLE TAXPAYERS
Taxable Pay tax of Plus this percent of amount by which income income exceeds lower end of bracket $0-17,850 $0 15% 17,850-43,140 2,677 28 43,140-100,470 9,759 33 100,470 plus 28,678 28
*The 33% bracket is extended by $10,920 for every personal exemption beyond the first two.
Source: congressional Joint Tax Committee
