Tax Bill: Less Than Meets the Eye

Sometime before Thanksgiving, President Reagan will sign into history the tax bill on which, for better or worse, this Congress has devoted much of its time. Clustered around him with faces frozen in joy will certainly be Sen. Bob Packwood and Rep. Dan Rostenkowski, and very likely Sens. Bill Bradley and Bob Kasten and Reps. Jack Kemp and Richard A. Gephardt, sponsors of legislation antecedent to the Reagan-Packwood-Rostenkowski measure. A Congress that has been otherwise singularly unproductive will trumpet its redemption.

For the time being, tax reform is popular enough--at least in Washington and the media--that Republicans and Democrats jostle each other for credit. A year from now, both the President and his congressional allies may be a great deal more modest.

Whatever the merits of the $120-billion tax shift from individuals to business enterprises, it is singularly ill-timed. It hits a sluggish sector--investment in plant and equipment--just as the economy teeters on the brink of the second Reagan recession. Limitations on state and municipal tax-exempt bonds will cool another part of investment, public construction.

The nonsensical Gramm-Rudman-Hollings contraption inflicts spending cuts on an economy in need of stimulus. The Fed will shortly prove that it does much better at starting than at stopping recessions.

Moreover, a great many Americans, when they tote up their tax bills, will wonder what the excitement was about, for they will discover that they are better or worse off by inconsequential sums. Nor will families with $50,000 in taxable income necessarily rejoice in the news that the same 28% rate applies to a portion of their earnings as to those collected by investment bankers, law firm partners and corporate executives in the $1-million-plus stratosphere.

Tax Bill May Be Discredited

It is quite possible that by the time our next presidential pageant rolls around, the tax bill will be discredited. Still, while tax euphoria endures, it is worth examining an intriguing sidelight on the credit competition derby. Staking his own claim for legislative immortality, Congressman Rostenkowski boasted that he and other House conferees had protected the interests of the middle class against, presumably, White House and Senate efforts to retain even more loopholes for corporations, defense contractors and developers than survive in the current bill.

Who belongs in the middle class? At various times, politicians have talked about $50,000, $60,000, even $75,000 as the dividing line between middle and upper. Rostenkowski has been especially unclear on this.

In Manhattan, there are yuppie couples subsisting on a $100,000 who regard themselves as deprived members of the middle class. I know a Scarsdale corporate economist who contends that his $125,000 annual stipend puts him in a situation no more elevated than the upper middle class.

It is just conceivable that nobody considers her or himself truly affluent. When David M. Roderick, head man at USX--formerly U.S. Steel--confided that he had taken a 25% cut in his salary to an exiguous $750,000, he looked genuinely pained.

Perceptions are powerful. It really is possible to feel financially pinched on a large income, and those in that situation are not shy about complaining to their political representatives. Nevertheless, what might be called the politician’s middle class is, as I shall in a moment demonstrate, quite small--even if its members are not only noisy but also generous contributors to candidates whom they favor.

Let us now turn to the statistical middle class. One estimate concludes that only 3% of the population will collect incomes of $85,000 or more in the current year. In 1984, a mere 15.8% of all families registered incomes above $50,000. An additional 18.4% fell between $35,000 and $49,000. If we talk numbers instead of perceptions, any family whose income exceeded $35,000 in 1984--and, allowing generously for inflation, $40,000 in 1986--had the right to describe itself as upper class--members of the top third of the income hierarchy. Few were quoted as so doing.

Doesn’t Do Much for Middle Class

Then just who is a genuine middle class man, woman or family? How about the 19% in the $25,000-$34,999 bracket plus the 10.7% worse off in the $20,000-$24,999 category?

The new tax bill doesn’t do much for the statistical middle class. It does retain tax-free IRAs up to $40,000 in family income and limited deductibility between $40,000 and $50,000. But the elimination of interest deductibility on consumer purchases of cars, appliances, furniture and clothing--and of state and local sales taxes--hits our statistical middle class considerably harder than it does their financial betters.

These luckier souls can pay cash or use American Express, which does not impose credit charges. And since they save larger fractions of their income, they expend a smaller proportion of that income on items subject to sales tax than the non-saving low- and moderate-income majority. By retaining mortgage interest and property tax deductibility, Congress continues to favor owners, a generally more affluent group, over renters.

Robert Greenstein’s Center on Budget and Policy Priorities, a liberal Washington-based advocacy group, estimates that tax cuts will range between $129 and $337 per family for the hordes whose incomes are as low as $20,000 and as high as $75,000, well into my statistical upper class. No wonder that there has been more excitement over tax revision in Washington than in the rest of the country. Trivial is indeed the word of choice for all the effect that the new tax code will have on the affairs of average Americans and, in particular, the statistical middle class.

The protracted public debate over tax policy will be valuable if it acquaints more Americans with the realities of our income distribution. A stray yuppie who happens to read these words may feel a trifle better about his finances than he did before. For the fact ought to be clear that far fewer people are affluent than the tales of starting salaries for law firm associates and unindicted investment bankers might induce the naive to believe.