Long Wait for Any Benefits From Tax Bill

Tax reform has all but made it into law, but the issue is going to produce a lot of angry debate even after it’s signed by President Reagan.

For one thing, the impact on individuals is going to vary so widely that lots of people are going to question the fairness of the new system--just as many did the old one. For another, the immediate impact on the economy could be severe enough to seriously test public support for the measure.

One of the reform effort’s original goals was to simplify the tax code and make compliance easier. It fails miserably in that effort. Not only is the new legislation more than 2,000 pages long, there are more than 300 so-called transition rules required to ease the pain of switching to the new system. The plan certainly isn’t going to put many accountants out of work.

The big problem for individuals next year is that the legislation eliminates a good many deductions and other tax-saving devices but doesn’t reduce tax rates nearly as much as in the following year. In their final effort to reach a compromise, House and Senate conference committee negotiators left the top tax rate at 38.5% for 1987, well above the 28% that takes effect in 1988. This was a means of producing some needed revenue next year and making wealthy taxpayers bear a good bit of the burden.

Uneven Distribution

That burden, however, won’t be felt evenly. One Los Angeles executive who anticipated taking a drubbing next year, based on news reports about the bill, made some calculations recently and found that he’s going to get a tax reduction of between 8% and 10%. The head of a small manufacturing company, who would seem to be an even clearer candidate for higher taxes, estimates that he, too, will come out ahead, and he feels a little guilty about it.

“There’s no way I deserve a tax break,” he says.

On the other side of the coin, a Los Angeles judge, probably at a somewhat lower income level than the manufacturer, says his taxes definitely are going to rise.

What’s creating the contradiction is the very stuff of the reform effort. Those who will be paying less next year are generally those who have been collecting their salaries and paying their taxes. On the other hand, those who’ve designed various ways to hold down their tax payments are going to get stuck, at least in 1987. For the former group, it’s sweet justice. For the latter, it’s unfair because, like the judge, they made their tax shelter arrangements legally and now somebody changed the rules on them.

Part of the fairness the tax writers were striving for was to get people in roughly the same income brackets to pay about the same amount of tax. The reform makes progress in that direction, but the abruptness of change is going to cause a lot of grief.

Rough Transition

If that’s not enough to make the transition a rough one, the potential economic impact could threaten the very life of the new system. The bill entails such major changes that most experts can’t be certain just what it will do to such things as consumer spending and business investment. But those economists who venture a guess generally see some near-term problems.

Because the legislation eliminates the interest deduction for many kinds of loans, consumers will be discouraged from buying so much on credit. Over the long pull, lower tax rates may enable them to build up more savings and enhance their purchasing power. Short term, they’re likely to spend less.

The sharp increase in business taxes included in the bill may serve as another drag on the economy. Business usually tries to get back the cost of higher taxes with higher prices. With low inflation and lots of price resistance among customers, however, business probably will have to offset the cost by tightening its belt, observes economist A. Gary Shilling.

“A lot of middle-income people who think they’re going to win on this tax bill aren’t,” Shilling says. “They’re going to wind up with pay cuts or forced into early retirement.”

If the new tax law gets blamed for a slow economy, pressure to make some quick revisions will mount. Long term, tax reform may prove to be a smart thing. But long term is a long wait.