Is There Any Workable Way to Reduce the Federal Deficit? : Tax Rates for the Wealthiest Provide a Starting Place

We all know the conventional wisdom in Washington: There is no significant support for modifying the income-tax rates of the 1986 Tax Reform Act to increase revenues to reduce the deficit. Supposedly, the demand for hands-off treatment of the act extends to allowing the maximum income-tax rate for the wealthiest taxpayers to be cut in 1988 from 38.5% to 28%.

By a quirk in the law, other Americans--like a family of four with substantial but lesser income of, say, $100,000--would pay a marginal tax rate of 33%, destroying our historically progressive income-tax basis.

When House Speaker Jim Wright (D-Tex.) proposed freezing the current 38.5% maximum rate for married couples making more than $150,000 and single individuals making more than $100,000 and using the approximately $40 billion raised over four years for reducing the deficit, pundits declared his idea a “non-starter.” One of the reasons cited for not considering it as part of the deficit-reduction effort was that the American people allegedly wanted lower income-tax rates and would oppose delaying or modifying the rate reductions embodied in last year’s tax reform.

Because of this conventional wisdom in Washington, there is now talk of focusing on significant excise-tax increases as a way to bridge the budget gap. The impression created is that the public would be more sympathetic to increases in excise taxes like those on beer, wine and telephone bills.

Last year, when I opposed the measure for tax reform, I was struck by the lack of positive and enthusiastic support for the bill when I talked with my constituents. This was in total contrast to the almost pep-rally support for tax reform within the Washington Beltway.

This is why, when current talk of revenues to meet the goals of the fiscal 1988 budget resolution started to get specific and when it appeared that the Tax Reform Act of 1986 was being treated as sacrosanct, I sought to sample the views of the American public. My suspicion was that the conventional wisdom in Washington of what the public wanted was more conventional than wise.

So I commissioned two questions to be asked in a nationwide poll of 1,015 people conducted during late May by Opinion Research Corp. of Princeton, N. J.

The first question asked was: “Do you think the top federal income-tax rate for the wealthiest taxpayers should be cut next year, as scheduled, to 28%, or should the rate for the wealthiest taxpayers stay at the current level of 38.5%, with the money gained being used to reduce the federal deficit?”

In response, 20% said the top income-tax rate for the wealthiest taxpayers should be cut to 28% as scheduled, 61% said that the top tax rate should be kept at 38.5%, and the remainder had no opinion.

The second question asked was: “There have been a number of suggestions to reduce the federal budget deficit. If more money is raised to reduce the deficit, which one of these two approaches would you prefer: (1) Increase the taxes on beer, wine and telephone bills, or (2) freeze the top federal income-tax rate for the wealthiest taxpayers at 38.5% instead of cutting the rate to 28% next year, as scheduled?”

In response, 20% chose to increase the taxes on beer, wine and telephone bills, 63% chose to freeze the top income-tax rate for the wealthiest taxpayers at 38.5%, and the remainder had no opinion. Thus, by a 3-1 margin in response to both questions the public prefers reducing the deficit not by raising excise taxes but by modifying last year’s tax act by freezing the maximum income-tax rate for the topmost taxpayers.

So the message is clear: The American public, by an overwhelming margin, does not view the maximum income-tax rate in the tax-reform law as a sacred cow. In fact, the public recognizes that it doesn’t make sense to give the wealthiest taxpayers income-tax cuts when we have a huge budget deficit, but supports freezing the income-tax rate for the wealthy before asking average Americans to disproportionately share the burden of deficit reduction through excise-tax increases on items like beer, wine and telephone bills.

In fact it appears, by extrapolating from statistics available from the Congressional Budget Office and the Joint Committee on Taxation, that deficit reduction by the use of excise taxes would be considerably more difficult than by freezing the tax rate for the wealthiest taxpayers. For example, continuing and raising the current excise tax on telephone bills by 33% and increasing excise taxes by 17 cents on a six-pack of beer and a fifth of wine would produce only about half the revenues of Wright’s proposal from 1988 through 1991, yet would affect far more taxpayers than the 3% that his measure would embrace.

It is evident that those who would keep off-limits the reconsideration of the rate reduction for the very wealthiest cannot do so on the basis that they are listening to the voice of the people. To persist in representing the public as opposed to modifying last year’s tax act will not serve the interests of an informed debate on the difficult budget choices before us.