Economist Seeks to Turn Tables on Taxes : Deficit: Director of Citizens for Tax Justice offers plan to bring in an extra $188 billion over the next five years.

“ ‘Soaking the Rich’ No Solution to Government Revenue Shortfalls.”

That’s the headline on an article in a publication of the Tax Foundation. The writer says that the idea of erasing the budget deficit and funding more programs by imposing more taxes on the well-to-do is “a false hope.”

But economist Robert McIntyre holds that the business-backed Tax Foundation is “just wrong.” The director of Citizens for Tax Justice, which is financed mostly by trade unions, says the Reagan tax cuts for the nation’s wealthiest 1% alone cost $50 billion a year. He offers a sample list of tax changes striking primarily at upper-income families that would bring in an extra $188.7 billion over the next five years.

Who is right?

Well, even the Tax Foundation’s numbers show that the rich have money. In 1987, the 36,299 individual taxpayers making more than $1 million reported total adjusted gross income of $87.2 billion with a taxable income of $75.5 billion. They paid an average effective tax rate of 29.3% on that adjusted gross income, or $25.5 billion. If, the Foundation says, Uncle Sam were to confiscate all of this group’s taxable income, the extra $50 billion would have run the government for only 17 days in 1988.

Looking at a broader group, the 545,000 taxpayers who in 1987 had taxable income of $200,000 and above, confiscation of all that money would bring in $121.8 billion extra, or enough to pay the federal government’s bills for one month and 11 days. The Foundation calls this group “merely well-off.”

The Foundation’s numbers decidedly underestimate the real income of the wealthy. Adjusted gross income does not include sheltered income, such as interest on municipal bonds or income from other tax shelters.

The Congressional Budget Office estimates that this year 1 million taxpayers will earn more than $200,000, enjoying a total income of $500 billion. Their total tax burden (federal, state, and local) will amount to about $135 billion, or 27% of their income. So they have a few pennies left over.

Of course no one responsible is advocating confiscating all income of the well-to-do. McIntyre, for example, suggests raising the top marginal federal income tax rate to 38%. At present, the rich pay 28%. If Congress took action this year, it would boost revenues by $7.3 billion in fiscal 1991 (actually half a year), $19.9 billion in 1992, and $38 billion in fiscal 1995. It would affect 750,000 people making more than $250,000 a year.

McIntyre also suggests a few tax loophole closing measures that would boost revenues by another $18.4 billion by fiscal 1995, making a total of $56.4 billion. He doesn’t even mention imposing capital gains on the estates of those who have died.

The Economic Policy Institute last autumn suggested “progressive” changes in the tax system to raise $65 billion in both fiscal 1990 and 1991. These include a 38% income tax rate for those making above $192,930, a measure which would raise about $6.9 billion. The Institute proposes other changes which would hit a broader group of taxpayers, such as removing the ceiling on taxation of earnings for Social Security and Medicare.

Robert Kuttner, a founder of that Institute, says boosting taxes on the wealthiest 1% of the population enough to restore their share of national income to 1977 levels would raise $130 billion a year--compared to 1991’s projected U.S. budget deficit of $63 billion.

Opinion surveys show that the public believes it is desirable to raise taxes on the rich. The idea is probably less popular in the Senate, which has been described as a “millionaires club.”

Today both the rich and the middle class in the United States pay about the same proportion of their incomes on all taxes--federal, state and local. Many economists maintain that it would be fairer to distribute the tax burden somewhat on the ability to pay.

Supply-side economists argue that because the rich save and invest more, they shouldn’t be taxed more. Their money, used in job-creating investments, will “trickle down” to those poorer.

Liberal economists like McIntyre and Kuttner regard this argument as utter nonsense, noting that Japan and other industrial countries with far higher marginal tax rates on the well-to-do are economically advanced and highly prosperous.