President Bush is reversing Reaganomics. Bush's statement last week that "tax revenue increases" will be needed to cut the budget deficit signals a return to the way things were before the 1986 tax reform lowered income tax rates, reduced the number of tax brackets and got more people to pay.
In the future, the tax system will go back to more graduated brackets, with an offsetting increase in deductions, and capital gains will be taxed at a lower rate than ordinary income. Tax shelters will make a comeback, and new tax wrinkles will appear.
To be sure, nothing so dramatic was announced last week; the President merely conceded that more taxes would be needed to reach a budget agreement.
But Bush also said he wants "entitlement reform" and "growth incentives." Translated into plain English--"read my lips"--that means new taxes on Social Security benefits and a differential rate for capital gains.
Yes, there will be months of political argument before such tax changes are imposed. But keep in mind that both parties want to change the tax system--Bush's statement was drafted by both Democrats and Republicans, working over breakfast in the White House. You will be paying more taxes next year.
Why is this happening? Because a slow economy made a mockery of the Administration's economic assumptions. Tax returns brought in $20 billion less than anticipated, and high interest rates cost the government at least $30 billion more than planned in payments on the national debt. Budget chaos loomed.
So the scramble is on to raise taxes, beginning with hikes on gasoline, alcohol and tobacco. Politicians regard such taxes as painless, although gasoline taxes hit Western states harder than Eastern states and are inherently unfair because the same burden is levied on rich and poor. Indeed, poorer people, with older cars, will pay more.
Objections will arise. "There should be equity involved," says Professor Frank Levy of the University of Maryland, an expert on income distribution. "It's particularly unjust at a time of widening income inequality to try closing the budget deficit on the backs of those who've been less fortunate."
Inevitably, the government's quest for revenues will lead to income taxes. A higher tax on the Social Security benefits of well-to-do retirees is probable. But the elderly will benefit from a new lower tax rate--probably 20% or so--on gains from investments in businesses, stocks and real estate.
The marginal rate on the highest incomes will almost certainly be hiked to 33%, from 28% at present, as public opinion shifts against business executives and Wall Street deal makers who made big incomes in the 1980s--and politicians say they'll close the deficit by taxing millionaires.
Trouble is, there aren't that many millionaires--the top 1% of taxpayers includes folks with less than $100,000 in annual adjusted gross income. And while the rich pay taxes, they also pay tax accountants $250 an hour to see they don't pay too much.
So Congress will be reaching for new taxes down through the top 20% of taxpayers, to two-earner couples with income above $50,000. Those taxpayers can't afford $250 an hour, but they'll pay $50 to get tax help.
And the result will be a return to the days of tax shelters, a reversal of the flat tax reform of 1986 that was praised by Sen. Bill Bradley (D-N.J.) for allowing people "to invest money to make money, not to lose money for tax purposes."
That 1986 reform worked. More people paid up and federal tax receipts rose $50 billion to 20% of the gross national product, from 19% and less in previous decades.
"A lot of my clients gave up tax shelters because the deals no longer made sense," says Philip Holthouse, a tax accountant in the Los Angeles firm of Parks, Palmer, Turner & Yemenidjian. Now his clients will once again look for ways to shelter income.
You have to wonder why tax law changes so much--this will be the ninth tax change in 14 years--when practically all taxpayers end up paying the same 20% to 25% of their income in federal taxes no matter what.
The explanation for the changes, and the growth of the income tax, goes back about 100 years, according to UC Berkeley scholars Carolyn Webber and Aaron Wildavsky. In their massive "History of Taxation and Expenditure in the Western World," they write that "as governments in Europe and America assumed responsibility for citizens' personal welfare, by funding public roads and water supply as well as public insurance against unemployment and old age, the idea arose that in an industrial society--where differences in wealth exist--the fairest way to raise taxes was on the ability to pay"--that is, through a graduated or progressive income tax.
Ever since, the need for taxes has grown along with demands for social benefits--to the point today that taxes and government budgets seem to grow continuously.
Well, Ronald Reagan tried to stop that process--lowering tax rates and limiting government in the belief that citizens were better off assuming more responsibility for their own welfare. It was a controversial position. Inevitably, some citizens suffered--but public roads and water supplies suffered too.
And now George Bush has signaled that he doesn't believe in Reagan's policies anyway. He believes government should meet increased needs, in education and the environment, in drug rehabilitation and aid to the Soviet Union--read his "kinder, gentler" lips--and he wants higher taxes to pay for it.
Is that wrong? "It's not a matter of right or wrong," says Wildavsky, "but of political philosophy. What kind of society do we want?"
George Bush last week--more than 10 years after he called Reagan's policies "voodoo economics"--asked for the money to pay for the kind of society he wants.