NOT MUCH REFORM IN "TAX REFORM"

...Let us look at the long-term shift of the tax burden from capital to labor (which the reform may slow), the relief it offers to low-income workers and the poor...

...Losses from the accelerated capital cost recovery system (not including the investment tax credit—both are to be repealed under the tax reform) ran to an estimated $18.2 billion, $26.1 billion, and $35.7 billion in the three years.' True, the giveaways enacted in 1981 were partly scaled back under the so-called Tax Equity and Fiscal Responsibility Act of 1982...

...The political relation of forces has not changed...

...By 1985, the relationship was reversed, the former rates averaging 18 percent, the latter 21 percent...

...It's too early to say whether the tax reform will slow or halt the long-term shift of the tax burden to labor income...

...Avineri pleaded with the head of the customs unit for half an hour, but failed to retrieve the books...

...He added that a Hebrew prayer book he carried was inspected but not confiscated...

...8-10...

...The slated rate cuts are to be offset by scaling back of depreciation write-offs, abolition of investment tax credits, many tax shelters, and a number of exclusions and exemptions...

...Its announced aim is to make the tax system more "neutral" with respect to economic decisions...

...Washington, D.C.: The Brookings Institution), 1985...

...This reduction was of course exacerbated by the 1981 cuts in the federal income tax...

...In 1978, a family with ten times the median family income paid 40 percent of its income in tax...

...But this act was not the "backlash against Reaganomics" it has been called by some of the more knowledgeable critics of President Reagan's tax policies.' It did not undo the income tax cuts instituted in 1981...

...With the cutbacks or outright cancellation of these tax preferences under the tax reform, the effective corporation income tax rate may well rise, notwithstanding the scheduled reduction in the nominal rate...

...The tax reform is bound to be a revenue loser...

...The House version of the reform would ensure "that no families below the poverty level will have Federal tax liability...

...360-361...

...Hearings before the Committee on Ways and Means, House of Representatives, Part 1. May 30, 1985, p. 39...

...Prepared by the Staff of the Joint Committee on Taxation, June 5, 1986, p. 2. 14 Robert Greenstein, director, Center on Budget and Policy Priorities, testifying before the Senate Committee on Finance, June 17, 1985...

...11 See also R.S...

...Congress has agreed...

...McIntyre, in Comprehensive Tax Reform, op...

...18 J. Minorek of The Urban Institute, quoted in the Wall Street Journal, June 11, 1986, p. 62...

...THE PREFERENCES GRANTED BUSINESS by the 1981 tax act failed to spur capital investment...

...It is a victory for the rich, but one gained at their peril, for it will further sharpen existing inequalities, and further polarize American society...

...but since his income concept includes transfer payments, which rose steeply, "the distribution of income from market activity (wages and salaries, interest, dividends, rents, and windfall profits) must have become more unequal...

...5 Summary of Revenue Provisions in the President's Fiscal Year 1987 Budget Proposal...

...Hence, it is possible that the tax burden on labor will not continue to rise...

...Its success in terms of tax policy has been considerable...

...McIntyre, in Comprehensive Tax Reform, op...

...diminishes the relative economic importance of liberal depreciation write-offs and other investment tax aids...

...A tax bill that's un391 ashamedly capitalist," proclaims Paul Craig Roberts, former assistant secretary of the Treasury under Reagan...

...cit., pp...

...Where a family of four with earnings equal to the poverty line (adjusted for inflation) paid but 2 percent of its income in federal income and payroll taxes in 1979, by 1985 it paid an estimated 10 percent!' The tax reform simply reduces the percentage to pre-Reagan levels, as well as taking many poor families off the federal tax rolls altogether...

...Is the tax reform informed by some other principle ensuring equitability...

...6 See R. McIntyre and D. Tipps, Inequity and Decline (Washington, D.C.: Center on Budget and Policy Priorities), 1983...

...q Notes American Economic Review, March 1928, p. 182 Tax Reform for Fairness, Simplicity, and Economic 392 Growth...

...and its loss of progressivity...

...In fact, if the revenues to be generated under the reform were compared, not to the revenues collected under current rates, but to what Troubles with Books Soviet authorities recently confiscated two of Karl Marx's books (in Hebrew) from a prominent Israeli visitor to Moscow, while letting him keep a Hebrew prayer book...

...19 Who Paid the Taxes...

...Generally, the argument that high marginal rates act as disincentives is specious since it brushes away the complexity of motivations and the offsetting influences that work upon them...

...Motivated by class and ideological interests, the Reagan administration has steadily aimed at depriving the public nondefense sector of needed resources (as well as compelling privatization of public services...

...For example: A working mother of two grossing a monthly wage of $450 (in 1984 dollars) was at one time entitled to a monthly welfare supplement of $230...

...That would be very good...

...Does the tax reform provide sufficient means to do so...

...Pechman writes that the distribution of income as he defines it, from 1966 to 1985, did not change...

...9 Economic Issues, op...

...others have corresponded to valid public policy...

...Not the only method, it recommends itself as a relatively peaceful one...

...new business formations have been below levels of previous cyclical expansions...

...Because the tax system became less progressive, the distribution of income after taxes and transfers was more unequal in 1985 than in 1966.' 9 The blow to progressivity under the tax reform, together with cutbacks in transfer payments— either already instituted or prompted by the falloff in revenue likely to result from the reform—will give freer rein to "market forces...

...2 What's more, the tax reform is far from neutral in economic impact...

...Avineri, who returned to Israel at the weekend, said the two hooks had the English titles on the hack flaps...

...Its object is to help make possible a steep reduction in tax rates...

...Or: "a historic retreat . . . a drastic change in what Congress views to be the proper distribution of the tax burden," as Richard Musgrave, dean of public finance economists, says...

...16 Business Week, June 9, 1986, p. 16...

...8 THE ELIMINATION OF THESE BUSINESS tax preferences was already proposed by the Treasury Report of November 1984...

...The argument for progressive taxation is that it reduces the inequality of income...

...The November 1984 Treasury Report on tax reform stated that "to the extent that direct spending replaces tax subsidies, tax rates could not be reduced as much as proposed...

...But as noted, it lacks any fund-raising objective...

...The top marginal rate of the personal income tax, at 70 percent when Reagan took office, was cut to 50 percent in 1981, and would be cut further to 27 under the Senate or 36 percent under the House version of the reform...

...Reduction of Resources THIS BRINGS US TO THE PURPOSES underlying the tax reform...

...The answer is no...

...For example, the effect on federal tax receipts in 1983 from the revenue provisions of the Economic Recovery Act of 1981, was a decline of $92.5 billion from what these receipts would have otherwise amounted to...

...Prepared by the Staff of the Joint Committee on Taxation, February 25, 1986, p. 29 ff...

...cit., pp...

...It is, in that sense, an antireform...

...17 The Wall Street Journal, May 29, 1986, editorial page...

...But no such action is intended...

...The rising power of business, together with the waning power of labor, lay at the root of this reversal...

...In passing their versions of tax reform, the Senate and the House virtually abandoned the principle of progressivity that at least in theory has underlain the American tax structure since the income tax was introduced seventy-three years ago...

...393...

...Abolition of worthy tax preferences calls for their being replaced by direct spending measures...

...For it to be implemented effectively, we need a favorable relationship of political forces...

...1, Overview (Washington, D.C.: Office of the Secretary, Department of the Treasury), November 1984, p. 20...

...3 Ibid., p. iv...

...and from 8.7 percent for 1975-79, when that share was 14.4 percent.' Citizens for Tax Justice found that, "Of the 250 large, profitable companies we surveyed, more than half enjoyed at least one year between 1981 and 1983 in which they either paid zero . . . Federal income taxes or actually received cash rebates from the Treasury...

...Cambridge, Mass.: Ballinger), 1984, p. 192...

...It is unlikely that these cuts are offset by the proposed tax gains...

...In The Reagan Record, J.L...

...The ideology of Reaganomics, which has inspired this tax reform, can thus claim another victory...

...It would presumably distribute the tax burden more fairly, exempt most lowincome earners or radically reduce their federal taxes, and shift some of the burden from families to business...

...It is hard indeed to see how the cuts in personal income taxes (which in recent years have accounted for 45 percent of federal revenue) can be offset by the elimination of some business tax preferences...

...The calculation is mine—H.B...

...and the scaling back of depreciation writeoffs did not spell much of a reduction from the revenue losses noted above...

...Other reasons for the acclaim are that it would broaden the tax base, i.e., make the definition of taxable income more inclusive by eliminating various tax benefits...

...Resistance to the lessening of inequality has certainly stiffened since the 1960s...

...JERUSALEM POST June 3, 1986 would be collected if the current rates were applied to the broadened base, "[we] would . . . see that the Senate . . . bill truly represents a very sharp reduction in the taxes of high-income earners...

...Sawhill, eds...

...These decisions are to be less influenced than hitherto—if influenced at all—by tax considerations...

...On arrival at Moscow's international airport, his baggage was searched and customs inspectors confiscated a translation into Hebrew of Marx's Early Writings and a new Hebrew translation of the Marx-Engels classic, The Communist Manifesto...

...Again, no...

...In reducing personal income tax rates, it shifts economic decisions largely in the direction of personal consumption, and away from social investment...

...Prepared by the Staff of the Joint Committee on Taxation, January 29, 1986, p. 6. 8 "Disarm the Deficit: End Corporate Tax Dodges," by R.S...

...First, taxes pay for the resources needed by society at large...

...12 Joseph A. Pechman, Who Paid the Taxes, 1966-85...

...Another stated purpose of the tax reform is to remove, as far as politic, the tax disincentives that supposedly face "the entrepreneur...

...Second, the tax burden should be distributed equitably...

...by 1984, that had declined to 33 percent...

...On the contrary, it decreased to an average 8.6 percent of the GNP over the 1980-84 span, from 9 percent for 1965-69, when the share of corporation income tax receipts was 21 percent...

...Palmer and I.V...

...Comparable rates on income from labor (wages, salaries, and the portion of business income regarded as deriving from work) rose 17 percent...

...But that is not its object...

...They also relieved some of the largest corporations from paying federal taxes altogether: this is surely a primary reason why these preferences are virtually being canceled under the tax reform (although some concessions to business seem likely in the final version...

...But "without [the accelerated 390 capital cost recovery system and investment tax credit], General Electric, for example, would have paid close to $1 billion in taxes in 1983, instead of receiving a refund...

...There remains the question of why so many liberals have enthusiastically endorsed the "tax reform"—but that is part of the very political atmosphere in which such "reform" can flourish...

...4 Reprinted in Comprehensive Tax Reform...

...In 1966, the effective tax rate on capital income was 33 percent, on labor income around 18 percent...

...The story, which became the joke of the colloquium, caused the Soviet academicians "acute embarrassment," he said...

...Joseph Pechman notes that "[The] effect of these changes was to reduce the progressivity of the tax system...

...for 1984, the loss has been estimated by the Treasury Department at $136.5 billion, and for 1985, at 170.3 billion...

...Moreover, given the pettiness of Reaganinspired eligibility rules, tax relief well may raise the mother's income above the limits set for food stamps, Medicaid, and other entitlements, making her no better and possibly worse off than before...

...I will show that this acclaim has been less than thoughtful on the part of those who have traditionally called for a more equitable tax structure...

...15 See D. Lee Bawden and J.L...

...Not by coincidence, however, since these myths rationalize a tax reform that "opens wide the door" only for the highest income groups, and will have the very probable, if unacknowledged, result of reducing revenue...

...13 Summary of H.R...

...However, as Musgrave states, "this is not a change from past practice...

...Under Reagan administration rules, this supplement was reduced to $50 a month after four months of work— an annual loss to such a family of more than $1,400.' That loss will but partially be made up by tax relief...

...And these forces, unless countered by a progressive tax system and income transfer programs, are bound to work toward greater inequality, as experience has amply shown...

...The proposed change merely returns the level of tax-free income to that of the poverty-income level...

...cit., p. 359, although he refers to the sequel to the November 1984 Treasury Report...

...Lowering personal tax rates will give a hefty boost to the nearly 15 389 million...

...and the farmer, once regarded as the epitome of individualism, is undergoing his worst crisis in more than fifty years...

...Palmer, "Social Policy: Challenging the Welfare State...

...IN APPRAISING THE TAX LEGISLATION, three issues need to be examined...

...Families in poverty had not only not gained from the 1981 tax cuts, their effective tax rate in fact kept rising...

...The White House has conditioned its acceptance of the tax reform upon its being "revenueneutral...

...Ideologically more revealing was President Reagan's address of May 29, 1985, promoting tax reform, in which he said: The greatest innovations for new jobs, new technologies, and economic vigor today come from a small but growing circle of heroes—the small business people, American Entrepreneurs...

...Many tax preferences have been abusive...

...I have already cited changes in the distribution of the tax burden between capital and labor...

...Unfair Distribution How ABOUT THE DISTRIBUTIONAL ASPECTS of the tax reform...

...The Treasury Department Report to the President, Vol...

...The immediate reason for this reversal was the steep rise in the payroll (Social Security) tax and the increasingly generous tax preferences granted to business at all levels of government...

...Such broadening of the tax base has merit...

...And third, the broadening of the tax base is fine if its object is to generate more revenue, especially revenue to meet social needs and reduce the federal debt with its enormous interest charges...

...The accelerated cost recovery system, together with the investment tax credit (enacted in 1964), led to a decline in corporation income tax receipts as a percent of total revenues from 12.5 percent in 1980 to 8.5 percent in 1984— yet corporate investment did not improve in relation to the national product...

...The effective rates of federal, state, and local taxes on income from capital (e.g., profits, interest, rents, capital gains) declined by nearly 50 percent between 1966 and 1985...

...3838 (Tax Reform Act of 1986) as Reported by the Senate Committee on Finance...

...True, rates at lower income levels are also cut, and tax-free income at the bottom brackets is to rise...

...The president may believe in the myths he propagates...

...and that it would "simplify" the tax system...

...Next, look at the tax relief granted to lowincome groups under the tax reform...

...For the tax on capital gains—which helps mostly persons with incomes of $200,000 or more, to whom there has hitherto accrued 72 percent in value of the partial exclusion of capital gains from taxable income—will at most be equal to the top rate of the three steeply lowered personal income tax rates under the tax reform.' The revenue neutrality of the tax reform has been repeatedly questioned...

...In the November 1984 Treasury Report, then Secretary of the Treasury Regan wrote, "Rate reductions of the magnitude we propose will open wide the doors of opportunity to those who are willing to work, to save and invest, and to innovate...

...The reduction of liabilities at the top of the income scale, however, "involves an actual loss in progressivity...

...But the rise of industries less dependent on investment in heavy equipment and other capital goods than such older ones as steel, railroads, automobiles, etc...

...3838...

...individual proprietorships and partnerships.' The president neglected to mention that business failure rates under his administration have been the highest since the 1930s...

...The tax reform would likely reinforce this downward trend...

...cit., p. 5. 19 The Wall Street Journal, June 27, 1986, p. 54...

...7 Economic Issues Relating to the House-Passed Tax Reform Bill (H.R...

...But even under the House tax bill, which would cut the corporate income tax rate less than the Senate version, the net cost to business would merely restore the share of tax receipts from corporations in total revenue to 1980 levels.9 The privileged position of capital would thus be affected little by the tax reform...

...But this is a debatable objective...

...However, both this and subsequent reports, and the tax reform legislation itself, would partially offset the "losses" to business resulting from this elimination by sharp cuts in the corporation income tax rate...

...These scheduled gains should be viewed against the severe cuts in cash benefits and grants in kind suffered by poverty households under the Reagan administration...

...Shlomo Avineri, professor of political science at the Hebrew University and former director-general of the Foreign Ministry, was in Moscow last week at the invitation of the Soviet Academy of Sciences to participate in a colloquium on dialectical philosophy...

...Nor did it stem the rise in the federal deficit, which has continued at high levels throughout the current prosperity phase of the business cycle—and which manifests the corruption of the public finance system through Reaganomics...

...No calculations are yet available to show the extent to which progressivity has been lessened by the tax reform...

...The End of Progressivity BY FAR THE MOST SERIOUS failing of the tax reform is its virtual abandonment of progressivity...