One year ago, President Reagan called for a plan to “simplify the entire tax code.” And no wonder. The U.S. Tax Code is a bewildering, 2,000-page maze of legal gibberish.
Last November, following the President’s lead, the Treasury Department announced a new tax plan. The Treasury stuck by the Presiden’ts pledge not to raise taxes and came up with a plan that its backers call “tax neutral.” This means that the plan won’t bring the Treasury any more money or any less.
But many experts say a tax hike is needed to reduce the deficit. Simplifying taxes without making a “dime’s dent in the deficit” would be pointless, says Senator Bob Packwood (R-OR), the new head of the Senae Finance Committee. CONFUSED TAXPAYERS
According to a Gallup poll, 81 percent of the public expects a tax hike. Americans don’t want one, the Gallup organization found. But they do want simpler taxes. Currently, 40 percent of U.S. wage earners pay tax preparers more than $1 billion a year to untangle their tax bills, says a representative from The eCPA Group, an online tax preparation company.
How will the Treasury simplify taxes? Mainly by reducing the number of different tax levels, and by dropping confusing deductions and exemptions. today’s system puts taxpayers into 14 different categories, or “tax brackets,” based on how much they earn. People in the lowest bracket pay 11 percent of their earnings in taxes. People in the highest bracket pay 50 percent of their earnings in taxes.
The new plan would have only three brackets. In one, the tax bite would be 15 percent of a person’s earnings. In another, the tax bite would be 25 percent. In the highest bracket, the tax bite would be 35 percent. Today, the average family pays about 26 percent of its income in taxes.
Under the new plan, only about 22 percent of all taxpayers would end up paying more than they do now. “Those are the ones who are getting away with murder,” says Joseph Pechman, a Brookings Institute tax expert.
Pechman is in favor of the new tax plan. “Lower tax rates would increase the incentive to work, save, and invest, and reduce the incentive to cheat,” he says.
If taxes were simpler and more fair, perhaps the one in five Americans who admit to cheating on taxes would stop. The Internal Revenue Service estimates that it loses about $80 billion a year through tax evasion–almost enough to cut the deficit in half. BURDEN ON BUSINESS
The burden of the new tax plan would fall on corporations. On paper, their tax rates will drop–from 46 to 33 percent. But because of tax breaks called “loopholes,” corporations today actually pay an average of only 17 percent in taxes. The new plan would close most loopholes. The Treasury estimates that this would hike its revenues by more than $500 billion between 1986 and 1990.
The Treasury’s plan has many opponents. Among them:
* “High tax” states. Right now, the U.S. doesn’t tax money paid out in state and local taxes. Under the new plan, the U.S. would tax that money. Hardest hit would be people who live in state where taxes are high, such as New York or California.
* Charities. Under the new plan, small contributions to charities would be taxed. Charities complain that this provision could cut the flow of contributions by as much as 20 percent.
Donald Regan, Secretary of the Treasury, says that the new plan can be changed. But even with changes, getting Congress to okay the tax package is going to be tough. Congress is divided over the plan. And special interest groups will lobby hard to save their tax breaks. also, Congress is considering two slightly different tax plans, each with its own supporters.
Joseph Pechman puts the burden for success on President Reagan’s shoulders. “If the President embraces the proposal, it’ll go far,” he says. “If he doesn’t, it will sink without a trace.”