(Archived document, may contain errors)
12/2/85 100
THE ROSTY HORROR TAX B1 LL SHOW
H ouse Ways and Means Committee Chairman Dan Rostenkowski, fondly
known as "Rosty," has labored hard to draft a tax bill. In so
doing, he has produced a horror. it differ s significantly from the
tax reform principles embodied in Ronald Reagan's proposal and is
unacceptable to those committed to economic growth, job creation,
and a more competitive U.S. economy. It dilutes the Reagan plan's
marginal rate cuts, raises the c o st of capital to business,
reduces savings incentives, and fails even to achieve much
simplification. At a time of growing concern about America's
ability to compete in the world, the Committee bill imposes new-tax
burdens on U.S. industry, commerce, and entrepreneurs. The bill
achieves neither fairness, growth, nor simplicity. Its-most serious
flaws are:
1) Tax Rates on Individuals. The bill establishes a higher top rate
than that proposed by Reagan--38 percent vs. 35 percent. And.
Americans, under the Co mmittee bill, will move into higher
brackets sooner at lower thresholds than under the Reagan proposal.
This means that marginal tax rates will be higher for virtually all
taxpayers under the Ways and Means bill. Since it is the marginal
tax rate that is most significant in terms of incentives,. this is
the- most serious problem with the bill.
Joint Returns, Taxable Income
Rate Ways and Means Reagan Proposal
15 percent up to $22,500 up to $29,000 25 percent $22,500 - $43,000
$29,000 - $70,000 35 percent $43,000 - $100,000 above $70,000 38
percent above $100,000
2) The Extra Bracket. The addition of an extra top rate of 38
percent makes little economic sense, since very little revenue will
be
generated by it.- It seems that it was added solely to appeal to
those still interested in the symbols of wealth redistribution.
3) Corporate Rates, The bill would set a higher corporate tax
rate than the Reagan plan: e6 percent vs. 33 percent. Higher
corporate tax rates simply mean higher taxes on capital. 4) S tate
and Local Tax Deduction. The bill would retain full deductibility
of state and local taxes; the Reagan proposal would eliminate it.
Retaining deductibility forces taxpayers in low-tax states to
subsidize those in high-tax state and forces low-income taxpayers
to subsidize high-income taxpayers. Retention of deductibility
encourages excessive spending and taxation at the state and local
level. Eliminating or scaling back this deduction would allow tax
rates to be scaled back as well.
5) De2reciation. Schedules for depreciation of plant and
equipment are lengthened from the Reagan proposal, in which they
already are longer than current law in most cases. Indexing of
depreciation is also eliminated, thus making firms again vulnerable
to inflation-generated. tax increases. The affect is to raise the
cost of capital, slow growth and investment, and reduce American
competitiveness.
6) Capital Gains.'The bill would raise the maximum tax rate on
long-term capital gains from the current 20 per cent to 22 percent,
significantly above the 17.5 percent rate proposed by Reagan.
Evidence. strongly indicates that the 1978 and 1981 capital gains
tax cuts strongly encouraged growth and investment and, in fact,
increased tax revenue. This suggests that the bill may lose, rather
than raise, revenue.
7) Minimum Tax.. The bill sets a higher minimum tax rate.than
proposed by Reagan--25 percent vs. 20 percent--and greatly expands
the number of tax preferences subject to the tax. The result will
be an erosion of investment incentives,. higher taxes on capital,.
and increased complexity in the tax law.
8) Personal Exemption. The $2,000 personal exemption was a
cornerstone of the Reagan proposal, designed to relieve some of the
tax burden on families. The Ways a nd Means measure would permit
the $2,000 exemption only for those who do not itemize their tax
retiirns; itemizers could take only a $1,300 exemption.
9) Savings Incentives. The bill reduces savings incentives,
especially 401K plans. Yet the U.S. needs more saving, not
less.
10) Research and DeveloRment. The R&D tax credit would be
scaled back, with a very damaging impact on U.S. high technology
industries.
Bruce Bartlett John M. Olin Fellow
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