A chart on individual tax burdens, in the Sunday Business & Finance section, should have indicated that the amounts shown were potential reductions in tax burdens under Republican-sponsored legislation.
Q. Republican presidential candidate Ronald Reagan has proposed a new $36.1 billion tax-cut plan for 1981 that has put the Democrats on the defensive and forced President Carter to drop his opposition to a tax bill this year.
What is Reagan's proposal and how would it work?
A. Reagan has unveiled a new combination tax-cut and spending-restraint plan that would cut taxes by $31.8 billion for individuals and $4.3 billion for business, effective next Jan. 1.
The package contains three parts:
A 10 percent across-the-board tax reduction for individuals, designed to offset the recent increase in Americans' tax burdens stemming from the impact of inflation in pushing taxpayers into higher brackets.
Faster depreciation writeoffs for business to help stimulate more investment, through a new "10-5-3" plan that would allow firms to write off the cost of structures in 10 years, equpment in 5 years and vehicles in 3.
Some offsetting restraints on spending by reducing government outlays gradually to 19.5 percent of the gross national product, from the current 22.8 percent. The move would entail spending cuts of more than $120 billion over four years.
Q. What, specifically, is new about the governor's latest plan?
A. Nothing. It's merely a repackaging of the larger "Roth-Kemp" tax-cut proposal Reagan had endorsed earlier, which called for a 30 percent tax cut for individuals over three years.
Under the Roth-Kemp plan, devised by Sen. William V. Roth (R.-Del.) and Rep. Jack Kemp (R.-N.Y.), tax rates would be cut 10 percent a year through 1983 and then indexed to provide automatic inflation adjustments each year.
Reagan simply took the first year's "instalment" of the Roth-Kemp proposal, combined it with the 10-5-3 depreciation plan -- which he also had endorsed previously -- and proffered them as a new proposal.
Q. Why did Reagan feel compelled to repackage the plan?
A. Two reasons: First, he wanted to preempt President Carter, who was just beginning to make plans for a tax-cut proposal of his own. Reagan advisers gambled that by proffering a "new" proposal, he could steal the president's thunder.
Second, Reagan wanted to free himself from having to defend the full three-year Roth-Kemp bill, which is subject of substantial controversy both politically and among economists.
GOP candidates had rushed to endorse the Roth-Kemp plan in 1978, mainly as a ploy to get voters' attention, but Democrats succeeded in convincing people that the proposal was overly ambitious and would only be inflationary.
Reagan's own economic advisers had been trying for weeks to get him to back away from the full Roth-Kemp proposal, but the governor steadfastly refused to do so. (Even now, Reagan insists he's still for the three-year proposal.)
Now, by concentrating on only the first year portion of the plan, Reagan is having it both ways politically: He's managed to shed the most controversial part of the Roth-Kemp plan -- while still hanging onto it!
Q. Did Reagan's ploy work?
A. So far, it's worked beautifully. Within 24 hours after Reagan unveiled his "new" plan, Senate Democrats bolted from President Carter's hold-the-line stance and pledged to draft a tax-cut bill of their own by Sept. 3.
This past week, the House served notice it would have to go along with the Senate, and the White House agreed to try to shepherd the process. Carter's main hope now is to postpone any bill until a post-election session, where it could become too bogged down to pass.
Q. Why are American voters so anxious for a tax cut?
A. Few analysts believe they are. Indeed, many politicans and pollsters sense just the opposite mood among a large proportion of voters: Many Americans believe that enacting a big tax cut now would simply refuel inflation. Until Reagan unveiled his new plan earlier this month, there was little, if any, sentiment in Congress for a tax bill this year.
Q. Well, if Reagan's plan was simply a repackaging of the old Roth- Kemp bill, and Democratic candidates had successfully beaten it back before -- and if so many voters actually oppose a tax cut, why did the senators jump ship so quickly?
A. In recent years, the Senate has not often been cited as a bastion of political courage.
Q. Would Reagan's tax-cut plan really be inflationary?
A. Economists are divided on that issue. Most Democrats contend the plan would spur wages and prices sharply because it would pump enormous amounts of money into the economy and drive up consumer and business spending.
Traditional Republican economists argue the inflationary impact could be blunted if the government also cut spending dollar-for-dollar to offset the new stimulus from the tax cuts.
However, Reagan's proposal to cut spending would offset only part of this, and the former California governor still hasn't said specifically how he would get Congress to go along with the spending cuts.
On the other hand, economists agree that in the short run, at least, a one-time tax-cut of any kind most likely would not be inflationary. Indeed, the reductions would barely make up for the tax-increases that come from inflation.
Q. What are the other criticisms of Reagan's tax-cut plan?
A. There are three:
First, Democrats argue that providing the same 10 percent cut for every tax bracket would end up giving the lion's share of the tax relief to upper-middle-and upper-income persons.
Congressional tables, for example, show the tax-cut for a family of four under the Reagan plan would average to $2,170 in the $100,000-a-year income bracket, but only $150 for a middle-income family earning $17,500 (see chart.)
Under the Californian's proposal, 73 percent of the total tax cut would go to persons with incomes of $30,000 or more; 37.2 percent to those in the $15,000-to-$30,000 middle brackets and only 13.9 percent to the poor.
Second, critics complain that because Reagan's plan would provide so little relief in the lower-and middle-income brackets, it would do nothing to offset the comming rise in Social Security taxes that will hit voters in 1981.
Because of legislation already on the books, the maximum Social Security tax is scheduled to rise a whopping $1,975.05 next Jan. 1. The increases will hit wage-earners primarily in the $29,700 and below categories.
Finally, opponents argue Reagan's plan simply costs too much. Treasury figures show the full Roth-Kemp bill -- which the governor still endorses -- would cost $30.3 billion in 1981 and up to $222 billion a year by 1985.
With the 10-5-3 depreciation writeoff plan included, the entire Reagan-Roth-Kemp package would drain $34.7 billion in 1981, with the total tab soaring to $281.8 billion a year by 1985.
Q. Are these critisms justified?
A. The question of how much relief should go to various income brackets depends on your own philosophy.
Democrats traditionally have favored using the tax system to redistribute income to the poor. Republicans historically have sought to channel the bulk of the tax relief to those who pay the most taxes.
The cost estimates for the Reagan plan also are the subject of debate. Proponents contend the revenue-drain would be reduced somewhat because the tax-cuts would spur production, which in turn would bring in more tax revenues. t
However, the majority of economists still believes the plan would be quite costly.
Q. What about Reagan's "10-5-3" proposal for faster depreciation writeoffs for business? Is a business tax break really necessary? And is the formula Reagan is proposing the best way to go about it?
A. Most mainstream economists, Democrats and Republicans alike, agree the current depreciatin system needs to be liberalized to help spur needed investment in new plants and equipment.
Under present law, companies base their tax deductions for capital spending projects on a complex and outmoded system based on what the government decides -- usually arbitrarily -- is an asset's "useful life."
However, with inflation raging in recent years, the system has broken down, and many firms are unable to recover their investments as rapidly as they had before. One result: There's less incentive for them to spend at all.
The 10-5-3 plan would replace the present plethora of "useful lives" with three basic categories -- structures, equipment and vehicles -- and speed up the depreciation period sharply.
Critics contend it's far too costly and is overly generous on writeoffs for construction. The 10-5-3 plan has several rivals, but Congress appears undecided so far on precisely which plan to adopt.
Q. Does Reagan have any other tax-cut proposals?
A. Yes, besides his latest proposals, Reagan also has called for repeal of the estate and gift tax and the new crude-oil tax; exemption of interest and dividends from taxation; and passage of a tuition tax credit.
If enacted, these measures together would cost the Treasury an estimated $77 billion in 1981. The tab would soar to $309 billion a year by 1985 -- far more than any surplus the government now projects.
Q. What kind of tax-cut plan are the Democrats proposing?
A. They haven't really worked that out yet, but so far it appears likely that their plan will be somewhat smaller than Reagan's -- say, in the $20 billion to $30 billion range -- and will channel less tax-relief to individuals.
Democratic strategists also are looking at ways to ease the impact of the scheduled Jan. 1 Social Security tax hike, either by allowing taxpayers an offsetting credit on their income tax or by cutting rates in lower brackets.
Q. Why hasn't President Carter proposed his own tax-cut plan?
A. Carter essentially agrees the government should reduce taxes in 1981, but wants to put off proposing his own tax-cut bill until January, partly for valid economic considerations and partly for political reasons.
White House economic advisers fear that if Congress takes up a tax bill now, it could revive inflationary psychology and unsettle the financial markets, sending interest rates soaring, as they did earlier this year.
They also worry seriously that if congress acts on a tax-cut before the election, the lawmakers will be unable to restrain themselves and the bill that emerges will be "irresponsible." History is on their side on that one.
Finally, Carter's political advisers fret that unveiling a tax-cut proposal now would risk being interpreted as another in a long string of Carter policy flip-flops -- an image they're anxious to avoid before the November election.
Carter began this year warning that the nation could not afford a tax cut. His January budget proposed allowing Americans' tax burdens to continue rising -- to their highest level since 1944 -- to help combat inflation.
Six weeks later, abruptly tightening economic policy even further, the president held out the possibility of a tax cut in early 1981, but warned he would not even consider one until Congress had officailly balanced the budget.
Before Reagan unveiled his latest proposal, Carter's key advisers were beginning to map plans for a tax-reduction to take effect in 1981, but the president was not considered likely to unveil it until budget-time in January.
Now, with the Reagan plan spurring Senate Democrats into tax-cut action, the administration is simply trying to delay final passage of any tax bill until after the election. The odds seem 50-50 that it will succeed.
Q. Is a 1981 tax cut really a good idea?
A. Many economists believe it's needed, if only to help offset the impact of the increases in Americans' tax burdens, energy prices and inflation over the past two years, which together constitute a massive "drag" on the economy that could dampen the coming recovery. Also, virtually all sides agree that business needs more investment incentives. The question is when -- and how -- to enact the cut so it doesn't refuel inflation.
Q. I'm confused. As things stand now, we have the Republicans proposing the kind of big tax cut for individuals that the Democrats used to push a few years ago, while the Democrats are proposing GOP-style cuts for business.
A. Jody Powell, the president's press secretary, told reporters last week that "people do tend to act a little peculiar as you get toward an election sometimes." Powell's judgement occasionally is unimpeachable.