House passage of the Tax Reform Act of 1985 is a milestone in more ways than one. It's obviously a personal triumph for Chairman Dan Rostenkowski and the other members of the House Ways and Means Committee. It's an unconventional victory, but a victory just the same, for the president. And, as the speaker of the House said, it may be the best and most important tax bill the House has passed in a generation.
Perhaps more conscientiously than any other people in the world, Americans pay their taxes. They grumble, but they pay them. What really makes them angry, and rightfully so, is the nagging feeling that they are paying more than their share because others have found a legal way to duck their taxes through shelters and loopholes. On behalf of those who do pay, this bill is a frontal assault on entrenched inequities in the tax code. It isn't perfect, but it is a very good bill.
To begin with, it really would simplify taxes, reducing five corporate brackets to three and 14 individual brackets to four. Thirteen million taxpayers who now itemize could switch to the short form and save money, not because their old deductions would be eliminated but because the bill would raise the personal exemption to $2,000 for non-itemizers and raise the standard deduction to $4,800 for joint returns.
It's a great bill for the middle class. Over 50 percent of the individual tax relief would go to taxpayers in the $20,000-to-$75,000 income range. Single people with a taxable income of $26,000 are now in the 30 percent bracket. Under this bill they would be in a 25 percent bracket. A family with taxable income of $42,000 now faces a 33 percent marginal rate, but under the bill it, too, would be in the 25 percent bracket.
The deductions that most people utilize all stayed the same under the bill. IRAs, the state and local tax deduction, the mortgage deduction, medical deductions, consumer interest deductions and charitable deductions all would remain in their familiar form. Even short-form users could deduct $100 in charitable contributions.
Low-income taxpayers do so well in this bill that it's hard to believe they didn't have high-priced lobbyists. Increased personal exemptions, standard deductions and earned income credits would mean that no one under the poverty line would pay federal income taxes.
So who would lose under the bill? Exotic real estate tax shelters would take a beating. It would no longer make sense (as if it ever really did) to invest in useless construction of empty warehouses in order to gain five times one's investment in tax deductions. Much of the luster would fade for corporate takeovers, fueled by tax-subsidized loans and paid off with tax-free corporate gains and writeoffs of acquired losses. And with reform of the accounting methods for long-term contracts, even defense contractors would start paying taxes. Meaningful minimum taxes for individuals and corporations finally would be established.
Naturally, the critics of the bill clutched at various straws. They said it was "anti-growth" or "anti-family," or swore it would start a recession. Nonsense. The gnomes of Wall Street, who must put their money where their predictions are, know all about this tax bill, yet they expect lower interest rates and a healthy economy. In the past nine weeks, while this bill dominated the financial pages, the Dow Jones Industrials gained more than 200 points -- hardly an augur of recession or poor growth.
Anti-family? The charged is based on the fact that the net personal exemption for itemizers under the bill is $1,500, compared with $2,000 for non-itemizers. The extra $500 for short-form users is designed to approximate some of the breaks itemizers get, simplifying taxes for millions. Since the current personal exemption is only $1,040, even a family of two would gain at least $920 in deductions under the bill. What American family would lose out with this arrangement?
One criticism of the bill has been a political one: that it seems to put increased revenue options off limits with respect to deficit reduction next year, since many loopholes have already been closed in this bill in order to reduce individual taxes.
I disagree with this view for two reasons. First, the creaking structure of our current tax code is not in good shape to bear the additional weight of deficit reduction. The more revenue we collect under the current code, the more the inequities in the code are magnified.
Second, the president has attempted to associate Democrats with high taxes. A tax increase, no matter how equitable, originating in the House would be a fruitless exercise without the president's support, because to override his veto on a tax bill would be impossible. If additional revenues are to be part of a balanced deficit reduction package, as so many in both parties believe, the president will have to bless the effort.
House passage of this bill leaves me optimistic that the Senate will act next year before the election and, I hope, enough to permit taxpayers to make intelligent adjustments before the 1987 tax year begins.
The president's problems with his own party in the House on this issue are well known. An interesting question now has to be, "Where are the House Republicans on the tax reform issue?" Even when the president intervened energetically, an overwhelming majority of his party in the House opposed the tax bill. Are they searching for a bill that lowers the top rate for individuals yet keeps the business burden about where it is now? If so, their only choices are to cut taxes further in the face of $200 billion deficits, or make up the lost revenue by squeezing the middle-class taxpayer.
When the president first presented his tax propoal I was repeatedly asked whether the bill would realign the electorate. I always said "no," but I might not have considered one unexpected outcome. Despite the president's best efforts, the Republicans in the House may have breathed new life into their old image as the party of economic privilege and special interests. Three-quarters of the House Democrats, on the other hand, supported reform and supported the president. On to the Senate.