Treasury Secretary W. Michael Blumenthal, President Carter's chief tax adviser, said yesterday he has urged the President to recommend a top limit of 50 per cent on the tax rate for individuals, whether their income is "earned" (wages and salaries for example) or "unearned" (dividends, interest, rents).
"A 50 per cent top rate appeals to me." Blumenthal said at a breakfast news conference. "Then we can say to the citizen. "Whether you do in your lifetime, whether you make a salary, invest the money, or anything else - Uncle Sam will never take more than half of it, and leave you the other half to spend for yourself."
At present, the theoretical top tax rate is 70 per cent on unearned income of $200,000 or more (joint returns), although a compilation by tax expert Joseph A. Pechman shows that credits and special exclusions for capital gains reduce the effective, or actual, average rate to about 30 per cent, even at the $1 million a year income level.
The tax rates on earned income run from 14 to 50 per cent, and here, too exemptions and deductions lower the effective rate. For example, the nominal tax rate of 22 per cent on $10,000 a year income works out to a "real" average tax of 8 to 9 per cent.
Predicted that the nation's unemployment rate 6.9 per cent in May, will drop "to the 6 per cent to 6.5 per cent range by the end of the year, probably closer to 6 per cent." It was the most optimistic forecast yet by the Carter administration. The June jobless rate is scheduled to be announced today.
Cautioned that "inflation is more difficult to deal with in the short run," but the rate neverthless will "go down below 6 per cent next year."
Said there would be little pressure on inflation because of wage negotiations in 1977.
Blumenthal's press aide, Joseph Latin, later called reporters to say the secretary had had second thoughts on his unemployment forecast, which "was probably over-optimistic at 8 o'clock in the morning." Latin said Blumenthal preferred to stick with a guess of 6.5 per cent at end of 1977.
On taxes, the net effect of a lower rate structure combined with elimination or reduction of special preferences. Blumenthal's aides said, would be to give everyone on wages or straight salary a tax reduction. At the same time, those enjoying special tax breaks would pay more.
Treasury experts are now compiling alternative lists of "tax expenditures," showing the whole gamut of tax losses arising from special tax exclusions or deferrals. These include everything from mortage interest deductions to special benefits for so-called domestic international sales corporations.
No decisions have been made, but Blumenthal impiled that the Carter tax package, when delivered to Congress early this fall, will be a practical compromise between what tax "theorists" would recommend, and political realities.
A top tax limit of 50 per cent could be achieved, Blumenthal told reporters yesterday, by making the tax system more equitable. That is, some income that now gets special treatment would be included in the regular, but lowered tax schedule.
One key target of administration tax-revisionists is capital gains. Tax-payers can now divide in half their income from sale of stocks and other real assets. One half is not taxed. The other is taxed at usual rates.
Blumenthal acknowledged that "all of the options are still open," but said that he thought "50 per cent is a pretty good number" for the top tax rate.
The eventual "shape" of the entire tax table has not yet been settled, he said, but the benefits of revision should be concentrated in the "lower and lower middle income brackets." One possibility is a reduction of the 14 per cent basic by a few points.
Earlier this week, Carter told reporters that the 14 to 70 per cent tax rate on individual income should be reduced "30 to 40 per cent." A 30 percent reduction in the top bracket would lower the rate to about 50 per cent.
"From the first," Blumenthal said. I believed that there should be no distinction between earned and unearned income. Somehow, the theory was that earning interest or getting a dividend was slightly less moral than being paid a salary. To me, that doesn't make any sense, and I hope that distinction will be eliminated."
Blumenthal said that everyone should "look forward to tax reform, except those who have found ways not to pay their taxes."
He conceded that there had been "no ringing (Wall Street) endorsement" of the administration's plans to end the special tax treatment of capital gains but said that most businessmen admit the need for "fundamental reform."
Besides, he said, the administration "ought to come up" not only with new financial incentives for capital formation, "but provide incentives for both business and individuals to work harder."
He said that no decisions have been made on the method for eliminating preferential treatment of capital gains or on the elimination of so-called "double taxation" of dividends.