President Carter yesterday sent Congress his long-awaited tax proposals - $33.9 billion in tax cuts for individuals and business that would be offset by $9.4 billion in revenue-raising "reforms."
His plan would slash the total that Americans pay in individual income taxes by almost 10 percent, and would reduce the income taxes levied on corporations by about 8 per cent. All the reductions would take effect Oct. 1.
The Carter tax cuts would be pitched so that most of the benefit would go to families at low- and moderate-income levels.
A family of four with an income of $10,000 a year would have its income taxes reduced from the $446 it paid last year to $192 this year, and only $134 in 1979, when Carter's plan would be fully effective.
No family of four with an income below $9,256 would pay any federal income taxes.
There would also be cuts in higher income brackets. A four-person family with a $30,000 income would have its income taxes cut $322 by 1979, according to tables supplied by the Treasury yesterday. But these income tax cuts would be offset - particularly for these higher-income families - by sheduled increases in the Social Security tax. Taking both taxes together, only families with incomes under $20,000 would end up net winners by 1979. Those above the level would see their total taxes rise.
Americans now pay 10.7 per cent of their total personal income in federal income taxes. Carter's recommendations would reduce this to 10.3 per cent this year. Then it would creep up with inflation to 10.5 per cent next year.
The Carter plan, which the President said is necessary to increase purchasing power and keep the economy growing, would change a number of familiar features of the tax code.
Among other things, the President recommended repeal of the deductions now allowed for state and local sales and gasoline taxes, and new restrictions on deductions for medical expenses. These revenue-raising changes would have particular impact on families in higher income brackets. They are the ones who typically itemize deductions. The other "reforms" in Carter's plan are also mainly directed at the better-off, and also at corporations.
The President't tax package contains these elements:
$16.8 billion in net tax cuts for individuals, through two major changes in present law.
First, the familiar $750 personal exemption now claimed by all taxpayers and their dependents would be replaced by a $240-a-person tax credit - a change that would result in lower taxes for virtually all taxpayers earning less than $22,000.
Second, tax rates would be reduced by roughly 2 percentage points in every bracket, trimming rates from the present 14 per cent at the low end of the range and 70 per cent at the top to 12 per cent and 68 per cent, respectively.
$5.7 billion in net tax reductions for business.
The big cut would come from trimming the present 48 per cent corporate tax rate to 45 per cent in October and 44 per cent in January, 1980. Carter also proposed liberalizing the present 10 per cent tax credit allowed business for investment in new facilities.
Simplification of tax-return preparation by eliminating $5.8 billion in currently available itemized deductions, including those for state and local sales and gasoline taxes. The medical deductions would be replaced by a new writeoff for costs involving catastrophic illness.
A modest $3.6 billion package of tax "reforms" designed to limit tax preferences that benefit the rich. Among them are proposals to phase out a $1.2 billion tax subsidy for exporters and the ability of multinational corporations to defer taxes on foreign income.
Carter also is proposing paring back the present deduction for business expenses such as lunches and entertainment costs. Under the new plan, companies would be able to write off only 50 per cent of these costs. And some other expenses would not be deductible at all.
A $2 billion "anti-inflation" tax change aimed at reducing business costs, including sooner-than-scheduled repeal of the 4 per cent telephone excise tax and repeal of the recently enacted two-tenths of a percentage-point increase in unemployment payroll taxes for companies.
Carter told the lawmakers the reductions are needed to offset the new Social Security payroll tax increases and the impact of inflation in pushing taxpayers into higher brackets - both of which would create a "drag" on the economy.
The President said that without these reductions the economy would slow from the moderate 4.5-to-5 per cent pace it's expected to maintain this year to a sluggish 3.5 per cent by 1979 - possibly pushing unemployment up. He estimated that the cuts would produce 1 million new jobs.
However, unless Congress changes its mind about adhering to the Oct. 1 effective date, Americans still will be paying higher taxes for most of this year as a result of the Social Security payroll tax increase that went into effect Jan. 1.
With the Social Security tax increases taken into account, the tax reductions become minimal for taxpayers in upper-middle-income brackets. A family of four earning $25,000 a year for example, would see its total tax bill cut by only $22.
At the same time, the President conceded that the cuts would not be large enough to offset higher energy taxes if Congress passes his energy legislation. He said if the lawmakers don't include tax rebates for consumers in the energy bill, he will propose additional income-tax cuts later to offset the added taxes.
Carter also hinted he would not endorse the full $24.5 billion tax cut if Congress also did not pass the revenue-raising measures he proposed. The $24.5 billion total comes from offsetting $33.9 billion in actual tax reductions with $9.4 billion in revenue-increasing proposals.
Reaction to the Carter tax package was mixed. Rep. Al Ullman (D-Ore.), chairman of the House Ways and Means Committee, said the tax cuts the President recommended are too large. He also criticized the proposals for eliminating the foreign tax breaks and business deductions.
The National Association of Manufacturers welcomed the business tax-cut proposals, but also criticized Carter's "reforms" as unjustified.
Virtually all of the Carter tax package had been disclosed previously. The only alteration was in the size of the $240-a-person tax credit the President is proposing to replace the present $750 personal exemption. Carter earlier had been considering a $250 credit.
Treasury officials made clear that the President will ask for additional tax reductions in coming years, to help offset scheduled Social Security tax increases and expected inflation. The White House has sketched out a "Long-range" plan envisioning perodic reductions.
The shift to the $240-a-person credit was designed to divert more of the benefits to lower-income persons. Since the present exemption reduces the amount of a taxpayer's income that is subject to taxation, the higher a taxpayer's bracket, the more the deduction is worth.
With a credit, however, the $240 would be subtracted from the tax an individual owes, giving a bigger tax break to low- and middle-income families. (The credit also would wipe out the present $35-a-person "general tax credit" now in force.)
The reduction in overall tax rates also would be skewed, both to provide a proportionally larger tax cut for lower-income taxpayers and to eliminate some of the quirks in the present tax rate structure. The reductions range from 1 to 5 percentage points in different brackets.
W. Michael Blumenthal, the Secretary of the Treasury, estimated that the reductions would mean another 6 million persons whose income is at or near the poverty line no longer would have to pay taxes. The poverty line now is $3,252 a year, and will rise to $3,499 in 1979.
The elimination of the itemized deductions now allowed taxpayers in all brackets would involve these changes:
Medical and casualty costs would be treated differently. Under present law, taxpayers may deduct half the cost of health insurance premiums to a maximum of $150, and other medical expenses in excess of 3 per cent of their adjusted gross income; and property damage of more than $100.
The new proposal would combine all of these into a single deduction, but allow taxpayers to claim only that portion of the total that exceeds 10 per cent of their adjusted gross income. Tax planners argue that the writeoff is supposed to cover only unusually costly illness.
Taxpayers no longer would be able to deduct state and local sales taxes, gasoline taxes and other miscellaneous taxes. But deductions would continue for state and local income taxes and real property taxes.
The proposal would end the present deduction for political contributions, under which taxpayers may claim a writeoff for up to $200 a family in donations to candidates or parties. (Present law also allows an optional tax credit of up to $50. This, too, would end.)
The tax reductions affecting bsuiness are designed primarily to make it easier for companies to accumulate more capital and spur needed investment in new plant and equipment. Reluctance of business to expand or modernize has held back economic growth.
Besides the reductions in the corporate tax rate, the President proposed extending the present 10 per cent investment tax credit to cover spending for structures as well as equipment, and to allow companies to use the credit to offset 90 per cent of their taxes instead of 50 per cent.
Carter also proposed lowering the corporate tax rates on the first $50,000 of business income - a gesture to small business. The proposal would reduce these rates from the present 20 per cent on the first $25,000 and 22 per cent on the second $25,000 to 18 and 20, respectively.
He also added several other proposals to benefit small business - simplifying depreciation rules applicable to small business and liberalizing deductions for stock losses involving small companies. The combination of measures would trim small business taxes 10 per cent.
The proposal yesterday omitted any mention of two key provisions Carter was reported earlier to have been considering - a special tax credit for working spouses, to relieve the so-called "marriage penalty," and a proposal to continue the jobs credit Congress passed last year.
Key administration officials said the president had decided against the credit for working spouses on grounds that it was too costly and complex, and instead would count on revisions in the tax rate structure to reduce some of the present overtaxation of married persons.