President-elect Ronald Reagan will ride into office on the biggest tax increase in recent history, with little prospect of scaling it back until well into his first year now that Congress has ruled out a tax cut bill in the lame duck session.
Taxes are scheduled to rise by about $85 billion next year. Part of this simply reflects inflation. But more than $35 billion represents a real increase in the tax bite, the share of total income that goes to the government.
It will be a "miracle" if a big tax bill is now passed before mid 1981, according to Sen. Bob Dole (R-Kan.), chairman-to-be of the Senate Finance Committee.
A midyear bill along the lines proposed by Reagan in his campaign would probably cut taxes by only about $20 billion during next year, roughly half the cut that would have occurred if Congress had passed a tax cut bill this session.
Inflation, a legislated increase in Social Security taxes and higher receipts from the tax on oil profits will act next year to increase the tax burden. Inflation increases the tax bite by pushing people into higher tax brackets, even if their incomes rise only enough to keep pace with prices.
This will add a "real" $15 billion to individual income taxes next year, according to estimates prepared by the Joint Committee on Taxation. In total the committee expects income taxes to rise by $35 billion in 1981.
Social Security taxes are due to go up in January by about $12 billion in real terms with inflation adding another $7 billion, the committee estimated. Individuals will pay overall about $11 billion more in payroll taxes in 1981 than in 1980, the estimates show. Nearly $8 billion of this is a real increase, or one which is not offset by higher wages.
Futher decontrol of oil prices will increase the tax take on so-called "windfall profits" in 1981 by over $11 billion, the committee estimates. The figure could be even higher if the Reagan administration decontrols prices faster.
It is this arithmetic which spurred the move to pass a tax bill this session, to take effect from January 1. Reagan and his economic advisers publicly supported that move. But delaying a tax cut gives the new administration much more flexibility next year, as well as more cash in hand.
Some repubicans had wanted to wait until next year anyway so that the Reagan administration and Republicans in Congress would get full credit for bringing taxes down.
A tax cut is virtually certain next year, but congressional sources yesterday differed over its likely shape and 1981 size. A key question is whether the cuts will be retroactive to Jan. 1.
A Republican staffer close to Dole, said this week he doubted whether Congress would vote to make the cuts retroactive. There is little reason to do so, he said, as it would not boost savings or investment or raise incentives to backdate the cut.
But another source disagreed. He said he thought both Democrats and Republicans had promised the electorate to cut taxes effective from January 1. The state of the economy next year will play a part, as will the success of the new administration's attempts to cut spending.
Congress is likely to be more cautious about cutting taxes if inflation and interest rates are still high next year or if federal spending is above target. iConversely, if the economy is growing only slowly there will be more pressure for a big tax cut.
Even if the measures are made retroactive, individuals will probably only get the extra money after the end of 1981.
A straight 10 percent cut in tax rates for 1981, as Reagan supported in his campaign, would cut individual taxes by about $15 billion in the second half of next year if Congress passes a bill by the beginning of June. It takes between four and eight weeks for the Internal Revenue Service to prepare the forms to change withholding taxes. Any further delay in getting a tax cut on the books would reduce the benefit to individuals in 1981.
Committee staffers expect a compromise between a straight across-the-board cut and the Senate Finance Committee bill which included a capital gains tax cut; a measure to end the marriage penalty under which a married couple currently can pay more tax than if they were single and living together; and measures to encourage savings.
Many of them doubt whether Congress, even with its new markup, will pass the Kemp-Roth measure to cut taxes by a further 10 percent in 1982 and 1983. Reagan's task force on taxes has recommended implementation of Kemp-Roth.
Businesses may take a bigger share of the 1981 tax cut during the actual year because they could anticipate the cut and reduce their periodic tax payments accordngly all year long.
Simpler and more generous depreciation allowances for business are bound to be part of the tax cut. A key GOP staffer said that these may be made effective from the date that a tax bill is reported out of committee, even if not backdated to January 1. A compromise proposal between the so-called 10-5-3 plan and the Senate Finance Committee's depreciation proposals is likely, according to congressional sources. This would probably reduce business taxes by $3 billion to $5 billion in 1981 if a bill were passed in the summer.