YOU MAY have noticed that W. R. Grace and Company recently ran another round of advertisements commenting on taxes and our editorial views. W. R. Grace and Company is more enthusiastic than we are about President Reagan's tax plan. We are always delighted to hear from our critics, including those whose feelings impel them to buy large ads. Thanks to W. R. Grace, the newspapers running these ads are the only businesses in the country that can rest assured of benefiting from the administration's supply-side economics. But we wish to deny the widespread rumor that The Washington Post editorial page staff is getting commissions from our advertising department for the Grace ads.
Why not explain what this debate's about? It's about the winners and the losers under the Reagan plan. First we'll do the calculation the way Grace does it, and then we'll do it the way most other people do.
More precisely, the debate is about the way inflation affects the income tax system. Grace says that the Reagan plan favors the working poor and the middle class. Here it helps to use some figures -- similar to the figures that may be, at this moment, spread out on your dining room table. Throughout this exercise, let's assume a family of four at various income levels, whose deductions are one-fifth of their income. We'll use the administration's scenario of 35 percent inflation from 1980 to 1984.
Grace's logic is illustrated in Table I. A family with $10,000 in 1980 would have exactly the same real income -- the same purchasing power -- after 35 percent inflation if it had 13,500 in 1984. Under present law, with no tax cut at all, its 1984 tax would be $972. With the Reagan tax cut, its 1984 tax would be only $688 -- which is 29.2 percent less than it would be with no tax cut. At higher levels the reduction is a little less, as the table indicates. At first glance, you might easily conclude that Grace is right and the Reagan tax plan is tilted toward lower incomes.
Question: If Grace is right, why do the poor come out paying heavier tax rates at the end of those four years, while the wealthy pay lighter rates?
The answer is that Grace's statistical method leaves out the effects of inflation. Inflation takes place over time, and it's only by comparing one year's taxes with another year's that you can see the distortions that inflation creates. Grace is not unaware of this point. In its ad, Grace protested that projecting tax rates across the years is comparing "apples to oranges."
Some apples. Some oranges. Some billions of dollars in tax liabilities, slowly and silently sliding downward on the income scale.
The standard method of comparing real rates, and in our judgement the right method, is illustrated in Table II. The family of four with $10,000 in 1980 is liable for a tax of $374, which is 3.7 percent of its income. If inflation follows the administration's scenario at 35 percent, and that family stays barely even with 13,500 in 1984, its tax that year under the Reagan plan would be $688. That's 5.1 percent of its income, a significant increase. The increases are even higher for poorer families lifted out of the earned-income credit. For middle-income families there are modest cuts, typically a little over one percentage point -- part of which, incidentally, has already been offset by this year's increase in the Social Security payroll tax. The income tax cuts under the Reagan plan would begin to get more substantial around $50,000. For a hypothetical family with $100,000 last year, the tax rate was about 30 percent depending on the nature of the income. By 1984 it would be down to 25.2 percent. Those are pretty valuable oranges and apples.
One reason for this unequal distribution is inflation's erosion of basic protections like the zero tax bracket and the $1,000 personal exemption. Another reason is the eccentric structure of the brackets. A family in the middle-, or upper-middle, income range is much likelier to be bumped into the next tax bracket by inflation than richer families are.
A tax cut is needed this year, and the top rate ought to be brought down to 50 percent as Mr. Reagan proposes. But it is equally necessary to expand the basic protections for people farther down the income scale. There's something to be said for parts of the Reagan tax plan. But you can't say that it favors poor and middle-income taxpayers. That's inaccurate, mere Graceful thinking. TABLE I (TABLE) (1)(COLUMN)(2)(COLUMN)(3)(COLUMN)(4)(COLUMN)(5) (COLUMN)(COLUMN)(COLUMN)(COLUMN)Difference 1980(COLUMN)Same income(COLUMN)1984 Tax(COLUMN)1984 Tax(COLUMN)between Income(COLUMN)1984 Dollars(COLUMN)Present Law(COLUMN)Reagan Plan(COLUMN)(3) & (4) $10,000(COLUMN)$13,500(COLUMN)$972(COLUMN)$688(COLUMN)-29.2% 20,000(COLUMN)27,000(COLUMN)3,497(COLUMN)2,539(COLUMN)-27.4 30,000(COLUMN)40,500(COLUMN)6,904(COLUMN)5,027(COLUMN)-27.2 50,000(COLUMN)67,500(COLUMN)16,444(COLUMN)12,073(COLUMN)-26.6 100,000*(COLUMN)135,000(COLUMN)46,364(COLUMN)34,063(COLUMN)-26.5 100,000**(COLUMN)135,000(COLUMN)43,378(COLUMN)34,063(COLUMN)-21.5(END TABLE) *unearned **Earned TABLE II (TABLE) (1)(COLUMN)(2)(COLUMN)(3)(COLUMN)(4)(COLUMN)(5)(COLUMN)(6) 1980(COLUMN)1980(COLUMN)1980(COLUMN)Same Income(COLUMN)1984 Tax(COLUMN)1984 Rate Income(COLUMN)Tax(COLUMN)Tax Rate(COLUMN)1984 Dollars(COLUMN)Reagan Plan(COLUMN)Reagan Plan $10,000(COLUMN)$374(COLUMN)3.7%(COLUMN)$13,500(COLUMN)$688(COLUMN)5.1% 20,000(COLUMN)2,139(COLUMN)10.7(COLUMN)27,000(COLUMN)2,539(COLUMN)9.4 30,000(COLUMN)4,169(COLUMN)13.9(COLUMN)40,500(COLUMN)5,027(COLUMN)12.4 50,000(COLUMN)9,968(COLUMN)19.9(COLUMN)67,500(COLUMN)12,073(COLUMN)17.9 100,000*(COLUMN)30,154(COLUMN)30.2(COLUMN)135,000(COLUMN)34,063(COLUMN)25.2 100,000**(COLUMN)29,378(COLUMN)29.4(COLUMN)135,000(COLUMN)34,063(COLUMN)25.2(END TABLE) *Unearned **Earned