Almost all households with incomes under $40,000 a year will have their federal taxes go up instead of down this year despite the 10 percent income tax rate "cut" scheduled July 1, according to a Treasury Department analysis.
The reasons are "bracket creep"--families move into higher tax brackets as their incomes rise with inflation each year--and scheduled increases in Social Security taxes.
Only for households in the highest tax brackets are the income tax rate cuts enough to offset these.
A family of four making the median income, $24,300, will get $289 from the rate cut this year, but bracket creep and rising Social Security taxes will more than offset this, resulting in a net tax increase for the year of $127.
Similarly, for the four-person family making $15,000, the Treasury found total taxes will increase by $88; for the $20,000 family, $108; for the $30,000 family, $171, and for the $40,000 family, $318.
The administration is using the study to bolster its case that middle- and lower-income taxpayers would be hurt if Congress put off the second and third installments of the three-year tax cut it voted for individuals last year; some members want to defer these to help reduce the deficit.
At the same time, however, the study supports those who have criticized the administration tax bill on grounds that it gives real relief only to those in the highest tax brackets.
The Treasury study also casts doubt on the administration's view that the July tax cut will help finance recovery from the recession: if most taxpayers are facing net increases in tax liability, they will not have an increase in spendable income to lead a recovery.
Congressional committees are to begin work this week on House and Senate budget resolutions, tax increases and domestic spending cuts.
A budget conference committee may begin work as early as today, and the Senate Finance Committee, under pressure to raise taxes by about $100 billion over the next three years and to make the largest spending cuts besides, is expected to start work tomorrow.
The Treasury study declares:
"Bracket creep due to inflation and Social Security tax increases scheduled under the 1977 Social Security amendments wipe out most or all of the personal income tax reductions in the Economic Recovery Tax Act across a wide range of middle income families. . . . Most families end up paying a higher percentage of their income to the government than in 1980."
One reason wealthy taxpayers received "real" tax relief is that the 1981 legislation reduced the top marginal rate on investment income from dividends and interest from 70 percent to 50 percent and cut the top capital gains rate from 28 percent to 20 percent. These two kinds of income go mostly to the rich. In addition, Social Security tax increases fall most heavily on middle- and lower-income taxpayers.
In this light, the Treasury study notes that repeal of the July tax cut, a proposal under consideration by some House Democrats, would hurt lower- and middle-income taxpayers far more than the better-off:
"Upper income taxpayers, who received substantial benefit from the reduction of the top rate from 70 percent to 50 percent in 1982, would lose least in percentage terms. At $200,000, a family would lose about 25 percent of its tax cut by 1986. Lower income families would lose roughly twice that amount."
If the July, 1983, 10-percent rate cut were eliminated, then "only the highest (six figure) income families would come out ahead," the study continued.