A chart yesterday gave the tax rates in three pending tax-simplification plans as if they applied to adjusted gross income. They apply to taxable income.
The Treasury Department yesterday unveiled an elaborate tax-simplification plan that would lower rates but wipe out many familiar deductions, exemptions and other special provisions in return, while shifting the tax burden back somewhat from individuals to corporations.
The plan, which President Reagan ordered a year ago and some version of which he has said he will send to Congress next year, would replace the present 14 individual income-tax brackets with three: 15 percent on taxable income up to $19,300; 25 percent on income from there to $38,100 and 35 percent on all remaining. The present top rate is 50 percent.
The proposal would increase the personal exemption for each taxpayer and dependent from $1,090 to $2,000. This and other adjustments would raise the tax threshold for a family of four -- the point below which no income taxes are owed -- from $8,070 to $11,800, moving it back above the federal poverty line. The threshold would rise from $3,600 to $4,800 for single taxpayers.
The taxes of the poor would thus be cut, but because they pay so little already, the Treasury said that various income groups would end up paying about the same share of total income taxes as they do now.
About three-fourths of all taxpayers would have no change or a cut in taxes, the department said, and for half of the rest the increase would be less than 1 percent of income.
The plan would preserve the deduction for mortgage-interest payments, but state and local tax payments would no longer be deductible. Charitable contributions could be deducted only to the extent that they exceeded 2 percent of adjusted gross income. These recommendations brought quick protests yesterday from state and local officials and from charitable organizations.
The Treasury plan would treat long-term capital gains as ordinary income, dropping the provision that exempts 60 percent of such profits from tax. But it would also index gains to allow for inflation while an asset was held. Interest income would be indexed as well, Treasury said.
For corporations, Treasury would drop the tax rate from 46 percent to 33 percent. It would also reduce what critics call double taxation of dividends -- first as corporate profit, then as individual income -- by allowing companies to deduct half of the amount paid as dividends.
However, the Treasury plan would dry up the famous "three-martini lunch" by limiting business-meal deductions to $10 per person for breakfast, $15 for lunch and $25 for dinner. Other such business deductions would likewise be curbed.
The plan would also curtail the accelerated depreciation provisions that were a key part of Reagan's big 1981 business tax cut and eliminate the investment tax credit. Those provisions now save businesses over $20 billion a year, and their curtailment is likely to provoke opposition, particularly from capital-intensive smokestack industries.
The Treasury said its proposal would mean a 25 percent increase in corporate taxes next fiscal year, or $22 billion more than companies would pay under current law. By 1990 this increase would be 36 percent, the department said. This would change the trend of recent years of corporate income taxes declining sharply as a share of federal revenues.
The department said individuals would have an average 8.5 percent cut in tax liabilities. A 262-page summary released yesterday emphasized that the plan would be "revenue-neutral" as the president demanded, not a tax increase. But it contains complex transition rules under which most new provisions would be phased in. These work out so that the plan would be a wash next fiscal year, cost the government money in fiscal 1987, gain it a little the following two years and then shift back toward being revenue-neutral.
Treasury Secretary Donald T. Regan defended the plan at a news conference yesterday. "The present U.S. tax system desperately needs simplification and reform," he said. "It is too complicated . . . it reduces economic incentives, hampers economic growth and is perceived to be so unfair that taxpayer morale and voluntary compliance have been seriously undermined."
Though it would eliminate many provisions of importance to business, including the oil industry's depletion allowance and right to "expense" or write off so-called intangible drilling costs in the year incurred, Regan said the plan would encourage investment.
Treasury officials also said they do not think it would hurt charitable organizations. Deductions would be worth less to upper-income taxpayers -- the lower a taxpayer's rate, the less a deduction reduces his tax bill -- and gifts below 2 percent of income could not be deducted. But the plan would remove an annual ceiling on charitable deductions.
Regan also questioned the harm that would be done to state and local governments by eliminating the deduction for state and local tax payments. He noted that only about a third of all taxpayers itemize deductions and take advantage of this provision. He said these tend to be the wealthiest third, suggesting that the subsidy is more for them than for state and local services.
In addition, Regan said a new 1040 tax form would be simpler, eliminating about 20 percent of the lines on the current form. The accompanying schedules would also be simpler, and 14 would be eliminated, Regan said.
"About 280 million hours are now spent by Americans in preparing their returns," Regan said. "Our plan will cut this by almost one-third."
Regan also said that, with modernization of the Internal Revenue Service in a few years, about two-thirds of taxpayers will be able to have their returns automatically prepared for them by the IRS.
The main advantage proponents see in the Treasury proposal is that it attempts to neutralize the tax code so that it no longer favors some industries over others and so that investment and other such financial decisions would not be made for tax reasons.
"Our plan will substantially curtail tax shelters, and we think our recommendations will go a long way to assure the average American that the other person is being taxed on the same basis as he or she is," Regan said.
The president is expected to study the Treasury proposal along with similar plans circulating on Capitol Hill. One sponsored by Sen. Bill Bradley (D-N.J.) and Rep. Richard A. Gephardt (D-Mo.) would also have three individual rates -- 14 percent, 26 percent and 30 percent -- and 30 percent for corporations.
Another bill, introduced by Rep. Jack Kemp (R-N.Y.) and Sen. Robert W. Kasten (R-Wis.), has a 25 percent tax rate for individuals and would reduce the maximum corporate tax rate to 30 percent on earnings above $50,000.
The Treasury plan would make several changes in the tax status of fringe benefits, one of the main forms of "income" that now escape taxation.
Employer contributions to retirement plans would continue to be tax-free. But contributions to health-insurance programs would be counted as income taxable to employes to the extent they exceeded $70 a month for single taxpayers and $175 for families. One purpose of this is to make patients more cost-conscious and to help restrain national medical costs. About 30 percent of employes with health coverage would be affected, Treasury said.
The Treasury plan also would start counting as income employer contributions to group term life-insurance plans, as well as such benefits as educational subsidies, legal services and employer-paid child care.
The existing child-care credit would be converted to a deduction of up to $4,800 a year for two or more children.
The plan would not change the tax treatment of Social Security benefits, and it would increase allowable annual contributions to individual retirement accounts from $2,000 to $2,500 per employe and from $250 to $2,500 for spouses working in the home.
It would retain tax-indexing, the adjustment of various figures in the code to keep inflation from lifting taxpayers into higher brackets.
The plan would retain the tax-exempt status of general-revenue municipal bonds but start taxing the interest on industrial-revenue and other special-purpose bonds issued by state and local governments.
For business, elimination of the investment tax credit and the accelerated depreciations provisions of the 1981 tax bill are likely to be the most controversial part of the Treasury proposal.
But the depreciation provisions were enacted, in part, to protect businesses against inflation, which adds to the cost of replacing equipment, and inflation is now down.
The plan would also:
*Eliminate the new deduction for two-earner families intended to wipe out the "marriage penalty."
*Drop the dividend exclusion of $100 per single taxpayer, $200 per joint return.
*Drop the credit for political contributions and the checkoff to help defray presidential-campaign costs.
*Begin taxing all unemployment compensation payments; some are now exempt.
*Limit deductions for non-business interest payments other than on the mortgage on a first home. In general, the limit would be $5,000 in excess of investment income.