Genuine tax reform is within reach. The bill approved by the Senate Finance Committee significant improvement over current law. But in one major respect, it should be further improved.
As reported, the bill accomplishes part of the tax reform agenda: by substantially reducing special preferences and exemptions, and adopting an effective alternative minimum tax, it responds to public doubt about the fairness of our tax system.
But it does not accomplish another important part of the reform agenda: providing tax relief to the middle-income taxpayers of this country.
Of the 89 million returns that report taxable income, less than 5 percent reflect income over $75,000. The Finance Committee bill gives almost 27 percent of its total tax relief to the 5 percent of Americans with the highest incomes.
At the very highest income levels, only one-half of 1 percent of all taxpayers report taxable income of $200,000 or more. The committee bill channels fully 16 percent of the total tax relief to these wealthiest Americans.
But for people in the middle class -- the vast majority of taxpaying wage-earners -- the tax bill will mean relief ranging from $100 to $400 a year.
The Senate should accept the president's proposal of three tax rates, which the House has already adopted.
The additional revenues from a higher top rate (the president proposed 35 percent, the House adopted 38 percent) should be used to provide greater tax relief for middle-income taxpayers.
It could be provided most broadly and equitably by raising the level of income at which the 27-percent rate takes effect. Under the committee bill, a single person will start paying the maximum rate of 27 percent on taxable income that exceeds $17,600. At that point, a middle-income single taxpayer would be paying tax at the same rate as the person earning $176,000 or $1 million a year. That's not fair.
I intend to offer an amendment on the Senate floor to establish a more progressive three-rate structure, similar to that proposed by the president and adopted by the House. The principle of progressivity has been embodied in the federal tax system since the permanent adoption of the income tax.
But since the late 1960s, that progressivity has declined. Between 1965 and 1985, the one-tenth of taxpayers with the lowest incomes saw their overall tax burden rise by 30 percent. The one-tenth of taxpayers with the highest incomes saw theirs fall by 16 percent.
The 1981 tax bill was a major part of that shift. In the aftermath of the bill, the federal budget deficit increased dramatically. That in turn has produced tax increases that have further eroded the progressivity of the federal tax system. In 1982, gas, cigarette, airline and telephone excise taxes went up. In 1983, the payroll tax went up. In 1984, alcohol excise taxes went up.
Although President Reagan professes opposition to "higher" taxes, he has in fact proposed, endorsed and signed into law a series of tax increases since 1981 -- in payroll taxes, excise taxes, user fees and other "revenue enhancements." His 1987 budget askes for 10 more such tax increases. The only tax the president truly opposes is the income tax -- the only nonregressive federal tax.
The policy of cutting income taxes, which are based on ability to pay, and raising other taxes, which are not based on ability to pay, has shifted the tax burden down the income scale. It has reduced taxes for persons with higher incomes. It has raised the tax burden on persons with lower incomes. And it has wiped out tax relief for the middle class. That is unfair and wrong.
Moreover, fiscal realities make it more than likely that this trend will continue. After debating the tax bill, the Senate will turn to the budget, which both the House and the Senate have already agreed should include $46 billion in new taxes over the next three years. These new taxes will almost certainly be excise taxes.
It is in this context that we should debate the tax bill. It will enormously improve the tax system by ensuring that all Americans pay a share of the tax burden. But unless the essentially flat rate in the bill is modified, we will not be able honestly to claim that all taxpayers are paying a fair share.