- as present law) the first bracket rate on income above the exempt level is 14% on the first $500, 15% on the second $500, 16% on the next $500, and so on. Under the scaling-down approach in the Bill, however, the rates in effect for 1970 are much higher for example, the starting rate really becomes 21% instead of 14%. Thus, under the new table for that year, a single person is exempt if his income is below $1700. As he earns income in excess of $1700 his tax rate is 21% on the first $500 earned, 22-1/2% on the next $500, and 24% on the next $500. The same effect exists for married persons. This is because the taxpayer not only pays tax - on each dollar he earns, but each such dollar also adds $.50 more to his taxable income because his low-income allowance is sliced $.50 for each $1 of income. These high rates do not show up in the law or tax returns because the tax is stated only in table form nor are they discussed in the House Committee's Report or the Treasury proposals. But the disadvantage of very high marginal rates for these brackets exists under the scaling-down approach. Fortunately, the House Bill in 1971 eliminates the scaling-down and thus eliminates these high marginal rates for that year and thereafter. However, under the permanent scaling-down approach now recommended by the Treasury, the aspect of high marginal rates would persist. The scaling-down is slower the low-income - - allowance would be sliced $.25 for each $1 of income and the marginal rates would not be as high as in 1970, but they would be high. Thus, in 1971, when the general rates are stated to be 13% on the first $500, a low-income person subject to tax would under the Treasury approach actually have a rate of 16-1/4% on his first $500 of taxable income; when the general rate is 14% on the next $500, the low-income person would actually have a rate of 17-1/2% and so on. Thus, for low-income taxpayers, the tax tables under the Treasury scaling-down really involve actual tax rates 25% higher than the rates used in the general rate tables and which people presumably think are the rates applicable. It is right to exempt from tax completely those persons whose incomes are below the poverty level. It is not right as the Treasury would do to tax at high rates those persons whose - incomes are just above the poverty levels. The House Bill in rejecting a permanent scaling-down is thus distinctly preferable to the Treasury recommendation to use that device. Middle-Income Taxpayers In 1944 the Congress took a major step to improve the simplicity and fairness of the individual income tax when it adopted the standard deduction at 10% of gross income up to a maximum - deduction of $1000. This standard deduction was then used on about 82% of the tax returns. This action had two consequences: From the standpoint of simplicity, for the great mass of taxpayers the computation and record keeping under the income tax were greatly simplified. From the standpoint of fairness, for this group variations in deductions for personal expenses would not affect tax liabilities so that the tax burden was the same within the range of the average for these deductions. Only those taxpayers with personal expenses above the average could affect their tax liabilities through those expenses. Since 1944, however, these important gains in simplicity and equity have steadily eroded away. In 1969, it is estimated that In only 57% of tax returns will utilize the standard deduction. the intervening years, average deductions have risen, making the 10% figure inappropriate, and incomes have also risen, making the $1000 limit inappropriate; yet those two aspects of the standard deduction have remained unchanged. The result is increased complexity for taxpayers, and a greater spread of actual tax liabilities for taxpayers largely similarly situated. It must be remembered that many taxpayers who actually bear the burdens of these personal expenses cannot obtain the itemized deductions for those expenses since they do not directly pay the items, such as tenants who in their rent bear the costs of property taxes and interest. In these cases, the purpose of the standard deduction is to prevent serious unfair distinctions in tax burdens. And even where there are actual variations in personal expenses, the precise reflection of those variations in many cases would produce only small tax differences, whose reflection in tax liability is out of all proportion to the complexity involved in keeping track of the items. This is especially so where the deductible personal expenses themselves raise qualitative judgments on which people differ. In these cases, the standard deduction serves to prevent taxpayers from being involved in excessive costs to obtain at best minor equity advantages. As a result, our goals of simplicity and fairness point in the case of this group of taxpayers those with incomes from about $7000 to $25,000 to a revision which would restore, as - far as possible, the effectiveness of the standard deduction. This step requires both an increase in the 10% figure and the $1000 limit, and the revenue cost involved depends on the extent to which these amounts are increased. The House Bill here also meets the problem of tax reform for this group of taxpayers. It increases the standard deduction to 15% by 1972 and raises the limit to $2000. The effect, in combination with other changes in the Bill, would be that about 80% of returns would again be using the standard deduction. This is clearly a major gain in both tax fairness and tax simplification. The Treasury recommendation to your Committee to increase the standard deduction only to 12% and $1400 is a decidedly inferior approach and should not be adopted. A word as to revenue costs and the priorities for tax reduction may be appropriate here. The $1100 uniform minimum standard deduction or low-income allowance with no scaling-down costs $2.7 billion under the House Bill. The 15% $2000 standard deduction costs $1.3 billion. The revenue is well spent, however, and goes to the persons under the individual income tax who held the top priority for tax relief when revenues for that relief became available, as they do under this Bill. These are the people who are first in line for tax relief, for they are treated unfairly and less favorably than other taxpayers under the present law the low-income groups who can least afford the income tax burden and the middle-income groups who do not benefit from itemized deductions. - reasons - - The Treasury, however, seems to have an upside-down view of the priorities for tax relief. It gives top priority to the across-the-board rate reduction under the House Bill in the individual tax of $4.5 billion, stating that it "represents reasonable, equitable tax relief" because it "does not discriminate between itemizers and non-itemizers, between homeowners and tenants" and so on "it provides even-handed non-discriminatory relief." But the task of tax reform and tax revision -- when taxes are being reduced is to see whether the present treatment is fair or unfair and to correct injustices first rather than simply uniformly to change tax rates. Such a uniform adjustment is appropriate in a temporary measure adopted for economic stabilization a 10% surcharge (though even here the lowest brackets were exempted) or a 10% reduction to avoid a recession. There the task is not to change existing relationships and not to consider basic tax policy issues these are to be left to permanent tax revision. But now we are engaged in just such a revision where the task is that of examining just who is treated more favorably and who less favorably under the tax system. To approach such a fundamental revision by saying, as does the Treasury, that the first tax priority is across-the-board rate reduction would mean we would never really ever deal with the basic issues in an adequate way. The Treasury approach is thus a misstating of priorities and a negation of the essential task of tax revision. The House Blll approaches the matter properly by giving full relief to those first in line for it. - Several additional matters not in the House Bill may be mentioned with respect to the middle-income groups. Another step that can achieve simplicity, and also is in keeping with tax fairness, would be to eliminate the deduction for state gasoline taxes where the item is a personal and not a business expense. Like the non-deductible federal gasoline tax, the state gasoline tax is essentially a charge for the use of highway facilities and, therefore, should not be deductible. This step is now recommended by the Treasury. Simplification and fairness for this group also call for a complete revision in the tax treatment of the elderly. The present rules are a maze of complexity adding up to a full page on the tax return. They also involve unjustifiable discriminations among the elderly through differing tax treatment for different sources of income, here bearing adversely on those elderly who need to continue working after reaching age 65. Further, they provide unneeded tax relief for those elderly who are well-to-do. The February Treasury Proposals involved a complete revision of present rules, with a revenue cost of $80 million.* The problem presented in the high-income group is a complete breakdown in the fairness of the individual income tax. A few examples will illustrate this: - In 1967 there were 155 tax returns with adjusted gross * Another desirable change, recommended in the February Treasury Proposals, was in the charitable deduction, under which that deduction would be allowed outside the standard deduction (i.e. allowed together with the standard deduction), but would be available only where the contributions exceeded 3% of adjusted gross income. This threshold would apply to taxpayers using either the standard deduction or itemized deductions. These changes in the charitable deduction, combined with the standard deduction changes, would reduce significantly the number of returns requiring record keeping and audit for personal items, while maintaining for all taxpayers, even those using the standard deduction, an incentive for charitable gifts above routine giving. The charitable organizations apparently oppose such changes. But they presumably overlook or misjudge its advantages. Under the House Bill, with its increase in the standard deduction, and no other change as respects charitable contributions, only about 15 million returns would be left to use itemized deductions and to claim a charitable deduction. Under the above proposals, however, with the ability to claim a charitable deduction whether other deductions are itemized or not, even with a 3% threshold about 26 million returns would claim a charitable deduction. These proposals would thus provide a wider base for charitable support than simply changing the standard deduction. |