The Bad New Tax Law

The US Tax Reform Act of 1986 has been praised by the leaders of both parties, from the intellectual “founder” of the idea, the moderate Democratic senator Bill Bradley, to Ronald Reagan, the most conservative president in recent memory, who made it the chief domestic policy goal for his second term. Proponents of the bill said it would make the tax code both fairer and simpler, by lowering tax rates for the common man and curtailing a wide variety of special deductions, credits, and loopholes that the rich had used to avoid paying their fair share of tax.

The bill was also promoted as a boon to the working poor—six million lowincome taxpayers will be taken off the tax rolls entirely—while remaining “revenue-neutral,” i.e., providing neither more nor less income to the government. But those who have had high expectations for the bill are in for a shock. Not only does it amount to a substantial tax cut for many of the rich, but it also contains hidden dangers to the idea of equal opportunity in America.

The new bill replaces the current system of fourteen tax brackets ranging from 11 percent to 50 percent with only two tax brackets, 15 percent and 28 percent.1 This is a clear step backward for the progressive idea of taxation—that the rich should pay a greater share of the tax burden. The current system is only mildly progressive, because many upper-income taxpayers have used deductions and shelters to pay less than their nominal rate of tax.2 But the new law is a gift to the rich unmatched since Calvin Coolidge pushed through a 24 percent top rate for 1929. In the new law, the top rate also extends far down into the middle class; single taxpayers begin paying a marginal 28 percent on every dollar earned over $17,850. Thus, for example, a science researcher making $22,000 a year pays the same 28 percent marginal tax rate as Lee Iacocca, who makes over $1,000,000 a year.

The new low rates create a windfall in tax savings for those taxpayers making over $200,000 a year who didn’t take advantage of many deductions or tax shelters; their top tax rate falls from nearly 50 percent to 28 percent. For example, a stockbroker earning $500,000 a year who paid 40 percent, or $200,000, in federal tax in 1986 gets a $60,000 cut to 28 percent, paying $140,000 on the same income in 1988. Such taxpayers make up only 0.3 percent of the total but will, in 1988, save $19.7 billion in taxes, according to the Joint Committee on Taxation—an astonishing 32 percent of the bill’s benefits to individuals in that year. For a government facing huge budget deficits, this is a large gift to bestow on an already privileged part of the population. It is only partially balanced by $17.3 billion in increased revenues expected from those in this income class who are giving up shelters and other deductions.

By contrast, the cost to…

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