SPECIAL REPORT

LESSONS FROM A NEIGHBOR

IAN AUSTEN June 29 1987
SPECIAL REPORT

LESSONS FROM A NEIGHBOR

IAN AUSTEN June 29 1987

LESSONS FROM A NEIGHBOR

SPECIAL REPORT

For most Americans, their first encounter with the effects of last fall’s tax reform program was a four-page form known as W-4. It was an inauspicious beginning. Internal Revenue Service (IRS) commissioner Lawrence Gibbs declared last November that the new form—which almost all American taxpayers must fill out—would put an end both to large refunds and large tax bills by providing a more accurate estimate of how much employers should deduct from paycheques. Although simplifying forms was one of the goals of the reform, the W-4 was twice as long as the form it replaced and sparked complaints about its baffling design and directions. Indeed, the all-new W-4 was too much for even the 1RS experts. A sample form passed out by officials to show how it worked underestimated a fictional taxpayer’s bill by $5,885. Complained Democratic Senator David Pryor of Arkansas: “A lot of people think that when the government tries to simplify something, we make it worse. This reaffirms that idea.”

Unknown: Embarrassed tax agency officials redesigned and shortened the new form. But problems with tax reform in the United States are far from

over. The impact of the first year of the program—which eliminated a number of deductions in exchange for lower tax rates—will remain largely unknown until businesses and individuals file their returns next April. And although the changes were designed neither to increase nor to decrease Washington’s overall tax take, a $25.5-billion revenue shortfall in the federal budget may prompt Congress to impose new taxes even before the reform’s first anniversary.

The American Tax Reform Act of 1986, which became law last October, introduced the most sweeping changes in taxation that the United States has experienced since 1954. If all goes according to plan, the top individual federal tax rate, formerly 50 per cent, will fall to 28 per cent this year. Likewise, the maximum corporate rate will decline to 34 per cent from 46. And although business rates will be lower, elimination of some capital gains and depreciation benefits for business will shift about $160 billion of the tax burden from individuals to corporations.

While the full impact on individual taxpayers will not be clear until next year, those with incomes below $13,400 a year are the biggest group of winners—with an average tax cut esti-

mated at 61 per cent. But even in that group, not everyone will come out ahead. Four per cent of taxpayers at that bottom rung—mostly retired people with large capital gains incomewill pay more. Beyond that, the higher the income, the lower the proportion of people who gain. At the top, among those with incomes over $268,000, almost half will pay more. The biggest losers, according to Jeffrey Spinner, a policy analyst with Citizens for Tax Justice, a labor5 backed lobby group, will g be “the prototypical I yuppie couple with two "incomes and no £ children.”

The corporate picture is equally mixed. Some heavy industries—including steel and automobile manufacturers—will be hit hard under the new system. In the early years of Ronald Reagan’s administration, corporations were allowed to accelerate writeoffs of investments in new buildings and equipment, giving companies bigger tax deductions. But the new bill lengthens depreciation periods again, which will boost taxes on many manufacturers and may slow investment in capital goods—machinery and equipment used to make other products.

Burden: Despite the potentially negative impact on its members and the shift of the tax burden to business, the U.S. Chamber of Commerce remains a strong supporter of the program. Said David Koenig, a tax attorney for the chamber: “We back it for one reason— the attractiveness of the low rates.” But Koenig cautioned that support could evaporate because of the first post-tax-reform budget debate. Unable to create a budget that meets mandatory deficit-reduction requirements through spending cuts, the Democratic leadership in Congress last week proposed to make up a $25.5-billion revenue shortfall through new taxes.

Although the lawmakers agreed on the amount, they have yet to decide what form the taxes will take. Most congressmen appear reluctant to tinker with the new tax rates adopted only a few months ago. The likely alternatives: new excise taxes on gasoline, oil imports, cigarettes and alcohol. But if that happens, the effects of the reform program may be undermined. Said Spinner: “We’ll be back at Stage 1.”

— IAN AUSTEN in Washington