Making out your income tax? Budget Director David A. Stockman, the amazing 34-year-old whiz kid of the Reagan administration, casually observed at breakfast with reporters the other morning that there may be $300 billion in tax shelters in use in the United States today -- a third of $1 Trillion. The amount is growing, he said.
That's one reason the Reagan administration wants to cut income taxes for the upper and middle brackets (with some cuts for the lower brackets, too).
The middle class just isn't going to give its money to tax collectors if it can avoid it, Reagan tax philosophers believe. They think that if the taxes were reduced, or if some of the right ones were reduced, the actual take by the federal government would increase. That's the theory of the "Laffer Curve," the equation worked out by Prof. Arthur Laffer, the nonconformist economist from California. He believes that above a certain level less money is collected in taxes, while below it more money is collected, and he draws a line to show where. Its this aberration, he feels, that interrupts the symmetrical operation of Keynsian economics, and his views help support the overall Reagan economic approach known as supply-side economics: emphasizing production (supply) rather than prices and wages (demand).
What is a tax shelter? a tax shelter is where a rich man, who might be in the 50 percent tax bracket, buys tax-exempt municipal bonds and gets his taxes down by a substantial degree through this legally countenanced device. He pays a premium for the bonds (i.e., they may return less interest than obligations of another character), but because his tax bracket is so high, he makes a good thing out of the transaction, which is perfectly legal. Many tax shelters are really subsidies, designed to encourage social objectives.
Mr. Stockman, who has done the astonishing job of formulating the radical Reagan revision of taxes and expenditures in the few months since the election, speaks casually of tax shelters. He customarily speaks in "billions" and "trillions." He makes no doubt about the amount going into shelters at present. Behind shelters is a different, murkier world of tax evasion that has reached such proportions that some specialists call it a "third economy." It grows, too, as taxes rise.
A number of European countries, including Britain, have imposed the so- called "value-added tax," a concealed, cumulative national sales tax with a new payment added at each increment of the production process. It is largely self- policing because each element wants to be assured that the layer below is paying the proper amount.
The degree of voluntary complaince in self-calculating income tax paying is almost unique in the US and has been the envy of other countries. Now it may not be able to survive new conditions. Taxes are higher. In 1950 the amount of personal income going for taxes in all types was 25 percent, now it is 45 percent. The Treasury has economized by cutting back on auditing: about 5 percent of individual returns were audited in 1965; 15 years later it is about 2 percent.
As the tax payment deadline of April 15 approaches, some 100 million Americans wrestle with Form 1040 to make approximately 95 million individual returns that will shake out of envelopes at the appropriate regional divisions. How much shall be subtracted for donations, business expenses, home entertainment? Reasonable deductions will be taken in most cases, it is believed. But the shadow world of outri ght evasion looms behind.