New tax law will increase the burden on the poor

Presidend Reagan's tax cuts could have the poort paying more taxes proportionately that the well-to-do (though perhaps not the rich). It may be some years before this assertion can be proved. The National Science Foundation has cut off the Brookings Institution from funds it had used in the past to examine the comparative tax burdens of federal, state, and local taxes on the various income groups.

Brookings is using its own money to update earlier studies of the overall "effective rate" of federal state and local taxes, that is, the rate after taking into account all tax loopholes on nominal tax rates. It is the tax rate people actually pay on all income. The funding is at such a low rate, however, and the computer programming so expensive, that the updating could take years, says Joseph A. Pechman, director of economic studies at Brookings.

Dr. Pechman, along with Benjamin A. Okner, was responsible for a landmark Brookings study in 1974, "Who Bears the Tax Burden?" It found that the overall effective rate of federal, state, and local taxes in 1966 averaged nearly the same across most of the range of family incomes.

Last year Mr. Okner updated the study to 1970. He came up with two sets of burden estimates (see accompanying chart). These embrace differing assumptions as to the "ultimate incidence" of certain taxes, in other words, who finally pays the tax bills. Taking the "least progressive incidence assumptions" -- that is, assuming that the final burden of some kinds of taxes falls proportionately to a greater extent on lower-income people rather than the well-to- do as compared with the "most progressive incidence assumptions" -- the study found that 1970 taxes took nearly the same average fraction of income from families in every income class from $5,000 up to $50,000. That would correspond roughly to a 1980 range of $10,000 to $100,000.

The assumptions are important in such a study. Both sets of estimates assume that the individual income tax is borne by the income recipients. They also reckon that sales taxes are paid by consumers in proportion to their consumption of the taxed items, and that payroll taxes levied on employees are actually paid by them.

The chief difference between the two sets of estimates results from the treatment of the corporate income tax and property taxes. Under the least progressive assumptions, half of the corporate income tax and all of the property tax on improvements (houses, office buildings, etc.) are assumed to be paid by consumers. Under the most progressive assumption, these taxes are assumed to apply to income from capital, which tends to go the well off.

Economists have long debated such tax incidence issues. But it is certainly possible that a corporation, paying perhaps 40 percent in income taxes, may as a result pass on some of that burden to buyers of its production in higher prices and also pay somewhat smaller dividends to its shareholders.

Whatever, even if the most progressive assumptions are accepted, the tax burden falls only slightly more on the well-to-do. It would be 22.4 percent for the $5,000-to- $10,000 group of families and 27.3 percent for the $30,000-to-$50 ,000 group.

For the rich, the tax burden is only moderately greater with the least progressive incidence assumptions; considerably so with the most progressive assumptions.

Looking at the nominal federal income tax tables, such results may seem like non- sense. However, there are many loopholes in the federal system which reduce rates more for the well-to-do than the poor. Moreover, federal income taxes account for less than one-third of all tax revenue in the United States, economist Allen D. Manvel points out in Tax Notes, a publication of the Washington-based Taxation With Representation. Even if other "progressive" taxes (that is, the well-to-do tend to pay proportionately more of their income than lower income groups) such as state and local income taxes are included, only about half of aggregate tax revenue is involved.

Further, more than a third of total tax revenues comes from sales taxes and payroll taxes which have markedly "regressive" incidence; that is, they bear more heavily upon the poor than the affluent.

Federal taxes may hit harder as income rises. But state and local taxes tend to hurt lower income groups more than the well-to- do. That's true all the way up the income ladder, according to the least progressive incidence assumptions, and until the $25,000- to-$30,000 bracket (twice that today) under the more progressive assumptions.

Now, Congress and President Reagan have taken steps that will reduce further the tax burden on the well-to-do and rich and thereby add to that of the lower income groups. Maximum federal income tax rates are being reduced from 70 percent to 50 percent. More loopholes have been opened for the oil-wealthy. The corporate income tax is being reduced dramatically, a tax that is assumed to fall either entirely or in part on divident collectors.

Also, there is a long-term trend to reduce taxes on property, again a factor that tends to benefit the upper-income groups.

Finally, Congress has almost abolished estate taxes, eliminating them up to $ 600,000 by 1985, and reducing rates for the highest brackets from 70 percent to 50 percent.This benefits well-to-do and wealthy families most.

"It will increase the concentration of wealth," Dr. Pechman says. $S o, both those with high incomes and those with wealth stand to benefit from the Reagan era; the poor will pay a bigger share of the total tax burden than now.

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