The Rich, the Poor, and the Taxes they Pay, by Joseph A. Pechman. Boulder, Colo.: Westview Press. 317 pp. $40. From a political standpoint, much of the credit for the astonishing tax reform taking place in the United States goes to people like President Reagan, House Ways and Means Committee Chairman Dan Rostenkowski (D) of Illinois, and Senate Finance Committee Chairman Bob Packwood (R) of Oregon.
From an intellectual basis, the author of this book, Joseph Pechman, should get a good chunk of the credit for tax reform.
Dr. Pechman has been researching and writing about taxes for some three decades. He was member of the Division of Tax Research of the Treasury from 1946 to 1953, and then was a consultant to that department. He helped the late Stanley S. Surrey, the top tax man in that department in the 1960s, put together a tax proposal that might be regarded as a precursor to today's reform. He's served as an adviser on tax questions to presidents and presidential candidates, usually Democrats.
Now a senior fellow at the Brookings Institution, Pechman brings together in this book a selection of essays on key tax issues, income maintenance, and social security.
Though written clearly, this is not an ``easy read.'' That's because tax affairs are not that simple. For those wanting to understand some of the principles of the tax system and other matters of public finance from a citizen's or legislator's standpoint (rather than from the viewpoint of a tax preparer), this book is first-class.
Pechman has a keen interest in the fairness of taxation. So he devotes the first two chapters of his book to ``The Rich, the Poor, and the Taxes they Pay,'' and ``Who Paid the Taxes, 1966-85?''
``Everybody knows that there are loopholes in the federal tax laws, but few realize that there are loopholes for persons at all income levels,'' he writes. ``Even fewer have a clear idea about the effects on the distribution of income of closing the more controversial loopholes. And only the experts know the state-local tax structure is in more urgent need of reform than the federal structure.''
For example, probably most people figure that the Reagan tax reform, by dramatically reducing the top rate on the federal income tax to 27 percent, means that the rich will be getting a big break.
In fact, the reform is more likely to modestly increase the progressivity of the system -- that is, it will tend to tax the well-to-do at a higher rate than those with lesser incomes. This phenomenon stems from the abolition of a multiplicity of loopholes in the present tax system, the higher taxation of capital gains, and the boost in corporate taxes. Further, the reform will relieve some 6 million poor people from the burden of paying any federal tax at all.
As now structured, the federal tax system is ``either moderately progressive or slightly regressive,'' notes Pechman.
If the corporation income tax and the property tax are assumed to be borne by capital -- that is, by those holding corporate stock or properties -- the very rich pay higher average effective tax rates than does the average family.
In 1980, under such ``most progressive'' assumptions, effective tax rates ran from about 20 percent at the low end of the income scale to 27 percent at the top. So the rich pay proportionately little more tax on their income than middle class families pay.
However, if the corporation income tax and the property tax are assumed to be shifted to consumers to a considerable degree by price hikes of the goods or services the companies sell -- and this is the view of many tax economists -- then the very rich pay lower effective tax rates than are paid by the average family.
Under these ``least progressive'' assumptions, effective tax rates in 1980 declined from over 30 percent at the lowest end of the income distribution to about 25 percent for the second poorest 10 percent of families and remain at about that level through the income levels until reaching the top 10 percent. These well-to-do or plain rich pay only 22 percent in taxes under these assumptions -- 8 percent less than the rate for the poor.
Since 1980, various changes in the tax laws have made the system even less progressive, or more regressive, depending on assumptions.
Pechman writes in a matter-of-fact way about these results. He clearly believes that the tax structure should be somewhat based on the idea of ``ability to pay'' -- that those with larger incomes should pay a larger proportion of their incomes as taxes than those with smaller incomes pay. But in this book he doesn't climb on any soapbox about it. He recalls how Mr. Surrey, who later returned to Harvard Law School, insisted that only the highest standards of economic and statistical analysis would promote serious tax reform.
The new tax reform leaves some tax loopholes intact. For example, tax exemption for interest on municipal and state bonds remains -- a favorite of the well-to-do. Congress is leaving some loopholes for the middle class in place -- deduction of interest on home mortgages, for instance.
But there are fewer loopholes, and that makes economic sense to Pechman. In a telephone interview, he called the tax reform ``a noteworthy achievement.''