Taxes, Present and Future
For decades, politicians have fought over the merits of the federal income tax system. Right now, some Republicans are talking of abolishing the present tax code - perhaps an appealing idea as the federal tax deadline approaches for about 174 million Americans.
President Clinton calls such talk "irresponsible." It's at least premature. Nothing substantive in the way of tax reform is expected from Congress before next year. Proposed alternatives to the current code have bounced around for years, and the more scrutiny they get, the better.
Without question, the present system needs reform. For one thing, it certainly should be simplified. Instead, Congress frequently complicates the system.
For instance, last year it lowered the tax rate on capital gains. But Congress made the mistake of varying the capital gains rate according to the months the investment has been held. So this spring investors and their tax advisers are spending extra hours calculating taxes owed. Congress should desist from adding such complexity to the system.
One desirable simplification would be to raise personal deductions so that more low-income taxpayers are not subject to any income taxes. They would still pay Social Security taxes.
Such a step would also add greater progressivity to the system. This year, according to the Congressional Budget Office, the one-fifth of families with the lowest incomes will pay on average 4.2 percent of their total incomes in federal taxes to Uncle Sam. The effective rate for the second fifth of families is 14.2 percent, the middle fifth 19.7 percent, the fourth fifth 22.7 percent, and the top fifth 29.3 percent. On average, Americans with the highest incomes pay far less than their marginal income tax rate (currently 39.6 percent on the last dollar of income earned) would indicate.
Now, for those alternatives. Some Republicans are urging a "flat tax" that would tax most people at the same rate. Though most versions of the flat tax excuse those at the lowest end of the income scale from taxation, those with high incomes would pay less taxes, while people with incomes in the middle range would pay proprtionately more. The same is true of various types of national sales taxes that have been proposed.
One key argument for a flat tax is that it would be simpler. Fewer accountants, less business for tax-assistance firms, fewer hours spent filling out tax forms. Another argument is that a flat tax would release a burst of productivity. Some analysts believe the well-off, in particular, would work harder if less of their income were destined for Uncle Sam.
BUT recent academic research has tended to undercut the theory that the affluent will head for the beach if their taxes are raised, or escalate their work hours if taxes are slashed. After the massive 1983 Reagan tax cut, the already long hours of high-income workers didn't increase.
In a way, that's a relief. It shows the motivation of often highly talented people with large incomes is not just to pile up more dollars. Rather, they prize accomplishment, achievement, and constructive activity, just like Americans generally.
We prefer a tax system that maintains at least modest progressivity - those who can afford it paying more. And we urge Congress to keep striving for simplification.