|And it's not just individuals. A group
called the Citizens for Tax Justice reported a few weeks ago that 65 of
America's largest corporations paid no income taxes between 1981 and 1983
despite reported profits of more than $50 billion. In fact, they received
$3.2 billion in refunds or credits against future taxes. General Electric,
according to this study, reported a profit of over $6 billion during that
3-year period, but paid no income taxes. G.E., in fact, collected $283
million in credits against future taxes. Boeing, the aircraft manufacturer,
reported an income of $1.5 billion and paid no income taxes.
|"Since the federal income
tax fills such a vital need, it is sad to realize what has happened to
it over the years."
A recent political cartoon showed a street person
being taken into custody by the police. He says to the arresting officer,
"Vagrant? I'm no vagrant. Why I paid more in federal income taxes last
year than G.E., Boeing and Dow Chemical all put together." A funny cartoon,
perhaps, but a sad commentary on our tax laws.
Since the federal income tax fills such a vital
need, it is sad to realize what has happened to it over the years. It has
become a kind of topsy-turvy welfare system, unwittingly granting all sorts
of favors and benefits to the well-to-do, who don't need them, and imposing
unfair burdens on those in the great American middle-class.
No wonder people are cynical about our tax system
today. And as people become more cynical, tax evasion becomes an ever more
serious problem. No one admits to cheating on their taxes, but more and
more Americans are doing it.
The IRS estimates that due to increased cheating,
unreported income has jumped from $94 billion in 1973 to $250 billion in
1981. As a consequence, we are now losing more than $100 billion a year
in tax revenues. That's not small change, even by the standards of the
Unfairness and cheating, however, are not the
only problems with our tax laws today. The tax code is becoming more and
more complex despite efforts to simplify it. Congress last year "simplified"
the tax code with a 1200-page tax reform bill. And so it goes.
It's important to understand how our Federal tax
code got so riddled with loopholes. It isn't that Washington is filled
villains and political ogres who believe in robbing the poor to pay
the rich. Most tax loopholes have an innocent beginning. Long ago,
|for some legitimate social or economic
reason, a class of taxpayers was given a special deduction or preference.
The motive, in most cases, was good. Congress in years past, for instance,
has decided to give special deductions to blind persons and the elderly.
We also have given a child care deduction to parents. Faced with an energy
crisis, we gave tax credits for solar energy and energy conservation. And
faced with a declining technology base, we gave a 25% credit to companies
for research and development expenditures above a certain base level.
But over the years, some of the tax preferences
have become distorted and applied to situations never anticipated thus
benefitting persons it never intended to benefit. In some cases, the original
purpose has already been fulfilled or forgotten, but the old law remains
on the books.
Doing something to correct these inequities is
not going to be easy. Closing a loophole, once opened, is like trying to
plug a dike at high tide while the ocean is pounding through. The people
who benefit, or who have come to depend on tax preferences for their investment
or income, will fight long and hard against any change. And the defenders
of these loopholes will make good, strong arguments in favor of the status
|"Closing a loophole, once
opened, is like trying to plug a dike at high tide while the ocean is pounding
A few months ago everyone was hoping that Congress
would enact a truly comprehensive tax reform bill, a bill that would eliminate
all but a few of the existing tax preferences. Everyone seemed to agree
that people should be able to deduct the mortgage interest on their home
and that charitable contributions should be largely tax deductible. Beyond
that, however, everything was on the table for possible elimination.
The final plan approved by the President takes
several steps back from that position, but it's still a good starting place
for reform efforts. The President's plan, by eliminating a large number
of tax loopholes, would lower tax rates from a maximum of 50 percent to
a maximum of 35 percent. For married couples filing jointly, the first
$4,000 in income would not be taxed. Income between $4,000 and $29,000
would be taxed at a 15 percent rate. Every dollar of income between $29,000
and $70,000 would be taxed at a 25 percent rate. Every dollar in excess
of $70,000 would be taxed at a 35 percent rate. In addition, the personal
exemption would be raised from $1,080 per person to $2,000. The standard
deduction would also be increased.