Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: TUESDAY, March 6, 1990 TAG: 9003061976
SECTION: BUSINESS PAGE: B7 EDITION: METRO
SOURCE: The New York Times
DATELINE: WASHINGTON LENGTH: Medium
One of the main political selling points of that law, which changed the income tax system more than any other legislation since World War II, was the expectation that $120 billion in taxes would be shifted from individuals to corporations in the first five years.
But for reasons government experts and outside economists do not completely understand, corporate tax receipts, while higher than they were under the old law, ran $20 billion to $30 billion less each year than anticipated in the three full fiscal years since the law was enacted. The shortfall in years to come is expected to be even larger.
Lawmakers were told when they passed the sweeping legislation in 1986 that it would be "revenue neutral" over the first five years, meaning it would generate about the same amount of money for the government as the old tax law.
So far, that has proved to be the case. Tax receipts from individuals have exceeded expectations by more or less the same amount that corporate receipts have lagged.
Experts agree on why tax payments by individuals have been higher than estimated four years ago. The economy has performed better than anticipated, giving people higher incomes and, thus, higher tax bills.
But most government officials and private economists say they are not sure why tax receipts from corporations are so far off the mark.
After checking with tax specialists at the Treasury Department, Roger Bolton, assistant secretary for public affairs at the Treasury, said the department's view was that corporate tax receipts have been less than expected almost entirely because corporate profits have been lower than anticipated.
"It's not that tax reform didn't do what was predicted but that the economy didn't do what was expected," Bolton said.
Other economists and tax experts agreed that was part of the cause, but they doubted it was the full reason.
They say the government's overestimates of corporate profits varied enormously: the estimate was $23 billion too high in fiscal year 1987, $9 billion in 1988 and $60 billion in 1989.
By contrast, the shortfall in taxes paid by corporations did not vary by nearly as much. It was $20.9 billion less in 1987 than the Treasury's estimates made right after the tax law was passed, $22.7 billion less in 1988 and $25 billion short in 1989.
Economists in Congress and outside the government suggested these possibilities:
With leveraged buyouts and other structural changes, corporations took on much greater debt in the late 1980s than was foreseen when the law was passed, and that reduced their tax burden.
The computer models used in estimating revenues did not take account of the negative effects on the economy in general and corporations in particular of the abolition of various tax breaks.
by CNB