Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: SUNDAY, July 1, 1990                   TAG: 9007010282
SECTION: HORIZON                    PAGE: C-1   EDITION: METRO 
SOURCE: RONALD D. ELVING CONGRESSIONAL QUARTERLY
DATELINE: WASHINGTON                                LENGTH: Medium

NOW, WHAT TAXES WILL THEY RAISE?

When Republicans discuss tax increases at all, they generally want to tax the sale of consumer goods such as gasoline, alcohol and tobacco.

That sort of tax does not hinder economic growth, investment or productivity, says Richard Darman, director of the Office of Management and Budget. But it is also regressive, levied without regard to ability to pay. So it hits the poor harder than the wealthy.

Many Democrats refuse to talk about specific taxes until Bush endorses some specifically. At the same time, Democrats have made it clear that they prefer taxes that make the revenue system more progressive by increasing the burden on upper-income households.

Those who make millions can well afford to pay more in taxes than two-wage-earner families with four children struggling to make ends meet on $25,000 a year, says Rep. Byron Dorgan, D-N.D.

Republicans stress tax policies that do not take dollars away from savings and investment. Critics of higher taxes on higher income traditionally have argued that capital is needed to create jobs. Now they add the specter of economic challenges from Asia and Europe. "This debate is not about rich vs. poor," says Richard Rahn, vice president and chief economist of the U.S. Chamber of Commerce. "It is about encouraging new opportunities, new business and new technology. It is about the U.S. competitive position in the world economy."

Democrats counter that the tax policy of the 1980s already did yeoman's work for the investing class, tilting the system too far toward regressive taxes, including the Social Security tax. It is time, they say, to reverse the trend.

House Speaker Thomas Foley of Washington and Senate Majority Leader George Mitchell of Maine have spoken out for a higher top rate on the income tax. And Sen. Daniel Patrick Moynihan, D-N.Y., risked his reputation as a defender of Social Security by calling for a rollback in the regressive payroll taxes that support it.

Many Democrats would like any new taxes to redress the growing inequity they see in both pre-tax and after-tax incomes. At a minimum, they insist that the budget agreement contain no taxes that increase that inequity.

But Republicans have a response: Despite the tax-rate cuts of the 1980s, the rich pay a larger share of the federal income tax now than a decade ago.

"The wealthiest 20 percent of American taxpayers today pay 58.1 percent of federal income taxes. In 1980 they paid 55.7 percent," says Rep. Richard Schulze, R-Pa.

In the end, neither party is likely to be able to put together a workable tax package without some of the taxes the other party prescribes.

The classic argument for consumption taxes, such as excise or sales taxes, is that they are levied equally on all buyers and leave savings and investment dollars alone.

The argument for progressive taxes is that they fall more heavily on those more able to bear them. Taking this a step further, as many do, progressive taxes might modify the income inequities associated with a market economy.

But in practice, even steeply graduated tax rates that seem to place a heavy burden on the wealthy do not necessarily lead to proportionately progressive tax collections.

Why? Because top rates are marginal. They apply only to part of a taxpayer's earnings. The current top rate of 33 percent, for example, applies only to taxable income in excess of about $75,000 (for married taxpayers filing joint returns). Given the deductions, exemptions and deferrals written into the law over generations, the effective rate - the percentage of tax a household pays on all its taxable income - tends to be far lower. Thus the family paying 33 percent on the first portion of its income may pay only 20 percent or less on its gross income.

The higher the top rate, the greater the incentive for the rich to use tax shelters. Conversely, lower rates may make expensive tax avoidance schemes less attractive.

This argument helped sell Congress on the tax cuts in the 1986 Tax Reform Act. But many Democrats were suspicious of the low top rates then and remain so now. Studies from the Congressional Budget Office and the House Ways and Means Committee staff indicate that tax cuts in the 1980s were a windfall for the wealthy and a wash for the poor and near-poor, especially when Social Security tax increases are included.