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2 Federal Tax Policy Memo 1 (1978)

handle is hein.tera/fetxcyemo0002 and id is 1 raw text is: TAX FOUNDATION'S January 10, 1978 VOL. 2 NO. 1 1825 K Street, N. W. Washington, D.C. 20006 THE 1978 TAX PROGRAM DOING IT WITH MIRRORS The Administration is out on another limb with its still hazily-articulated tax program. No matter what specific proposals are presented in the January mes- sages to Congress, they can hardly accomplish the multiple objectives set forth over the last two months. Directly or indirectly the Administration has postured a program that will strengthen the economy, make up for past inflation, offset the added costs of social security and energy taxes, and still contain significant reforms to make the tax system more progressive. All this, according to Decem- ber press reports, is proposed to be done for a mere $25 billion..... Or perhaps with mirrors. Predictably, those most concerned with fiscal drag are urging a bigger cut, and some a much bigger cut. To correct only for inflation's rising bracket effect on the 1978 income tax bill of individuals would take about $6 billion. To offset the gross cost of the additional social security and unemployment compensa- tion taxes in 1979 -- when they really start to bite -- $16.5 billion. At this point nobody knows what the final energy tax bill will involve; Walter Heller estimates a net annual cost of another $6 billion. One can easily conjure up a case for a $30-50 billion tax reduction to settle these various accounts and get the economy really moving -- that is, if you're not squeamish about budget deficits of even heftier proportions. Congress, of course, will have its own ideas on the size and distribution of tax relief Income Tax Reduction vs. Social Security Increases The shape, if not the size, of the Administration's tax plan, as announced on December 21, looks a bit thin to many Americans with substantial existing tax bills. The catch-22 is that the stiff increases in payroll taxes mandated by the 1977 social security bill hit hardest at those in the upper-middle income groups who generally would get the least in income tax reductions under the proposed package. It is reported that the package provides rate reduction of two percentage points perhaps across the whole schedule. But it also contains a switch to a $250-per-dependent flat credit in place of the existing $750 personal exemption (and $35 per person credit). This won't do much for those in the $25,000-and-up AGI brackets. Across the overall income spectrum, the Carter tax reductions could more than offset social security hikes, but if concern extends beyond fiscal drag and current consumer spending to capital formation and productivity incentives, the outlook gets muddier. The table on page 2 shows what would happen over the next decade to the typical taxpayer, married with two dependents, at selected AGI levels under the

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