The MacNeil/Lehrer Report; New Tax Law

[Tease]

President RONALD REAGAN: This represents $130 billion in savings over the next three years. This represents $750 billion in tax cuts over the next five years.

JIM LEHRER: Now it`s law.

[Titles]

LEHRER: Good evening. President Reagan had the supreme pleasure of signing his economic plan into law today. He put his signature on the largest tax and spending cut legislation in American history -- legislation which he said markedly changes the course of government in this country. The new laws do reduce planned federal spending $130.5 billion over the next three years, and cut income taxes by some $749 billion through 1986. Mr. Reagan did the signing deed this afternoon before reporters and photographers at his California ranch, where he is vacationing. He thanked members of the Congress, Democrats and Republicans, who voted for his programs, but said the real credit goes to the American people, who finally made their wishes known. It is how that tax cut bill will specifically affect the American people that we detail tonight. Robert MacNeil is off. Charlayne Hunter- Gault is in New York. Charlayne?

CHARLAYNE HUNTER-GAULT: Jim, the main feature of the Reagan tax bill was an across-the-board 25 percent cut in tax rates over 33 months. The first cut, of 5 percent, will come on October 1st of this year. The second round, a 10 percent cut, will take place on July 1st, 1982. And the final cut, of 10 percent, will come on July 1st, 1983. Then, starting in 1985, individual tax rates will be determined by changes in the Consumer Price Index. That indexing will prevent people from being pushed into higher and higher tax brackets because of inflation. Other main features of the tax bill include an easing of the so-called "marriage penalty" for working couples; increased child care credits; and various tax incentives for savings and investment. Such drastic changes in the tax code will no doubt cause people to rethink their financial planning. Jim?

LEHRER: So, first, a simple A-B-C look at how the tax rate cuts will affect various categories of taxpayers. It comes from an interview I taped a few days ago with Daniel Kruger, managing partner of the Washington national tax office of the accounting firm Peat, Marwick & Mitchell. [videotape]

LEHRER: Mr. Kruger, first, is there a quick, simple way that each of us can figure out what that first tax cut on October 1st could mean in terms of real savings for each one of us?

DANIEL KRUGER: Yes, I think so. If we look at the withholding slips that we have, let`s say, on a weekly salary check, and take 1 1/2 percent of that and then multiply that by 52 weeks, that should add up to savings we would get. Now, that number is a rough guide and would not necessarily apply to individuals who have interest and dividends, who have exceptional deductions.

LEHRER: But if you wanted a general idea--

Mr. KRUGER: Certainly that would be a way to do it.

LEHRER: I see Okay now. in dollar amounts, in what the savings will be to various taxpayers according to how much their income is and all of that, you have a chart here. Let`s go through that. First of all, beginning with single people and their various income levels.

Mr. KRUGER: Yes. I think that the charts will show that in the beginning it starts off very slowly and then the savings increase dramatically through 1984. In the first chart of a single individual, we`ve taken into account some typical deductions that would be applicable to all individuals as an average. And that would apply to all the charts. So, let`s look at the $ 15,000-salaried individual. Although the chart doesn`t show it. he would pay a tax of about $2,000 in 1980.Note in 1981 a savings of only about $26 over 1980.Now, that saving increases to $211 in 1982 and it increases to $400, and then by 1984 it`s $475. Now. the same person at the $30,000 level would have paid tax of about $5,700 in 1980. That savings is $71, and then it increases to $566 and then by 1983 it`s $1,081. And it increases to $1,333 in 1984. Now, the individual who is in the $75,000 bracket, of course, has paid much more tax in 1980, and that tax would be about $22,000. The savings here can increase more dramatically. They start off at $277 in 1981,and they increase to 1984 when we can see it`s 4,200-some-odd dollars.

LEHRER: Okay, let`s go to the category of married couple, two children, with only one wage earner in the family.

Mr. KRUGER: All right. Now, that couple, at the $15,000 level, would have paid $1,200 in tax, and as we can see in 1981, there`s a small savings of $15, and that increases to $151 and then $226, and then by 1984 it`s $281. At the $30,000 level, the same kind of situation, that couple would have paid about $4,000 in tax. And here you can see the savings start at $49 and then they increase to almost a thousand-- over $900 in 1984. Now here again the $75,000 couple paid about $18,000 in tax -- or will pay about $18,000 in tax in 1980. Their savings in `81 will start off with $229, and as you can see they`ll reach over $4,000 by 1984.

LEHRER: Okay. Now, there`s another married category, and that`s with-- we`ll take a married couple with two children but with two wage-earners in the family. And that plays-- the "marriage penalty" fits into that, or the change in the "marriage penalty." Explain that, and then work on the chart there.

Mr. KRUGER: Right. Now, the chart that we`ll show assumes that the couple have an equal amount of income, and so at the-- well, I think I should just mention what the "marriage penalty" is. A married couple with equal amount of income pay a certain tax. The way the tax taw is structured up to now, if they were single and filed separate returns they would pay a lesser tax. That is known as the "marriage penalty." What they`ve done is try to correct that penalty in part. They haven`t eliminated the penalty, but they`ve put in a relief provision which will start off in 1982 and will become fully effective in a modest way in 1983. Now, this chart will show what the people who were subject to the marriage penalty, the kind of savings they will have. Now, the same $15,000 married couple, in 1981 they will have paid a little more than $1,000 in tax. I`m sorry, in 1980 they would have paid a little more than $1,000 in tax. In 1981 their tax savings will be $15, the same as for a couple with one wage earner. But by 1982, their savings start to get greater -- $211 -- and they rise up $386.

LEHRER: And that same pattern follows in the $30,000-a-year category, starting about the same as the other category, going up to $1,200, and the same from the $75,000 category up to $5,300 in 1984.

Mr. KRUGER: Right.

LEHRER: Another thing, Mr. Kruger. This new tax law also calls for the indexing of the income tax rate, beginning in 1984. In other words, adjusting it in accordance with the inflation. What is that going to mean?

Mr. KRUGER: Well, I think for the first time the income tax code really will automatically adjust for inflation, and that will begin really in 1985. It will be based on the increase in the Consumer Price Index in `84 over `83, and then in later years it will be moved up. As that index increases, in effect the tax rates will be reduced. The assumption here is that because of increasing inflation, your income will increase, you`ll be paying more tax, so the mechanism worked out has the effect, we hope, of reducing the tax burden on the higher amount of income.

LEHRER: Mr. Kruger, thank you very much.

HUNTER-GAULT: There`s something for just about everybody in the new tax law. We`ll go over some of those changes now with Dominic Tarantino, a New York-based partner in the accounting firm of Price Waterhouse. Mr. Tarantino, which of the individual tax changes will affect the most people?

DOMINIC TARANTINO: Charlayne, there are literally several provisions that will affect millions of taxpayers. One of those, for example: on October 1 of this year, banks and savings & loans and other thrift institutions will be able to issue special tax-exempt qualified saving certificates. Those certificates with a one-year term have to be issued sometime between September 30th of this year and before January 1 of 1983. They must provide for a yield that`s equal to 70 percent of the yield on the one-year U.S. Treasury bills. The income from these certificates will be tax-exempt to the extent of a lifetime amount of $1,000 for a single taxpayer, and $2,000 for those filing joint returns.

HUNTER-GAULT: And how much do you have to pay into--

Mr. TARANTINO: Well, that hasn`t been established yet, but that would be a function of, of course, the yield of the certificates to get the maximum $ 1,000 for a single taxpayer and $2,000 for joint filers. Another change is the increase in the allowable deduction for contributions to an Individual Retirement Accounts, IRAs. That figure-- the maximum deduction in 1981 is $1,500. It`s going to go up to $2,000 in 1982. But more importantly, people who are otherwise participants in a company-sponsored plan will now be able to make deductible contributions up to $2,000 in their own Individual Retirement Account. The child care credit, of course, is another item that is quite popular, if you will, for the people who have to pay baby-sitters or for other care for children or dependents in order to be able to work. They have been entitled to a credit for expenses incurred in caring for such dependents to the amount of $400 for each of two dependents in 1981. That amount is going to scale up to a maximum of $720 for each of two dependents in 1982. Now, if your income exceeds $30,000, the top credit you`ll be able to receive is $480 per individual, or a total of $960. So, those are three very, very big changes and affect millions of taxpayers.

HUNTER-GAULT: All right. Now, how about the charitable deductions for people who use the short form. How is that going to work?

Mr. TARANTINO: Well, we have a very important change there. People who have not-- who do not itemize their deductions will be able to take deductions for their charitable contributions. Now this change phases in rather slowly, because in 1982 and `83 one dollar out of every four that you contribute to a college or church or other charity up to a total of $25 will be deductible in those two years. Eventually, in 1986, 100 percent of the deductions that you-- charitable deductions that you make, or charitable contributions that you make, will be deductible, even though you do not itemize your other deductions.

HUNTER-GAULT: Dollar for dollar.

Mr TARANTINO: Dollar for dollar.

HUNTER-GAULT: All right, how about the new tax breaks for people selling their homes?

Mr. TARANTINO: Well, there are some very important changes there for people who have recently or are about to sell their home. For a long time the tax rules have provided that when you sell your home you do not have to recognize the gain. That is, you do not have to pay the tax on the gain right now, as long as you reinvest the proceeds from the sale of that home in another home within 18 months. Now, for sales after July 20th of 1981 -- so, that change affects this year --- for sales after July 20th, that reinvestment period is extended to two years. Another important change here is the tax-free amount that individuals over 55 can take benefit of on the sale of their home. That amount has been $100,000, but now someone who sells their home after July 20th of this year, who has reached the age of 55, can exclude $125,000 of their gain.

HUNTER-GAULT: Very interesting. What about changes in estate taxes in general, and gift taxes?

Mr. TARANTINO: Well, the estate tax structure and gift tax structure has for some time been skewed in such a way as to try and minimize the tax on smaller and moderate size estates. But because of inflation, the built-in exemptions and the lower rates in the tax rate schedule have not been doing the job. So now, although the current provisions provide that you can transfer -- during lifetime or at death --- $175,000 of property without paying any tax, that`s going to change. That`s going to scale up to a total of $600,000 that can be transferred tax-free, during lifetime or at death, without certainly paying any tax. That will come into effect in 1987, and will be applicable in future years. A very important change is the marital deduction. That will permit unlimited transfers of property between spouses without any tax during lifetime or at death. And probably-- finally, now you can each year give away $10,000 to any number of donees, as much as you can afford, without paying any gift taxes. That`s an increase from $3,000 to $10,000 in the annual exclusion.

HUNTER-GAULT: All right. Very briefly, there are changes in the investment incentives, especially for wealthy investors. Can you tell me how those work?

TARANTINO: Well, there has been a reduction in the maximum tax on income from 70 to 50 percent. That comes into effect in 1982 and it certainly will change-- or should make people rethink their investment strategies. Dividend-paying securities, interest-bearing obligations, certainly become more attractive at a tax rate of 50 percent. Tax shelter losses, when they only redeem benefits at 50 percent, are not as attractive as they were when they were 70 percent. Most importantly, the capital gains tax rate -- the maximum tax on capital gains -- is changed this year. It doesn`t wait until 1982. And that maximum will be 20 percent for sales of property after June 9th of this year. So, if you sold any property that you held for more than 12 months after June 9th of this year, the maximum capital gains tax rate is 20 percent.

HUNTER-GAULT: Okay, thank you. The new tax law will affect not only individuals. There are also major changes slated for business. To cover some of that ground, we go to Karen Arenson, business reporter for the New York Times. Karen, you recently wrote an article in the New York Times carrying the headline, "The Quiet Repeal of the Corporate Income Tax." In less than the 2,000 or so words you did it in the Times, can you explain that?

KAREN ARENSON: Yes. Charlayne, there`s been a lot of attention focused lately on the tax cuts that are going through for business right now. And in fact, they`re quite significant. The tax bill for corporations will be cut in approximately half by the time all of these cuts are phased in.

HUNTER-GAULT: You mean, by-- in the three years` time?

Mr. ARENSON: More like five or six, actually. But most of us hadn`t been paying much attention to the starting point: how much taxes have corporations been paying. And, in fact, that amount has been decreasing steadily as a percent relative to other types of taxes our government collects over 20 or 30 years. The corporate income tax was once one of the federal government`s biggest revenue producers. That`s no longer the case. Today, our government gets only about one-tenth of its tax dollars from the corporate income tax, and by the end of the decade that should be down to roughly 5 percent of our total tax revenues from the corporate income tax.

HUNTER-GAULT: But the corporate tax rate is now 46 percent. What does that actually mean, and what will it be under the new law?

ARENSON: That is still going to be the nominal tax rate paid by corporations on income. But, in fact, because of tax credits and depreciation and all kinds of other special provisions for business, the effective rate that corporations pay is well below that. There are indeed businesses that pay 46 percent of their income in taxes to the federal government, and at the other end of the scale you could find corporations that pay no tax whatsoever, even though in fact they`re making lots of money. And the way it works is that the corporation starts out with whatever income it has got for the year, and then it starts taking deductions. If it buys, say, a machine for a million dollars, it takes that-- subtracts that from its income. And if it buys some plant or some other machines, it subtracts those. And after it`s done subtracting all of these machines and other investments from its income, then it figures out the tax. So, it takes a 46 percent rate against whatever is left, but it may not have much income left for tax purposes.

HUNTER-GAULT: Will that change dramatically under the new law?

ARENSON: Indeed it will, because we are giving corporations much more generous credits against their taxes, and we`re speeding up the depreciation, which will increase the deductions they can take, and that`s particularly good for companies that have lots of investment -- particularly manufacturing companies that buy lots of machines. And this, of course, is aimed at stimulating more investment in this type of plant and equipment in the hopes of stimulating the economy.

HUNTER-GAULT: All right. Industries. Specifically, which types will make out best?

ARENSON: Almost any industry that has lots of heavy manufacturing, that buys lots of plant, will make out very well. On the other hand, any kind of business -- a group of lawyers or doctors, a consulting firm -- any business that uses very little plant and equipment will find almost no reduction under these new tax cuts.

HUNTER-GAULT: Because they have nothing to buy and nothing to depreciate.

ARENSON: That`s right. And they`re going to still be paying that 46 percent against almost all of their income.

HUNTER-GAULT: Right. Well, what happens with small business under the new tax law?

ARENSON: Small business is going to be subject basically to the same rules, but Congress was very concerned about giving them some special breaks. And that`s because small business is seen as being the source of many new jobs and a lot of innovation. And so Congress went out of its way to reduce tax rates. That 46 percent is much lower on the first $100,000 of income. That won`t do a big company much good, but for a little company just starting out, it`ll pay 10 or 20 percent on that first $100,000 of income. They also set special credits-- they`ll be able to use special credits that are available to all companies for research and development, but this is especially helpful to a new technology company that may have to invest a lot in research and development to get started. And there are a couple of other provisions, such as, companies will be able to deduct purchases of used machinery. And this is something-- anybody could buy used machinery, but a little company just starting out is more likely to be buying used machinery. So. there are a few provisions in the new tax bill specially aimed at helping small business.

HUNTER-GAULT: Okay, thank you. Jim?

LEHRER: Non-profit groups and charities which depend on contributions also have a big stake in this new tax law. They have been sifting through its provisions to find the good and bad news for them, and they found some of both. Brian O`Connell is here with those discoveries. He`s president of Independent Sector, a Washington-based coalition of major contributors, as well as the colleges, churches, health, arts and other groups which do the receiving. The good news for your group is what. Mr. O`Connell?

BRIAN O`CONNELL: The principal good news is that people and companies will have more disposable income and, given the past generous patterns of both individuals and corporations, we can expect that they`re going to give a reasonable proportion of that to charity. Another very good feature that we in the Independent Sector have been struggling for a long time, is the charitable contributions legislation that Dominic mentioned.

LEHRER: The short form-- the ability on the short form to take the deductions.

Mr. O`CONNELL: He mentioned the somewhat discouraging phase-in for the early years, but on those out years of `85 and `86, it will mean in the order of five or six billion dollars in increased contributions.

LEHRER: Coming from the lower income brackets, right?

O`CONNELL: Yes, that`s one of the beautiful features of it. Obviously, if you`re now allowing the people who use the short form to deduct their contributions, you`re dealing with people with incomes generally under $20,000, who are the big contributors in American anyway. It further broadens that wonderful base of giving that is a unique feature of our country.

LEHRER: All right. Now let`s go to the down side in this tax bill, the bad news. There are three or four things there. For instance, the thing that may be good for individual taxpayers like estate and gift tax changes are not too good for you, right?

O`CONNELL: Yes, as with most of the good news/bad news stories, the bad news always seems to come out ahead. In this case it`s really discouraging, unless we can change past patterns and levels of giving by individuals and corporations. Let me give a very vivid example, as it relates to the estates and bequests. Last year your decision was as simple as deciding whether 50 or maybe 60 or 70 percent of your estate was going to go to your favorite charity or to the treasury -- a fairly simple decision for most people. In the future, the decision will be simple, but it will be whether it goes to your favorite charity or whether it goes to your heirs. And that`s as dramatic as the drops are in the taxes on estates and bequests.

LEHRER: And you are realistically believing that that choice-- most people will choose their own family, obviously.

O`CONNELL: Yes. Yes, I think they will. It`s a natural disincentive for giving to charity.

LEHRER: Now, the rate cuts on-- the income tax rate cuts for the higher income levels. That`s going to have an effect on contributions as well.

O`CONNELL: Yes. and it isn`t just the higher rates. All of us are going to experience a 25 percent rate reduction, and even at the level of $20,000 of income, there is a sensitivity to one`s tax bracket and the cost of one`s gift. Let me give an example, starting with that easier upper bracket. At the present time those well-to-do individuals are in the 70 percent tax bracket. So. if you give $10,000 to Columbia or to the San Francisco Symphony or to United Way, the gift really only costs that donor $3,000, because he deducted the $10,000 rather than keeping it for personal consumption. Had he kept it he would have had to pay $7,000 in taxes. Next year, that same gift of $10,000 is going to cost $5,000 because their tax bracket has lowered from 70 to 50 percent. And we worry, even with the generosity of Americans, whether that same individual is going to give that same $10,000. And certainly we worry whether he is going to increase it, given the climate and the increased cost of the gift.

LEHRER: Finally let me ask you this, Mr. O`Connell. Weighing the bad with the good, you say the bad news for you all much outweighs the good. What do you think the result of this is going to be, the impact is going to be, on organizations that depend on contributions?

O`CONNELL: Well, there`s a big unknown in this. We know what the tax law is now, and we know what the budget cuts are for many of these same organizations. We also know what past patterns of giving have been, and what the tax incentives have been. What we don`t know is whether the president`s keen interest in this whole sector can change those past patterns in terms of increased levels of giving -- percentages of income given by individuals, the strengthening of foundations, the strengthening of corporate giving. If the president and the rest of us can cause this country to be more generous, I think we can come out all right. On the other hand, if we can`t, the result of the tax law -- certainly on giving - - could be devastating.

LEHRER: Devastating. Give me an example of how devastating -- in about 15 seconds.

O`CONNELL: Surely. A youth center is going to have a triple whammy. It`s going to have its budget cut, because it has some federal funds coming to it. It is going to have its contributions cut. And most of us are going to expect it to increase its services because the government is cutting back its public programs. Another quick example would be the arts groups and universities and groups trying to build new churches or build new hospitals, because those are the drives that depend on the wealthier individuals who are going to have that considerable disincentive for giving.

LEHRER: I see. Mr. O`Connell, thank you very much. And in New York. Mr. Tarantino and Ms. Arenson, thank you very much. And good night, Charlayne.

HUNTER-GAULT: Good night, Jim.

LEHRER: And we`ll see you tomorrow night. I`m Jim Lehrer. Thank you and good night.