In 1986 Congress passed and President Reagan signed a landmarkand heroic piece of legislation: the 1986 Tax Reform Act. The 1986TRA closed economically inefficient tax loopholes and dramaticallyreduced income tax rates for all Americans.
The result of the 1986 Tax Reform Act was to create a simpletwo-rate income tax system: 15 percent and 28 percent. It should beemphasized that the 1986 TRA was a bipartisan measure and wassponsored by Democrats Rep. Richard Gephardt and Senator BillBradley and Republicans Rep. Jack Kemp, and Senator Bob Packwood,with important contributions from the now Chairman of thisCommittee, Bill Archer.
A major objective of the 1986 Act was for the 15 percent incometax bracket to apply to all low income and the vast majority ofmiddle income workers. The 28 percent bracket was primarily toapply to wealthier workers.
In the post-1986 TRA era, we have passed several bad tax bills,most notably the 1990 budget deal and the 1993 budget deal, both ofwhich unraveled tax simplification and created a new multitude oftax rates climbing to a high of 39.6 percent. I agreewholeheartedly with Jack Kemp and others that a very good start totax reform would be to get us back to the two bracket system of 15and 28. We have a plan that we are promoting at the Cato Institutecalled the MAXTAX that would be even more pro-growth. It wouldcreate two income tax rates at 10 and 25 percent wrapped around thepayroll tax. I have attached to my testimony an explanation of thatplan, which involves giving taxpayers the freedom to choose betweenthis low rate gross income tax or the complex current system.
Another pernicious trend since 1986 should be rectified by thisCommittee to restore tax fairness for the middle class. More andmore middle income workers have now been pushed into the 28 percenttax bracket -- and some are now paying the 31 percent bracket. Thisphenomenon is occurring because the tax brackets are not indexedfor real income growth, just nominal income growth.
Today, there are roughly 21 million workers with earningsbetween $30,000 and $50,000 a year most of whom pay marginal incometax rates of 28 percent.
Believe it or not, these workers pay the highest marginal taxrates under our federal tax system. Why? Because they pay a 28percent federal income tax rate on top of a 15percent payroll tax. The combined rate of 43 percent ishigher than the top income tax bracket for even the wealthiestAmericans at 39.6 percent. The two charts that I have attached tomy testimony show the problem graphically. The middle class workers-- particularly single workers -- face punitive tax rate burdens.And as Reagan taught us: taxes matter most at the margin.
Nixon once called these neglected citizens the "silentmajority." Both parties lay claim to speaking for these workingclass Americans, but neither party seems to be listening to them.Ever since the sweeping Reagan tax cuts of 1981, neither politicalparty has done much to directly benefit the middle class in thepocketbook. The latest figures from the nonpartisan Tax Foundationhighlight that since 1980, despite a Republican in the White Housefor 12 of those 17 years and a Republican-controlled Congress for 3of the 5 others--the tax bite on median-income families hascontinued to ratchet upward to 38.5 percent. Federal taxation isnow at its highest peacetime level, as a share of Americans'incomes, since the height of World War II.
Much of the escalating tax burden has, of course, beenattributable to hikes in the regressive payroll tax. For mostAmericans, payroll tax increases have canceled out, nearly dollarfor dollar, the benefits of the Reagan income tax cuts. Meanwhile,the federal gas tax has been tripled since 1980, state and localproperty taxes continue to climb and so does a multitude ofobnoxious fees and assessments.
Last year Rep. Dick Armey (R-Tex.) called this plight ofAmerican workers, "the middle class squeeze." Exactly the rightdiagnosis. But what is either party doing about it? Last yearRepublicans passed a niggling tax cut about one-third as large aswhat they had promised in 1994.
Yes, for families with young kids this is blessed relief--a$1,000 tax cut for a family of four. There are still millions ofmiddle-class households without kids at home and without capitalgains income that will angrily learn come April 15th that they getessentially nothing out of this tax bill.
Jack Kemp and Ronald Reagan taught us that taxrates matter, too. Combining payroll tax, federal incometax, and state income taxes, many middle income families areapproaching a 50 percent marginal tax burden. If a stay-at-homemother wants to get back in the workforce, full- or part-time,she's paying nearly 50 percent tax on her first dollar of incomeearned. Counting the costs of child care, she may only bring home20 cents on the dollar. Often she can't afford to work.
Republican Senator Paul Coverdell of Georgia has proposedrelieving the middle-class squeeze. He would raise the incomethreshold on the 15 percent income tax bracket. I understand thatMr. Archer will propose to do so as well.
Under current law the 28 percent tax bracket creeps up on singleworkers at an income level of $25,350 and on married couples at$42,350. The 15 percent bracket should be stretched to $35,000income for singles and $50,000 for married couples. This wouldreduce federal revenues on a static basis by $25 billion a year --or roughly the amount of the budget surplus now being projected.The principle here is simple: all middle-class families in Americashould be in the 15 percent tax bracket--not the 28 percentbracket.
In fact, eventually, Congress should expand the 15 percent taxbracket to apply to all Americans with earnings below $65,000 ayear --the income level where people stop paying payroll taxes.
This is not a plan that is vulnerable to attacks as a "tax cutfor the rich." It is designed to benefit the workers who earnbetween $30,000 to $50,000 a year.
This plan would provide middle-class workers, not symbolic, butmeaningful tax relief. A single filer with an income of $32,000 ayear would receive an $864 tax cut. A married couple with taxableincome of $48,000 a year would receive a tax cut of $734.Preliminary estimates indicate that the plan would result in astatic revenue loss of $20 to $25 billion annually. This is lessthan the projected budget surplus. Dynamic analysis would suggestthat as much as one-third of the static revenue loss would berecouped through more work and savings.
Newt Gingrich and Trent Lott have announced that Republicanswill cut taxes again in 1998. The bigger the tax cut, the better.But I urge this committee that whatever is done: cut taxes and aimto simplify. No more "targeted" education tax credits, no moreloopholes and complexities. The President's tax plans are deeplyflawed in this area. H&R Block is the primary beneficiary ofthe White House proposal. Tax cuts in 1998 should make the tax codesimpler and the tax burden lighter.
Consistent with these principles, I am very much in favor of twoother ideas that have been presented before this Committee:indexing capital gains for inflation and relieving Americans fromthe burden of the Alternative Minimum Tax. Inflation is a thief. Itis not fair to tax Americans purely on phantom gains. In this lowinflation environment, indexing capital gains would not impose muchof a cost on the Treasury, but would provide investors an insurancepolicy against a return to a high inflation regime.
Bill Archer and Paul Coverdell's ideas are sound. Marginal ratecuts are necessary to improve American competitiveness in theglobal economy. It is noteworthy that almost all nations in theworld have been cutting tax rates since 1981 -- see tables. Weshould broaden the 15 percent tax bracket this year. In 1999 or2000 we should vastly simplify the tax system by flattening theincome tax, or better yet, by adopting a national consumptiontax.