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From: dgh@sun.UUCP
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Subject: Marginal Tax Rates and the Senate Tax Bill
Message-ID: <5314@sun.uucp>
Date: Mon, 21-Jul-86 21:50:29 EDT
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Posted: Mon Jul 21 21:50:29 1986
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         Marginal Tax Rates and the Senate Tax Bill
                sun!dhough or dhough@sun.com

     Most people only know what they read in the newspapers,
and in the case of the Packwood (now the Senate) bill that's
not much.  If you want to know more  you  can  plow  through
over  1000  pages  of  the  bill itself.  As a tax client of
Coopers and Lybrand I received a copy of their June 8,  1986
Tax  Topics  Advisory which summarizes key provisions of the
bill in only 91 pages.  They also included a  discussion  of
the  House bill and noted that the California state legisla-
ture is quietly in the midst of a major rewrite of the state
income tax to get it more in conformance with Federal.

     Anyway this posting is intended to disabuse you of  the
notion that the maximum marginal tax rate is only 27% in the
Senate bill.  The bill calls for taxing low income people at
15%  and  high  income people at 27%.  Note that none of the
high income people's income gets taxed at 15%, so there is a
transition  point  at  which your tax rate jumps from 15% of
all your income to 27% of all your income.  Well, almost.

     To avoid such a disincentive marginal tax rate >  100%,
there isn't a transition point but a transition region. Your
first x dollars are taxed at 15%, your last y at 27%, and in
the middle, at 32% in order to get continuity at the ends.

     It's further complicated beyond  that  (thank  goodness
they  tried  to  SIMPLIFY  taxes).   Low  income  people are
allowed n personal exemptions;  high  income  people  aren't
allowed  any.   So there is a second region in which you are
taxed at 27% + n * 1.35% if you have n personal  exemptions.
The  personal exemptions work like property insurance with a
disappearing deductible, except not in your favor. So if you
have  a  wife  and  18 kids, your marginal rate in
this region is 54%, even for long-term capital gains.

     No  doubt  you  are  wondering  what  these  transition
regions are.  They are set to not bother the low income peo-
ple who have lots of votes or the  high  income  people  who
have  lots  of money to finance election campaigns. They hit
the people trying to make the transition from  low  to  high
income:

                        32% bracket             27%+n*1.35% bracket

Single                  45000-87240              87240-127240
Married joint           75000-145320            145320-185320

Many Silicon Valley singles and two-earner couples  will  be
in  these  brackets.   Your consolation is that although the
marginal rate is high, you are still only paying  a  max  of
27% on your total taxable income.

     >>> MORAL <<<.  Politicians simplifying taxes makes  as
much sense as simplifying the Unix kernel by hiring students
who've just completed their  first  programming  course  (in
BASIC).

     >>> EDITORIAL <<<.   The  overwhelming  impression  one
gets by studying the Internal Revenue Code is of an enormous
kluge put together by hackers without the slightest sense of
where  they  were  intending  to go or how the various parts
might interact. Most of the Senate  bill  is  in  this  same
great tradition.  My main objections to the bill are

1)   it doesn't go far enough in radically  simplifying  the
     Code,  but the economy will suffer all the transitional
     adjustments anyway, with very little to show for it  in
     the end;

2)   it is fraudulent tax reduction in  that  it  hides  the
     cost  of government in the prices of goods and services
     rather than by direct exaction from individuals.

     One of the few things Reagan has said that I  think  is
sensible  is "Taxes should hurt".  I don't know if he under-
stood what he meant, but whoever he was quoting  meant  that
if  people  knew  how  much  it was costing them to keep the
government going they might do something radical  about  it.
Unfortunately  he seems to have forgotten all that now that,
and seems eager to hide the cost of government by increasing
corporate taxes.  Well, I didn't vote for him!