"When there is an income tax," Plato said, "the just man will pay more and the unjust less on the same amount of income."
Twenty-three centuries later, the Treasury Department has concluded much the same. It doesn't buy the Greek philosopher's premise that income taxes and justice are mutually exclusive, of course.
But in its mission of tax reform, the Treasury has acknowledged that injustice runs deep in the tax laws and must be routed out. On the other hand, many taxpayers would pay a heavy price for the reforms.
To translate the Treasury's theories to real-world cases, The Times examined how the taxes of three individuals and two companies would be affected if the agency's tax-simplification proposal were enacted in full. Tax calculations were performed by the Los Angeles office of the Price Waterhouse accounting firm.
The analysis relies on several assumptions: All provisions have been phased in; inflation is at 4%; and the proposed depreciation method was in effect when assets were acquired. To calculate taxes under current law, 1984 tax rates and law are used, even when the taxpayer's most recent available numbers are from the 1983 tax year.
Among the case studies, the individual "winner" has relatively low income while the individual "loser" is a wealthy man with substantial tax shelters. The family for whom the proposed changes would result in a wash, falls somewhere in the middle.
The business "winner" is in retailing, an industry that isn't favored under the current tax system. The corporate "loser" is a high-technology company. Some analysts had speculated that high-tech companies would fare well, especially in comparison to smokestack industries.
He is a wealthy Southern California businessman who saves hundreds of thousands of dollars in taxes each year through tax shelters, the favorable treatment of capital gains and numerous personal and business deductions.
Call him Norman Bayer. He is the epitome of the tax-simplification plan's target.
If the tax plan were adopted exactly as proposed, Bayer would face a 71% tax increase. And for that, he has reason to feel fortunate. If only one minor change were made in his finances, he would have to pay 159% more than his current $202,408 tax bill under the Treasury's tax plan.
Bayer's name has been altered here, for reasons that have more to do with his domestic relations than with any reluctance to publicly disclose his personal finances.
Bayer is divorced and claims two sons as dependents. He derives his $1.9 million in income from wages, interest, dividends and the stock market, in which he is an active player.
He shelters nearly half of his income from taxes through losses (for tax reporting purposes) on rental property, business ventures and real estate partnerships. And in 1983, he avoided taxation on an additional $760,000 in profits from the sale of stocks, benefitting from the capital gains laws, which allow taxpayers to exclude 60% of such gains from taxation.
Bayer reports wages of $37,602, interest income of $127,089, dividends of $453,909 ($454,009 minus a $100 per-taxpayer exclusion) and $491,700 in capital gains (40% of his $1.23-million gain from the sale of several thousand shares of stock).
Accounting losses from consulting and an equipment leasing business, real estate limited partnerships and rental property drop to $348,445 his total income subject to taxation.
An $8,063 deduction for employee business expenses, $3,000 in personal deductions for himself and his two sons and itemized deductions for state and local taxes, interest expenses, charitable contributions and such miscellaneous deductions as tax return preparation and professional subscriptions shave another $128,021 off his income subject to taxation.
The tax bill on Bayer's $222,724 in taxable income is $98,892. A $7,861 investment tax credit and a $3,039 research and development credit reduce the bill to $87,992. On top of that, he pays $114,416 in so-called alternative minimum taxes, which basically is government insurance that individuals who benefit from preferential treatment on such things as dividends and capital gains pay at least a minimum amount of tax.
Highest Tax Bracket Bayer's total tax bill is $202,408 and he is in the 50% tax bracket, the highest under current law.
Fortunately for Bayer, the limited partnerships in which he participates (and which in turn are involved in other partnerships, for a double-tiered tax shelter) comprise fewer than 35 individuals. If there were more than 35 partners, it would be taxed as a corporation under the Treasury's proposal and Bayer would lose a $525,324 write-off, which would increase his tax bill by $322,912, or 159%.
As it is, his total income and his adjusted gross income nearly triple in the Treasury package, his allowable itemized deductions are reduced by two-thirds, his taxable income more than quadruples and his tax bill rises by $144,070, or 71.2%, to $346,478.