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Rate-Slashing Tax Revision Measure Signed by Reagan

October 23, 1986|TOM REDBURN | Times Staff Writer

WASHINGTON — President Reagan, culminating a two-year odyssey that was fraught with perils at nearly every turn, Wednesday signed into law a sweeping tax overhaul measure that slashes rates to the lowest level since the Great Depression and curtails many widely used business and personal tax breaks.

The new law eliminates income tax payments for more than 6 million low-income people, reduces taxes for the large majority of Americans and makes major changes in business taxes that will add about $120 billion to the corporate tax burden over the next five years.

Hard-Fought Issue

The detailed measure, the outcome of intense lobbying and a hard-fought compromise between tax writers of the Democratic-controlled House and Republican-led Senate, is considerably different from the Reagan Administration's original proposal. But it was Reagan's unwavering commitment to the decades-old dream of tax revision in the face of public indifference and mostly reluctant lawmakers that finally produced a law that may well stand as the most significant initiative of his second term.

"It's the best anti-poverty bill, the best pro-family measure and the best job-creation program ever to come out of the Congress of the United States," Reagan said in signing a page from the massive 879-page document before a bipartisan group of lawmakers and a crowd of about 1,000 gathered on the White House's South Lawn.

Some See Recession

Although some analysts are convinced that the tax overhaul will precipitate a recession next year by upsetting the delicate balance of a sluggish economy, Treasury Secretary James A. Baker III sought to dispel such fears Wednesday by arguing that it will result in a "much more efficient economy and a much more efficient tax code."

Meanwhile, even as the many interest groups that were forced to sacrifice some treasured tax preferences are gearing up for an effort to recoup their losses in future legislative struggles, key lawmakers insisted that they will limit tax changes next year to such matters as fixing the numerous mistakes that inevitably crept into the bill in the rush to complete action.

House Ways and Means Committee Chairman Dan Rostenkowski of Illinois, who was an essential Democratic ally in the tax revision fight, told reporters after the bill-signing ceremony that he wants to "avoid ever-changing tax policy." And, after four major tax bills in the last five years, Rostenkowski said earlier this week, "the stability that business has long begged for is at hand."

Moreover, Reagan vowed once again to hold the line against any efforts to raise federal revenues by boosting the lower tax rates that will go into effect over the next two years.

Under the new law, the current personal income tax structure, with 15 tax rates ranging from 11% to 50%, will be compressed in 1988 to just two brackets of 15% and 28%. Although the vast majority of Americans will be taxed at a 15% rate, some affluent taxpayers may face a maximum rate of 33% or even higher in a few cases because of complexities in the new system.

To add to the confusion, the law establishes--for 1987 only--a hybrid tax structure with five rates for individuals, up to a maximum of 38.5%.

To pay for the lower rates and generous increases in the standard deduction and personal exemptions for each taxpayer and dependent, Americans will be required to give up a handful of once-sacrosanct personal tax breaks.

The new law, for example, gradually puts an end to write-offs for consumer interest, eliminates the deduction for state and local sales taxes and repeals the special tax preference for two-income couples. Workers covered by a pension plan will begin to lose some of the tax deduction for individual retirement accounts once their income exceeds $25,000 ($40,000 for a couple).

Reliable estimates by Treasury officials and congressional tax analysts indicate that about 76 million couples and individuals are expected to receive cuts in 1988 compared to current law, and about 20 million taxpayers face tax hikes.

The bill continues Reagan's crusade to slash the top individual tax rate, which was 70% when he took office and was cut to 50% as part of the huge 1981 tax reduction. But it also represents a stunning reversal of the approach to business taxes embodied in that 1981 tax cut, because it moves to drastically curb the numerous tax preferences that were added during the early months of Reagan's first term.

Business, for instance, will lose the investment tax credit retroactive to the beginning of this year. Most real estate tax shelters will lose their value, and a stiff minimum tax will be imposed to prevent corporations and high-income individuals from escaping taxation.

Other efforts to revise the tax code have been attempted in the past, and significant overhauls were approved in 1954 and 1969. President Jimmy Carter labeled the old tax code a disgrace but was unable to improve it.

However, Reagan was able to ride an unusual bipartisan wave that began when Sen. Bill Bradley (D-N.J.) and Rep. Jack Kemp (R-N.Y.) each offered a tax revision proposal in 1982. Reagan's own package went to Congress in May, 1984.

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