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YOUR TAXES: A SPECIAL REPORT : HEADING HIGHER? : Experts Agree Taxes Will Creep Up Again; the Only Question Is How

March 06, 1988|TOM REDBURN | Times Staff Writer

WASHINGTON — Enjoy it while you can. Taxes may never again be as low as they are right now.

"It's immaterial whether we have a Republican or Democratic administration after Reagan," argues Gerald Padwe, national director of tax practice for Touche Ross & Co., a major accounting firm. "We are going to see rates starting to creep back up. Within five years, I expect the top tax rate to be back up to 40%."

Not everybody agrees with Padwe that income tax rates will move sharply higher, but nearly all tax advisers are warning their clients that, one way or another, most people will be paying more in taxes in the years ahead. That suggests trying to figure out ways to report as much income as possible in 1988, while postponing for future years substantial tax deductions, such as major gifts to charities.

Despite the campaign rhetoric, any effort to reduce the federal budget deficit in 1989 and 1990 will add to the current tax burden, analysts and congressional insiders agree. That probably means tax writers will concentrate on narrowing a handful of leftover tax loopholes that escaped their attention during the tax revision battles of 1986 and boosting the current top income tax rate of 28% to 30%--or perhaps even as high as 35% on families with incomes above roughly $150,000--while modifying or eliminating the phantom 33% rate that applies to some affluent taxpayers.

At the same time, expect to see efforts to impose higher taxes on consumption in the form of additional gasoline taxes, other energy and excise taxes, or--possibly--the eventual establishment of a broader national sales tax similar to the value-added tax (VAT) system widely used in Europe.

"The hidden political battle over the next tax revision has already begun," says Rep. Robert T. Matsui (D-Sacramento), a veteran member of the House Ways and Means Committee, which initiates all tax legislation. "The venture capital folks, the excise tax guys--they're all over the Hill. We're getting it from all directions."

It used to be so simple. From the early 1960s to near the end of the 1970s, the income tax code was modified only infrequently, usually in response to a specific presidential initiative. And, except for 1968, when President Lyndon B. Johnson belatedly proposed a 10% surcharge to pay for the Vietnam War, income tax changes invariably meant politically popular tax reductions.

All that has been turned upside down over the past decade. Beginning with the first rescue effort of the Social Security system in 1978 and a separate reduction in the capital gains rate that was originally opposed by then-President Jimmy Carter, barely a year has gone by without a major change in the federal tax system.

Under President Reagan, taxes have been substantially overhauled on practically a nonstop basis, with the original massive 1981 tax reduction act followed by a series of tax hikes--generally as part of broader deficit reduction moves--in 1982, 1983, 1984 and 1987. And that doesn't even include the revolutionary, "revenue-neutral" income tax changes that Congress agreed upon in 1986, which shifted a portion of the income tax burden away from individuals and back toward corporations, while rewriting hundreds of separate provisions that taxpayers are only beginning to grapple with as they prepare their 1987 tax returns.

There doesn't seem to be any end in sight. Not only does the 1988 tax system vary significantly from last year's transition to the new tax code, but most analysts are also convinced that lawmakers will continue to tinker avidly in the years ahead.

"Even the smallest tax bill of the 1980s was a lot bigger than anything Congress did in the 1970s," said Stephen R. Corrick of Arthur Andersen & Co.'s office of federal tax services in Washington. "And we don't see it getting much better. The one constant you can count on now in the tax system is constant change."

What's next on the agenda? Given the present political and economic instability, it is impossible to forecast accurately the shape a tax bill will take under the next administration. Certain changes, however, seem more likely than others, tax experts agree. At the same time, some major unknowns loom on the horizon as lobbyists for every interest group begin to gear up for the impending tug of war that is certain to break out as soon as Reagan leaves office.

Perhaps the biggest question mark is whether Congress will respond to the lobbying campaign for a major new tax on consumer spending, either in the form of a national sales tax or a value-added tax that hides the additional cost by imposing the tax on goods at each stage of their production.

"Right now, there's no consensus for a consumption tax," Matsui said. "But there will be a lot of pressure not to tamper much with the individual tax rates, and, as we get closer to the crunch, I could see a consumption tax emerging as the most desirable of the undesirable options."

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