A tax by any other name�� - indirect tax increases - Column

A highly popular provision of U.S. tax law began disappearing in 1987.

That year marked the beginning of the phaseout of the longstanding tax deduction for interest paid on consumer loans. Generations of taxpayers had written off the interest they had paid on credit purchases of items ranging from children's clothing to automobiles. By 1991, the deduction had vanished.

The elimination of the deduction was accompanied by another move aimed at interest deductions--a further limitation on deductibility of interest paid to acquire investment property.

Those two moves on interest deductions boosted federal revenues by nearly $30 billion over the five-year phaseout period. It was $9.5 billion in 1991 alone, and the cutbacks in the interest deductions continue to add substantially higher amounts to revenue collections each year as the population grows.

The action on consumer interest was not isolated. Because raising taxes directly is such a visible and politically risky action, lawmakers have often resorted to what might be called "stealth" boosts. These are achieved by curtailing or abolishing longstanding deductions and exemptions, by increasing the maximum amounts that are taxable, or by keeping in place taxes that had been imposed with assurances they would be short-lived.

A 1990 tax provision picked up $18 billion in added revenue over five years by limiting the total deductions that could be claimed by higher-income taxpayers. That same legislation also phased out the personal exemption in that income range, gaining an additional $10.8 billion.

The government is gaining well over $30 billion between 1991 and 1997 through increases in the amount of wages covered by the health-insurance payroll tax.

That tax was previously levied on the same wage base as other types of Social Security taxes. That base, $51,300 in 1990, was raised to $125,000 for health-insurance taxes. In 1993, still another revenue change applied it to all wages.

An additional $18 billion was gained by raising to 85 percent, from 50 percent, the amount of Social Security benefits on which taxes had to be paid by recipients at specified income levels. A scheduled drop in the tax on estates and gifts was canceled, providing a five-year tax pickup of $2.8 billion.

Elimination of the deduction for lobbying expenses and country-club dues added hundreds of millions to the revenue stream.

Other actions included a cut to 50 percent from 80 percent in the cost of business-related meals that can be deducted (a pickup of $16 billion) and a curtailment of the range of deductions for expenses incurred in moving to a new job ($2.3 billion).

While many such steps to increase revenues without imposing direct new levies have been used over the years, the potential for more is substantial because of an ongoing exercise by the Congressional Budget Office.

Each year, that agency is required by law to list options for reducing the deficit by increasing revenues and cutting spending.

Although the CBO states that the appearance of any proposal does not constitute a recommendation, it also points out that its report "has become a standard reference for developing deficit-reduction plans." Among the items on this year's list:

* Amend or repeal inflation indexing for exemptions, brackets, and other aspects of the tax code.

* Eliminate or limit deductions for mortgage interest, state and local taxes, and charitable giving.

* Tax more Social Security benefits.

* Limit the tax value of deductions to 15 percent instead of the full rate applicable to the taxpayer's bracket.

While the mood of the present Congress tends toward cutting taxes rather than raising them, the CBO list demonstrates the many ways still available to lawmakers of the future who are inclined toward revenue-boosting steps that do not involve levying direct tax increases.

And sometimes those backdoor increases come in the guise of supposed reform. The 1986 law's elimination of many deductions and other forms of relief was defended as a tradeoff for a reduction in rates, with the top set at 28 percent.

At this point in tax history, the deductions are still gone but the top marginal rate is back to nearly 40 percent.

By Robert T. Gray

COPYRIGHT 1995 U.S. Chamber of Commerce
COPYRIGHT 2004 Gale Group