Remarks and a Question-and-Answer Session With Economic Editors During a White House Briefing on Tax Reform

June 7, 1985

The President. I know that Secretary Baker has already briefed you, and Don Regan will be talking to you after I finish. These CEO's always want to have the last word. [Laughter] But I'm going to speak for a few minutes and then take some questions, time permitting.

People all across the country are embracing our tax plan, America's tax plan, because they rightly see it as fairer and simpler -- something they've been waiting for for a long, long time. All the indications are favorable. Polls show a ground swell of popular support, and a rising stock market and dropping interest rates suggest that the financial markets are very comfortable with America's tax plan.

Our tax overhaul will begin with major tax relief for families who've seen their personal exemptions whittled away by inflation and who've shouldered a huge increase in the tax load. Our family relief plan would raise the standard deduction, practically double the personal exemption, lower marginal income tax rates significantly, and give homemakers equal access to tax deductible IRA's.

Now, I know that I may be saying things that Jim Baker's already said to you, but we're also expanding the earned-income tax credit for low-income wage earners and indexing it to inflation. And the result will be that families will have an easier time making ends meet, and those at the bottom end of the ladder will be virtually exempt from taxation.

Opportunity is key to the promise to the American dream, but high tax rates have transformed that difficult but rewarding climb up the ladder of success into a bitter and exhausting enslavement on the tax treadmill, and that's all going to change.

The tax system must no longer be poverty's accomplice. An American opportunity society begins with an expanding, healthy economy, and that's where our progrowth initiatives come in.

First, we're cutting marginal income tax rates by an average of 19 percent; there's no surer way of getting more economic growth. We saw it happen in Germany after World War II, when Ludwig Erhard's tax cuts helped revitalize their economy; in Japan, when 20 years of continuous tax cutting was instrumental in catapulting that nation into the front ranks of the world's economic leaders.

And here at home, we've had three dramatic examples of lower marginal rates liberating growth -- Andrew Mellon's tax cuts in the twenties, John Kennedy's in the sixties, and our almost 25-percent across-the-board tax cut that helped lift the American economy out of malaise and into a surging economic growth in 1981.

America's tax plan will give us just about the lowest tax rates of any country in the industrialized world. And that, along with our vibrant economy, will make us the investment capital of the world.

Some, I know, are concerned about the elimination of the investment tax credit and the restructured depreciation system. We feel our plan would stimulate new economic growth. One of the important ways our proposed depreciation system would be superior to the accelerated system that we had is that it would be indexed to inflation. So, businesses wouldn't have to worry about a decline in the real value of their writeoffs. It would also reduce the distortions in economic efficiency caused by the investment tax credit and other provisions so that the market, not the Government, would determine the flow of capital.

As part of our growth agenda, we're also cutting the capital gains tax. The two previous capital gains cuts in 1978 and '81 probably saved the life of the American economy. Excessively high capital gains had almost strangled the technological revolution at its birth. Venture capital, the high-powered money to finance the riskiest and most daring projects, had all but dried up to a mere $39 million in commitments in 1977. But after cutting capital gains, venture capital shot to all-time high, increasing over a hundredfold to $4.2 billion in 1984 alone.

We're pulling ahead of the competition. Cutting capital gains again, we'll make sure that we stay there. We're closing the door on unjustifiable tax shelters so that we can open the door for innovation, opportunity, and growth. It's time that we pulled our investment money out of the tax shelters and reinvested it in America's future.

We've also pared down deductions for business entertainment expenses. It just doesn't seem right for a wage earner carrying his tuna fish sandwich to work to subsidize exorbitant business lunches at luxury restaurants.

We'd still allow for legitimate expenses. But to those who complain they can't live quite so high off the corporate account, we can only ask: ``Well, why not `brown bag it' once in a while? Why not find smarter ways to put our money to work than investing so heavily in executive lunches?''

We`re keeping the provision for writeoffs of intangible drilling costs. Today we import more than a fourth of our oil from abroad. And the money we spent on those imports last year represented half our total trade deficit -- scuttling the IDC deductions, which slow oil exploration in this country and reduce our output by as much as half a billion barrels a day. I don't believe we want to increase our energy dependence on foreign imports or give the ailing OPEC cartel a shot in the arm. We must ensure reliable, secure energy sources here at home.

Also key to a fairer, simpler tax code is elimination of the deduction for State and local taxes. The current deduction benefits wealthy citizens at the expense of those less fortunate. About two-thirds of all Americans and an even greater majority of low- and middle-income taxpayers do not itemize and get no benefit from the State and local tax deduction. The simple fact is low- and middle-income taxpayers are being cheated, because whatever State they're in, high or low tax, the present system forces them to pay the bill for the wealthy few who use the State and local deduction. And that's the injustice. Perhaps if the high-tax States didn't have this Federal crutch to prop up their big spending, they might have to cut taxes to stay competitive.

Some of the elected representatives from the high-tax States don't seem to like that idea much, but maybe they should take a poll of their constituents to see if their people think a tax cut is such a bad idea.

We should get out of the habit of thinking of our economy as static and frozen in place. Our tax proposal is a dynamic model for the future. Any change of such scope and magnitude's going to require some adjustments. For the great majority of Americans, it'll be a very pleasant adjustment to lower rates and new and more plentiful opportunities -- a growing, expanding, superenergized economy, an economy of hope and opportunity that just won't quit. I don't think we should settle for less.

And now, I've got time for a few questions here.

Q. Mr. President, are you comfortable with the 24-percent increase in the tax-take from corporations in the short term in the new tax plan?

The President. I believe that what we've done with regard to corporations is aimed more at corporations that, in all good faith, have taken advantage of the present tax structure to make a profit, and at the same time, many of them avoid paying any tax whatsoever or certainly reducing it greatly.

What we think we've done -- and by reducing the rate from 46 percent to 33 percent -- is actually make the tax structure more fair for business and industry. But also, we have plugged that loophole or series of loopholes by which a number were not paying at all. And that's where the increase would come.

Q. Can we follow up? It also would be knocking the supports out from under some of the basic industries that have enjoyed those benefits -- steel -- heavy type of capital intensives industries. Is that your aim?

The President. No. But we also don't think that the compensating factor of the reduction in the rates, from 46 to 33, and then some of the other advantages that will be as a part of this plan, we don't believe that we're knocking the props out from under anyone.

Q. Mr. President, there are proposals on the Hill for a fourth tax bracket, perhaps a 40 percent, for those in the upper income levels. Would you consider that? Might you go along with that proposal?

The President. No. As a matter of fact, I think that'd be contrary to what we're doing. Right now, I feel like I'm standing against a cellophane wall getting shot at from both sides, because there are also some people up there on the Hill that want to reduce that top tax from 35 to 30. So, the 40-percenters will be shooting and so will the 30-percenters, and we think that the bracket we've chosen is a fair one.

Q. Mr. President, as you know, the deductions for State and local taxes, along with interest deductions, have been with us since the first income tax in 1913 when the top rate, as I'm told, was about 7 percent. So -- --

The President. If you were making a half a million dollars a year -- --

Q. Well, I wasn't. [Laughter]

The President. -- -- back in 1913. [Laughter]

Q. I'm not -- not now either. [Laughter] And of course that's been around a long time, and you want to get rid of it. So, the question obviously is, considering what's happening on the Hill: Just how open to negotiation are you on this tax program?

The President. You mean on the -- --

Q. Not just on that, but on the whole plan.

The President. Well, we think that we've worked out a pretty good plan. We've made some changes from the Treasury One proposal that we think were justified and should be made. We think that this one is balanced.

But if they start nibbling at some of the specific proposals there on the Hill, as they undoubtedly will, there's one thing that they're going to have to be able to answer for any change they want to make. And that is: Where are they going to get the replacement revenue? For example, the deductibility of State and local taxes is a tremendous part of the revenue proposal, and I don't know where they would get the money that would be eliminated if they did away with that.

Q. Mr. President, you have always been an advocate of federalism and of having decisions on taxes and spending made as close to the local taxpayer as possible. Aren't you in this proposal trying to force certain States to cut their taxes and thereby cut their programs also?

The President. We just said that if this kind of subsidy is taken away from them, they might take a look to see if they haven't just been sort of inspired to raise their taxes because of the deductibility feature. And no one, no level of government should be taxing more than is absolutely necessary. We should be taxing to meet government's real needs, not government's wants.

And we think that the overall tax reduction that we're giving the people in a way does something that I also have advocated for a great many years and that is that the Federal Government, beginning back in the Depression days, gradually preempted so much taxing authority that local and State governments found it impossible to go to the people for a tax increase that they might actually need for something necessary.

And by doing what we did in '81 and doing what we're now doing with this proposal, we are reducing the share that the Federal Government is taking and opening up the fact that some local level of government or State level with a real need now can find that there's more leeway out there.

Back when I was casting my first vote, the total amount of money that governments were taking in this country was about 10 cents out of every dollar earned and of that two-thirds was going to local and State governments, only less than one-third to the Federal Government. Now we're taking up there somewhere around 35 cents for all -- total governments. And of that amount, three-fifths is taken by the Federal Government and only two-fifths left for the State and local. So, we're in a sense redressing this back to where there'll be more availability out there in the earnings of the people.

Ms. Mathis. One more question.

The President. Now, I'm -- all right.

Q. Yes. I think that there is considerable concern in Congress about the distribution benefits, the fairness issue. And one way of figuring it is that the people in the bracket of $20,000 to $50,000, they would get an average tax cut of about $200. But people over $200,000 would actually get a tax cut of about $10,000. Do you think that that's fair or should that be altered?

The President. Well, I don't know that the figures are completely accurate on this other, but I do know that the brackets and the percentages -- it is still a progressive tax, and we have not come down to proportionate tax, as some of the flat tax people would have us do.

I think we have to recognize that that tiny percentage of people up there at that top level, roughly about 3 percent of the taxpayers -- yes, if you go dollar-wise, they're going to get tremendous amounts of dollars back. But they're also going to be paying a tremendously greater, much greater tax out of those earnings.

But when you start talking about people -- like now, some of the salaries that are so loosely thrown around of a million dollars or more a year, obviously, they're going to get a bigger bundle of dollars, as I've said. But at the same time, proportionately, they're going to be paying hundreds of times more tax than the individuals that you mentioned. But I believe that that middle-income group is also going to be doing better than that tax that's been proposed.

Ms. Mathis. Thank you very much.

The President. You won't let me take any more? Can't I take the lady's question? [Laughter] If I don't, you'll have to.

Yes.

Q. Thank you, Mr. President. Education for the handicapped has been proven to be an investment rather than an expense. For instance, at Cal State Northridge in Los Angeles, the masters program produces graduates who are able to earn up to $45,000 to $60,000 a year -- thanks to the program for deaf-mainstreamed education there -- at the cost to the taxpayer of $6,200 a year. May I ask, what is the proposal in the tax plan at the moment to maintain such programs to help these people to be able to find employment and so relieve the Government of the tax burden of supporting them?

The President. I don't think I heard -- you're talking about our aid to college students now?

Q. To the handicapped students, the deaf students, particularly.

The President. Well, now -- I should have let him answer this to begin with -- [laughter] -- because I don't think that we're having that much of a -- --

Secretary Baker. She's -- I think that's a budget question, if I may say so. You've proposed a budget question, not a tax question.

The President. Yes.

Q. Well, we were hoping that it would be part of the tax plan, to incorporate it as a peripheral for the budget.

The President. I think that what we're talking about is the whole general thing in the educational funds of the Federal Government. And I think that they have been misread, also, and are not taking into consideration a number of programs in which we have changed from a specific program -- where we found the administrative overhead when the Federal Government dictated it was very high -- that we have switched to incorporate things in block grants, where the local entity can utilize that in the way that they think meets their priorities, because they're not the same wherever we go. And I think you'll find that we have provided -- that we're not actually cutting into those funds.

I can just give you one example. We have in 1 block grant, we reduced -- or one series of 10 block grants -- we incorporated some 62 categorical grants, Federal grants, and in so doing found that we had reduced the regulations and the redtape on local levels of government from 801 pages of regulations down to 30 pages of regulations, by incorporating it into the block grant.

So, having been a Governor and knowing what some of those redtape restrictions did to us when we started implementing the programs, I think that we've made an improvement there overall.

But I'm going to have to turn it over to the CEO now. Thank you all very much.

Note: The President spoke at 1:33 p.m. in Room 450 of the Old Executive Office Building. Susan K. Mathis was Deputy Director of Media Relations.