Tax Debate Already Making Big Waves Muni Bonds Could Get Soaked; Some Democrats Go With Flow
Talk of radical tax reform is spooking the muni bond market - and some Democratic legislators.
The $1.2 trillion municipal securities market has turned in a rotten performance in recent weeks and analysts say one of the reasons is Republican proposals of a flat tax.
The 17 percent flat-rate income tax plan by House Majority Leader Dick Armey, R-Texas, would repeal taxes individuals pay on all investments - stocks, bonds and so forth. That would strip munis of a major advantage as one of the few tax-exempt investment options.
Any action on a flat tax is a long way off, and its prospects are uncertain in Congress.
Nevertheless, senior House Democrats are splitting with the Clinton administration and joining Republicans in advocating a complete overhaul of the income tax.
They fear that tax reform is a potent and popular issue with voters.
Debate over the tax system started in the House of Representatives last week and key Democrats moved quickly to distance themselves from the always unpopular Internal Revenue Service.
“We Democrats do want change. We aren’t defending the old status quo,” said Rep. Sam Gibbons of Florida, the senior Democrat on the House Ways and Means Committee.
House Minority Leader Dick Gephardt, D-Mo., told the panel “it’s time for massive, radical change.”
“When I go door to door in my town of St. Louis … I find a deep anger and a resentment of a system that favors the tax experts and insiders at the expense of average families,” Gephardt said Thursday.
In contrast, the Treasury Department a day earlier had called major tax reform a “grand experiment” that could disrupt the economy.
That’s the view bond traders seem to be taking.
Between April 21 and June 2, price movement for 10-year Treasury notes outperformed a benchmark of the muni bond market, the Bond Buyer Municipal Bond Index, by 4.8 percent, the Public Securities Association said. That’s a wide margin for that period of time.
But it’s important to note that other factors - such as more attractive returns in the stock and government bond markets - are depressing muni returns, said Joe Mysak, editor of the Municipal Bond Observer.
xxxx THE GREAT TAX DEBATE Politicians are jockeying for position in a growing debate of the U.S. tax code. Hearings on abolishing or overhauling the income tax started last week in the House of Representatives. Many legislative analysts doubt that reform efforts will come to fruition before the 1996 elections, but momentum is building for an eventual change. Here’s a look at some of the ideas that have been proposed.
ARCHER CONSUMPTION TAX: House Ways and Means Committee Chairman Bill Archer, R-Texas, would levy a 16 percent tax on consumer and business spending, with exemptions for medical and some housing spending. His plan, which is still under development, could combine features of a national sales tax with a value-added tax. Armey would eliminate tax returns for individuals and would tax foreign imports at the border and exempt U.S. exports. ARMEY FLAT TAX: House Majority Leader Dick Armey, R-Texas, would exempt a certain amount of earned income ($13,100 for a single person; $26,200 for a married couple and $5,300 for each child) and apply a 20 percent tax to the rest. After three years, the rate would drop to 17 percent. Unearned income such as interest, dividends and capital gains would be tax-free to individuals. Deductions and credits, including the mortgage interest deduction and earned income tax credit, would be eliminated. He also would end payroll withholding, requiring taxpayers to pay monthly. DOMENICI-NUNN UNLIMITED SAVINGS ALLOWANCE TAX: The idea of this bipartisan plan is to tax only income that is not saved or invested. Sen. Pete Domenici, R-N.M., and Sen. Sam Nunn, D-Ga., would offer three tax brackets for individuals: 8 percent, 19 percent and 40 percent. Each household would get a family living allowance tax free - $17,600 for a family of four, for instance. Deductions continue for home mortgage interest and charitable contributions. Individuals also could deduct any income saved or invested in financial assets such as stocks and bonds. People would get a full income tax credit for their Social Security and Medicare payroll taxes and there would be a new college tuition deduction of up to $2,000 per person. GEPHARDT PROPOSAL: House Minority Leader Dick Gephardt, D-Mo., the highestranking Democrat to wade into the tax debate, would tax most Americans at roughly an 11 percent rate on all income - both earned and unearned. Upper-income Americans would pay at a higher rate. Most deductions would be eliminated. GIBBONS VALUE-ADDED TAX: A VAT is a type of national sales tax. But unlike the retail sales tax that many states impose, it is levied at each stage of production and marketing. Under a proposal by Rep. Sam Gibbons of Florida, senior Democrat on the Ways and Means Committee, businesses would pay a tax on the economic “value-added” they produce - the difference between their receipts from sales and their payments to other businesses for goods and services. No business would be exempted. Imports would be taxed at the same rate as domestically produced goods. Exports would not be taxed. LUGAR SALES TAX: Presidential candidate, Sen. Richard Lugar, R-Ind., would scrap the income tax altogether and abolish the Internal Revenue Service. States would collect a national retail sales tax on goods and services of 17 percent and forward it to the federal government. Purchases of homes and investment securities would be exempt. Americans would no longer need to fill out annual tax returns. SPECTER FLAT TAX: The plan by Sen. Arlen Specter, R-Pa., who is seeking the GOP presidential nomination, is similar to Armey’s but has lower personal exemptions: $9,500 for a single person, $16,500 for a married couple and $4,500 for each child. Other differences are a 20 percent flat rate, a deduction for mortgage interest up to $100,000, a deduction for charitable contributions up to $2,500 and continued payroll withholding.