LOOSE LIPS SINK CHIPS But those coming tax hikes may not be so bad after all
By Teresa Tritch

(MONEY Magazine) – Lip reading will never be the same again. Neither, for that matter, will your taxes. They're going up, all right, but unless you happen to be a hard- drinking, hard-smoking muscle-car owner who pulls down six fancy figures a year, you may barely notice. For starters, personal income taxes are unlikely to increase for all but top-bracket Americans. And even they are far less exposed to a hike than populist political rhetoric would suggest. True, to get bipartisan deficit talks rolling, President Bush did pull back from his no-new-taxes campaign promise. But that doesn't mean he can't still hold the line on income tax rates for most taxpayers. And according to MONEY's sources in Washington, D.C., he may also manage to persuade Congress to cut the top capital-gains tax rate from 28% to 20% or so and maybe even throw in a tax break for savers. On the other hand, two key factors could insulate all taxpayers from an income tax hike, a capital-gains cut and a savings plan. One is political: too many Republican reputations are riding on the no-new-taxes pledge to totally abandon it during a congressional election year. The other is fiscal: the only personal income tax rate increase anyone in Washington has been taking seriously -- extending the 33% bracket to income above $162,770 for a couple filing jointly (or above $97,620 for a single taxpayer) -- would raise just $3.8 billion next year, according to the Congressional Budget Office (CBO). With a 1991 deficit-reduction goal of $50 billion -- $25 billion from new tax revenues and another $25 billion from spending cuts -- $3.8 billion is beans. And as for capital gains, a cut this year might bring in only $3.2 billion in 1991 as taxpayers cashed in their profits from investments. Furthermore, the President's own family-savings break -- which would allow tax-free growth on middle-income families' savings held for at least seven years -- would cost the government $200 million in 1991. Besides, no matter what members of Congress say in speeches aimed at the folks back home, our elected officials know one truth all too well: the widespread notion that the richest taxpayers are getting a break under the current law is nonsense. They pay a flat 28% on their taxable income, the highest effective personal income tax rate of all. Those just below those income levels, while paying a top marginal rate of 33% on the last dollars they earn, start out at 15% (for income up to $32,450 for a couple filing jointly) and move to 28% (between $32,450 and $78,400) before the 33% rate kicks in. By the time it's fully phased in, at $162,770, the lower 15% bracket has disappeared, leaving a 28% effective rate. ''There's no doubt the 33% rate will eventually be extended, but not this time around,'' predicts David Berenson, national director of tax policy at Ernst & Young in Washington, D.C. By contrast, you're likely to face higher levies on tobacco and alcohol by next year. Not only do such hikes go down smoothly among the New Nineties Neo- puritans, but they also raise some real money. The CBO figures that doubling the cigarette tax to 32 cents a pack and boosting liquor levies to about 25 cents per ounce of alcohol -- pushing the tax on a bottle of wine to 70 cents from 3 cents currently -- would bring in $10 billion in 1991. Energy taxes are an even higher-octane revenue source, and despite old Texas oilman Bush's long-held loyalties, their time may have come. Gerald Portney, a partner with KPMG Peat Marwick in Washington, D.C., believes that there is a good chance for enactment of a flat tax on the value of the energy you consume in whatever form -- coal, petroleum, natural gas or electricity. The expected take from a broad-based 5% energy-consumption tax: $14.2 billion in 1991, according to the CBO. Similarly, the federal gas tax, another likely target, would bring in $12.1 billion next year if raised to 21.1 cents a gallon from 9.1 cents currently. Our advice: Don't make any moves until the budget is tucked firmly into bed. That could be as early as September, in time for the start of the new federal fiscal year on Oct. 1. Just as likely, the final package won't be tied up until after the November elections -- in time to fold the results into your year-end planning. We'll keep you posted.