Tax increases: don't compound the error
No one was surprised by President Reagan's decision not to seek higher taxes in 1984 but to defer the unpleasant task until after the election. Any other decision would have been an upset on the order of the Minnesota Twins winning this year's World Series.
The question is what kind of major tax increase will be enacted, undoubtedly in 1985, to reduce the huge federal deficits which, to use a phrase seemingly enshrined in our economic lexicon, extend as far as the eye can see.
On the individual tax side, the depressing prospect is that the new tax or taxes will further erode the progressivity of the nation's tax system - despite general acknowledgment that Reagan's 1981 tax cut bill was a major attack on the progressivity principle.
Nearly all the taxes under consideration for 1985 are regressive - that is, fall proportionately more heavily on lower-income Americans. The best that can be said about one of the current possibilities is that it will not further the retreat from the nation's longstanding commitment to progressive taxation - hardly a stirring rallying cry.
Energy taxes - such as the excise tax on oil proposed by Reagan in 1983 - may be sold, on the notion of promoting energy independence, but they are regressive. A family earning three times the average US income will not use three times as much energy.
The value-added tax - now being promoted by lobbyist Charls Walker - is a national sales tax and is regressive. The only things to recommend VAT are that it is hidden and that it is little known as a concept.
Replacing the existing income-based federal income tax with a consumption-based income tax may be in the race if people like economist David Bradford have their way. Treasury Secretary Donald Regan - who is to report to the President in December on a tax plan - also likes the idea. The consumption-based tax will be sold as another means - the 1981 Kemp-Roth approach having failed - to improve the nation's miserable personal savings rate. But the consumption tax is likely to be regressive. Low- and middle-income families must consume most of what they earn; wealthy Americans need not.
The elimination of indexing before it takes effect in 1985 is tempting as a way of putting the bracket-freeze bonus back into the government's revenue picture. But bracket creep doesn't bother wealthy Americans whose marginal rate is already at the limit.
A flat-rate surcharge on existing income tax would not be regressive nor would it restore lost progressivity.
The Bradley-Gephardt proposal (fewer deductions, fewer brackets, lower rates) has much to recommend it, but designed as a revenue-neutral it doesn't really qualify for this discussion of how additional revenue will be raised. In any event, its place on the progressivity-regressivity scale would require examination.
A reelected Reagan is unlikely to be any more concerned about progressivity in recommending revenue enhancers to Congress in 1985 than he was in 1981.
But what if a Democrat is elected? And, no matter who is president, what should Congress be pursuing?
Closing tax loopholes would add to the progressivity of the tax system. Conventional wisdom has it that not much money can be raised by tax loophole closing, because of entrenched opposition. But tax loopholes nonetheless deserve major attention. By 1985, over $400 billion in lost revenue will be at stake.
The upper end of income tax brackets could be increased to restore part of the progressivity loss from the 1981 tax act. Improvement in personal savings rates - the reason for tax cuts to the wealthy - has not occurred. Alternatively , an income tax surcharge with steeply graduated rates would, though not dramatically, redress the progressivity imbalance. This avenue also lends itself best to raising large amounts of revenue.
The Democratic Party clearly intends to stress the fairness issue in the 1984 election campaign. Attacking the Reagan tax cuts on that basis is fine, but the focus needs to be on how in 1985 the president and the Congress will replace the revenue given away in 1981.
Having cut taxes in a regressive way in 1981, it would be criminal to compound the error by raising taxes in a regressive way in 1985.