Tax reform a sideshow next to the need for continued deficit cutting
SOMETIME during the next 10 days the administration is scheduled to unveil its tax reform plan. While no one likes to pay high taxes, there is scant evidence that the public is demanding overall reform. Rather, Mr. Reagan's own aversion to high taxation makes this a natural issue for him to promote, while the existence of rival tax reform plans on both the Democratic and Republican sides of Congress makes it expedient for the White House to get involved, too.
You know how difficult it is for Congress to pass the annual budget. Increasingly, it's taking virtually the whole session of Congress. This year is even more difficult because of the need to cut the roughly $200 billion deficit.
The Senate late last week passed (50 to 49) a Republican version, in which the President agreed to no real increase for the Pentagon. But there will be more compromises before a final bill gets through both houses of Congress.
Knowing this, it would be naive to think that tax reform will be an operation clothed in political purity. (This is one reason the opponents of tax reform are apprehensive about what might come out of Congress.) The present tax system is a hodgepodge, yes; but it's a hodgepodge partly because it has been built to satisfy many particular social needs and has had to compromise diverse interests along the way.
There is no evidence that the present income tax code is on the whole unfair -- certainly not more unfair than whatever can be expected to emerge from any conceivable Congress. There are some grievous inequities in the tax code, so grievous that they could be fixed without all the hype attendant on so-called tax reform.
There needs to be a minimum tax for individuals, so the very few wealthy who now maneuver legally through the tax man's net are caught up with the rest of us.
Likewise, there should probably be a minimum corporate income tax.
There is room for changes in depreciation schedules and investment credits.
These matters have come up as discrete items and been handled separately before. They could be so handled again, and probably more sensibly than under the umbrella of tax reform. Beyond that, there are no obvious leaks in the system calling for remedy.
From briefings the Treasury has been conducting while the President was out of the country, it appears that the proposals James Baker's department will make are much more sensible than those that came out of Donald Regan's Treasury last year.
Capital-gains taxes will be kept low -- at roughly their present 20 percent maximum. Mortgage interest will be deductible on one's major residence, but very possibly disallowed on vacation homes. The charitable deduction is still limited, but only to the extent that the first 1 percent of income level must be exceeded before the deduction kicks in.
Apparently the plan would still disallow the deductibility of state and local taxes, although the mayors and governors are just beginning to fight on this point. If there are grounds for excluding anything from federal taxation, one would think it should be income that has already been paid out in taxes to other jurisdictions.
But whether or not that gets restored, what seems to be happening is a restoration of so many items disallowed in the original plan that either (1) the maximum rate will have to be much higher than the suggested 35 percent top, or (2) there will be major revenue losses under the reform.
If the first alternative occurs, President Reagan may lose interest in reform. If it is the second, to call the plan tax reform would be to hoodwink the American public.
Sometime this year or next, the United States will pass from being a creditor to a debtor nation. The deficits of the '80s have done this to us. The negative implications of this for America's future have barely been reflected upon. The implications for the rest of the world, which needs its own savings for domestic investment, are likewise not good.
Instead of wasting its time over a reform that makes little practical difference, Congress and the President should continue trying to compromise over the economic issue that really needs attention: the deficit.