Clumsy budget action casts doubt on what to expect in tax reform
After last week's wrangling over the fiscal 1986 federal budget, there is even more question as to how competently Congress could draft a reasonable tax reform package. One must ask whether tax reform is really an idea whose time has come, when Congress and the White House have had such a difficult time agreeing on spending for the coming year. The latest polls on President Reagan's tax reform plan indicate that less than one-third of the public supports it.
In Washington last week, Illinois Rep. Dan Rostenkowski, who chairs the House Ways and Means Committee, suggested how the tax reform package might be changed. For one thing, the committee is looking for ways to retain at least part of the deduction for state and local taxes, elimination of which was a key part of the Reagan tax package.
This would be a step in the right direction. But at the same time it would increase the pressure to have a top tax rate higher than 35 percent. The deduction for state and local taxes is the current tax system's largest revenue-loser.
The White House, in theory, would like to put the spotlight on high-tax states by ending the ability of their residents to deduct state taxes from federal tax. This, again in theory, would increase pressure to cut the cost of government in those states. It just happens, though, that the high-tax states are the industrial Midwest and Northeast, plus California -- states with large populations, where urban needs make the cost of government higher.
They are also, at least in the case of New York and California, major points of entry into this country for immigrants. These states perform a service for the entire nation which happens to get reflected in the cost of government in those states and their municipalities. This cost has been mitigated to a degree in the past by allowing the deduction.
Moreover, it seems only equitable to most people that they should not be taxed at the federal level for money that has already gone out of their checkbook to pay state and local taxes.
Part of Mr. Rostenkowski's plan is apparently to add a fourth tax bracket for the very wealthy. This would provide some of the income lost from continuing the deduction for state and local taxes. Mr. Reagan is determined not to have another bracket and does not want total taxes on any level of income to exceed 35 percent. The idea is that if most people are able to keep roughly two-thirds of any marginal income, that is added incentive to earn it. New York Rep. Jack Kemp wanted the top rate at 30 percen t. Certainly, as it climbs to 40 percent and beyond, the tendency to shelter income must increase.
Eventually, someone may resurrect the current tax code with its 15 brackets for single returns, 14 for joint and head-of-household returns. Each bracket rises a few percentage points at a time. Someone may even have the courage to say that the present brackets look a lot fairer for most individuals than the proposed sudden jumps from 15 to 25 to 35 percent.
Where did pressure for tax reform come from? Was it only to fill out the agenda for the second Reagan term? There is no doubt that Mr. Reagan wants a fairer system. And he appears to believe it could be simpler.
But whether any system devised by a Congress that cannot pass a budget in six months would be fairer is up to each taxpayer to ponder. Whether the system should actually be simpler, given the complexities of this economy and the myriad social purposes a tax system can serve, is also worth pondering.
In this case, one should not make the assumption that simplicity and fairness are necessarily walking down the garden path hand in hand.