Tax-overhaul plan has serious flaws and could delay paring the deficit
The Treasury's tax-reform plan may never become law. But these plans don't surface even once in most administrations, so they're news. Advertised as simpler and fairer, this plan is nothing if not bold. In broad, Van Gogh-like strokes, it would alter the canvas of both individual and corporate taxation. On the individual side, it involves the progressivity of tax rates, exemptions, deductions for interest, for state and local taxes, and for charitable contributions.Skip to next paragraph
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What is simpler is not necessarily fairer. It isn't at all clear that the plan is even simpler. The personal tax brackets, for instance, are decreased in number from 16 to three. Is this simpler? All one has to do now is look at one line, which tells him his income tax up to a certain point and what bracket he is in beyond that point. There are not 16 separate calculations. And which is fairer - for the bracket increments to be 3 or 4 percentage points, or 10? Under the 3-bracket formula, a taxpayer would go at one jump from a 25 to 35 percent rate.
Assuming there is no sudden rush to get this plan through Congress, the special interests who are supposedly against it will have ample time to marshal forces. Meanwhile, we might all recall that most of the loopholes, or ''tax expenditures,'' were written into the law for very decent social purposes. They do need periodic review. One problem with ending those that have served their purpose is that the special interests affected by them can put undue pressure on Congress not to change the law.
The parts of the proposed reform that seem to lead in the direction of fairness are those that attempt to put investments solely on an investment basis and not mainly one of sheltering otherwise taxable income.
But Congress must decide whether all shelters are really without economic or social purpose. Investors in gas and oil partnerships do get an immediate tax advantage; they also help support an inherently risky business - one that would seem in the public interest.
Parts of the corporate code have been rewritten before. The accelerated depreciation allowed under the 1981 tax code may be skewing investment too much to those industries that are large users of fixed equipment. But such changes can be made without altering the entire tax structure.
The proposed capital-gains changes appear highly questionable. Investors have barely gotten used to the new maximum rate of 20 percent, and this reform would jump the rate to 35 percent, albeit with an inflation adjustment. General tax brackets higher than 35 percent are not particularly irksome if individuals have the opportunity to make substantial gains taxed at only a 20 percent rate. In all the discussion about capital gains, it was fairly well established that a lower rate made individuals more willing to take risks, to cash in on their profits, and thus contribute to what economists refer to as the efficiency of the capital markets.
Taxing income paid as taxes to states and local governments seems to be a kind of double taxation, although it is not unconstitutional. A sudden change in the federal law would penalize citizens in those states with higher taxes, often the result of higher infrastructure costs associated with major urban areas.
The main economic issue before Congress in 1985 should be the '86 budget and how to cut the deficit. The issue of wholesale tax reform should not monopolize lawmakers' time or attention. At the very least, Congress should make it clear early in the year that changes in the corporate code will not affect the treatment of investment decisions made in 1985. Otherwise, Congress itself could be contributing to a weakened economic outlook for the year.