Taxes and equity
IT is understandable why the administration is delaying its final tax reform plan. Granted, Senate Republicans and the White House want to keep tax reform separate from the budget-cut, deficit-reduction package now being debated in the House. After all, let the House take up tax reform at the same time as deficit reduction, and who knows what it might do -- it could even go so far as to raise taxes to help reduce the deficits! There are other reasons for the White House to hold off on tax simplification until later this month, however, and they go right to the heart of the problem with tax reform itself: The administration is having difficulty coming up with a plan that meets its twin objectives of fairness and revenue neutrality. Tax simplification, although obviously an appealing political goal, does not necessarily mean the same thing as tax fairness.
There is no doubt that the current federal income tax system is untidy, and even complicated. But that is not to say that the present system is unwieldy -- or even inherently unfair, although the system is often perceived as being unfair.
What needs to be remembered is that the array of numerous exemptions, credits, and deductions in the current tax code -- many of which would be terminated or curbed under the administration's tax reform plan -- are in the tax code precisely because they were designed to provide legitimate social or economic benefits to taxpayers and the economy. In many cases, removing such deductions in the name of tax simplification would make the tax system more, not less, unfair. Consider just one example, the federal deduction now allowed for state and local taxes.
The administration proposes eliminating the deduction.
Well, that would simplify US tax forms all right, but how is that inherently fair?
Eliminating the deduction would be unfair, because of essential differences between the states. As a draft study by New York State concludes, the administration's tax plan would be virtually certain to mean higher federal taxes for middle- and upper-income taxpayers in New York State. And many tax experts believe that such a situation would occur in other high tax states.
What would the administration propose to offset such higher federal taxes for residents in high tax states? That they move elsewhere, thus leading to major social and financial disruptions throughout the land as taxpayers flocked to neighboring states with lower taxes? Assuming that socking taxpayers more than once on the same income -- which would be the effect of ending the deduction, since taxpayers would pay at the state and local level, as well as the federal level -- is constitutional, is such a proposal really ethical?
Most high tax states, it might be noted, are high tax states not out of any sense of financial profligacy, but because they have large numbers of lower-income and minority Americans. Many of these lower-income people fled into their jurisdiction from elsewhere to receive state and local government services that were not being provided by either the federal government or their own low tax states back home.
If the administration's plan became law, would high tax states have to cut back their tax levels to stay competitive with low tax states? Doing so would likely mean a loss of essential state services for the poor -- a loss of services that would come at the very time the federal government was reducing its own level of services to the poor and asking the states to pick up the burden.
Ironically, the White House decision to delay the release date of the new tax measure is working against tax reform this year, in the sense that delay gives more time for opposition groups to coalesce. The process of delay, however, may well serve the long-range well-being of the American people, if the administration is forced to develop a tax plan that can truly win broad bipartisan and public support. In the case of taxes, haste seems unwise.
President Reagan has long been personally critical of the graduated federal income tax system.
But successive administrations and Congresses have sought to make the tax system as responsive to legitimate social and national needs as intelligently possible. That is in part why there are so many ``loopholes.''
Tax reform is a worthy objective. It warrants the careful attention of Congress and the American public. But exactly for that reason the White House and Congress must ensure that far-reaching tax simplification would not lead to more problems and be even more unfair than the present system the administration is so eager to throw out.