IN calling for a sweeping reform of the American tax system, President Reagan has set the stage for what promises to be a historic and comprehensive battle in Congress. Few Americans would disagree that a fundamental examination of the tax code is long overdue. Surely, Mr. Reagan expressed the attitudes of millions of taxpayers when he argued that the present tax system has become ``complicated, unfair, cluttered with gobbledygook and loopholes designed for those with the power and influence to hire high-priced legal and tax advisers.'' Unfortunately, many persons of considerable income, as the President noted, have been able to escape paying taxes, or pay at levels far below their fair share of wealth or income. That is also true for many businesses. That is why the call for tax reform has become a broad-based and -- as a Democratic congressman, Dan Rostenkowski of Illinois, pointed out in his response to President Reagan Tuesday night -- a bipartisan concern.
What the American public and Congress must now ask is whether Mr. Reagan's sweeping tax-reform plan -- a plan that he dubs ``America's Tax Plan'' -- does what the President says it will do; that is, foster simplicity, fairness, and a better allocation of the nation's economic resources.
What needs to be kept in clear focus is that Mr. Reagan's plan represents a wholesale restructuring of a tax code that has evolved over more than 50 years. Loopholes abound. Some are justified. But surely, many are not. No person or corporation should escape paying its fair share of taxes. But should the whole tax system be thrown out to go after the relatively few who manage to escape fair taxation? The logical alternative to Mr. Reagan's sweeping plan would be to close the most blatant loopholes at this juncture -- on a case-by-case basis -- pending a genuine long-range reform of the tax code that avoids the creation of more problems than currently exist within the system.
Using Mr. Reagan's own standard, Congress would seem justified in asking some hard questions about the Treasury's tax plan:
Simplification: Is the Treasury plan really a simplification of the tax code? Clearly, it is not, although the plan does change, modify, or repeal some 65 categories of preferential tax treatment while also replacing the existing 14 tax brackets ranging from 11 percent to 50 percent with just three brackets of 15 percent, 25 percent, and 35 percent.
But the President's plan keeps large numbers of deductions. Deductions and loopholes are merely rearranged, or modified. If you were looking for the type of simplified short form called for in the last year or so by ``flat tax'' advocates, forget it. You won't find such a simplification in the President's plan. Accountants and tax lawyers will be just as useful in filling out your forms under the Reagan plan as under the existing system.
Fairness: Is the Treasury plan really fairer? For low and moderate income Americans, who might well be dropped from the tax rolls or see their taxes sharply reduced, the answer is yes. But those same low income Americans might also be perplexed to find that Americans at the highest income levels stand to gain substantially under the administration plan. But middle-class taxpayers would benefit the least. Is that fair?
Some changes are obviously unfair. Eliminating the deduction for state and local taxes could mean higher taxes for persons living in high tax states. The upshot could also mean that such states would eventually have to either raise additional taxes, or reduce services, if individuals and families fled high tax states because of the loss of the deduction. Ending income averaging is also unfair to persons whose incomes rise and fall sharply from year to year, or to families where the spouse works on an intermittent basis for one reason or other.
Net impact on the nation: Most important, would the Reagan plan have a positive impact on the economic well-being of the US? Here, some particularly serious questions have to be raised.
We noted the possibly adverse impact of ending deductions for state and local taxes. Consider just three other key areas of the economy: housing, real estate, and heavy industry.
1. The Treasury plan would shuffle the existing market value of assets, including housing. The home mortgage deduction, for example, would not be worth as much, since the mortgage deduction would be worth only the value of the tax bracket to which the individual belonged. In the case of 15 percent, for example, the deduction would be worth only 15 cents on the dollar. Younger families which have taken on homes in recent years with high mortgage rates could find themselves, for whatever duration of time, ``locked in'' to homes with lessened value and unable to ``buy up.''
2. The plan to increase the depreciation period for real estate could result in less investment money going into office buildings and shopping malls. Ironically, this could work against one of the most successful areas of the US economy, service firms.
3. In the case of the scaling back of special tax advantages to heavy industry, the very industries that would be most affected are also, unfortunately, the very manufacturing industries in the US that are most in trouble because of severe overseas competition and the high value of the dollar, which work against their exports.
For just such reasons, Congress should examine the Treasury plan with care. Congress should start by closing the most egregious tax loopholes. So far as long-range tax reform itself, Congress should act with particularly thoughtful deliberation. If the present system is to be dismantled, Congress has a responsibility to ensure that whatever system is put together in its place does not create even more problems than it purports to solve.