Although `tax reform' is practically here, its impact is worrisome
IN another week, Congress will take up the tax reform package. There is opposition, but it probably will not prevent speedy passage of the bill. Sen. John C. Danforth (R) of Missouri has decided to oppose the bill. His fellow Missourian, Sen. Thomas F. Eagleton (D), worries that Congress has never in his time ``approached a matter as momentous as this revolutionary tax bill in such an abysmal state of ignorance.''
Sen. Eagleton says there has been only superficial analysis of the bill's economic impact on the country -- at a time ``when the smallest policy misjudgment could be enough to tip the balance.''
One should remember how the Smoot-Hawley Tariff of 1930 added to the weight of depression that hung over the nation then. Nevertheless, such criticism doesn't appear to have set in motion any organized opposition to the bill.
The bill has strong media support. Business Week editorially supports it, saying that ``by appreciably lowering tax rates and stripping the code of its underbrush of exemptions, deductions, and other preferences, Congress has brought the system more into line with reality.''
The Economist, jubilant over the the United States having the lowest maximum individual tax rates in the world, says this country ``will have achieved it by the elimination of hundreds of tax shelters that have hitherto encouraged Americans to waste their money on `investing' in everything from windmills to jojoba beans.''
Therein actually lies one of the problems with the bill. The lower rates have been obtained by adding a cumulative $120 billion to business taxes over the next five years. Yet the economy is not at a point where any extra load on business can be easily absorbed.
Moreover, the industries that will be hardest hit are those that are trying to survive against foreign competition. Lengthening depreciation periods and ending the investment tax credit hits especially hard at heavy industry. (Over a longer period of time, however, it is true that business decisions are made on the basis of demand for products and the opening up of new markets, not on marginal tax rates.) But Congress has again done what it usually finds it so easy to do -- penalize business and give more purchasing power to consumers (voters).
The major plus in the bill is the virtual ending of tax shelters -- the concept that the rich could shelter their earned income with paper losses that would eventually be converted into long-term capital gains.
The greatest negative remains the bill's indifference to the true nature of capital gains. Capital gains rates have been increased almost 50 percent, without any recognition that many of the unrealized paper gains citizens have are merely the result of past inflation. Until the capital gains differential is restored, it will be difficult to claim that the new system is an advance in fairness over the old.
As Congress begins to gather a wish list of corrective actions to improve on the bill in 1987, restoring the capital gains tax at 20 percent or lower should be a first priority. This can easily be accomplished by raising the top rate on individual incomes, so as to tax more highly income that is more a matter of corporate prestige than of any single individual's possible contributon to any company.
Meanwhile, it looks as if you're right, Sen. Eagleton. Either as a matter of faith or election year logic, your fellow Congressmen will vote Yes. Tax reform, whatever it's going to do to us, is here.