Optimism on tax reform: winning one for (or from) the Gipper
Boston — At the end of September a highly unusual ''college'' convened at Patrick Air Force Base in Florida. Its students were 22 congressmen, almost two-thirds of the members of the influential House Ways and Means Committee. Its professors were economists right and left - from the Hoover, Brookings, and American Enterprise Institutes, and the International Monetary Fund, among others. Rudolph Penner, head of the Congressional Budget Office, was there, as was Martin Feldstein, Reagan's ex-chief economic adviser.
The semester lasted two days. The football coach at this overnight university was Ways and Means Committee chairman Dan Rostenkowski (D) of Illinois. By all accounts the coach put his bipartisan group of congressmen through a tough preseason workout.
The whole semisecret performance was to help committee members cram for the major proposals on budget cutting, tax simplification, and such tax formulas as the flat, three-tiered flat, value added, partial value added, and sales tax. The unspoken aim: to be ready to tackle deficits and tax reform quickly and boldly once the new Congress convenes in January.
There's a lot of skepticism loose in Washington about the ability of President and Congress to cut the deficit and simplify taxes next year. But some budget specialists who know both the White House and the key committees on the Hill well, have recently come to believe that this Herculean task may be done after all. The unexpected optimism is due to just such dead-serious preparation as the Ways and Means weekend college in Florida and the work the Treasury is doing in preparing for its December report to the President on taxes.
Anyone listening to the two presidential candidates could be excused for expressing doubt about the cautious optimism. In their speeches, both Mr. Reagan and Mr. Mondale have given us fairy tales about dealing with the deficits. Mr. Reagan, by implying that the economy can grow its way out of deficit; Mr. Mondale by presenting a plan whose main new sources of revenue are built on wishful thinking.
But speeches, as usual, don't represent a candidate's actual planning. Since Mr. Reagan is well ahead in the polls, a realist should look first at his likely approach.
Those familiar with the President's thinking believe that, if reelected, he would push quickly for some further cuts in budget expenditures, particularly in the rate of growth of medicare outlays. Reagan has hemmed himself in by pledging not to cut benefits for social security recipients. (Purists point out, though, that no one in the White House has guaranteed that the retirement age would not be raised.)
The realists feel that when such new budget cutting falls far short of closing the deficit gap, Congress will ''force'' new taxes on the White House in the same sort of compromise that was arranged between Mr. Reagan and each of the last two congresses. The idea, once again, would be for each side to accept an unpalatable half-loaf in order to win the half-loaf it wants.
So far, this is all easy generalization. What might some of the tough specifics be?
First, specialists from both parties believe that the central vehicle may be some version of the Bradley-Gephardt tax-reform bill. That bill is the once-trendy Flat Tax turned into three flat stairsteps. It would create three basic tax brackets, and thin down the present welter of loopholes to just a few.
As it stands, Bradley-Gephardt is what is called ''revenue neutral.'' That means that if adopted in present form it would bring in exactly as much income to the Treasury as the present convoluted income tax does. But many economists believe that Congress and White House are almost bound to use any such tax simplification formula to raise revenues and cut the deficit. If, for instance, they raised the three Bradley-Gephardt tax brackets, perhaps pushing the proposed top rate from 30 percent to 35 percent. That shift would bring in about
So much for a laboratory equation. What would happen in real life?
Lobbyists who favor present deductions would swarm, trying to preserve their favorites. For that reason, and because sudden changes in formula can hurt individual taxpayers, some loopholes would probably be phased out over a period of years.
The bargaining involved might cause a delay in tax reform that would threaten to decouple reform from deficit cutting. The two need to be bolted together. Reform is not likely without the crisis pressure caused by deficits. Deficit-cutting needs to be done promptly before a decline in economic growth brings calls for more deficit spending to stimulate the economy once more.
Another source of complexity might be inflation. If and when the dollar begins to fall in value relative to other major currencies, there will be many benefits. But the inflation rate is not one of them: A drop of 10 percent in the dollar translates into perhaps a 2 percent rise in inflation - mainly because imports would cost more and allow domestic competitors to raise prices.
Any such rise would trigger the newly installed indexing system, designed to prevent bracket creep on income taxes. Some members of Congress will be tempted to hold back on indexing to bring in more tax revenues. For once, it may be wise to yield to temptation. But only for a year or two. Indexing ought to be retained as a system, mainly because it is fair. But both the income tax index and the entitlement index (for social security and medicare) could be shaved a couple of percentage points in the interest of deflating deficits. And military budget growth ought to be shaved as part of the package.
If you think this sounds complicated, remember this is a simplified version of what's going to happen on the playing field next year. No wonder coach Rostenkowski decided his team needed to start drilling early.