Everyone seems to favor tax reform. But can the country afford it?
As President Reagan continues to push his tax-reform package -- and as myriad interest groups lobby for changes -- concern is rising that reform will aggravate the problem of huge budget deficits.
The latest warning comes from the Congressional Budget Office, which reported this week that the plan would raise far less revenue than the administration estimates. The CBO forecasts a $23 billion shortfall in revenue from corporate taxes through 1990. Projecting the impact of the plan over a period of 15 years, it finds the proposal would yield an average of $14 billion a year less from corporations in the decade after 1990, resulting in a widening of the federal deficit.
The CBO analysis touches only on the business provisions of the Reagan plan, and an official analysis of the entire package is still awaited from the congressional Joint Committee on Taxation. But the report is adding to qualms about the Reagan tax package.
The administration says the reform is basically ``revenue neutral'' -- that is, it would neither lose nor gain revenue over the long term.
``If the tax-reform plan turns into a significant revenue loser it should be killed, because anything that adds to the deficit will do more damage than what is gained from tax reform,'' says Henry Aaron, a tax expert at the Brookings Institution.
``So `neutrality' is an absolute prerequisite from an economist's standpoint. And even a plus [revenue gain] is needed as a protection against surprises,'' says Mr. Aaron.
Echoes of this concern are heard on Capitol Hill as well. ``If we don't do a strong deficit-reduction package, tax reform is not going to be an economic panacea,'' said Rep. William H. Gray III (D) of Pennsylvania. ``The major problem for the economy right now is dealing with the deficits,'' the chairman of the House Budget Committee told reporters Wednesday.
``I think reality is setting in,'' commented Senate majority leader Robert Dole (R) of Kansas, adding that he had yet to study the CBO report.
The House and the Senate are in the process of conducting tax-reform hearings. Batteries of witnesses -- from corporate lobbyists to women's groups -- are marching to the Hill to object to one or another facet of the Reagan plan. Putting together tax reform that balances the many interests fighting for changes promises to be a formidable political task.
As the President pursues his own lobbying (he is scheduled to give a speech to community leaders in Chicago today), he confronts a growing uneasiness among the nation's middle class. Many low- and middle-income Americans are beginning to question how much is in the package for them, inasmuch as it benefits the poor and the very wealthy the most.
``Households in the middle are more vulnerable to coming out losers,'' says George Minarek of the Urban Institute.
``On average, they get the smallest tax reduction, and there are likely to be more households in that group that end up paying more taxes.''
Politically sensitive to keeping middle-class support, the Reagan administration is already reviewing two aspects of the plan. One is the proposed elimination of the two-earner deduction enacted in 1981 aimed at compensating working couples who were pushed into higher tax brackets by pooling their income on joint returns.
If this deduction is repealed, tax experts say, working couples in the median-income range in several states would end up paying more in taxes, while couples in which one spouse stays home would have tax cuts.
The other controversial provision of the Reagan plan is the proposal to make the current child-care credit a deduction. This would be more advantageous to upper-income families than to median-income households.
The White House says the administration will probably work out a ``technical solution'' to these two problems with the congressional committees writing the tax-reform bills.
Senate Republicans also assail the Reagan reform on grounds it does not do enough for middle-income groups. Senate Finance chairman Bob Packwood (R) of Oregon says the plan has to be modified, citing a study done by his state.
Analyzing the impact of the Reagan package on Oregon taxpayers, the study concludes that the plan would benefit filers who use the standard deduction. Other taxpayers who would tend to benefit would be those with relatively low adjusted gross incomes (AGIs), those with large families, and those with relatively high adjusted gross incomes.
``Filers that would face increases in federal tax would generally be itemizers in the middle-AGI levels,'' the study states. ``Joint filers with two incomes would also tend to lose, especially as the percentage of spouse income increases or the number of dependents declines.''
Given the projections for larger budget deficits, and the pressures building for changes in the Reagan plan, enactment of tax reform this year appears problematic.