Son of Kemp-Roth: taxing consumption, rewarding saving
Boston — IT'S summer and school's out. But does anyone remember what a syllogism is? A little coaching? OK. Syllogism is the name for a system of reasoning in which two premises are set forth that together lead to a logical conclusion.
Example: Tax cuts stimulate savings. From 1981 to 1983 the United States cut income taxes. Therefore, the American savings rate went up.
That's a syllogism. But that's not what happened in real life. Since the sizable Reagan tax cuts of 1981-83, the American personal-savings rate has wandered below the already low average set in the 1970s -- 7.8%.
After the robust economic recovery fueled by the tax cuts, the rate has risen a few times but remained quite low -- about 4.7 percent at the start of 1985 and 6.6 percent this May. That is far below the savings rates of most Western (and Far Eastern) industrial nations. (Japan averages about 20%; West Germany 25%; Switzerland 20%.) To get back to the capital formation rates of the 1970s, Harvard economist Benjamin M. Friedman estimates, US private savings would need to jump by ``an astonishing 50%.''
There are mitigating factors. Pension funds and corporate saving add to American private-sector saving in a way that doesn't happen in the East Asian enterprise states.
But still there's something wrong. Saving was illogical in the high-inflation period of the 1970s and early '80s. Why save if inflation ate away your invested dollars? But now that we have (1) low inflation, (2) very high interest rates (until recently), (3) respite from oil-crisis fears, (4) tax cuts, and (5) increased ceilings on Individual Retirement Accounts (IRAs), that syllogism mentioned above should have gone into high gear by now.
So much for logic and theories. What was supposed to happen hasn't. Is there anything that can be done about it? We need savings to provide capital to finance new industries and retool older industries, which in turn provide jobs and greater productivity. Any society that fails to take these steps risks a declining standard of living.
At least two ideas for dealing with the problem are percolating among members of the Senate Finance Committee. One is intended to tax consumption. The other to reward savings. Both are quietly being pushed by Sen. William V. Roth Jr. (R) of Delaware, co-author of the 1981 Kemp-Roth tax-cut bill.
Let's look at consumption taxes first, then savings incentives.
Tax ideas to curb consumption are not new. Most Western industrialized nations levy a value-added tax (VAT), which taxes manufactures at each stage of production. US lawmakers have been flirting with VAT variations for years. But the concept lives under a cloud in American politics. VATs are seen as regressive (more harmful to the poor than the rich).
So Senator Roth and Democrats such as Sen. Lloyd Bentsen of Texas dwell on differences that would make their consumption tax plans more fair to lower- and middle-income Americans. Senator Roth's ``business transfer tax'' would, for instance, exempt food, housing, and medical supplies from the consumption tax. The Roth version could have an added appeal to labor because it would allow businesses to pay their social-security payroll taxes from transfer-tax revenues. This could reduce management concern about the cost of hiring new workers. Furthermore, the proposed transfer tax would apply to imports as well as domestic goods. The tax would exempt exports. This combination of taxing imports and exempting exports would help, in the words of the old trade clich'e, to level the playing field. Many of the exporting nations that have gained trade share against the US have this kind of tax system.
The Reagan administration does not favor a consumption tax. It is publicly against any new taxes. But, as protectionist sentiment rises in Congress, the transfer tax may start to appear preferable to more blatant barriers that could kindle a dangerous tariff war.
So much for inhibiting consumption. What about rewarding saving? Roth's answer was launched last February but has been smothered under massive coverage of the Reagan tax-reform plan. The Roth tax-reform bill is intended to be a revenue-neutral tax plan that doesn't shift the tax share of lower-, middle-, or upper-income Americans.
Its biggest innovation provides an exemption from taxation for something called a SUSA -- a super savings account. Like an IRA, a SUSA would allow tax shielding of saved dollars and interest until an individual begins to withdraw money from the account. Unlike an IRA, a SUSA could be used without penalty before age 591/2. It could therefore serve as a nest egg for college tuition or buying a house. The upper limit for a SUSA would be $10,000 for an individual, $20,000 for a couple. IRA savings would be counted in that total.
It remains to be seen whether this concept can surface during the fierce struggle now being waged over tax reform. The logic for some stimulus to saving is compelling. America continues to prove capable of generating new ideas and new technologies. But often these are put into production in Japan and other nations where savings provide the capital for such new businesses.
In the US, pension funds do part of the job. An assist from private savings would broaden the investment pool. And such investment means greater productivity, more exports, a better standard of living, and more jobs.
Earl W. Foell is editor in chief of The Christian Science Monitor.