President’s Tax Reform Plan Deserves to Die

It’s too early to say the President’s tax reform plan is dead, but it’s not too soon to say it ought to be.

Tax reform is a noble enterprise. Our system has become unfair, enabling some to avoid taxes entirely and, more important, making adequate enforcement impossible. Unfortunately, however, the Reagan Administration plan is not a viable substitute. Most significantly, it confuses the issue of tax reform with tax reduction. In addition, it is so controversial that it cannot be enacted quickly.

Both problems are fatal, or at least should be. It was unwise to reduce taxes as much as was done in the President’s first term. Now some of the recent analysis of the reform proposal suggests that it may produce another reduction, amounting to $14 billion. Such a reduction, with no hint of government success in dealing with impending deficits, is simply economic suicide. Trying to battle such a flawed product through Congress will extend the debate so long that there is real danger of lasting damage to already uncertain business conditions across the country.

There’s already scattered evidence that the tax proposal is affecting business. Talk to executives and it is likely to be one of the first items on their mind. Many say it is holding up some key decisions. The prospect of a bill hung up in Congress not only this fall but well into next year is not a bright one with the economy already in a period of pause.

Fairness Issue

Add to that the issues being raised about just how fair the tax reforms actually would be. Analysts began almost immediately to attack the lack of benefits for the middle income taxpayers as compared with what the upper and lower income groups would receive. If that sends the Treasury back to the drawing boards, it could make the overall tax reduction larger. Intense pressure from lobbyists to modify other parts of the proposal would make matters even worse.

By not adequately anticipating such problems, the Administration has gotten its reform effort off on the wrong foot--and prematurely. Long before any proposal was announced--and this includes the Treasury’s first plan published last fall--there should have been a campaign to inform people what tax reform would not do.

It should have been made clear that the plan would not be so sugar-coated that it could be introduced without pain. The point should be not to enable the great mass of people to pay less. It should be to see that everyone within income groups pays more nearly the same amount.

It should have been stressed that tax reform would take a long time. All along, the Treasury has paid inadequate attention to transition. The key to any reform bill is coming up with some kind of transitional framework so that pain is tempered with fairness. The latest proposal is better than the earlier one in that regard. In the area of interest deductions, for example, it allows for a 10-year phase-in.

Prolonged Phase-In

What’s needed, however, is a firmly set, broad concept of prolonged phase-in for the whole proposal that would let the economy keep operating both while reform is debated and after it is passed.

Another problem is that the proposal clearly does more than attempt to correct tax unfairness within income groups. It also shifts a substantially larger share of the tax burden to business. While it is true that the Administration went too far in its early tax reduction efforts to reduce the tax liability of business, this is not the context in which to correct that mistake. It adds yet another element of controversy and delay.

It may be good politics to try to make tax reform more popular by cutting direct taxation of individuals in favor of the indirect taxation that occurs when businesses pay more taxes, then try to pass them through in prices. But it would be better economics to debate the wisdom of that change separately.

Finally, the Administration is pushing tax reform in the face of a far more important debate over the budget and the deficit. Tax reform requires a clear road for quick consideration and passage. It doesn’t have that and so it ought to be dropped for now.