Uncertainty Is the Worst Part of Tax Debate

In a year in which most economists are saying economic growth will remain sluggish, the uncertainty surrounding tax reform looms as an unwelcome element.

The Senate would do us all a favor by taking up the House-passed reform measure and dispensing with it as soon as possible.

In doing so, it needs to answer a couple of key questions:

Just because so much effort has been put into achieving some kind of reform, is this reform bill close enough to the original idea of tax simplification to be worth the trouble of change?

Given the nation’s continuing deficit problems, should Congress use the tax measure as a means of gaining some needed revenue?

Some of the goals of tax reform are approached with the House bill. Tax brackets would be lowered, with the top rate dropping to 38%. Minimum taxes would be raised.

Those changes alone provide far more incentive for the individual to simply pay taxes rather than devise clever ways to avoid them.

Shifts Tax Burden

At the same time, however, massive lobbying, which no doubt will resume even more intensively this year, has left the bill full of loopholes in its effort to wipe out special tax privileges and truly simplify the tax code.

The bill does more to reduce taxes for individuals--an average cut of 9%--and shift the tax burden to business than it does to make paying taxes simpler and fairer.

One point of controversy over the bill as passed by the House is that it reverses once more the on-again, off-again efforts to stimulate business investment through tax incentives.

Such incentives have come under fire because they have been used to wipe out all income tax liability for some firms. On the other hand, the nation has long used some forms of incentive to keep business investment at a high level.

The important thing is to make a long-term commitment to one approach or the other, an incentive-based tax system or one that is neutral as far as business expenditures are concerned.

The Reagan Administration itself has been ambivalent on the question.

The original reform proposal developed by Treasury Department experts wiped out most incentives for business.

The House bill retains many but repeals the basic investment credit for equipment purchases.

The Reagan Administration has indicated that it wants the Senate to include some incentives for the nation’s troubled heavy industries.

The tendency to change the tax system often is an issue in itself. Whatever happens this year, there ought to be a commitment, once a broad change is made, to leave the system alone for awhile.

Should Pass Measure

If the Senate were to conclude that this reform measure is the best that’s likely any time soon, then it should pass it. If it finds major flaws and figures more reform will have to follow shortly, then it should pass nothing now.

Another big question is whether the Senate can resist the temptation to ease some of the provisions that increase taxes, provisions such as limitations on contributions to retirement plans and some of the measures directed at business.

This would remove some objections to the measure and the resulting overall tax reduction might even help stimulate the economy. But short-term economic stimulation at the expense of continuing federal budget deficits would increase the risk of long-term problems for the economy.

If business taxes are to be raised substantially, some of that revenue ought to go into reducing the deficit. It is far easier to raise taxes while the economy is still expanding than when it has slipped into recession.

There is, of course, substantial political pressure on the Republican-controlled Senate to pass reform because it has been given such high priority by the President.

That pressure is likely to build as the off-year elections approach, but it could lead to some bad decision-making.

Many businessmen have been complaining for a year that their planning process has been hampered by the prolonged debate. They shouldn’t have to complain any longer than necessary.