Packwood’s Package Should Carry the Day

In the short space of about a week and a half, Sen. Robert Packwood (R-Ore.), chairman of the Senate Finance Committee, has managed to not only salvage tax reform from what appeared to be almost certain destruction, but to actually propound a vision of tax reform more radical than anything ever to pass through his committee.

It is a remarkable achievement for a man whose first reaction to President Reagan’s tax reform proposal was to say that he liked the tax code pretty much as it is. Although the measure must still survive on the Senate floor and in conference with the House, Packwood has been able to surmount what most insiders thought would be tax reform’s greatest obstacle: the Senate Finance Committee, which voted out the proposal on a 20-0 vote.

The current tax reform movement is really the result of two separate ideas. The first is the traditional liberal idea that loopholes should be plugged to make the “rich” pay their fair share; the second is the more recent “supply-side” idea that marginal tax rates--the tax rate on the last dollar earned--should be as low as possible. The idea, therefore, was to close loopholes and use the revenue to lower marginal rates in a way that maintained total tax revenue at no less than its present level.

Packwood’s proposal goes a long way toward achieving this goal. The top marginal tax rate, in fact, would be lowered to just 27%--a major contrast to the 70% rate that prevailed when President Reagan took office in 1981. Indeed, the top rate under Packwood’s plan is even lower than that proposed by either Sen. Bill Bradley (D-N.J.) or Rep. Jack Kemp (R-N.Y.), the top congressional leaders most closely associated with tax reform.

To obtain the revenue necessary to achieve this low rate, taxes on corporations would rise by about $100 billion per year, including elimination of the investment tax credit. Also, a stiffer minimum tax would be imposed, so-called tax shelters would be curtailed, individual retirement account contributions would be limited, and the maximum tax rate on capital gains would rise from 20% to 27%, among other things.

At the same time, about 6 million taxpayers would be removed from the tax rolls by increasing the personal exemption from $1,080 to $2,000. Also, the vast majority of taxpayers would be taxed at a single 15% rate. The 27% rate would apply only to taxable incomes above $17,600 for singles, $29,300 for married couples.

Thus we would come very close to the achievement of a true “flat-rate,” where everyone pays the same tax regardless of income.

This is not to say that there are no problems with the Packwood bill. Supply-siders have already expressed concern about the increase in the capital gains tax, since this is the tax that is most significant for entrepreneurs and venture capitalists who have fueled so much of the growth in our high-tech industries in recent years. They have also expressed concern about the limitation on IRA deductions, which would be restricted to taxpayers not covered by a regular pension plan.

Liberals, on the other hand, have expressed concern about the limitation of the deduction for state and local sales taxes. This, they say, would unfairly penalize states that rely more heavily on sales taxes than states with income taxes. (It should be noted that Packwood’s state, Oregon, has no sales tax.)

There are any number of other items in the Packwood proposal that, by themselves, probably could never be enacted. But in presenting these items as a package deal, with very little margin for adjustment, Packwood has made possible the formation of a coalition that could carry the day.

The danger will come from special interests determined to maintain their special tax treatment even at the cost of overthrowing the whole package. But if the 20 members of the Finance Committee stick together, they will already have about 40% of the votes needed to defeat any special-interest amendment. Moreover, President Reagan has expressed strong support for the proposal--not surprising since it closely resembles his November, 1984, proposal--and presumably will exert his considerable efforts on behalf of passage.

Chances are that either something like Packwood’s proposal will be enacted, or nothing will emerge from the Congress this year. Much will depend on the grass-roots support or opposition that emerges in the coming weeks. The initial reaction seems to be quite positive, even among businesses and taxpayers slated to lose some benefits. If people believe that the ultimate benefits to them and the country--in terms of fairness and simplicity--overwhelm petty special interests, then we may well see the institution of the most radical tax reform ever enacted in any major industrialized country. In my opinion, the pluses far outweigh the minuses.