Put Ax to Corporate Income Tax

OK. The Senate Finance Committee’s version of tax reform merits much of the applause lavished upon it by both liberals and conservatives. Any measure that arouses the consternation of real estate, tax shelter, utility and other lobbyists seems likely to promote the general interest. What could be wrong with a proposal that allies Ronald Reagan with the dean of liberal tax reformers, Brookings’ Joseph Pechman?

Indeed, this son of Bradley-Gephardt closes most shelters, a good thing. It treats capital gains like ordinary income, an even better thing. Hordes of accountants and lawyers now engaged in craftily transforming income into capital gains will be constrained to seek other, possibly more socially useful, employment.

Best of all, about 6 million low-paid workers will be completely exempted from personal income tax liability. Not that the working poor get off scot-free. They will soon be subject to Social Security taxes not much lower than the 15% personal tax rate applicable to 80% of families under the Packwood bill if, as is generally assumed, employers’ matching Social Security contributions are shifted to their employees in the form of lower wages.

Preliminary analyses conclude that the Packwood bill will be about as mildly progressive as the existing code. More of the affluent will pay some taxes and, once ordinary folks get used to the new forms, they may find that filing their returns is simple enough to dispense with tax preparers, another set of specialists liberated for useful activity.

Small Political Price

The political price paid by Packwood is, as congressional precedent goes, comparatively small. Sen. Russell B. Long (D-La.) preserved oil and gas tax breaks--all the more outrageous because most other shelters will be eliminated. Mortgage interest even for second homes stays deductible. The compromise between high- and low-tax states sacrificed sales tax deductions but saved income and property taxes. The Finance Committee plan nibbles at business entertainment, but 80% of it, including those luxurious sports arena skyboxes, will continue to be publicly subsidized.

In most respects, Packwood’s plan is preferable either to the second version of the Administration’s bill or the House’s draft, itself an improvement on the Administration measure. The Senate measure, if it survives unlimited floor debate in the Senate and complex conference committee negotiation, is as close to tax decency as any sensible person might expect, possibly closer than in the end Congress will be willing to go.

Then why complain? Primarily because the Senate is about to blow an unusual opportunity to eliminate the corporate profits tax. The only justifications for the levy are the sums it raises for the Treasury and public sentiment that gigantic corporations really ought pay taxes like the rest of the world.

The corporate profits tax is the second-worst federal tax. Only our dreadfully regressive Social Security levies exceed it in iniquity. Corporations that exercise a degree of monopoly power simply shift the tax to their customers in the shape of higher prices.

The effect is inflationary and, since the rich spend smaller percentages of their income, regressive in the bargain.

Industries operating in international markets and ordinarily unable to raise prices perforce pay smaller dividends. As their cost of new capital in consequence rises, they will invest less and less in the research and development essential to the revitalization of American industry. In this period of enormous trade deficits, of all times, R&D; merits encouragement, not new handicaps.

Difficult to Amend

Instead of imposing an extra $100 billion of business taxes, our lawmakers would do well to raise the money by adding a 40% bracket for affluent individual taxpayers in addition to the 15%, 27% and implicit 32% rates now contemplated.

There is another serious departure from equity in the Packwood bill. If Congress enacts it in approximately its current form, the personal income tax will for a substantial period be extremely difficult to amend.

New taxes, almost certain to be enacted soon, will be imposed upon energy, unpopular products such as liquor and cigarettes, or consumption in general.

In each instance, the impact will be regressive.

As Social Security taxes rise, the federal tax system--still barely progressive--will very likely turn regressive, as state and local taxes already are. There is very little economic or social justification for slashing top rates in less than a decade from 70% to 27% for almost all taxpayers.

Why not close the tax shelters and preserve sensible discrimination between the genuinely affluent, the merely prosperous, average earners and the working poor?

The sound you hear is one hand clapping.