A Risk Worth Taking
Tax reform: Is it the great hope of a rejuvenated, growing U.S. economy or a black box of uncertainty? There are confirmed advocates of both theories in the wake of last weekend’s general agreement by a Senate-House conference committee on the tax-reform bill.
But for all its possible faults, the bill contains enough important reforms to merit its passage when Congress returns from its current recess.
Some economists and tax experts think that the legislation would jump-start the economy into a period of vigorous expansion. Others believe that the legislation at best is a gamble, and that heavy new taxes on some industries could drag down the economy more than other provisions would energize investment and productivity. One goal of any tax structure is to generate more savings by Americans, but that did not happen with the 1981 tax bill, and many doubt that the reform measure would achieve this goal, either.
Tax-reform advocates may have oversold the idea that the average American taxpayer would wind up a winner. That was appealing political rhetoric, but in fact there is no average taxpayer. Millions of Americans who view themselves as middle-income earners may be surprised to discover that they are considered affluent by the Senate and House tax-writing committees. Single people and working married couples without children may find their taxes going up, not down--particularly during the 1987 transition year.
There is concern that repeal of the investment tax credit and alterations in depreciation allowances would penalize precisely the lagging and dormant industries that need stimulation. And, while more than $100 billion in taxes would be shifted from individuals to corporations in the next five years, consumers ultimately would absorb much of that burden through higher product prices.
Still, it must be remembered that this was supposed to be tax reform, not another round of tax cuts. The idea was to cull the worst inequities from an encrusted tax system that was losing credibility as to fairness. In that respect the legislation would make some major improvements.
No longer could giant corporations and wealthy individuals escape paying any taxes at all. The bill would do away with the most egregious tax shelters that in effect made it attractive to lose money. Mergers with unprofitable companies would be discouraged. Investment decisions would be made on the basis of sound business judgment rather than on the unproductive funneling of money into tax hedges.
Millions of low-income Americans would have an onerous tax burden removed entirely. There would be a modicum of simplification of the tax system, since more low- and middle-income taxpayers would no longer have to itemize deductions.
The effect on the overall economy? It would be several years before anyone would know for sure. Future Congresses likely would have to pass tax-reform cleanup bills to nullify unintended consequences of the 1986 legislation that might turn up over the years. But the true elements of reform in the new bill are overdue. The chances that this legislation would help the economy, not hurt it, are good enough that the risk is worth taking.
