VIEWPOINTS : Tax Reform: Wrong Move at Right Time : As in Deregulation, Elements Converged to Stampede Change

Now that the key changes in the tax revision compromise have been identified and analyzed, and final passage is apparently assured, one interesting question remains. Why did Congress do it?

Congress seems to have amazed the press and, I suspect, surprised itself by its ability to act. That would explain the euphoric burst of praise that greeted the tax reform bill. I have seen it called “historic,” “unprecedented,” “revolutionary” and even “miraculous.”

This time, Congress--”the gang of 535,” as the Wall Street Journal sometimes calls it editorially--has its act together. Instead of being immobilized, as it is with the budget, or irresponsible, as it has been with the deficit, it is moving to take action on taxes. Its momentum is now so strong, writes Dean Witter analyst John D. Connolly, that “there seems to be no power on earth that could derail the present bill.”

Why? Certainly not because of widespread public demand for tax reform. President Reagan tried last year with speeches around the country to arouse that demand but failed. Opinion polls show that voters have paid little attention to the ups and downs of the tax bill. The public seems to be reserving judgment, and therefore the tax bill is not likely to be a key issue in the November election.

And certainly not for lack of opposition. In its present form, the bill is actively opposed by several industry groups that Congress is ordinarily loathe to offend--especially real estate, banking and finance.

Nor are the economic benefits of the proposed tax package obvious enough to maintain the momentum. As is the case with all important tax changes, the bill makes trade-offs. It improves both the equity and the efficiency of the system. Equity is achieved by distributing the tax burden more fairly and exempting low-income workers; efficiency is gained by reducing the incentive to invest for tax reasons.

Both are important objectives. But they are gained at the cost of favoring consumption over investment.

Effects Aren’t Known

The bill also imposes higher short-term transition tax burdens on some taxpayers, on the assumption that any adverse effects will be more than offset by longer-term benefits. Perhaps they will, but as of now, no one knows what these longer-term effects will be.

Under these circumstances, there is good reason to call the ability of Congress to act on taxes something of a legislative miracle. These miracles are rare enough that this is only the second one performed by Congress in the last decade. The first one was deregulation, and it was not clear why Congress did that either.

When Congress passed the Airline Deregulation Act of 1978 and the Motor Carrier Act of 1980, it puzzled observers in much the same way as the tax bill does today. There was little visible public support for deregulation; it was actively opposed by labor and industry groups; and although economists predicted eventual economic benefits, these were a matter of conjecture. Why did Congress act?

Two scholars answer that question in a recent book, “The Politics of Deregulation,” published by the Brookings Institution. In my judgment, their analysis offers the best answer to the tax puzzle as well.

Three principal elements, they say, came together between 1975 and 1980 to produce deregulation. First was a well-developed case that had an appeal on ideological grounds, one that could be easily explained and comprehended and that met “the need of politicians for positions that were responsive to current public concerns (inflation and intrusive government).”

The second element was leadership that generated action, and the third was that the opposition, though mobilized and well financed, could not confront the issue in a politically effective way.

Same Elements Exist

These same three elements are present in the tax case. First, tax scholars and the Treasury Department had a well-developed case for tax reform. Treasury I, the original tax bill proposed almost two years ago, based its case on the efficiency principle that the tax law should be neutral with respect to investments. But Treasury I had little political appeal. In the five revisions that followed, the goal of equity gained priority.

“Equity” may not have stimulated popular demand for tax reform, but it did fit the need of politicians to respond to the dominant public concerns. Those concerns were, and are, the state of the economy, declining growth and rising economic insecurity caused by the nation’s competitive problems. When growth declines, equity becomes more important.

Second, there was strong leadership for a tax bill based on equity, both in the Congress and in the White House. President Reagan found strong allies in the House on the equity issue.

Third, equity quickly emerged as an issue that the opposition could not defeat politically. As late as last week, major industry groups were still trying to decide what to do. Most will not oppose the bill but will try to work to amend it next year.

So, a bill whose symbolic message is equity generated the momentum. Those whose allegiance was with Treasury I still gained enough of their objective to add their support. Thus, as was the case with deregulation, liberals and conservatives are pushing the measure. Those “special interests” not accommodated in the technical language have been brushed aside.

Thoughtful critics, such as Martin Feldstein, former chairman of President Reagan’s Council of Economic Advisers, had no influence on the result. He argues that this is not the time for tax revision that adds to the burdens of business; that this policy will weaken the nation’s economic prospects. Those prospects will demand congressional attention soon.

The euphoria of tax reform is bound to create expectations for economic results that will not be met. Sensing that problem, the Reagan Administration (long positioned to take credit for tax reform) is already downplaying the expected effects of the bill.

Surely, the most memorable statement on the tax reform triumph is that of President Reagan’s spokesman, Larry Speakes, who said: “By and large, the bill is one we like very much and think it is historic and all that.”