Reform Tax Reform

With the unveiling of the plan of Sen. Bob Packwood (R-Ore.), we are up to Chapter IV of President Reagan’s quest for a tax-reform program that provides Fairness, Growth and Simplicity. Are we making progress in the process? It is doubtful.

First there was Treasury I, the plan produced by the Treasury Department at the President’s request back in 1984. It had flaws, but it was better than the present system.

Then came Treasury II--or Treasury I, as revised by the White House. It retreated from many of the progressive and bolder features of Treasury I, and promised new tax cuts for the wealthy. It was worse than Treasury I, and worse than the current system.

Then the House of Representatives wrote its own plan, which was fairer to the average American. The President didn’t like it, but said that the issue had to be kept alive, and he appealed to Republicans to vote for it. It passed late last year. On balance, the House bill definitely was better than Treasury II, not as good as Treasury I and marginally better than the current system.

Now we have the version presented by Packwood, chairman of the Senate Finance Committee. It contains significant differences from the House bill, some of which may be better and others of which clearly are worse. Packwood is better than Treasury II, not as good as Treasury I in some respects. How much better it may be than the current system is subject to debate, of which plenty is to come.

Packwood’s bill would provide slightly better tax breaks for individuals than the House bill--about 8.4% and amounting to $184 billion over five years. It would give the President the maximum 35% income-tax rate that he wanted. Corporations would gain lower rates, but would lose billions in deductions and be subject to a stiff minimum tax. Businesses and corporations would pay up to $185 billion more over a five-year period, but Packwood claims that the plan would stimulate investment. Investment alone, however, does not guarantee economic productivity.

There are glaring flaws. Packwood would eliminate the current deduction for state and local sales taxes. Income and property taxes still could be written off, but the deduction would be capped for wealthier taxpayers. There is no coincidence that Packwood chose to penalize areas that have sales taxes. Oregon is one of five states that do not.

His bill would raise about $13 billion a year in higher cigarette, alcohol and gasoline taxes to offset some of the revenue losses elsewhere in the package. Such increases may be needed, but the new revenue should be reserved for reduction of the budget deficit. In fact, Senate Budget Committee Chairman Pete V. Domenici (R-N.M.) is proposing to use some of the same money in the 1987 budget package.

The Packwood plan seems to meet the test of equity to individuals. Poorer Americans would get a bigger percentage tax cut than the wealthy. But should the wealthy, and even the near-wealthy, get another tax cut when the nation still is not generating enough revenue to meet its needs? This is one question that Congress continues to ignore and that may point up a fundamental problem in trying to fashion tax reform in an election year. There is just too much temptation to pass around more goodies to everyone.

As for simplicity, forget it. Neither the House plan nor the Packwood bill is simple, and this, too, may be a fundamental flaw. The fairness of the tax system will be suspect as long as it remains so mystifying and retains so many deductions that can be perceived as loopholes.

The Senate might be wise to pass one of the truly simple tax-reform bills that have been before it for several years--that of Sen. Bill Bradley (D-N.J.), for instance, possibly amended to reflect Treasury I. The simple plan then could be taken to conference committee for compromise with the House bill. The result might be better than the present system.

The danger of a conference committee choosing between two highly complex plans is that the lobbying groups that have donated so much to the tax-writers’ election campaigns will win too many of the compromises. In that event, the final chapter of tax reform may say precious little about Fairness, Growth or Simplicity.