Editorials
commonweal TAX REFORM: DON'T JUMP YET IT HAS often been SAID that only two things are certain in this life: taxes, and the need for tax reform. President Reagan struck a deep, responsive vein...
...In a Brookings Institute report this January, Joseph A. Pechman stated that "the distribution of income after taxes and transfers was more unequal in 1985 than in 1966...
...Finally, the Wall Street Journal reports, for the 1991-95 period the president's plan would generate an average of $25 billion less in revenue each year than would the existing tax system...
...Still, the most crucial point has not been addressed: While tax reform is clearly needed, the real problem remains the economy itself and the catastrophic, glacial national deficits...
...Because numerous deductions may be replaced as of January 1986 while the new tax rates themselves would not go into effect until July, many taxpayers who have been led to expect a decrease would actually end up with an increase in 1986...
...Despite a great deal of talk, it closes too few of the loopholes the president inveighs against...
...it must be fair, and it must be revenue neutral...
...It doesn't make the preparation process any simpler...
...He has given three: the plan must be simple...
...We are afraid it is only the stiff medicine of the latter that will eventually save the ground on which to finally undertake wise, temperate, and always needed tax reform...
...That sounds familiar, but this time it must not be sidetracked...
...What indeed are the wisdom, structure, and likely outcome of the president's plan...
...It is the middle class which already pays the bulk of the tax burden...
...The difficulty is it may do both...
...With a record deficit fast becoming a fiscal Grand Canyon, the Reagan plan cannot afford to be interpreted as another tax cut or as adding to the deficit...
...The original Treasury plan proposed taxing capital gains at the same rate as those imposed on wages and salaries, which would have merited the adjective revolutionary...
...Commonweal: 388...
...Simply put, the tax system has become less progressive in the last twenty years...
...But the president reneged...
...Both the House and the Senate will finally have to get serious: the House on Social Security outlays — a freeze seems called for, at least in the absence of a fairer proposal to tax Social Security in higher income brackets — and stringent paring of all but means-tested programs to protect the poor...
...It is time for Congress and the president to act...
...Constrained on the opposite side by supply-side ideology, it does not wish to be perceived as raising taxes...
...This year will be harder on farmers than last...
...Senator Packwood has brought this to the administration's attention, and with some sense of shock they seem to be listening...
...Personal savings have fallen to their lowest share of disposable income in forty years, a boomerang effect not anticipated by Mr...
...Reagan's 1981 tax cut...
...Furthermore, the president does not oblige defense contractors to eliminate the "completed-contract'' accounting method, a practice even Defense Secretary Weinberger has asked to be revoked, a method which has allowed five of the nation's largest defense contractors 12 July 1985: 387 to escape all federal income taxes from 1981-83...
...encourage investors to shift from basic manufacturing industries to the president's favored high-tech companies...
...Reagan chosen to structure a new tax system...
...Not on tax reform, but on the deficit...
...These are major areas of concern...
...The month of May was also the largest single-month deficit in U.S...
...If fairness does not seem too deeply rooted in the president's plan, what of simplicity...
...and cripple "high-tax" states which traditionally bear a greater burden in caring for the needs of citizens drawn to them precisely because of a proven ability to respond to those people's pressing needs...
...The federal deficit has nearly doubled in the last five (read Reagan) years, and will rise by a full third again by the end of his term in 1988...
...At the same time, our trade imbalance was the second largest in U.S...
...history...
...A group of six former Secretaries of the Treasury has called this unrestrained trade imbalance a hemorrhage in our trade sector...
...The dollar is massively overvalued because of the debt, a debt we are able to bear only because it is underwritten by foreign investment...
...To make the plan politically palatable, the treatment of tax shelters has been eased, oil producers have won sizable exclusions, and by excepting SO percent instead of 40 percent for capital gains, the capital gains tax has been cut effectively from 20 percent to 17.5 percent...
...Because of the strong dollar, commodity prices are at a two-year low...
...The energy the president displays in his various campaigns should be marshaled toward a genuine bipartisan crusade against the debt...
...The plan as now envisioned will substantially penalize property owners...
...the Senate will have to opt for a freeze on defense spending as the House has already done...
...With salesman's astuteness, he summed it up with a proven advertising phrase: "Go for it...
...Going from fourteen rates to three only affects the tax tables," he said...
...In such complexities, loopholes thrive...
...Under the Reagan plan it will pay an increased share...
...It would appear that if the Reagan plan has not struck out by its own criteria, it has come sufficiently close to merit substantial revision...
...The economy has not sunk into the recession some analysts were predicting, but by all accounts it has cooled...
...But in proposing tax reform, what criteria has Mr...
...history...
...Let's take a look...
...While the president's program would compress the number of tax brackets from fourteen to three, generally lowering the personal rate for most Americans, under scrutiny it has become clear the plan favors two groups: the poor (who without question need it) and the rich (who arguably do not...
...The plan as stated gives most favored status to the wealthy...
...Despite the rhetorical magic, we would do well to pause before we jump...
...According th Chase Econometrics, the plan would cause a 1 percent drop in growth next year, which would add to the shortfall in general federal revenues...
...Finally, savings and loan associations remain on shaky ground...
...When self interest talks, Wall Street listens...
...President Reagan struck a deep, responsive vein when he called for the latter in his speech of May 28...
...Fairness...
...Our fifteen largest banks, with assets of $852 billion in 1984, reported contingent liabilities at the same time of over $929 billion...
...Thomas M. Block, president of H&R Block, told Business Week that "the president opted a little more for fairness than for simplification...
...Revenue neutrality...
...By allowing depreciation to be indexed to inflation, the plan makes another major retreat from simplicity, creating greater accounting costs — which will then be written off...
...Still, as David Stockman told members of the New York Stock Exchange last month, "it is obvious enough that to close this [annual] $200 billion budget gap, we must massively cut spending or raise taxes by large, unprecedented magnitudes — or, by the lights of some, enact a sweeping mixture of both...
...Will the president's plan as now stated do the job...
...Industrial production fell in both April and May...
...According to the accounting firm of Touche Ross, a "staggering complexity has been included in the proposals...
...Shareholders may now be able to reap 30 percent more after-tax income on dividends than under the present system, and stocks have reacted positively...
...This fact seems to have been readily grasped by the taxpayers' collective unconscious, and President Reagan has rightly articulated it...
...Simplicity...
Vol. 112 • July 1985 • No. 13
