The 27 per cent solution.

The 27 Per Cent Solution CUTTING THE top tax rate to 27 per cent covers a multitude of sins, and a multitude of sins is a good way to describe the rest of what's in the tax code [see also "The Great Tax Reform Debate," p. 40]. There are many distortions that will remain, and a few new ones that will be added, but at least the cliffs will be much lower; no one will want to buy a tax shelter that costs forty cents on the dollar.

The Senate Finance Committee's sudden access of reformist virtue is all the more impressive because it had been leading the forces of the Sin Camp. Pelted by unprecedented editorial condemnation, Senator Packwood and his colleagues abandoned much of their own special-interest handiwork, including the proposal to end excise-tax deductibility recently complained of in this space. In fact, it was the very radicalism of their new solution that makes it politically feasible: Lobbyists who had fiercely refused to trade a few deductions for a 10 per cent cut were glad to trade a lot of deductions for a 23 per cent cut.

Not all the concessions were made by special interests. The forces of growth and efficiency gave up some ground too. The treatment of capital gains in the Packwood bill is probably too harsh in principle and is certainly too harsh in practice, given that inflation continues to create artificial gains on which tax must be paid (indexing should be a top priority). The loss of most IRA benefits will leave more retirees dependent on Social Security--just where the liberals want them--though at least the Packwood bill admits the logic of leaving the IRA deduction for workers who don't have private pension plans.

There are also puzzling new anomalies. A claw-back of the personal exemption for well-off taxpayers will leave many of them paying an actual marginal rate of 32 per cent, though the marginal rate for the really wealthy will fall back to the proclaimed 27 per cent. Home-mortgage interest will still be deductible, but most consumer interest won't. Which means many people will be taking out second mortgages to buy cars. And by denying deductions for state sales taxes but not income taxes, the bill would strongly encourage states to rely more heavily on graduated income taxation to raise revenue, something conservatives have traditionally opposed.

These flaws are hardly lethal, but they will all be magnified if, in Hill negotiations, the top rate is allowed to creep back up. Even if the bill passes, many people will still be paying marginal rates around 50 per cent when Social Security and state taxes are counted in. But unless it passes, they will continue to pay much more. The bill thus makes a fitting monument to President Reagan and this Congress, and an even better monument to good sense.