Reform for what?
The tax reform act likely to emerge as a compromise between the Senate and House bills already passed may simplify the process of filing tax returns, but it will complicate the politics of taxation in new and still unexamined ways. The bills have enjoyed an enthusiastic reception so far. Liberals, neoliberals, Reaganites and reactionaries seem to have formed an ad hoc rainbow coalition to back them. Only a few diehards whose oxes are specifically marked for goring, such as developers of luxury real estate and small-venture capitalists, have been heard to grumble. And who in their right mind can gainsay a measure that is beloved by the chair of General Motors and the director of the Citizens for Tax Justice?
It may be more prudent to ask a different question: What good can come of legislation that seems to disregard the inequalities and conflicts in the American political economy? The reform bills promise everything for everybody and something for nothing. For those in the upper brackets they lower the maximum rate by one-third, to about 30 percent. For the average wage-earner they delete confusing lines on the tax forms and raise the personal deduction. For the poor they eliminate filing altogether. Whatever "costs' are involved are to be paid for, in effect, by closing the myriad loopholes and razing the warren of shelters that have been created by Congress over the years.
Simplification and rationalization of an outrageously unwieldy code are worthy goals, but they draw attention from more pertinent purposes of the legislation, which have been ignored by the press. Consider these:
By destroying shelters and giving big breaks to the wealthy, the reforms are supposed to encourage capital investment and thus do what previous tax reductions--the centerpiece of Reaganomics--failed to achieve. Representative Dan Rostenkowski predicted last week that soon "people will be investing their dollars based on good business practices as opposed to hiding it from the government.' But the problem of growth may prove more intractable than he and supply-side economists hope. There have been seven successive quarters of very sluggish growth, and whatever good economic numbers Reagan can show for five years of trying can be credited to the huge military buildup, not fiscal finagling. The rich are more apt to take back their sheltered funds and keep their tax reform windfalls to themselves than to make long-term capital investments, especially with the repeal of the investment tax credit.
The reforms are meant to strengthen the free market, that magical agora of economic intercourse much frequented by Reaganites. Tax shelters, the investment credit and other loopholes are considered subsidies that restrict market freedom and thus deform the economy. But in modern usage the free market is more a religious symbol than an economic model, and deregulation could cause more problems than it solves, especially when it is selectively practiced. In its bill the Senate has retained oil and gas depletion allowances, a hugely expensive loophole that subsidizes the nation's biggest industry, now fallen on hard times. And removal of the investment credit could spell disaster for the entire system. Only twice in twenty-four years has it been suspended: for four months in 1966, resulting in a mini-recession; and again for two years in Richard Nixon's first term, leading to a major economic crisis.
The reforms further weaken--perhaps fatally--the theory of progressivity that has formed the foundation of the tax code since the introduction of the graduated income tax in 1913. The reform act will move the tax structure nearer to a flat rate for rich and poor. It's true that many loopholes are regressive in practice, in that they shift the revenue burden to poorer taxpayers. But the radical reduction of upper-income brackets effectively demolishes the theory of a progressive tax and makes it that much harder to institute redistributive policies in the future. Furthermore, the next, inevitable, tax increase will probably come in the form of a tax on consumption--a national sales tax or a value-added tax--the most regressive kind imaginable.
True tax reform would remove all the regressive loopholes, including special corporate tax rates, and replace them with a genuinely progressive income tax that would flatten the disparities of wealth instead of the percentages paid to the I.R.S. The bills now passed retain much of the present system's inequality and reform only the methods of calculation.