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Tax Plan: Is It Fair?

May 26, 1985

Simplicity, fairness, economic efficiency. Those were the goals set for tax reform when President Reagan ordered the Treasury Department to study the nation's tangled tax system a year ago.

Fairness, however, is the key as the President submits his version of the plan to Congress.

Simplicity is elusive, if not impossible. American taxpayers should not be under the illusion that tax revision will greatly simplify their tax forms. The Treasury plan submitted to the President last fall would have culled only about 10 lines from the two-page Form 1040. The fact is, says Richard Goode of the Brookings Institution, "In our complex economy, a satisfactory income tax cannot be simple." The reduction of brackets from 14 to 3 sounds simple, but it would make no difference to most taxpayers. They would figure their taxes from schedules or tables very much like those in use today.

Economic efficiency depends on your perspective. A tax-efficient oil well may translate into new levies on a wage earner's company-paid health insurance plan. But then the entire package is a series of trade-offs. The poor certainly would benefit, and should. Corporations would have to pay more of their fair share, and should. And, as Goode notes, the great bulk of the middle class "will still be paying a very substantial tax." That is inevitable.

As for fairness, the original Treasury plan drafted under former Secretary Donald T. Regan candidly declared what most people knew: "The tax law provides subsidies to particular forms of investment that are unfair and seriously distort choices in the uses of the nation's scarce capital." The Treasury attempted to right some of those distortions through its treatment of capital gains, depreciation and special breaks for the oil and gas industry. Unfortunately, it appears that the President has backed off in these important areas.

The original plan, in fact, was so well balanced that many tax experts thought it was too good to be true. Perhaps it was. One tip-off may be that the White House refuses to reveal any details of the plan until Wednesday, and presidential advisers are appealing that analysts not compare Reagan's proposals with the Treasury plan.

The Administration nearly bargained away fairness last week in deciding how to increase the personal exemption--all at once or over a period of years. A phase-in would have, in effect, bought political support from corporate interests out of the paycheck of the little taxpayer.

Fortunately, fairness and political reality prevailed in this case, and the jump to $2,000 would be immediate. The White House also made the right decision in retaining the present deductibility for charities, a provision of immense importance to some of the nation's most vital institutions.

The tax plan still retains a particularly onerous inequity in the repeal of deductions for state and local taxes, a $36-billion item. State and local governments have suffered at every turn of Reagan's crusade to cut back the federal establishment. Their ability to bear this burden would be severely handicapped if Americans had to pay federal tax on top of state, county, city and school taxes.

Finally, taxpayers should not be overwhelmed by the Administration's fanfare about a revolutionary new tax populism sweeping America. Opinion polls do not support the White House claim of massive anger over federal taxes. There is deep animosity over the fact that the tax system permits many wealthy people and corporations to pay little or no tax, and a suspicion that the rich have gained more under this Administration than everyone else.

Hear the President on Tuesday night. But check the figures carefully on Wednesday.

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