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More Study Is Needed Before Tax Reform

August 25, 1985|JOHN F. LAWRENCE | John F. Lawrence is The Times' economic affairs editor

Congressional leaders have said tax reform will be a top priority when they return from recess. It is a pity if that is so because, from all indications, they are proceeding on this matter for the wrong reason.

At one time, the idea of simplifying the income tax system and making it fairer had broad public support. That was before the public saw the specifics, before the problems and complexities of the various plans put forward were known. Now the indications are that the public's interest in reform has waned.

Privately, some of those congressmen who say they will vote for reform make it plain that they will do so without enthusiasm. Their support reflects no compelling feeling about rescuing the taxpayer. Rather, they want to save themselves from any political embarrassment. With a popular President pushing reform as one of his primary programs, they simply don't want to risk being open to his attack later.

Thus, despite the problems with the President's plan, there are strong signs the House will try to push through a bill before the end of the year. That would put the Senate in a box next year with its Republican majority facing a stiff election challenge. By some reasoning, that means the Senate will have to pass something, too.

That doesn't sound much like the way public policy should be established, particularly when it involves something so all-encompassing in its influence on the economic life of the nation.

Plans Aren't Workable

The proposals on the table aren't truly workable. They will confuse more than simplify. From the beginning, the Treasury and those congressional figures with reform plans have failed to do the hard work necessary to develop a proper transition from the long-standing, tax incentive-based system the country has operated under for so long to a plan that is supposed to be more incentive-neutral.

Consider the matter of deductions for state and local income taxes. President Reagan would eliminate them. Congress might compromise.

The present plan provides for these deductions on the theory that taxpayers shouldn't be taxed twice on the same money. Whatever the logic of it, the practice has served as an important form of federal subsidy to state and local taxing units, leaving more room for them to collect revenue. Whether or not it's right to take that away, it is foolhardy to proceed without a plan for avoiding the destruction of school budgets and other state and local programs.

Moreover, state and local tax deductions are hardly the most unfair area in the current system. They probably are lumped in with all the other reforms mainly because killing the deduction produces a pot full of revenue that can be used to reduce tax rates significantly. Otherwise, reform will lose its most appealing element.

The state and local tax deduction, however, is only the most written-about of the many issues yet to be resolved. It isn't clear yet how the bill will be structured to avoid giving too many benefits to the rich and too few to the middle class. It isn't clear whether this is the time to reduce anybody's taxes and whether it's right to use reform to shift some of the tax burden from individuals to business, as the President's plan would do.

Go After Loopholes

Perhaps the long-term answer on tax fairness is an intensification of efforts to go after the worst loopholes and a strengthening of the minimum tax on those who don't pay much.

In any case, those in Congress who want quick reform may be misreading the political winds. The public may have been content to watch--and sleep--while its government leaders wrangled endlessly over something as esoteric as a budget. But just as it did with Social Security, the electorate is likely is be watching more closely what goes on with taxes. Reform needs more study. Like the overhaul of Social Security, it must be separated as much as possible from the political process.

Proceeding on tax reform now means a battle well into next year, a battle over an inadequate plan and one that could easily lead to more economic uncertainty and an ill-advised election-year tax reduction.

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