Most of the tax debate that raged on Capitol Hill last week concerned the highly political question of whether to try to pass a tax -- cut bill before the election -- as the Republicans, including presidential candidate Ronald Reagan, and many Senate Democrats want -- or to postpone it until next year, as President Carter and most House Democrats prefer.
The more serious disagreements about the nature and scope of possible personal and corporate tax cuts often were obscured by the political rhetoric over timing.
But the gap between the Republicans' sweeping tax -- reduction proposal and the Carter administration's ideas -- it has offered no tax -- cut plan yet -- is enormous.
There is virtually universal agreement among Republicans and Democrats, liberal and conservative economists, andbusiness executives that the U.S. economy could use a tax cut in 1981. The nation may be mired in a recession, but taxes are going up by about $50 billion anyway:
Social Security taxes will rise a hefty $15 billion. The employer and employe share are to increase from 6.13 percent to 6.65 percent on Jan. 1, and the amount of wages on which the tax is due jumps from $25,900 this year to $29,700 in 1981.
Personal income taxes will increase about $14 billion solely because inflation will push taxpayers into higher tax brackets even though their real incomes have not gone up at all, the phenomenon known as "bracket creep."
Receipts from the tax on crude oil -- the so-called windfall profits tax -- will be up by $18 billion from 1980 levels, with oil users paying much of it in the form of higher prices. (President Carter also wants a 10-cent-a-gallon tax imposed on gasoline beginning no later than the middle of next year. It would yield about $5 billion in the second half of the year if Congress approved it.)
Other changes in tax law about to be passed by Congress, such as speeding up some corporate tax payments, will raise about $4 billion.
Against this $50 billion increase in real tax burdens, the Republicans want to cut taxes about $35 billion in 1981. In other words, even with the 10 percent across-the-board reduction in personal rates they have proposed, and the first step toward faster depreciation for business investment, taxes would still be up by $15 billion in 1981.
Administration officials studying what size cut Carter might recommend after the election have suggested a $25 billion package. With its adoption, taxes would only go up by $25 billion next year instead of $50 billion.
But what would happen in 1982 and beyond? Revenue losses would mount rapidly under the Republican proposal, but much more modestly under the plan being considered by Carter advisers.
After a modest revenue loss in 1980 of less than $5 billion, the cost of the Republican plan to increase depreciation allowances would reach $57 billion in 1985, the administration says.
As for personal income taxes, the Republicans technically are asking only that the first step of their multi-year scheme be passed now. In order to get essentially unanimous backing for action now, the backers of the Roth-Kemp bill -- which calls for a 10 percent cut in rates each year for three years and "indexing" thereafter to offset "bracket creep."
Reagan has endorsed the full Roth-Kemp bill, as well as other revenue-losing measures such as repeal of estate and gift taxes.
Roth-Kemp plus the depreciation changes would reduce federal revenues by $282 billion in 1985, not counting any revenue increases generated by a more rapid economic growth stimulated by the tax cuts, the Treasury Department says.
Sen. William V. Roth Jr. (R-Del.), one of the Roth-Kemp authors, last week pointed out, however that the administration also estimates that federal revenues, under one set of economic assumptions, would more than double between now and 1985, passing the $1 trillion mark that year.
That is not the point, say administration officials. If current federal programs and tax laws are continued as they are today -- incorporating only changes already in law such as the Social Security tax increases and proposals like the new gasoline tax -- revenues are indeed estimated to be $1.05 trillion in 1985. But spending is put at $945.9 billion, leaving only a $106.8 billion surplus. Withoutthe gasoline tax, that surplus would be $9 billion or $10 billion less.
This particular set of budget projections is based on economic assumptions that include an economy with output rising by about 4.3 percent a year from 1982 to 1985, unemployment slowly declining from 8 1/2 percent at the end of this year to 5.7 percent at the end of 1985, and consumer price inflation dropping to a 5.8 percent rate from about a 12 percent rate this year.
The question is, with a large tax cut of the Roth-Kemp variety, would the economy perform better than that, or would the added stimulus produce more inflation than gains in output and jobs? With a budget margin of less than $100 billion in 1985, and a strong Republican commitment to increase defense spending even faster than Carter plans, administration officials argue the budget deficits would be so large that they would set off another surge in inflation.
The Republicans reply their tax cuts would stimulate investment and provide such a boost to personal incentives that real output would soar. But if it did, how much larger would GNP have to be in 1985 to have the budget close to balance?
If the economy were to grow by 5 1/2 percent a year from 1982 to 1985 instead of 4.3 percent and inflation still gradually declined as in the projection above, GNP would be nearly $200 billion higher at the end of the period. The budget margin in this case would be up to $176.4 billion, with revenues more than $60 billion higher and spending down by about $9 billion, primarily because unemployment would be down to 4 percent in 1985 instead of 5.7 percent.
Even with such high economic growth, the budget probably could not be balanced without sharp cuts in non-defense spending.
The problem is, few economists think the economy can grow that fast for several years in a row without greatly increasing inflation. If business and personal tax cuts do stimulate investment and harder effort, it would still take time to build up the nation's capital stock -- the machines with which people work and the structures that house the machines -- and achieve an increase in productivity that comes with such an expansion.
At the least, the Republican tax cut plans for the years beyond 1981 constitute a high-risk policy as far as inflation is concerned. With such a tax cut with defense spending rising rapidly, with no intention on anyone's part to cut Social Security, veterans benefits or federal pensions coming within shouting distance of a balanced budget would be extraordinarily difficult if not impossible. And out of budget deficits when the economy is close to full employment comes inflation.