With a new president and a newly Republican Senate there are plenty of question marks over economic policy this year. But one near certainty is that a sizeable tax cut will be enacted before the year is out, maybe even before it is half over.
President-elect Reagan and President Carter, a majority of both Democrats and Republicans -- and most economists -- agree there should be a 1981 tax cut. The two new leaders of the key tax writing committees on the Hill are also in favor of one.
But if some kind of tax cut is certain this year, it is far less clear just what kind it will be, when it finally will be effective, and how much it will cost.More generous depreciation allowances for business and a cut in personal tax rates are two likely elements for any package. But beyond that there is much room for conflict and compromise.
There is also considerable disagreement about the effect of a tax cut on the economy. Some of the "supply siders" advising Ronald Reagan have claimed that a large tax cut this year will give a big boost to the economy. Opponents say that too large a cut will exacerbate inflation.
But it is most likely that the tax cut will do little more than mitigate the effects of the large tax increase that would otherwise occur this year because of the automatic effect of inflation on tax revenues -- it pushes people into higher tax brackets even though their real purchasing power may be unchanged -- and because of a legislated increase in Social Security payroll taxes. Taxes would go up an estimated $85 billion this year if there were no tax cut. More than $35 billion of that represents an increase in the real tax bite.
During the election campaign Reagan declared his support for the controversial Kemp-Roth plan to cut personal tax rates by 10 percent in each of the next three years. Although he also said that he would back the bill reported out by the Senate Finance Committee last summer -- which provided for rather different tax cuts -- since the election the president-to-be apparently has hardened his support for Kemp-Roth.
Others are not so keen. The plan, according to Reagan's figures would cost $18 billion in 1981, rising to $89 billion by 1983 and $130 billion by 1985, although the Carter administration put the cost somewhat higher, particularly toward the later years. These figures include the cost of indexing the tax brackets so that they rise automatically with inflation. This would stop people from being pushed into higher tax brackets simply because their income has gone up in line with inflation.
Supporters of the tax plan, so-called because it has been pushed by Rep. Jack Kemp (R-NY) and Sen. William Roth (R-Del.), claim the huge gross loss in tax revenues shown in these figures would be vastly reduced by a surge in economic growth in response to the tax cuts. But there is little evidence to convince skeptics that taxpayers would indeed respond to a tax cut by producing much, much more.
Both Sen. Robert Dole (R-Kan.) and Rep. Dan Rostenkowski (D-Ill.), incoming chairmen of the Senate Finance Committee and the House Ways and Means Committee respectively, have argued against Kemp-Roth in the past. Most recently they have refused to go on record as opposing it, although Dole said just after the election that he feared such a proposal would be inflationary.
But there is little doubt that if the Reagan proposals sent to Congress early in the year include a full Kemp-Roth, they will be vigorously opposed on the Hill.
One alternative would be a two-year, rather than three year, plan. This would of course cut the large cost in later years -- when Reagan is pledged to balancing the budget -- and would leave more room for Congress to make up its mind about tax cuts nearer the time when they would be effective. It would also give breathing space to see just how the first installments of Kemp-Roth affect the economy.
Director-designate of the Office of Management and Budget David Stockman has called for enactment of two years of Kemp-Roth as part of a package of tax and spending measures that he believes should be implemented urgently. His is likely to be an influential voice in the Reagan economic policy-making team.
But even a truncated Kemp-Roth could run into serious opposition. Most congressmen may agree that personal taxes should be cut, although many may feel that the $18 billion break in fiscal 1981, which is equivalent to a 10 percent across the board rate cut, is on the large size. But this year, as always, there will be almost as many views about the best way to allocate the cuts as there are congressmen.
There are several proposals likely to receive very strong support and, if part of a bill, would eat up some of the money available for an across the board rate cut.
The ending, or phasing out, of the so-called marriage penalty -- whereby a married couple pays more tax than they would if living together unmarried -- is probably top of the list for personal tax cuts. The Senate Finance Committee bill, which died with the last Congress, proposed a two-step deduction to reduce the penalty. Under this provision the lower paid spouse could deduct from tax 5 percent of the first $30,000 of income in 1981, rising to 10 percent next year. This would have cost an estimated $2.7 billion this year, if enacted by Jan. 1.
Another popular proposal is for a cut in capital gains taxes. Although this was counted as part of "productivity" cuts in the Finance Committee bill, it should be considered alongside the individual tax breaks: It goes to people and not to business.
Relaxation of the tax on those working overseas and an increase in the amount of exempted savings allowed are also likely to be pushed hard on the Hill.
Although an across the board rate cut for this year is virtually certain to be part of the package, the odds are against the pure 10 percent cut beloved of supply-side supporters of the new administration.
On the business side there is broad agreement that there should be more generous depreciation allowances. Conventional wisdom has it that greater tax writeoffs for investment will encourage businesses to build new plant and equipment and will eventually raise productivity.
Reagan has backed the 10-5-3 proposal for a drastic simplification in the system of business-tax writeoffs, with all investment falling into one of the three categories for depreciation over 10, five or three years. But, as with Kemp-Roth, there is ready-made opposition to this scheme. It has been most widely criticized for being over simple and discriminating in favor of investment in real estate and other building (which would for example benefit public utilities). Some industries, such as autos, would hardly be better off at all.
The Senate Finance Committee backed a more complex version, proposed by Sen. Lloyd Bentsen (D-Tex.), called 2-4-7-10 under which investments in plant and machinery would be written off over 2, 4, 7 or 10 years with other provisions for investment in buildings. The Carter administration, in the August economic package, put forward yet a third system for relaxing and simplifying the depreciation rules.
Technicians in the Treasury may well back this latter version rather than the 10-5-3 or 2-4-7-10 plan. But it remains to be seen which details Reagan and his new Treasury secretary will prefer.