Nothing better illustrates the brawling tendencies of politicians than the current tax fight. It's an avoidable fight, but one that neither the White House nor Congress chose to avoid. They revel in the combat: the haggling over details, the testing of political skills. The game is being played for the game's sake.
As spectacle, it's engrossing -- a summer at the ball park. The players spit tobacco. The managers yell, cuss and kick dirt. There's plenty of catcalling and strategy. Buy your popcorn now. Enjoy it as sport, but don't be deceived into thinking it has much to do with the shape of the tax bill.
This tax bill will benefit businesses and high-income taxpayers primarily. Both Democrats and Republicans have assured that result by endorsing measures that achieve it: a generous liberalization of depreciation for business investment, a reduction in the top personal tax rate from 70 percent to 50 percent and modification of the so-called marriage penalty.
The political brawling and realities of the tax system obscure most of this. Attention focuses on the vast middle class. True, they will receive most of the dollar benefits of any tax package simply because they pay most of the taxes. But their tax rates won't decline to levels of the late 1970s.
Inflation has been kicking people into higher tax brackets for the past two years. Even the original three-year, 30 percent tax cut proposed by President Reagan wouldn't have reduced the tax burden below 1977 levels (themselves relatively high by historic standards). The latest proposals, involving smaller tax "cuts," would leave burdens still higher.
All this may strike you as somewhat devious, and it is. Congress and the White House could have avoided this deception years ago by indexing the tax system.
Aside from pushing people into higher brackets, inflation-induced increases in wages and personal incomes erode the worth of final deductions and credits. Indexing would automatically adjust tax rates, brackets, credits and deductions to compensate for inflation's effect. Actual tax rates would remain the same.
That Congress hasn't done this tells you a lot about the nature of Washington politics.
Congress and presidents have welcomed the additional revenues generated by inflation, plus the frequent opportunities to "cut" taxes. Since 1969, Congress has enacted five major tax bills -- about one every two years. It's a giant game of musical chairs. Overall tax rates generally don't decline, but Congress shifts the burden among groups.
In the early 1970s, for instance, federal income taxes averaged 10.1 percent of personal income. By 1980 they had climbed to 11.4 percent, and now they are edging toward 12 percent -- nearly a one-fifth increase. Adding Social Security taxes, federal taxes now claim about one-seventh of personal income, up from about one-eighth in the early 1970s.
But Congress has attempted to shift the burden.
In the early 1970s, it substantially reduced income taxes for lower-income taxpayers. A recent study by economists Attiat F. Ott and Ludwig O. Dittrich shows that between 1967 and 1976 the lowest 30 percent of taxpayers received substantial cuts in income tax rates. Higher Social Security taxes may have offset these, but the income tax cuts accurately reflected prevailing social concerns and Democratic congressional majorities.
Now the pendulum is swinging in the other direction.
Even as recently modified, the administration's depreciation proposal would substantially reduce corporate tax rates. In 1980 corporate taxes provided about 12 percent of government receipts; by 1984 they would provide slightly less than 10 percent, according to administration projections. Individual income tax revenues would increase almost twice as fast as corporate tax revenues. Ultimately, the lower corporate taxes would benefit the owners of stock.
Likewise, the cut in the top personal tax rate from 70 percent to 50 percent would represent a real reduction. (The cut applies only to unearned income on dividends and interest; the top rate on wages and salaries is already 50 percent.) Many high-income, two-earner families also would benefit from relief of the marriage penalty. All these provisions reflect the changed political climate and growing concern that high tax rates discourage initiative and investment.
The point here is not the virtues of cutting taxes for low-income taxpayers in the early 1970s versus the virtues of just the opposite now. The arguments on either side can be made on grounds of economic efficiency or fairness. Rather, the point is that these changes get obscured because the tax system isn't indexed.
The case for the status quo rests on pragmatism. As a practical matter, you can argue that the automatic tax increase of the unindexed system came just when an inflation-prone economy needed it. You also can argue that forcing Congress to write new tax legislation every few years is healthy, that Congress ought to open up the tax code to give vent to particular frustrations or fashions of the moment.
But the arguments on the other side are strong and (to this reporter) more compelling. In part, our inflation results from our failure to index. With inflation always increasing tax rates, future budget projections always showed surpluses. This subtly encouraged spending, though the surpluses never materialized (the last was 1969) because Congress always cut taxes first.
The basic argument, though is honesty. Indexing doesn't allow the White House or Congress the luxury of asserting that they're doing something they're not -- cutting taxes. It doesn't allow them to shift tax burdens quietly under the guise of an overall tax "cut." Tax rates stay the same unless they're changed explicitly; those who favor change must make their case openly and forcefully. Advocates of higher spending face the same burden.
Reagan might have enbraced the clarity of indexing rather than the confusion of his multiyear "cuts." Even those have offended the jealous guardians of Washington's traditional powers and prerogatives, which include fussing with the tax code and fighting over the fuss. What's being contested in this year's fight are mostly details -- and political reputations.