Whether he wants to or not, President Reagan probably will have to increase taxes if he is elected to a second term, according to Rep. Barber B. Conable Jr. (R-N.Y.).
"I don't think Reagan wants to raise taxes. I think he stubbornly hopes that growth will give him the option of not raising taxes," said Conable. "My personal view would be that the chances of growth actually eliminating the deficit eventually would be less than 10 percent -- and I don't think we ought to base public policy on such an outside chance."
One of the leading economic philosophers in Congress, Conable has had a strong influence on tax policy as the top-ranking Republican on the House Ways and Means Committee since 1977.
Conable, who is retiring at the end of this year, shared some of his views about the future of tax policy in an interview. He was even-handedly skeptical of Walter F. Mondale's plans to eliminate tax indexing and the president's chances of avoiding a tax hike.
Conable fought for tax indexing, a major feature of the 1981 tax bill that will take effect in 1985. Indexing will adjust tax brackets to offset increases in the cost of living so inflation alone does not push taxpayers into higher brackets. "I thought it was the most significant reform I've voted for in the 20 years I've been in Congress," he said.
Mondale, looking for ways to reduce the federal budget deficit, has proposed limiting the benefits of indexing for families earning more than $25,000 or individuals earning more than $15,000. For taxpayers below those levels, tax brackets would be fully indexed. For those above, brackets would be indexed only to the extent that inflation exceeded 4 percent a year. However, everyone still would benefit from indexing the current $1,000 personal exemption and the so-called zero bracket amount -- $2,300 for individuals and $3,400 for joint returns -- used by taxpayers who do not itemize deductions. These changes take effect next year, and Mondale has not proposed limiting them.
This split between Reagan and Mondale on indexing dramatizes a basic philosophical distinction between Republicans and Democrats on taxation that should be getting more attention, Conable said.
"My impression is that Ronald Reagan and George Bush and others should really be hitting the indexing issue, because it's a chance for them to turn around the fairness issue that's been used against them.
"Income tax indexing really is the working man's friend. It doesn't help the wealthy very much, but it sure helps those folks who are getting cost-of-living adjustments and are actually losing purchasing power because the government is taking a bigger cut as a result of bracket creep," he said.
For more than a decade, Congress has taken advantage of bracket creep to automatically boost federal tax receipts without passing legislation. Conable called it "a thief in the night."
"A lot of people in government and out have not focused on what a whole new ballgame we have in taxes," he said. "For years we've been able to count on bracket creep doing our work for us -- and a lot of folks look at these outlandish deficits and say, 'That can't be true. We've always had deficits declining in the past.' "
Because indexing eliminates this political anesthesia, Congress faces painful decisions on deficit reduction, tax reform and tax simplification, Conable said. In the future, the tax debate will be dominated by the deficit issue, he said. "We're going to have to raise more money, and it's awfully hard to make major structural changes and to raise taxes at the same time."
Americans support tax reform and tax simplification because they think it will leave them comparatively better off, Conable said. "To the average American, tax reform means 'I'm paying too much tax for somebody else who isn't paying enough,' " he said. "The perception the American people have is that radical tax simplification will be fairer than what we've got now. By fairer they mean that 'I wouldn't have to pay so much tax.' "
But the top 10 percent of taxpayers account for 50 percent of tax revenues and the bottom 50 percent pay 10 percent, Conable he said. "That's the profile of a pretty damn progressive system, so the chances of collecting a lot more from the wealthy, given how few wealthy we've got, are comparatively modest," he asserted.
According to the Treasury Department, only 36 percent of all tax payers itemize while the other 64 percent use the short tax form, said Conable. "If you ask the question, how much are they willing to pay to buy simplification for the other 36 percent, you'll find they don't want to pay a lot," he said. "Half the people out there clapping when you say that tax simplification would be a great idea . . . they're clapping because they think the short form's too complicated."There is strong interest in simplifying the tax system by "flattening" it, that is or by reducing the number of brackets and cutting the top tax rates. This would thusnarrow ing the gap between the highest and lowest rates.
"The effect of flat taxes tends to be to reduce taxes significantly for the wealthy and raise them slightly for everybody who isn't wealthy to make up for it," said Conable. "Now, they [flat tax advocates] have tried to jiggle them this way and that, creating exclusions and modest graduations and so forth, and maybe they've been able to do that," he said.
When Congress gets into the act, "they're very likely to jiggle it even further to be responsive to pressure . . . so you're likely to wind up reducing taxes significantly for the wealthy and raising them slightly for everybody else," he said. "Therefore, even with a revenue-neutral bill, you're raising taxes for more people than you cut them for. Now, when you start at the bottom of a $200 billion dollar fiscal hole, how much worse it gets."
Although such flat-tax proposals are designed to be "revenue neutral," neither raising nor lowering tax revenue overall, Conable said that the deficit obliges Congress to raise revenue.
One idea proposed by Tax lobbyist Charls Walker has proposed combining would be to combine he loss of revenue from tax simplification with a passing a value-added tax -- a form of national sales tax that would raise new revenue to help lower the deficit. at the same time you pass radical tax simplification and to divert $100 billion from the $200 billion the value added tax would raise, said Conable
"He assumes it will be easy to pass a simple value-added tax. Well, that's a lot of baloney, too," said Conable said. "You can't pass a simple value-added tax, which is basically a regressive vehicle, in a political group like the Congress. They're going to try to make a basically regressive vehicle less regressive by having a different rate for luxuries and necessities, by having exclusions for poor people and credits against other taxes, and in the process you're going to give away a lot of the revenue you could get."
Besides, said Conable, the proposal adds up to "a double whammy and regressivity for the average American," who would suffer from both a flattening of tax rates and the regressive nature of the value-added tax. VAT, he said.
What may happen in the long run is that the move for tax reform or simplification may get dropped when Congress has to come to grips with the more overriding problem of raising revenues to reduce the deficit. "We may have to fall back on something like a surtax on individual taxpayers, which by definition is temporary and therefore more acceptable politically. That would raise taxes across the board, and thus how could they claim that wasn't fair?
"Obviously, a consumption tax of some sort is at the end of the road if we continue to give tax preferences on income tax, because we narrow the base and make the income tax less and less an instrument of raising revenue. But I hope it is a long road and has many turnings," said Conable said.
Conable'sHis preference though would be is to simplify the tax code "gradually by eliminating deductions. . . . But I think you have to be realistic about it and not permit large coalitions of interest groups to form to oppose the effort, which is what happens if you try to do it all at once."
Congress is not likely to leap quickly into the breach to take care of the deficit, despite calls from economists to try to resolve the problem before the economy begins slows seriously.
"I personally believe the economists when they say that we're going to begin to reap the harvest, the whirlwind of this cumulative deficit that we've got. I'm not one of these Republicans who believes that deficits don't make a difference," he said.
"It's entirely likely that sometime during 1985 there's going to be a growing perception among the public that if we don't do something, something bad is going to happen," he said. "Maybe it will be precipitated by a spike in interest rates or a resurgence of inflation or gradual upcreep in the unemployment rate.
"Right now, the average Americans are borrowing money and buying cars and feeling good about it," said Conable said. "It's very hard for a bunch of representatives to get out in front of the curve and do for the people what the people aren't willing to have done for them. . . . The fact is, the government is going to have to be dragged kicking and screaming into recognizing change. . . .
"That doesn't mean that we won't do what we have to do, maybe too late to avoid doing some harm, but we'll do it," said Conable said. "The optimistic side of my view is that our system is well designed to give the people what they want.
"The Reagan administration doesn't like me to say this, but I think whoever gets elected in the presidential election this fall is going to have to deal with the deficit next year," said Conable said. "Whoever gets elected is going to be a formula politician, and formula politicians know that you have a window of opportunity at the beginning of a four-year term that you have to take advantage of, you have to do the tough things then.