The acid test for tax reform prospects, as Sen. Bill Bradley (D-N.J.) reminds us, is just how strong a pitch for it is made by President Reagan in his State of the Union message on Wednesday. The incoming No. 2 man at the Treasury, former White House aide Richard Darman, already has told Congress that the administration won't back tax revision until "it enjoys fairly widespread bipartisan support."
Any tax reform plan "ought to be a proposal that has a wider base of support than any now on the table," Darman said at his Senate confirmation hearing. "I suggest that as a matter of politics, not economics. And assuming that such a proposal could be developed in the next couple of months, the process might move along relatively well."
That's language that the Washington bureaucracy can understand very well: What it means is that tax reform, as Senate Majority Leader Robert J. Dole (R-Kan.) has insisted all along, will take second priority to the effort to deal with the massive budget deficit.
And when the administration gets ready to push tax reform -- as it almost surely will, because it is such an attractive political issue -- it will be toned down from the original (and radical) wish list formulated by the outgoing Treasury secretary, Donald T. Regan.
The suspicion around the Treasury is that Regan's proposal to do away with the investment tax credit (ITC) and accelerated cost recovery system (ACRS) will be watered down. These "incentives" for business allowed huge tax write-offs of investment in real estate and other capital assets.
Business lobbyists have been hyperactive, suggesting that the recent burst of positive economic statistics can be traced to the hefty tax breaks provided to them in the 1981 legislation. Lobbyists representing other special interests, including charities, home builders and local governments now getting special privileges, also have been taking potshots at tax reform.
A New York Times news analysis published on Jan. 23 makes a direct cause-and-effect connection between a 20 percent rise in business investment in production machinery and factories last year and the "stunning impact" of the ITC in combination with the accelerated cost recovery system.
But more sophisticated studies show that, despite the ITC and ACRS, business investment in plant and equipment is barely back to where it was before Reagan took office and the reason for recovery in 1984 was that demand revived, not that tax "incentives" were expanded.
The record, as assembled by Robert S. McIntyre of the Citizens for Tax Justice, reveals that, despite the ITC and ACRS, real business outlays fell in each of the first three years under the new Reagan tax regime, and even with a smart rebound registered last year, the four-year scorecard is decidedly below performance in the four years before enactment of the tax laws in 1981.
Investment in plant and equipment did increase by 13.7 percent in real terms last year over the depressed level of 1983. But even with that good score for 1984, the four-year average for 1980-84 was less than 1 percent (with the ITC and ACRS) compared with the prior four-year average increase of 6 1/2 percent (with lesser tax advantages).
The basic reason why billions of dollars spent for corporate tax "incentives" are wasted (except to fatten individual company profits) "is that, in the real world, companies invest only when they need new plant and equipment to produce products they can sell to consumers," McIntyre says. "When consumers don't spend money, plants are idled and new investment drops."
In many cases, the tax credit and ACRS have only been a reward to companies for what they would have been doing anyway. He shows that, among 238 major corporations, those -- such as General Electric Co., "the champion refund recipient" -- that got the largest tax advantages slashed their investments the most between 1981 and 1983.
GE got $283 million in tax rebates, and cut its investment spending by 15 percent between 1981 and 1983, according to McIntyre.
But the best case for doing away with the ITC, for modifying the ACRS system and for carrying out other reforms was made by the Regan Treasury proposal itself: A fairer tax system, curbing or closing out such special tax breaks, will mean that the huge majority of citizens will have a lower tax bill. A broader tax base means that tax rates can be cut.
According to the Treasury study, "At current rate of inflation, the ITC and ACRS generally provide capital recovery allowances that exceed the present value of the real economic depreciation . . . . " That means you can borrow money at the bank, receive a full deduction for interest paid, "and invest in assets where the return is not fully subject to income tax." What's more, the allowances under the ITC and ACRS are front-loaded, which means that an investor in a tax shelter can get back in the early years many times the value of the true economic depreciation of an investment.
Bradley, along with his Democratic colleague, Rep. Richard Gephardt, were early to sense the appeal and utter logic of tax reform. Although their proposals differ, so were Republicans Rep. Jack Kemp and Sen. Robert Kasten. Bradley and Gephardt were unable to sell the idea to Democratic candidate Walter Mondale last year, and at the Republican convention in Dallas, the GOP platform emphasized more tax giveaways than tax reform.
But the Regan Treasury plan seized the initiative for the Republicans and threatens to leave the Democrats behind -- unless the Republican-controlled Senate knuckles under to the special interests.
Tax reform and tax reformers have been around for a long time, usually losing out in the end to the well-organized lobbies. This may happen again. But I sense a different mood in the country. Taxpayers are more sophisticated today, and they understand that their April 15 obligations are swollen because some individuals and businesses aren't paying their fair share.
Polls show that tax reform proposals made by Bradley, Gephardt, Kemp, Kasten and Regan have touched a responsive chord. Other politicians who ignore this growing grass-roots sentiment do so at their own considerable risk. Once it's understood that tax reform spells tax cuts for most people, it should be a powerful idea. And if Ronald Reagan gets aboard, it may be unbeatable.