Under the glare of television lights, the debate on the Senate Finance Committee's tax-reform bill has gotten under way. The consensus on Capitol Hill is that it's now on track for final passage this year, with the historic change engineered by the Senate committee intact. That means sharply lower tax rates in exchange for curtailing or eliminating special tax breaks.
Yet, the euphoria that originally greeted the prospect for true tax reform along these lines has been somewhat diluted.
For example, the proposal to place a top tax rate of 27 percent on personal income has been attacked as a bonanza for the wealthy. In a Wall Street Journal article, Harvard emeritus Prof. Richard A. Musgrave contends that this slash from "a not unreasonable top rate of 50 percent" is, in effect, "a retreat from the principle of progressive taxation."
Musgrave says that his generation of economists, while supporting broadening of the tax base by doing away with loopholes, still thinks that upper-bracket income-earners should pay a significantly higher tax rate.
In the end, the Democrats in control of the House Ways and Means Committee may go a step toward Musgrave's position, since some of them also find the 27 percent marginal rate too low. The House bill calls for a 38 percent top individual rate.
Former presidential adviser Alan Greenspan predicts that in the final conference with the House, the top rate may be raised to 29 percent. This would allow, among other things, for full continuation of Individual Retirment Accounts, a relatively new tax shelter permitting deferment of taxes on $2,000 annually.
Musgrave is correct that progressivity would be downgraded by compressing tax brackets into just two -- 15 and 27 percent. But as Majority Leader Robert J. Dole (R-Kan.) said this week, the low top rate is "the glue" keeping the pro-reform coalition together. Greenspan reminds us that President Reagan tried -- and failed -- to get tax reform through with a maximum 35 percent rate. That, it appears, was too high to generate wide support for abandonment of most tax shelters. Even 30 percent, if the House were to try that, might abort the effort.
Another way to raise revenue to offset restoration of IRAs or other special provisions in the law would be to boost the corporate rate from the 33 percent top in the Senate committee bill (down from 46 percent now).
But as John H. Makin, Norman Ornstein, and Eugene Steurele say in a new American Enterprise Institute assessment: "Lower marginal rates . . . reduce the value of all deductions." Thus, they argue, boosting the top personal rate to 29 percent or the corporate rate to 35 percent would weaken the degree of reform throughout the whole tax code. In effect, the higher rates would boost the value of all other deductions, such as home-mortgage interest.
The proposal to limit IRAs, judging from my mail, has stirred middle-America's emotions -- even though the Senate Finance Committee plan is less drastic than some understand. The Senate bill doesn't abolish IRAs, but eliminates new contributions by workers who already are covered by company-financed pension plans. The earnings on existing and future IRA accounts would remain tax-deferred.
There is contradictory evidence, as an American Enterprise Institute report points out, on whether IRAs have increased net saving in the economy -- their ostensible purpose. There is good reason to think that in many cases people simply switched old savings into the IRA tax-deferred accounts, meaning that Uncle Sam was the only loser.
Nonetheless, in an election year, politicians probably will heed the wails of a well-organized lobby dedicated to retention of the full loophole. If the price of IRAs-as-usual is a 29 percent top rate, that probably will cause second thoughts about taxing capital gains at the same level as other income. Chances are that some formula would be found to give capital gains a tax preference.
Finally, there is the question of the impact of the tax bill on the economy. Some claim that higher taxes on investment will have a negative impact on business and many types of construction. Lawrence Chimerine of Chase Econometrics says, "It seems quite clear that tax reform could significantly depress the economy in the short run." That's because the rate reductions take effect later than the loophole-closing provisions.
It seems likely to me that there will be some temporary period of adjustment to the new rules. But neither that possibility, nor the permanent loss of tax privileges (particularly in the sheltered real estate industry), should be allowed to derail tax reform. The whole idea, after all, is to encourage sound economic investments, and discourage those made only to reduce one's tax bite.
Over the long haul, a fairer, more equitable tax bill has got to be good for the country, even if it's not so good for real estate and other special-interest groups.