IT LOOKS as though Congress intends to spend the next few months tinkering anxiously with both the income tax and Social Security tax rates. This prolonged indecision over tax policy is bad for economic stability, and, according to everybody's careful plans, it shouldn't be happening. The congressional leaders had firmly agreed to settle the Social Security bill by last December, before they got into the election year. The bill was, in fact, passed on schedule. But the tax increases were greeted with a totally unexpected torrent of denunciation by constituents, and there has been a panic-stricken rush in Congress ot push the reluctant leadership into reopening the whole issue of Social Security financing.
As for the income taxes, President Carter hoped last winter for quick passage of his tax-cut bill. But he insisted on attaching to it several hotly disputed reforms. They slowed the progress of the bill, and now Congress has been seized by doubts about the cuts themselves. Should it cut taxes or, instead, the budget deficit? The administration has lost control of the debate and is now joining in a compromise.The income tax will be cut, but by a substantially smaller amount than the president said, as recently as last month, was necessary.
The commonly cited reason for all these presidential and congressional second thoughts on tax cuts is the brisk pace of business activity in recent weeks. But that brisk pace is largely a reaction to the end of the winter, with its unusually cold weather and its coal strike. Nothing fundamental has changed in the economy since last January when the tax-cut proposal was first sent to Congress. It has now been four years since the bottom of the last recession and, as these things go, that's a fairly long cycle of business expansion. From this point forward, the economy will require particularly careful and steady management to keep it from faltering and tipping the country back into another recession. Steady management implies the opposite of the present uncertain zigzagging on fiscal policy.
Concern with inflation obviously had something to do with the president's retreat on the tax cut. But there's more to it than that. Most of the benefits of the tax cut would have gone to people who makes less than $20,000 a year. Under the new Social Security bill, the tax increases would fall most heavily on people earning more than $18,900 a year. Taken together, those two tax changes would have constituted a significant shift in the distribution of the federal tax burden.
The political system is, not surprisingly, highly sensitive to shifts in the tax burden. In recent years the federal income tax has become a bit more progressive - that is, the burden ahs been pushed upward on the income ladder. The Social Security bill last year promised to push it a little further, starting in 1979. Then the president's tax program proposed to push it little farther still, starting next fall. Now Congress is getting a scathing reaction from the people with incomes over $20,000 a year. It is not merely a protest against a rise that constitutents see as unfair and, measured by past practice, as disproportionate and discriminatory. That's why public figures in Washington are having painful second thoughts about things that seemed quite clear four or five months ago. This prolonged vacillation on basic tax rates, in Congress and at the White House, is not good for the health and spirits of the national economy. But Congress is now searching urgently for a distribution formula that a wide consensus of Americans will accept as fair. While the search goes on, it is hardly realistic to hope for stable or predictable tax policy.