WRITING a tax bill is always a process of trying to define, in dollars and percents, the common idea of fairness. Congress is now undertaking the broadest revision of American tax policy since the mid-1960s, for a country that, over the years, has become both richer and less self-confident. President Reagan's tax plan provides a point of beginning, but it is much too crude to meet the country's present requirements. It's time to begin thinking about the tax issues that Congress will need to address this year.
The personal income tax is a subject with which, at this season, most people are more familiar than they would like to be. The larger part of the coming tax cut will be in the personal -- as distinct from business -- taxes. That much, at least, seems to have been settled by the last election. Mr. Reagan proposes a series of three annual cuts in tax rates, across the board, with no attention to the distortions imposed by past or future inflation. That's not good enough.
The first place to make changes in the Reagan plan is at the bottom of the income scale. It would be unconscionable for Congress to enact a bill that -- like the Reagan plan -- actually left the working poor with higher real tax rates. Those people are going to bear the brunt of most of this year's budget cutting in any case. Because inflation is rapidly eroding the tax code's basic protections for them -- the zero bracket amount, and the earned income credit -- their tax rates will actually rise unless Congress intervenes. Similarly, inflation increases the taxes of a family with several children much faster than it increases the taxes of a couple with no children. The value of the $1,000 personal exemption is also being rapidly diminished by inflation. Families that are both large and poor are being disproportionately burdened, and Congress has a clear responsibility to intervene.
At the top of the income scale, the maximum rate ought to be dropped from 70 percent to 50 percent. The rates above 50 percent now collect about $4 billion a year, but abolishing them would cost less than that. The reason is that a vast variety of intricate tax shelters would no longer be worth their considerable trouble and risk. Only so-called unearned income -- dividends, for example, and interest -- is taxed at the higher rates. The need to raise the level of investment argues forcefully for an end to this discrimination against the return on it.
This year's bill will need to address the broad discrimination against saving that's in the present law. Interest on savings is taxed as income, as you may have noticed in filling out your return, while interest paid on borrowings is deductible without limit. That peculiarity has become extremely important in recent years, with the arrival of very high interest rates, and it creates a dangerous bias in favor of borrowing. Ideally, the tax law ought to be neutral. As a first move in that direction, it would be useful to abolish the present tax exemption for consumer credit.
Should Congress enact a schedule of cuts marching all the way to 1984, as the president asks? Congress has traditionally been reluctant to pass tax laws that, on matters of braod policy, bind future Congresses. There's particularly good reason to be wary in this case. The dimensions of the real tax cuts will depend, inevitably, on the inflation rates in the years ahead, and no one can forecast them with confidence. The argument for the four-year schedule is the desirability of letting people know what to count on. But since that certainty is not within reach, Congress would do better to limit itself two successive annual cuts and leave the later years to future bills.
How big a tax cut? The two parties in Congress have agreed on procedures that will hold the tax bill behind the budget legislation as they move toward passage. The idea here is that the size of the spending cuts will determine the permissible tax cuts, and that's the right way to do it. While most of discussion so far has revolved around the personal income tax rates, readers might keep it in mind that this bill will also contain large and influential changes in the taxation of business -- an interesting subject to which we shall shortly return.