Ever since Secretary Donald Regan released the Treasury's constructive and far-reaching proposal to reform individual and corporate income taxes and reduce tax rates, the special interests have been blasting it from all sides. Business lobbyists see in it a plot to undermine their firms or industries, labor leaders say that it will hurt the wage earner, governors are arguing that taxpayers in their states will pay billions in higher taxes, nonprofit groups think that charitable contributions will dry up, and so on. Nobody bothers to mention the basic features of the plan that make all these charges look silly.
Take the taxation of business and capital income. Today's tax system is a hodgepodge of preferences that exacts high tax payments from some firms and industries and subsidizes others. The tax shelter industry has mushroomed to take advantage of the loopholes. Investors hesitate to take long-term risks because inflation increases the burden of taxation on capital income. The results are distortions in the economy and slower economic growth.
All of this would be swept away by the Treasury plan. The depreciation allowances would be sufficient to permit every business to recover its investment in full, even at high inflation rates. Capital gains and interest income would be adjusted for inflation, so that taxes would no longer be levied on illusory incomes. Half of all dividends would not be taxed at the corporate level. And the corporate tax rate would be cut from 46 percent to 33 percent.
The business world would certainly be different from what it is today, but the change would be all to the good. Effective tax rates would be more uniform among different industries. Big, stodgy capital-intensive industries would no longer be favored over growing, innovative industries, particularly those in high technology. Equity financing would become more attractive relative to debt financing. Business decisions would again be made on the basis of market rather than tax considerations. Businessmen and investors should be delighted with these changes -- not chagrined, as many seem to be.
The elimination of some personal deductions and the exclusions for some fringe benefits will not hurt labor. To offset these changes, the personal exemption would be doubled to $2,000, the standard deduction would be increased from $2,300 to $2,800 for single persons and $3,400 to $3,800 for married couples, and marginal tax rates would be cut for most workers. On the average, taxes would be cut about a third for taxpayers with incomes below $10,000, by a sixth for those with incomes between $10,000 and $15,000, an eighth for those between $15,000 and $30,000, and a tenth for those between $20,000 and $30,000. For all taxpayers, the average tax cut is 8.5 percent. This is as progressive a tax cut as the 1964 tax cut was. How can labor leaders argue that workers will be hurt by this proposal?
Governors in high-tax states are arguing that their constituents will be losing billions of dollars as a result of the denial of deductions for state and local taxes. This allegation assumes that there would be no cut in tax rates. In fact, the top federal tax rate would go down from 50 percent to 35 percent, a reduction that would still leave the top combined federal and state income tax in all states much lower than it is now. The combined rate would go down from 52.5 percent to 40 percent in a state with a top rate of 5 percent, from 55 percent to 45 percent in a state with a top rate of 10 percent, and from 57.5 percent to 50 percent in a state with a top rate of 15 percent. It is true that taxpayers in high-tax states would pay relatively more taxes than those in low-tax states. But the average taxpayer in all states would get a tax reduction.
Non-profit organizations are saying that the proposed 2 percent floor on the deduction for charitable contributions will discourage philanthropic giving. It's doubtful that the average taxpayer has been motivated by tax considerations in giving to his church, the Red Cross, the local United Givers Fund or the Girl Scouts. The new proposal retains a full deduction for the amount of contributions above the 2 percent of income, thus giving taxpayers a considerable incentive to exceed the threshold. Furthermore, the limit on charitable deductions of 50 percent of income would be lifted, a feature of the plan that would encourage wealthy taxpayers to give more to their alma maters, local operas, symphonies and museums. It's true that the reduction of the marginal tax rates will increase the price of charitable giving, but I doubt that the nation's philanthropists would wish to oppose a general cut in tax rates on this basis.
The federal tax system is unfair, inefficient and complex. There is widespread agreement that something needs to be done to eliminate the distortions and to simplify it. The Treasury's proposal is along the same lines as the Bradley-Gephardt, Kemp-Kasten and other congressional tax reform plans. There is no reason why the differences among these plans cannot be reconciled.
But the steam behind the tax reform movement will evaporate if the general public allows the special interests to take control of the debate. It's time for the average worker, investor or businessman to make his views known. Only then will the administration and Congress listen.