Last May, when President Reagan's tax proposal was brand-new, I applauded his initiative and suggested four criteria by which the product of congressional tax revision could be judged. As the House prepares to vote on the tax bill that came out of the Ways and Means Committee, substantially revised from the Reagan proposal, let's see how it stacks up against those standards: the Four P's of Poverty, Progressivity, Principle and Productivity.
Poverty: Under the existing tax code, a family of four at the poverty level pays 10.5 percent of its income in federal taxes -- 21/2 times as much as it did in 1978. The Reagan proposal aimed at taking the poor entirely off the tax rolls, and the Ways and Means bill does an even better job of ensuring that will be done.
Some 6 million low-income households would be relieved of federal taxes, making the bill the biggest federal antipoverty program in years and the best news for the working poor. Give it an A grade.
Progressivity: The income tax is based on the idea that taxes should increase with the ability to pay, but tax shelters and loopholes have seriously eroded that principle. The Reagan proposal shut down some of the tax- dodging devices in the present code, but provided a bonanza to the very rich, who would get the main benefits of his proposed marginal rate reductions.
The Ways and Means bill still allows some big loopholes, but shifts the benefits significantly to the middle- income taxpayers. It cuts by 47 percent the aggregate tax breaks Reagan proposed for the few who earn more than $200,000. It increases the gains for the $20,000- $75,000 group by 48 percent. It also includes a minimum-tax payment provision for corporations and the wealthy that is tougher than Reagan proposed. Grade for progressivity: A-minus.
Principle: Neither the original Reagan proposal nor the Ways and Means bill avoided compromises aimed at garnering votes in Congress and/or defusing the opposition of potent lobbies. But both repair some of the more outrageous distortions of the existing code.
On many issues, including mortgage interest and business entertainment deductions, Reagan's approach appears more principled than the committee's. But the Democrats -- albeit for political reasons -- are more respectful of the principle of federalism than was the president. The bill before the House rejects Reagan's effort to end the deductibility of state and local taxes, and thereby preserves a principle that has been a cornerstone of the fiscal compact between Washington and the states.
Mark the report card: B.
Productivity: Given the realities of international competition, the effects of any tax law changes on the productivity of American business must be given great weight. The Reagan proposal shifted the tax burden significantly from individuals to corporations, and the Ways and Means bill goes even further. But even the latter would do no more than bring the corporate share of overall revenues back to the level of 1980.
Selfishly, some business lobbies are urging Congress to abandon the effort to improve the tax code. Many profitable businesses have managed to avoid paying any taxes since the extravagantly generous 1981 tax cut; now they are trying to protect that privileged position.
But Republicans in the House make a valid point when they argue that the individual tax cuts in the Ways and Means bill may go too far in encouraging consumption, while some of the corporate tax hikes significantly increase the cost of investment. That is especially true for some of the capital-intensive heavy industries, such as steel, that are belatedly trying to modernize their plants to meet foreign competition. Although the bill is better than the present cde for many small, emerging businesses and for the rapidly growing service sector that is the source of most new jobs, a grade of C seems about as high as it deserves on this criterion.
Overall, the Ways and Means bill -- like the original Reagan proposal -- is a clear improvement on Poverty, Progressivity and Principle. The potential effects on Productivity are its main drawback.
But the House Republicans, in their alternative bill, show plausibly how to mitigate that problem. Their bill is unlikely to prevail in the House, but its concepts will surely resurface in the Republican-controlled Senate. Industry has many friends on the Senate Finance Committee, and members of that committee are acutely conscious of the competition facing U.S. businesses in foreign trade.
The president is right in saying that the House should send its bill on to the Senate. House Democrats can feel justifiable pride that the Ways and Means Committee has made a good start toward a significant overall improvement in the tax code.
House Republicans should remember that if they vote to kill the bill when their own substitute fails, they will be gutting the principal policy initiative -- and only potential landmark domestic achievement -- of Reagan's second term. That would be a sorry legacy for last year's landslide and a cynical send-off for the 1986 campaign.