In his Jan. 31 letter, former governor Bruce Babbitt says that he will stick to his proposal for a flat consumption tax until "anyone else has a real alternative."
The alternative he is looking for is the progressive income tax. As a result of the 1986 tax reform, the base of the income tax will amount to about $2.5 trillion at the end of this decade. Thus, an increase of one percentage point in the two rates we now have -- i.e., the 15 percent rate to 16 percent and the 28 percent rate to 29 percent -- would raise $25 billion a year. An increase of three percentage points in each rate would raise $75 billion.
To relieve the burden of a consumption tax on the poor, Gov. Babbitt promises to exempt food, shelter and medicine and to provide income-tax credits and rebates to low-income families. Such relief is given in the income tax by the personal exemption and the standard deduction, which are now set at or above the poverty line and will remain there because they are adjusted for inflation each year. I see no reason why we need a whole new tax, with complicated methods of relieving the poor, when the income tax would do it automatically.
The real difference between the income tax and a consumption tax with a credit is in the distribution of tax burdens above the poverty line. The credit makes the consumption tax progressive up to the point where it vanishes. Thereafter, the tax resumes its regressive profile. In the typical case, the credit would disappear at an income between $15,000 and $30,000.
Gov. Babbitt would impose the heaviest tax in this income range and a progressively lighter tax above it. Is he really in favor of this method of distributing the burden of deficit reduction? JOSEPH A. PECHMAN Senior Fellow, The Brookings Institution Washington