PRESIDENT CARTER is now engaged in the final review of his promised proposals for tax reform. Responding to one of his self-imposed deadlines, he evidently intends to send the tax bill to Congress sometime in the next couple of weeks. That would be a great mistake. Mr. Carter would be wiser to wait until his energy bill, with its intricate new taxes, has cleared Congress. Otherwise the people in Congress who don't like the income-tax bill - and they will be legion - will start trading off pieces of it against the energy taxes.The administration would then risk losing most of both of them.
But there's another reason as well for caution, and it goes beyond mere tactics. The American economy is not currently growing fast enough to generate jobs for all of the women and young people who are flooding the labor market. Unemployment is stuck at a painfully high rate, and there's no sign of any great reduction soon. Tax policy affects the way that the economy works. Mr. Carter's tax bill will apparently be designed mainly to improve the equity in spreading the burden among taxpayers. But he also needs to worry about the effect of tax-law changes on economic growth - which means jobs.
The crucial factor in economic growth over the coming year, most economists agree, will be business investment. Whichever way business investment goes, it will act as a lever on jobs and wages. Something in the order of 90 per cent of business investment comes from the retained earnings of corporations - the profits that they do no pay out to shareholders. Here we come to the hard part. The most dramatic changes being considered by Mr. Carter would all affect corporate investment.
Mr. Carter is apparently going to propose taxing capital gains as regular income; present law taxes it at half the regular rate. Another major change would respond to the longstanding complaint that dividends are subjected to double taxation, once when the corporation earns its profit and agains when it pays them to the shareholders. The Carter plan will reportedly offer shareholders a tax credit for the corporate tax paid on dividends. Both of these changes would increase shareholders' pressure on corporations to pay out more of their profits as dividends. And that would leave less tho be reinvested in the business. This effect is irrelevant to the arguments about tax equity. But it is not irrelevant to economic expansion and employment.
The administration recognizes the need for faster investment by business, and the President's forthcoming bill is also likely to include an increase in the investment credit. In other words, the various elements of the bill will point in opposite directions, some of them pulling for greater investment and some of them pushing against it. The disquieting thing is that nobody can say what the total effect would be. There is no way to calculate the effect of changing the taxation of capital gains and dividends, and any forecasts at this point are mere guesses.
Earlier there were a lot of cherry predictions about rapid passage of the energy bill, but not recently. The tax sections have yet to be reported in the Senate. Beyond that lies a long debate on the floor and a turbulent conference with the House. Since revenues from oil taxes are to be used, apparently, to pay for income-tax cuts, it would be impossible to keep the two bills separate. That adds up to a compelling case to Mr. Carter to keep his income-tax reform bill in his desk drawer until the end of the congressional session. If the unemployment rate is still stuck at 7 per cent as we go into the winter, there may develop a case fro him to keep it tucked away there even longer.