THE SLACK PERFORMANCE of the inflation-ridden American economy is generating wide-spread pessimism among the people responsible for managing it. Pessimism always incites radical prescriptions. Rep. Al Ullman, the chairman of the House Ways and Means Committee, now proposes huge cuts in the present payroll and income taxes -- to be replaced by revenue from a VAT, a value-added tax. As Mr. Ullman observed, it would be the sharpest change in American tax policy since the establishment of the income tax 66 years ago. His strategy is a deeply interesting one, if not entirely persuasive.
The key question here is whether the national tax system needs fundamental revision to give greater incentives to savings and investments. We print on the opposite page excerpts from Mr. Ullman's statement yesterday, in which he strongly argued the affirmative. Instead of taxing what you earn, he would prefer to tax more heavily what you spend -- that's the point of the VAT -- and treat more gently the money that you keep in the bank or in stock. That, necessarily, would shift the tax burden away from the people on the upper rungs of the tax ladder, who do most of the saving and investing, to the disadvantage of people on the middle rungs. Mr. Ullman does not evade that sensitive point. He argues that middle-income Americans now have a greater interest in an end to inflation, and a resumption of rapid economic growth, than in a modest redistribution of the tax load.
It remains to be seen whether most middle-income American also think so. But Mr. Ullman is absolutely right in thinking that the idea of investment incentives is picking up great momentum in Congress. He is also right in thinking that his VAT legislation is superior to most of the alternative schemes that have already recruited wide support. Chances are better than even that there will be some sort of major tax bill next year.
The Carter administration botched its best opportunity for tax reform last year, with its endless indecision. A lot of people in Congress think that the present state of the economy requires a political response -- meaning tax cuts -- before the election. Now, in the person of Mr. Ullman, a serious and senior House Democrat has embraced a program exactly parallel to that of Margaret Thatcher's Tory government in Britain.
It may be plagiarism, but is speaks to American anxieties that this country may have caught the British disease, with it lagging investment, poor productivity and repeated currency crisis. And if the disease is British, why not look at Germany, with its high productivity and low inflation rate, for the cure? That, essentially, is the logic behind the VAT.
But it hardly seems plausible to look for the secrets of nations' rises and falls in the particular elements of their tax structure. Behind all of Mr. Ullman's concerns there seems to lie a deep exasperation with the income tax, for the perfection of which he has been waging battle for many years. He now finds it too cumbersome, too easily circumvented.
In his present mood, the coarse simplicity of the VAT appeals to him. That appeal will not be universal. The immediate importance of his bill does not lie in the VAT itself, but in the focus that it brings to the coming election-year debate on taxes and the future American Economy.