THE COMING tax bill may well be the most influential legislation of the Reagan administration. It will certainly become the foundation for the economic policy of the next four years. The Republicans around Mr. Reagan, and in the Senate, agree on the necessity to set their course decisively and swiftly. To do that, they are going to have to settle several large issues soon.
The first one is the link -- and whether there is to be one -- between tax cuts and spending cuts. The more euphoric version of the Kemp-Roth tax strategy sees no immediate need for painful reductions in federal spending, on grounds that a whopping tax cut would set off a great surge of growth generating vast new tax revenues. That's a truly dangerous supposition, sustained solely by its authors' hopes and expectations. Most of the evidence suggests that, in fact, it would generate little more than higher inflation.
The first test for the coming tax bill will be its impact on the inflation rate. To give a credible indication of declining inflation ahead, the bill will have to acknowledge the relationship between federal income and federal outlays. There's no need to make a fetish of the federal deficit, and it doesn't make a great deal of difference precisely in which year the budget is supposed to be blanced. But the federal Treasury's borrowing requirment is currently running at more than $70 billion a year. The direction of change is important. If that borrowing requirement begins moving down, the effect will be reassuring to anyone who wants lower interest rates and lower inflation. If the borrowing requirement stays high, and begins to move higher with the tax cut, the new administration will risk a real panic.
There's nothing wrong with a tax reduction staged over several years. That is a point to be made in favor of the Kemp-Roth proposal. If Congress is willing to commit itself to staged reductions, it could hold out substantial future incentives to investment with relatively slight immediate effects on budgets and deficits.
Mr. Reagan has promised to reduce the personal income tax rates 10 percent a year for three years. But when inflation is running 10 percent a year, as it is now doing, a cut in the rates of 10 percent a year merely keeps the income tax from taking a larger share of the average family's income. In the middle-income range, that would mean little or no real tax cut, although, for high incomes, there would be a small real cut. It is still not clear whether the incoming administration intends to do more for most tax-payers than offset the effects of inflation.
One commanding purpose of the tax cut will presumably be the encouragement of greater savings, investment and productivity. But broad tax cuts won't necessarily mean much more investment. Some people will invest some of their additional income, but many will spend it. To make the tax cut more effective -- to increase the amount of new investment -- at least some of the tax reductions need to be tied directly to sharply defined incentives.
The strategists around Mr. Reagan understand clearly the costs to the Carter administration of its hesitations and false starts in its crucial first few months. The Republicans are determined not to repeat that experience. They intend to make their economic policy sharp and steady from the beginning. The tax bill is their opportunity to do that -- and perhaps it will be their only opportunity.