A mystery lies at the heart of the Great Tax Debate between the Reagan administration and the Democratic leadership in Congress. The fight does not pit rich against poor as sometimes advertised, nor does it concern, as often claimed, inflation. So what is the fuss all about?
The true issue is how tax benefits are passed to Americans who are already relatively comfortable. While the administration favors blanket reductions soon, the Democrats want to target the favors later. But one compromise has already been struck, and the only question is how many more are in the works.
Redistribution wealth from rich to poor is a rallying cry used by some Democratic leaders about their tax proposal. But in fact it is practically impossible to help the poor through the income tax system. Only 4 percent of the take comes from persons with an income of less than $10,000 annually. To assist those below the poverty line of roughtly $7,000, negative income tax is required. Only a very few Democrats favor that approach.
The consensus Democratic plan advanced by Chairman Dan Rostenkowski of the House Ways and Means Committee not only is bare of any boons for the poor but also counts as its principal innovation a reduction -- from 70 to 50 percent -- in the maximum tax on unearned income. Whatever else that may be, it is only in the most indirect, trickle-down way of any benefit to the poor.
The tie between taxes and inflation is equally tneuous. One line of argument is that tax reducations deplete revenues, and thereby increase deficits that cause inflation. But "supply-side" economists deny tax cuts necessarily increase deficits. Keynesians doubt deficits cause inflation. Even assuming deficits do cause inflation, the difference between the administration proposal and that advanced by the Democrats hardly tips the scales.
The original administration proposal called for an income tax cut that reduced revenues by $54 billion in fiscal 1982. The Rostenkowski proposal featured a cut amounting to about $35 billion. Since then the president has postponed the start-up time for his plan from July 1 to October 1. That yields a revenue reduction of only $38 billion.
To those who take inflation seriously and foresee a deficit of more than $60 billion, the two proposals are practically identical. Thus Henry Kaufman, the chief economist at the brokerage house of Salomon Brothers, said in a telephone interview: "The dollars and cents difference is not enough to offset the basic inflation rate."
What plainly does separate the administration proposals from those of the Democratic leaders concerns the application of tax reductions. From it inception, the Reagan administration has emphasized an across-the-board tax cut at the margin, or top rate. That means a blanket cut with the same percentage reduction for all taxpayers. Naturally the biggest taxpayers receive the biggest dividends. But most taxpayers get something -- which is why the proposal is popular.
The Democrats, in contrast, have at all times ephasized a targeting of tax reductions. Chairman Rostenkowski included in his proposals special benefits for those with unearned income, and for married persons at a certain income level. Other Democrats have pushed special exemptions for farmers, oil men, givers of gifts, insurance companies, research and development investors and a host of other groups.
The bill now backed by the administration -- introduced in the House of Representatives by Barber Conable, a New York Republican, and Kent Hance, Texas Democrat -- is a compromise. While it centers on the blanket cut at the margin, it also includes 11 special exemptions -- most of them proposed by Democrats. As the bill passes through the House Ways and Means Committee, then the full House, then the Finance Committee of the Senate, then the full Senate, and then the conference committee between the two houses, more special exemptions will almost certainly be proposed. It is in order to limit the exemptions that the president is now pushing for speedy action.
Choosing among competing alternatives in these conditions comes hard. I think delaying the tax cut as much as possible works to reduce deficits, and thus limited inflation. I also think special exemptions can be targeted in ways that promote research and development, innovation and productivity.
But the differences are marginal. It is much easier to see in the arguments a sham battle than the substance of a Great Debate -- particularly during a season clearly designed by God for tennis.