REPUBLICAN SENATE leaders, unable to round up the votes needed to prevent repeal, agreed to abandon withholding of taxes owed on interest and dividends unless Congress votes to reinstate it four years hence. President Reagan has not yet decided whether to honor his frequently repeated pledge to veto a repeal of the withholding measure, which was voted into law last summer. His decision will have important consequences for any future effort to make the tax laws fairer and more enforceable--an effort in which his party has been the moving force in recent years.
Tax reform has traditionally been a Democratic rather than Republican talking point. But the history of tax policy over the past decade--when the Democrats were in firm control of Congress-- strongly suggests that while Democratic rhetoric supports tax reductions for the less well-off, Democratic votes go for tax breaks for the rich. Throughout the 1970s, while inflation raised effective tax rates for lower- and middle-income taxpayers--and sharply rising payroll taxes added greatly to their burden--ever more generous and elaborate loopholes were stitched into the tax code to the immense benefit of upper-bracket taxpayers.
The result is a tax code that distorts work and investment decisions, siphons off money into unproductive tax shelters and the pockets of accountants and tax lawyers, and breeds cynicism and dishonesty among the taxpaying public. The original Reagan tax- cut proposals went in the right direction. Cutting marginal rates is a step toward improving incentives for work and saving. Where they went wrong was in not closing enough loopholes to offset the revenue losses.
Last summer's tax bill--the handiwork of Senate Republican leaders--started the long overdue movement toward making the tax system fairer and more enforceable. It didn't go far enough, but it was an important step in the right direction. A key part of that reform was withholding taxes owed--not a new tax as the banks would have you believe--on interest and dividends, two of the most frequently underreported income sources. Once in effect, the measure would raise an estimated $4 billion a year --all of it coming from taxpayers now failing to pay up. The effect on incentives to invest would be so small--both for individual taxpayers and for the economy as a whole--as to be undetectable.
With the notable exceptions of Sens. Kennedy, Metzenbaum, Cranston, Dodd and Lautenberg, Senate Democrats preferred to cast their votes with the bankers, not the reformers. Now the pressure shifts to the House Democratic leadership, which has, in recent months, behaved responsibly on the withholding issue and much else besides. If the House votes for repeal, the president will have to decide whether he wishes to reassert his party's legitimate claim to leadership in tax reform.