There is almost no way of saying this kindly: in his interview last week with The Wall Street Journal, President Reagan demonstrated that he didn't understand that the Treasury's tax-reform plan would raise business taxes by 37 percent. And having comprehended -- apparently for the first time -- that the Treasury proposal would boost business taxes that much, the president said plainly that he didn't like that idea at all.
Thus, after the president declared -- in the State of the Union message -- his intention of supporting "an historic reform of tax simplification for fairness and growth," prospects for a thoroughgoing housecleaning of a badly distorted tax system seem ever more remote.
What is more likely to emerge now is a tax-reform proposal that is openly not revenue neutral. The new one will be a scheme that is baited with lower individual tax rates, and some changes on the business tax side, but not enough to keep total revenues intact. In effect, the tax-reform proposal would turn into a tax cut.
The underlying theme of the original Treasury proposal was to close loopholes, broaden the tax base and keep total revenues about unchanged by raising business taxes in order to finance a reduction in personal income taxes.
This involved sweeping changes in the business tax structure, including a new maximum capital-gains rate of 35 percent instead of 20 percent. Venture capital industries, among others, raised loud objections.
The president's confusion about the effects of the Treasury tax reform proposal is evident in the following extract from the Journal interview:
Journal:"You said Wednesday night (in the State of the Union address) that the individual tax rates would be no higher than 35 percent, perhaps even lower. Well, the way the Treasury proposal lowers individual tax rates is by increasing corporate taxes by 37 percent. Do you generally favor that approach?"
Reagan:"Oh, wait a minute. The corporate tax is given a ceiling of lower than the -- "
Journal:"No, but overall corporate taxes would go up about 37 percent. Not the rates, but overall corporate taxes would go up about 37 percent under the Treasury proposal while individual taxes would come down. Is that a general approach that you endorse?"
Reagan:"I haven't even made an attempt to study the bill in detail that much to know that. I assume that would mean things that would be taken away from them that are present deductions. No, I would have to be convinced of the need to do that because I'm a believer that one day we must recognize that only people pay taxes. And someday I would hope that we could arrive at a tax structure that would recognize that you can't tax things, you only tax people."
At another point, the president acknowledged that he did worry, as the Journal questioner put it, that changing the capital gains treatment might "kill the goose that's laying the golden eggs."
According to Myra MacPherson's portrait of former Treasury secretary Donald T. Regan in yesterday's Post, Regan explained to the president after the Journal interview was published that not all corporations would pay higher taxes, only those that don't pay now. "And then he said," Regan told MacPherson, " really hadn't had time to read it all, to scope it out around the table."
The president's seeming ambivalence about tax reform is welcomed by some segments of the business community, such as the National Association of Manufacturers. These groups had argued all along that outright repeal of the investment tax credit, and a less generous Accelerated Cost Recovery System (depreciation allowances) as proposed by Regan would reduce economic growth.
Treasury officials, under the guidance of Secretary James Baker, are now in the process of revamping the scheme left behind by Regan. They seem receptive to proposals to keep the existing capital gains system and to weaken the proposed curtailment of depreciation privileges. (The government, by the way, which first estimated that ACRS would cost $21 billion in revenue for fiscal 1986, has now raised that estimate to $35 billion.)
But what does watered-down tax reform do to the revenue-neutral idea? Says Chamber of Commerce economist Richard Rahn: "We have argued that a tax-reform proposal ought to be revenue neutral on a dynamic basis, not a static basis. After all, you go through tax reform to generate economic growth."
Jack Albertine of the American Business Conference says the Journal interview shows that "the president is a fan of lower capital gains rates." He suggests the time has come to acknowledge that it's unlikely that a tax reform bill will be completely revenue neutral. "That's pie in the sky," Albertine told me. "The political appeal lies in lower individual rates."
There's an opportunity in all of this for the Democrats: having booted it in the 1984 election campaign, they can now take the lead in backing true tax reform. Ways and Means Committee Chairman Dan Rostenkowski seems ready to push forward on this theme, which could set the stage for a no-holds- barred battle with a Senate Republican leadership bent on giving deficit reduction priority over tax reform.