All across America there is an increasing awareness and a growing outrage about taxes. Because of it President Reagan has the opportunity to undertake the most profound and important change in economic policy since the New Deal legislation 50 years ago.
Despite the many predictions to the contrary, 1985 must and will see a major tax reform and simplication act.
Why is this the moment for tax reform?
1)Because the vast majority of Americans are angry to discover that so many of our most profitable corporations pay little or no income tax and that billions of dollars of rebates have been collected by others. Corporate taxes as a percentage of total federal tax receipts plummeted from a high of 23.2 percent in 1960 to a mere 6.2 percent in 1983, and the resulting loss in revenue has been a major contributor to the mounting federal deficit.
2)Because many companies not favored with tax breaks are incensed about the grossly unequal tax burden placed on different industries. The effective corporate tax rate ranged in 1983 from minus 1 percent for the chemical industry to 36 percent for the soap and cosmetics industry. It is indefensible for government to create and maintain such an unlevel playing field for business.
3)Because there is a growing recognition that the "tax shelter" is a very bad idea. It cannot possibly be productive for so many talented individuals and companies to spend their energies and resources by making decisions that are totally irrational except that they help escape taxes.
4)Because people now understand that by simply eliminating shelters and deductions that favor certain industries, we can substantially lower the basic tax rate for all individuals and corporations.
Under current proposals, a head of household with a gross income of $25,000 would have a tax saving of $2,250. And a corporation with no special tax breaks could see its earnings rise by as much as 15 percent -- or even more.
The defense usually made for our complicated and biased tax code rests on the premise that tax tinkering is an efficient and important means of promoting various industrial, economic and social policies. Some even use the questionable argument that legitimate policies cannot be effected without the cover of a complex tax code. But this "hidden agenda" approach is wrong. It does not work, and has not worked for several reasons.
It creates higher marginal tax rates for individuals and corporations. This reduces incentives, stifles growth, makes tax avoidance more attractive and the underground economy enticing. What's more, tax benefits for special interests politicize the system, make industries dependent on the tax code, and make loopholes and abuses possible.
And choosing industries to favor is bad policy. Sub-rosa subsidies do not rescue industries or create jobs. Studies have shown that industries receiving tax breaks do not reinvest those proceeds or create jobs. In fact, the subsidies artifically tamper with the marketplace, delaying and making more painful the required adjustments.
The truth is that we did not create the current tax morass out of a sincere desire to efficiently promote some legitimate industrial or social policy, as some would argue.
Rather, special interests found that they could promote their own aims more effectively under the cover of the tax code. In turn, legislators discovered that they could safely respond to special interests by altering the tax laws without alienating the unsuspecting voter.
After years of watching the system at work, the Treasury Department saw the need for a fresh start, and developed its current tax reform proposal. It isan excellent proposition. Its primary virtue is that it flows from sound, common-sense principles.
Taxes must be levied fairly.
The tax code must be simple.
The tax code should be structured to have, as much as possible, a neutral influence on business and personal decision-making.
These three basic principles must be preserved. The "squeaky wheels" of the special- interest groups must not be oiled. And tax rates must be reduced at least to the Treasury proposal level for individuals and corporations, including the very important feature of allowing the deductibility of dividends. It is critical that we stop the unfair double taxation of dividends and its consequent bias against equity.
Reagan should not compromise on these principles and rate reductions.