The two basic building blocks of Ronald Reagan's tax reform plan are that everybody above the poverty line -- corporations and individuals -- will pay some tax; and enough tax shelters will be eliminated to permit a cut in the top marginal rate for individuals from 50 percent to 35.
Those two elements have long been the tax reformers' dream. They are enough to warrant strong public and congressional support of the Reagan program.
Many wealthy people and countless corporations have been able to shield their entire income from the tax collector. The huge majority of working people who earn wages or a salary have not been able to do that, usually paying the top applicable rate for their income.
If anything like Reagan's proposal passes in Congress -- and there is a strong undercurrent on both sides of the aisle no to be left behind on a popular issue -- that will no longer be true.
That is not to say that what Reagan called "America's Tax Plan" is perfect or can't be improved. (I found that description as offensive as calling the Dallas Cowboys "America's Team." If the present tax system is "un-American," as the president said, we shouldn't lose sight of the fact that his 1981 tax giveaway program helped make it that way.)
In fact, "T-1," the original Treasury proposal drawn by former secretary Donald T. Regan last November, was a better, more pure tax reform proposal. But Treasury Secretary James A. Baker III said at a press conference yesterday that concessions had to be made "to the real (political) world" in which we live.
Some of these are regrettable, such as the decision to scrap Regan's plan to tax capital gains the same way any other income is taxed. Business interests convinced Baker that this would interfere with capital formation and growth. Actually, the effective capital gains rate of 17.5 percent now proposed is less than the current 20 percent top rate and will add to other benefits for upper-income bracket taxpayers.
Business interests also prevailed on Baker to step substantially away from the reform of the accelerated depreciation system, which Regan had urged. Baker also gave in to the oil industry by allowing full expensing of intangible drilling costs (while phasing out the oil depletion allowance).
Baker's argument is that the president's proposal "should be judged against current law," not against T-1. On its own merits, Baker insists, the Reagan proposal accomplishes the key tax reform goals of fairness and simplicity and will lead to economic growth.
But whether Baker's glowing vision proves correct remains to be seen.
It is quite clear that there will be some losers -- by definition, there would have to be, when special privileges and shelters are withdrawn. And overall, there is bound to be a difficult tranition period -- perhaps with lower growth rates than would have prevailed otherwise -- before the economy adjusts to the new rules. Economist Alan Greenspan thinks that "even in the long run, capital investment may be lower," albeit real productivity may be spurred by the quality of investment that now will be encouraged by new depreciation rules.
In its propaganda barrage, the administration has glossed over many of these effects. Certainly, the president failed to mention any of the potential negative ones, by including the impact on several states, of the withdrawal of deductibility of state and local taxes. His claim that two- thirds of Americans who fail to itemize are subsidizing "the high-tax policies of a handful of states" was a cheap shot, way off the mark.
He also didn't tell the full story, in his carefully crafted and highly effective sales pitch to the nation, when he said that "the mortgage interest deduction on your home will be fully retained." That simply is not correct: when the top tax rate is lowered from 50 percent to 35 percent, that also reduces the dollar value of the mortgage interest (or any other) deduction.
This will have some depressing effect on individual home prices -- just how much is hard to calculate. But the toughening up of depreciation allowances -- compared with the present law -- will have a decided effect on the commercial real estate market. This has already shown up in current real estate transactions, Greenspan says.
To be sure, a reshaping of the tax laws to effect a better balance in the American economic system is one of the tax reformers' goals: the depreciation schedules, combined with the investment tax credit, had led to a boom in tax shelters, especially in real estate.
But Reagan's new proposal doesn't hit as hard as the original T-1 plan. "You have to be Draconian when it comes to tax reform," says former Internal Revenue Commissioner Mortimer Caplin, "and this (proposal) isn't."
Administration officials privately acknowledge they hadn't intended to release the first proposal last November, but when it began to leak, they had no options. Now, inevitably, one special interest after another on Capitol Hill will argue that if oil and other lobbyists were able to get their peculiar needs incorporated into the legsislation, why not mine?