THE DEBATE over the Reagan administration's income tax overhaul has hardly begun, but already attention is turning to other ways of raising revenue, such as a value-added tax, essentially a national sales tax. This search for a new revenue source was made almost inevitable by the administration's compromising of its original idea of swapping a much lower rate on high incomes for elimination of all the preferences that currently shield much income from taxation.
In the original Treasury plan, unveiled last November, high-bracket taxpayers would have enjoyed the same drop in the maximum tax rate from 50 to 35 percent proposed in the final version now before Congress. This rate cut would have produced substantial tax savings for wealthy individuals who do not currently take great advantage of tax shelters. But people who now shelter most or even all of their income would have ended up paying higher taxes as the result of the abolition of most tax preferences such as the low tax on capital gains income, inflated deductions for property donations, intangible oil drilling costs and so on.
This tradeoff of lower rates for a broader tax base was meant to improve economic efficiency by encouraging people to choose investments on the basis of expected economic returns rather than by their potential for tax avoidance. The trouble with the final Treasury plan is that it keeps the lower rates but seriously erodes the second element of the tradeoff. By retaining the major opportunities for tax avoidance -- including the preferential capital gains rate, which is made still more generous -- the plan loses in fairness, efficiency and revenue.
Because of high payroll and sales taxes, the overall tax burden already falls heavily on lower- middle and middle-income working people. There is no case for further reducing the relative tax burden on the wealthy -- already lightened by the 1981 tax cut -- unless a convincing case can be made that the change will substantially improve overall economic efficiency. But there is no evidence that the 1981 tax cut, which dropped top rates from 70 to 50 percent, drew individuals away from tax shelters.
Retention of major tax preferences also means that, even without further erosion, the plan will almost surely produce substantial tax losses. And no one can think, as the lobbying gets up momentum, that the efforts at gaining concessions will stop where they are.
To turn to a value-added tax now would be a confession of failure -- an acknowledgment that the shelters are too deeply engrained in congressional politics to be challenged. But that's a gross exaggeration. Congress is capable of much more, and better than that. Its job is to improve the income tax, not to replace it. There is no case, either in tax policy or fiscal necessity, for the value- added tax.