It is discouraging to hear the representatives of both political parties discuss tax reform. If you listen to Democratic spokesmen, you quickly learn that they are embracing tax reform in the hope that, in the voters' eyes, such action will return the party to the nation's mainstream.
But the Republicans are not any better on that score. They tell us that the beauty of their current tax reform plan is that it will help to attract blue-collar families to the Republican Party. The problems facing our nation deserve more than political responses.
When we remove the labels on the proposed "reforms" of the federal tax structure -- be they Kemp-Kasten, Bradley-Gephardt, the November Treasury proposal or the current White House recommendations -- we find that they are all variations of the same theme: reduce federal income taxes paid by American families and individuals. As someone who worked hard to get the 1981 income tax cuts enacted, I am a strong believer in lower taxes -- and less government spending.
But I am hard pressed to find a reasonable rationale to support another round of income tax rate reductions as the highest priority in economic policy in 1985. Given the desire for overall revenue neutrality in any package of tax changes, the pressure is on to identify other changes in the tax code to offset the erosion in the flow of revenues, primarily changes in provisions that are politically vulnerable. Many of these "loophole" closers boil down to reducing existing incentives to investment and economic growth.
It is ironic that policymakers in Washington are seriously considering tax changes that will depress the economy just as the growth rate is slowing down substantially and employment is leveling off. Moreover, in the face of increasing globalization of economic activity, the powers that be in Washington seem intent on redesigning our tax system so that it has a more domestic orientation. Why worry about the problems of meeting foreign competition? Businesses don't vote. In a period of expanding and increasingly fragile structures of indebtedness, the current breed of tax reformers seem bent on reducing future flows of private saving.
Moreover, at a time when the federal government, properly, is attempting to return some domestic public sector responsibilities to state and local governments, the federal government is reducing their basic fundamental underpinning. It is trying to do it on both sides of the federal budget simultaneously -- reducing grants-in-aid and proposing elimination of the deductibility of state and local taxes.
To oppose reforming the tax system per se is sure to make one come across as the heavy. Actually, I have my own agenda for tax reform. Conceptually, my main objection to what the folks in Washington are doing is that they have the cart before the horse. The driving force behind comprehensive tax reform should not be, as it is today, reducing the rates -- that's the sweetener. Rather, reform should start off with a systematic review of all the special provisions in the Internal Revenue Code, comparing the benefits and the revenue loss of each.
At the top of the list of serious reform proposals, I would put changes to reduce tax shelters. In fact, the Treasury proposals contain many good ideas along these lines, such as restricting interest deductions.
Given the weakness of U.S. heavy industry and the strength of foreign competition, we should make sure that tax-code changes do not reduce domestic investment and the productivity so essential to our economic health.
My sense of irony is aroused by the fact that the investment incentives adopted in 1981, which were then hailed as tax reform, are now proposed for diminution also as part of tax reform. That sounds like the invention of a political perpetual motion machine.
Tax reformers have ignored the justifications for many of these special provisions. It is appropriate to consider why these "loopholes" are currently in the tax code. Many of these tax breaks foster private-sector alternatives to the public sector's providing services. For example, most of the fringe benefits provided by employers are substitutes for direct government operation of social programs. Private insurance in lieu of national health insurance is an obvious case.
To determine the desirability of maintaining any specific tax incentive, we should compare the costs and benefits of various ways of achieving public policy objectives. In many cases, tax incentives are more economical than direct federal outlays. In other cases, just letting the market work provides the most attractive approach. There is no need to take a doctrinaire attitude.
What I have described is the unfinished homework of tax reformers. That is why it is premature to rush into a major overhaul of the tax code in 1985. Anyway, in the context of the key economic challenges to the United States in the 1980s -- foreign competition, fragile debt structures and huge budget deficits -- tax reform as currently contemplated is irrelevant.