SENATE FINANCE Committee Chairman Bob Packwood has done a sensible thing. He has dropped the old fights he was losing on tax reform and picked some new ones he may be able to win. His new proposal still has some pretty big blanks to be filled in, and it is not clear it can pass his jaded committee. But in some ways the new plan would produce the most reform -- the simplest, fairest code -- of any such plan so far.
What hung the committee up as it went through Mr. Packwood's earlier ideas last month were the tax circumstances of particular industries. For favored industries, members kept wanting to vote not less preferential treatment, but more. Mr. Packwood has now cut his losses by agreeing to leave the best-protected of these provisions alone. He would repeal the investment tax credit, which now costs the Treasury $25 billion a year; move against a page-long list of lesser preferences; then impose a fairly stiff minimum corporate income tax to limit the use any company could make of all the available preferences in any one year.
The proceeds from all this would be enough to reduce the corporate income tax rate from 46 percent to 33 percent and leave about $100 billion over five years to pay for individual income tax reduction. The earlier Packwood plan had, in addition, used excise tax increases to pay for this, but he has now abandoned that idea. Excise taxes are regressive, and they were also costing Mr. Packwood the support of industries previously well-disposed to reform. Here again he cut his losses.
On the individual side, the chairman would leave (though in several cases curtail) the familiar and redoubtable itemized deductions for medical expenses, state and local taxes, interest and charitable contributions; limit the use of IRAs to people without pensions; then tear the roof off most tax shelters by forbidding the use of their paper losses to shelter ordinary income; and finally, take away the preferential treatment historically accorded capital gains.
These last two steps especially would produce large amounts of revenue. That plus the excess from the corporate sector would be used to reduce individual rates to 15 percent for most people and 27 percent at the top (from 50 percent at the top now, and 70 percent when President Reagan came to office). The personal exemption and standard deduction would also be raised; for most people, the exemption would become $2,000.
This provocative plan is good reform because:
It would help the poor. The personal exemption and standard deduction combine to set the tax threshold, below which no one pays. The new plan would lift this well above the poverty line -- and while cutting the income taxes of the poor would not also raise their excise taxes. Excise tax increases would be left, if needed, to help reduce the deficit.
At the opposite end of the income scale, the rich could no longer obscure their true income for tax purposes through tax shelters. It would be harder for them not to pay. The same would be true for corporations, by virtue of the corporate minimum. Corporate income taxes would be lifted back toward the level where they belong as a source of support for the government.
With only two rates and without the distinction between ordinary income and capital gains, the system would also be much simpler. The big question is whether the committee will go along with the chairman on dropping the preferential treatment of gains. This is crucial both for fiscal and distributional reasons. Gains accrue mostly to the rich, and loss of this preference is one of the main ways they would pay for their lower rates. The argument will be made that the republic will fall without a capital gains distinction. We rather doubt that. At a top rate of 27 percent, those with investment income will still do just fine.
The Finance Committee ought to vote aye, and move its chairman's bill along.