THE ARGUMENT can now be heard that in going for tax reform Congress is giving up too much of the progressivity of the income tax. The right response is that a lot of that vaunted progressivity doesn't exist, except on paper. Over the years, Congress has voted, and rich people have resorted to, hundreds of pages of preferences to avoid the high nominal rates in the code. That is a corrupting way to proceed, intellectually dishonest and disruptive of the economy, in that it encourages investment purely for tax as distinct from productive reasons. Lower rates are the price of removing the preferences, and they are well worth it.
The best measure of the amount of income now so intricately protected from tax lies here. The top tax rate, which was 70 percent when President Reagan took office and is 50 percent now, would drop to 27 percent under the bill the Senate is to take up this week. Yet there would be no appreciable shift in the share of the income tax burden borne by the richest taxpayers. This is mainly because the bill would outlaw most of the phony losses by which subscribers to tax shelters now reduce their taxable income, and it would begin treating capital gains the same as ordinary income instead of exempting 60 percent of longer-term gains from tax as now. The maximum capital gains tax is now only 20 percent and would go up under the Senate bill. But in general the much lower rates in that bill would apply to a much broader base.
This is not just a political trade-off. There is also a causal connection between high rates and the spread of preferences. The lower the rates, the less useful the deductions that preferences typically bring.
Those deploring the loss of progressivity will respond that the rate structure in the Senate bill is not just low but flat -- 15 percent for most people, 27 percent for those above, no third step even for multimillionaires. Our advice to them is to wait. The delicately balanced Senate bill already has several features whose effect would be to impose a higher rate on some income of the rich; for example, as income reached a certain point, the personal deduction would be phased out. The House bill also contains higher rates; a House-Senate conference is likely to produce a more progressive rate structure than exists in the Senate offering. But the likely side effect will be the reverse of reform as currently defined; the price will almost surely be preservation of some preferences.
The present rate structure is more a symbol than true burden, a legislated sop to the national conscience. To apply genuinely progressive rates to a broadened base would be not the maintenance of the status quo, but a substantial increase in the tax burden of the rich. That may be a step the country wants eventually to take, but it isn't what this good bill (which would reduce the tax burdens of the poor) has been about. That's next year's argument.