By the remarkable margin of 97 to 3, the Senate has passed its remarkable bill to transform the Internal Revenue Code. The vote is a tribute to the power of a good idea -- the sense that, morally as well as economically, a combination of lower tax rates and fewer curlicues will serve the country far better than the opposite combination existing now. But good ideas need help to pass. Without Bob Packwood, chairman of Senate Finance, Bill Bradley, the senator who more than any other pressed for reform of the kind to which both houses have now agreed, and President Reagan, there would be no bill.
The next step is conference, where the central issue will be rates. The Senate bill has two -- 15 and 27 percent. There will be two sources of pressure to move toward something more like the House alternative of four -- 15, 25, 35 and 38 percent. Democrats will argue that the structure in the Senate bill is not progressive enough. They point out that the rate for millionaires would be the same as for much of the middle class, and say that 27 percent is too great a departure from tradition. The top rate, now 50 percent, was 70 percent when Mr. Reagan took office.
Members will also want to restore preferences struck down in either bill. They will likely need higher rates to finance them. Because preferences tend to benefit the rich, they will also need higher top rates to preserve the way the bill spreads the burden across income classes. There may be particular pressure to preserve some preferential treatment for long-term capital gains, in part on grounds that these gains are often illusory and reflect only inflation. Sixty percent of such gains are now exempt from tax, a benefit that accrues mainly to upper-income taxpayers; the Senate bill would end the exemption. There may be a good bargain to be struck along these lines: a top rate somewhat higher than 27 percent in return for a recognition that not all long-term gains are "real."
There are at least two other such broad issues. The House bill involves a larger transfer of the tax burden from individuals to corporations. Partly because of the way certain industries -- oil, timber, defense -- are treated, business as a whole would have a bigger tax increase, individuals a bigger tax cut. The Senate bill also uses a somewhat different method to achieve its business tax increase; it relies more heavily on a minimum tax.
The good news is that, at one level, it doesn't matter how the conferees resolve these and the lesser issues. The country will be better off whichever way they choose. The competing bills would both enormously benefit the poor, lifting the tax threshold back above the poverty line. Both would preserve the essential contours of the present income tax, in that the rich would continue to pay about the same share. Both would tear away at tax shelters (the Senate bill more so); both would make it harder for individuals or corporations to avoid taxation entirely; both would serve to extract the tax code from investment decisions, which it now so unhealthily affects. The way they're tearing down the tax code that is a symbol of the system -- well, it's almost enough to make you believe in that system.