Four questions about the Treasury tax plan

National Review, Feb 8, 1985

Oh, that thing? Isn't that dead by now?

Say not that it is dead; it only sleeps. In fact when it wakes up it may be, like Sleeping Beauty, more charming than ever. Right now Treasury is negotiating to make the plan more attractive to business, and for once "negotiation" may not mean "sellout." The compromise may ease the plan's too-harsh treatment of capital gains, at the expense of curtailing relief for corporate dividends, which was a good idea but a big revenue loser. As Donald Regan said when informed of the business community's complaints: "Are they just coming in to bitch or are they bringing in some numbers? We've told 'em all, and we should tell 'em again and again. 'Don't whine and whistle. Bring us evidence that we were wrong, and we'll listen.'"

Why was the plan so mean to business in the first place? Doesn't it undo the 1981 Reagan business tax cuts?

This is a line we hear from both liberals and businessmen, for quite different reasons. (The former want to embarass Reagan, the latter just want better tax treatment.) On the central issue of depreciation, however, the new plan would be a logical extension of the old. Four years ago inflation was creating a tax bias against corporate investment by making historical measures of asset value meaningless. The 1981 law compensated for that bias--but when inflation itself came back down, the depreciation schedules wound up overcompensating for nonexistent price rises. The Treasury plan gets off the roller coaster by introducing explicit inflation adjustment. The thing to remember about both depreciation and the investment tax credit is that, although discriminating against investment is disastrous, discriminating in its favor is not good either; both ways distort a firm's choice between equipment and things that substitute for it.

Don't change the subject. Why can't Treasury come up with a plan at least as good as the Democrats?

You're not serious. The Bradley-Gephardt bill does beat Treasury's in one respect: Its top tax rate is 5 per cent lower for individuals and 3 per cent lower for corporations. But it also abolishes indexing, the most important conservative reform of the past four years. Nor does it help taxpayers by indexing capital gains, interest income, or depreciation. BOth Bradley-gephardt and the Republican Kemp-Kasten bill would abolish income averaging, a pro-taxpayer provision that Treasury would keep. And Treasury, unlike the others, would extend IRAs to homeowners and boost permissible IRA contributions to $2,500, providing lots of new funds for investment.

It's true that cutting the top rate further than the TReasury plan does would cost the government little if any revenue. That's one reason it remains the leading priority for sensible reformers.

Speaking of which, though, won't the liberals just start pushing for higher rates as soon as they've wiped out our deductions?

Yes. and everyone else will start pushing to get the deductions back. After twenty years, we might find ourselves back in the current mess. Then it will be time for reform again.