Tax Bill Gets Two--But Not Three--Cheers

There’s a wise old saying about taxes that bears repeating in the afterglow of the euphoria that greeted the Senate Finance Committee’s proposed tax bill last week. “The art of taxation,� wrote Jean-Baptiste Colbert, who was finance minister to France’s King Louis XIV, “consists in so plucking the goose as to obtain the largest amount of feathers with the least amount of hissing.�

Well, Sen. Bob Packwood (R.-Ore.) and his committee members have heard almost no hissing since they reported out their tax reform proposals in the wee hours of last Thursday morning.

But why should they? Stripped to its essentials, the Senate bill gives a tax cut to consumers and pays for it by a tax hike on business. The good senators, who were doubtless aware that there are more consumers in the voting population than business owners or managers, were not exactly risking their jobs.

Lower Corporate Rate

But the Senate bill also brought nods of approval from the corporate chieftains at the Business Council’s semiannual meeting last weekend, even though it repeals the investment tax credit and raises business taxes by a projected $108 billion over five years. Why no hissing there?

One reason is that the bill lowers the corporate income tax rate to 33% from 46%; another is that the Business Council met against a background of falling corporate earnings and a rather nervous outlook for the economy. A quick tax cut might get the consumer spending again, reasoned the business brass, and besides, a lowered tax rate would boost short-term reported earnings. They pronounced the tax bill pleasing.

Not so Murray Weidenbaum, a former chairman of the Council of Economic Advisers who now heads the Center for the Study of American Business at Washington University in St. Louis. “The bill hits those industries that are already hardest hit by imports,� Weidenbaum says. He is referring to the fact that the manufacturing industry is losing the 10% investment tax credit just when it is pressed to spend heavily on computerization and automation in order to become more competitive.

Why is that happening? Because Congress is impatient that heavy industry has taken the tax breaks but hasn’t delivered the competitiveness. Besides, the lawmakers had few other options for raising $145 billion in tax revenue to offset the tax reductions that they were giving the voters.

Not to worry, however. Such maneuverings seldom do long-term damage. The next time the economy goes into recession, Congress will be rushing to restore the investment tax credit, as it has done twice before.

Simpler for Middle Class

So what, as they say, is the bottom line on the Senate bill? That it’s worth two cheers. It deserves one big hurrah for clearing away the bramble of tax shelters that had become an embarrassment to the economy. And, in that vein, the bill deserves another cheer for simplifying the economics of middle-class life.

Under the current system, ordinary people were getting involved in schemes that were too clever by half--such as putting future college tuition money in a trust in a kid’s name so that income on it could be taxed at the kid’s rate and not the parent’s. The Senate bill does away with that kind of thing, but it lowers the overall tax rate so that parents can save the money themselves and give it to their kids straight up. It’s the better way.

Basically, the great 1986 tax reform is good because the direction of tax rates is downward. But, otherwise, the bill probably doesn’t warrant so much excitement. The tax cut sounds like a lot when you say the top rate falls to 27% from 50%. But considering that, when all the deductions and exemptions are in, Americans currently end up paying 20% to 25% of their income in tax, the new reductions won’t make that great a difference. And if the new bill clears away one economic anomaly, such as the tax-shelter-driven overbuilding of commercial real estate, it undoubtedly opens another one. For example, if car loan interest and sales taxes are no longer deductible, might there now be a tax advantage in leasing a car? For a corporation there certainly would be.

Maybe that is why Chairman Roger B. Smith of General Motors, which makes cars for sale or lease, is cheering the Senate tax bill while car dealers--who mostly make their money selling cars--are squawking.

But their opposition, or that of the real estate lobby, is unlikely to prevent the tax bill from becoming law in the next couple of months. Even old Colbert would be surprised at how little hissing this tax bill is attracting.