Two Cheers for Reagan's Plan Time's

By John Greenwald

When the Treasury Department unveiled its dramatic tax-reform plan last November, TIME's Board of Economists was impressed by its boldness. Since then, the Reagan Administration has weakened or eliminated many of the most sweeping proposals. While that backsliding worried TIME's board when it met in Washington last week to assess the tax package and consider the economic outlook (see ECONOMY & BUSINESS), members nonetheless endorsed the broad goals of the President's program. Said Walter Heller, who chaired the Council of Economic Advisers in the Kennedy and Johnson Administrations: "This could well be the most far-reaching tax reform we've ever had."

Although final details of the plan were still being worked out when the board met, the economists were enthusiastic about the proposed sharp reduction in the number of brackets and the suggested lowering of rates. Board members noted that the changes greatly simplify the system and would encourage savings and enterprise. Moreover, the plan would achieve those benefits without adding to the burden of any group. Those in the bottom and medium brackets, for example, would not have to pay more to compensate for the rate drop in the upper bracket. Said Harvard Economist Martin Feldstein, Reagan's former chief economic adviser: "I think the most important aspect of the tax-reform discussion is that it has highlighted the idea that top rates can be lowered in such a way that the share of personal taxes paid at each income level will remain about the same."

The board was concerned, though, about the concessions to corporations, wealthy individuals and others that the Administration made in order to assemble a politically feasible package. The suggested cut in the rate at which capital gains are taxed and other similar moves, the economists feared, would turn the bill into a revenue loser and worsen the federal deficit. Said Alice Rivlin, former director of the Congressional Budget Office who is now at the Brookings Institution: "My big worry is not only that the President's proposal will be a revenue loser, but that as you move through Congress, the temptation will be to give a little here, give a little there, and that we will end up not with tax reform but with another tax cut."

The board's concern for revenues led members to endorse the Administration proposal to end the deduction of state and local taxes from federal returns. While that politically loaded move would be particularly hard on residents of high-tax states such as New York and California (see chart), the impact would be limited to individuals who itemize their deductions. Board members pointed out that only a third of all taxpayers are itemizers. But the most compelling reason for eliminating the deduction, the economists said, is that to do so would raise revenue that is certainly needed. The Treasury Department estimates that closing the state-and-local loophole will bring $38 billion into Government coffers by 1990.

The economists were wary of proposals for a minimum tax on companies and individuals. Such plans have broad appeal but, the board warned, are no substitute for ending tax breaks. Heller argued that the revenue produced by a minimum tax could lull Congress into granting special interests new tax concessions, and protecting old ones, without giving thought to the money- + losing consequences. In that way, Heller noted, the minimum levy "could be used as a cop-out."

While they generally favored the proposed reduction of tax rates on business, board members attacked other changes in the treatment of corporations. Feldstein, who supports the investment tax credit and generous depreciation allowances now available, called some of the suggested revisions "rather misguided." The Administration's plans to drop the tax credit and tighten the depreciation write-offs, he argued, would discourage companies from building new factories and adding equipment.

Other TIME economists maintained that the Reagan proposals do not go far enough in reducing tax breaks for business. Charles Schultze, who was chief economic adviser to President Carter, took exception to Feldstein's analysis. Said he: "I think the bill probably gives too much attention to stimulating investment in bricks and mortar as opposed to cleaning up a lot of the distortions in the tax code that are slowing the economy."

Some industries could take a pounding under the Reagan plan. "Clearly, real estate is a big loser," said Alan Greenspan, a New York City consultant. "If the bill goes through as currently stipulated, real estate values are going to fall." Greenspan explained that such proposals as tighter depreciation schedules would make real estate a less attractive investment. As a result, he said, many building owners may be forced to raise their rents. Added Greenspan: "We are going to find that things such as increased rents on properties will create a very large set of secondary consequences that we are only just starting to focus on."

The TIME board expects the White House to fight hard for its plan to boost the personal exemption in order to help trim the total amount that individuals pay. Observed Emil Sunley, director of tax analysis for the accounting firm of Deloitte, Haskins & Sells: "The President is going to want to say, 'In my term of office, I have doubled the personal exemption and I have cut the marginal tax rates in half.' That has a nice ring to it."

Sunley and the other economists stressed that Reagan must make a vigorous push for the entire reform package if it is to stand any chance of becoming law. Said Rivlin: "The President will have to do for tax reform what he did for the MX -- make a lot of phone calls and twist a lot of arms." Even then, the board agreed, the bill's prospects will hardly be assured. Said | Greenspan: "Anyone who thinks this is going to run through Congress like a hot knife through butter has not observed the political process in this country."

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