Good, Bad and Complex

The TIME Board of Economists divided sharply over the virtues and vices of the comprehensive tax-reform bill, which is likely to win final approval by Congress this week. Board members hailed such features of the bill as the lowering of the top tax rate from 50% to 28%, the lifting of all tax liability from some 6 million poor Americans and the abolition of many nonproductive tax shelters. But some of TIME's economists expressed concern that this complicated legislative contraption could dampen business investment and make the rules of the tax game even more uncertain for many corporations and households. In the end, the panel was almost unanimous in predicting that the new law would soon be followed by more legislative tinkering. Concluded Guest Economist Henry Aaron, a tax specialist at Washington's Brookings Institution: "Though not a landmark shift, the tax reform will make the personal and corporation income taxes significantly fairer."

Walter Heller, one of the architects of deep tax cuts during the Kennedy Administration, saw the new bill, despite its shortcomings, as a "remarkable achievement." The elimination of taxes for millions of poor citizens, he told the panel, was the "most significant antipoverty legislation that we have seen since the Great Society." Said Heller: "Washington is the citadel of the second best. Among the second best, this tax bill is one of the best that I have seen."

Harvard Economist Martin Feldstein, head of the Reagan Administration's Council of Economic Advisers from 1982 to 1984, disagreed. "This was a bill that went astray," he said, because it will shift about $125 billion in taxes from households to businesses over five years. Feldstein was afraid that abolition of investment-tax credits, as mandated under the new legislation, would lead to reduced corporate spending on plant and equipment and research. At the same time, hikes in capital-gains taxation rates could cause cutbacks in the financing of new business ventures. By hurting investment, Feldstein warned, the tax-reform package might heighten the risk of recession in 1987. Tax reform, he said, "turned out in the end to be a mediocre piece of legislation."

Another danger is that the legislation could swell the already bloated federal budget deficit. Although the law was not intended either to raise or reduce revenues, TIME's economists agreed that no one can know for sure what its impact on the budget will be. And for all the rhetoric from Congress and the White House about the need to simplify the tax code, the reform bill still contains many vagaries. Tax shelters affecting real estate, for example, have + been effectively squelched, but those involving oil and gas exploration remain relatively untouched. In Aaron's view, the major business losers under the new code would be the office- and apartment-construction industries, some public utilities, and transport and communications companies. Probable winners include firms that have not been able to take advantage of tax shelters in the past, such as retailers and even some manufacturing industries, like food companies. Some educational institutions are likely to be hurt. Under the new law, part of the value of gifts of property to schools may end up in the donor's income tax liability, making such donations less common.

The omnibus bill is filled with wrinkles, like a complicated "minimum tax" procedure for corporations that previously paid little or no taxes, and dizzying "transitional rules" designed to ease many businesses into the new regime. Fretted Manhattan Economist Alan Greenspan: "I don't think we yet understand how complex this is." As Aaron put it: "You will discover hardships, provisions that don't work the way that you want them to, tax liabilities that Congress would conclude it didn't want to impose. In some cases, the lawmakers will want to back off." If that is so, the tax reform bill of 1986 could easily have a sequel in 1987.