Tax Ideas from Flat to VAT

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Two Democrats, Congressman Richard Gephardt of Missouri and Senator Bill Bradley of New Jersey, are pushing a less radical tax-simplification strategy. Their plan would set three rates: 14% on individual incomes up to $25,000; 26% on amounts ranging from $25,001 to $37,500; and 30% above that level. About 80% of taxpayers would be in the 14% bracket. The Bradley-Gephardt plan eliminates many loopholes, but keeps such popular tax breaks as deductions for mortgage interest and charitable donations.

A pair of Republicans, Congressman Jack Kemp of New York and Senator Robert Kasten of Wisconsin, are preparing a bill similar in many ways to the Bradley-Gephardt plan, but the top rate would be 25% instead of 30%. Says Kemp: "I think the chances are fifty-fifty we'll pass something."

Some experts argue that trying to reform the income tax system to raise more revenue will be a politically futile exercise. Charls Walker, a former Deputy Treasury Secretary in the Nixon Administration and now chairman of the American Council for Capital Formation, suggests that the U.S. adopt a value-added tax (VAT) similar to the kind used in most West European countries. A VAT is a tax levied on goods at each point of the production and distribution chain according to the value added at that stage. A tax on refrigerators, for example, would be collected from the manufacturer, the wholesale distributor and the retail appliance dealer. Ultimately, of course, consumers would pay the tax in the form of higher prices.

A 5% VAT would produce $60 billion in 1985. Says Republican Congressman Barber Conable of New York: "The VAT raises significant amounts of money and hides it in the price structure—a politician's dream." A VAT is harder to evade than the income tax, which is one reason it is used in Europe, where income tax cheating is common. The Internal Revenue Service says it lost $81.5 billion in 1981 because people concealed income.

The main objection to the VAT is that it would fall heavily on the poor, who spend most of their income on basic items like food and housing.

One solution would be to exempt such essentials from the tax. Walker suggests that low-income people could get income tax credits or rebates to counterbalance the VAT.

No one expects tax reform to make much headway in an election year, but the White House may give it a big push in 1985. Says Walker:

"If Reagan is reelected, he's got nothing to lose. If a Democrat becomes President, he sure doesn't want the deficit albatross around his neck when he runs again four years later." For once, tax increases, if wrapped in tax reform, could be good politics.

—By Charles P. Alexander.

Reported by Gisela Bolte and Neil MacNeil/Washington