Congress, White House grapple with issue of tax reform

Congress and the Reagan administration are hard at work this week determining how big a tax bill Americans will face this year and during the last half of the 1980s.

Under the watchful gaze of paintings of former committee chairman, House and Senate tax conferees met yesterday in the Ways and Means hearing room to iron out differences their versions of the tax bill.

The House bill would raise $49.8 billion in new revenue and the Senate bill $ 47.6 billion in fiscal years 1984 to 1987.

The tax meeting is perhaps the most important of 12 separate conferences where a total of 90 House members and 35 senators will struggle to bridge the gap between the House's $182.4 billion deficit-cutting plan and the Senate's $ 140.1 billion program.

The goal is to finish the deficit package before Congress adjourns for its July 4 recess. But staff members note that many of the issues to be hammered out - like the three-year caps the Senate bill places on defense and nondefense spending - are highly controversial. So success is not ensured, and more time may be required.

Meanwhile, down Pennsylvania Avenue from the Capitol, the Treasury Department yesterday began the first of a series of hearings to be held around the country on a proposed major reform of the tax system. The administration's recommendations will not be unveiled until after the election.

Speaking in the ornate Cash Room, Deputy Treasury Secretary R.T. McNamar said the current tax system is ''deeply flawed . . . extraordinarily complex and often distorts economic decisions and impedes growth.''

No matter who is elected president this fall, tax hikes and tax reform will likely be at center stage in Washington next year.

The reason is that the tax-hike and spending cut plan the Congress now is completing makes only a relatively minor dent in the looming federal deficit. For example, under the Senate version of the plan, deficits keep growing - from

And some analysts contend that the effects on the budget of higher interest rates and slow economic growth will offset a major part of the budget savings Congress has achieved.

''The so called down payment on the deficit will have no meaningful impact whatsoever on the overall deficit,'' claims Edward Yardeni, senior vice-president of Prudential Bache Securities Inc.

Many economists say surging federal deficits have played a significant role in boosting interest rates in the United States.

Higher rates have shaken the banking system, pushed up the dollar's value, hurt US exports, and added to the woes of debtor nations. And the flood of government debt securities has made investors much more reluctant to purchase Treasury bonds unless a higher interest rate is offered. That in turn has pushed up government debt servicing costs.

''Unless economic policy becomes more balanced, there is no reason to expect significant improvement in financial market attitudes,'' notes Lawrence A. Kudlow, a former Office of Management and Budget official and president of a Washington-based economic consulting firm.

While President Reagan has long stated his objections to raising taxes, he recently has dropped hints that a tax hike may be needed.

At his May 22 news conference the President said he might review the tax structure ''when we get to the absolute bottom of where we can get in federal spending.''

He cautioned that ''we are not anywhere near that.''

Treasury Secretary Donald T. Regan also said in a recent speech that there may be two tax bills next year - one to reform the tax system and the other to reduce the deficit.

It is much easier to see that the current tax system should be changed than to make the changes.

That is one reason why former Congressional Budget Office director Alice Rivlin and several colleagues at Brookings Institution yesterday suggested a two-stage approach to deficit cutting.

''You are talking about three years and up for comprehensive (tax) reform,'' says Henry J. Aaron, a co-author of the Brookings book ''Economic Choices 1984 .''

To allow Congress the time needed to make more far-reaching changes, Dr. Rivlin suggsted the first step be a freeze on most social and defense spending. Programs for the poor would be exempt.

The spending freeze would be accompanied by a combination of closing some tax loopholes and a surcharge on current tax rates.

A second stage of deficit-cutting would feature cuts in social and defense spending and a shift to a tax system that focuses on an individual's cash flow, minus savings.

The current tax system is ''appalling complex'' and penalizes savings and investment, Dr. Rivlin says. The overall goal of Dr. Rivlin's plan is to eliminate the fedeal deficit by fiscal 1989. The consumption-oriented tax she favors is similar to one of the approaches the Reagan administration is considering.

The four main avenues the administration is examining are:

* A flat-rate income tax rate.

* A modified flat-rate tax with progressive rates.

* A tax on consumed income.

* A national sales tax

All of these approaches are not equally likely. John E. Chapoton, assistant Treasury secretary for tax policy, has said Congress is unlikely to enact a pure flat tax since it would shift income tax burdens from upper income taxpayers to lower and middle-income individuals.

Mr. Chapoton also has said it would be unrealistic to use a national sales tax as a primary revenue source, although one might be used to supplement funds from other sources.