For the real importance of tax reform we should look rather to fiscal neutrality. Eliminating deductions and equalizing tax rates across different sources of income, investments, and taxpayers is not the quid pro quo for lower rates; it is desirable in itself.

INVESTORS CHOOSE

A neutral tax leaves investors to make choices based on real economic returns, not tax advantages. It rewards wealth creation, not creative accounting, and by handing direction of productive activity back to the citizens, rather than the privilege groups and their lobbyists, promises significant gains not just for the economy, but for the democratic process.

The biggest achievement of the U.S. reform in this regard is the elimination of the differential tax rate for capital gains compared with other types of income - not because it's ''unfair'' or because it ''favors the rich,'' but because it's inefficient. To a large extent, it simply provides employment for tax accountants tarting up ordinary income into capital gains.

Even without such inevitable flimflammery, since the differential is worth more to a high-tax than to a low-tax investor, a wedge is driven between the value each assigns to a particular stock. Besides offering opportunities for tax-induced arbitrage gains, this alters the valuation of the equity by the market as a whole - and that can ultimately distort the real investment decisions of the company in question.

In this light, Wilson's commitment to the $500,000 lifetime capital gains exemption of his first budget makes any attempt to copy the U.S. model of reform certain to end in tears. You can't have a ''comprehensive income tax'' with a zero capital gains rate.

Even were Wilson to jettison the capital gains exemption, the U.S. reform would still not be a useful model for neutrality. Never mind all the deductions left in the bill to insure political acceptance; even in purest form, it wouldn't be neutral, because no income tax can be. There are three reasons for this: - A truly comprehensive income base is unattainable. That requires, for example, taxing the imputed rents on the house you own - the rents you ''pay'' yourself. There is no way to do this. - It is practically impossible to administer in a neutral way. Capital gains would have to be calculated on an accrual basis, and fully indexed for inflation, for starters. - Worst of all, a comprehensive income tax discriminates against savings and investment in favor of consumption. To see this, suppose you earn $1 this year. You would naturally prefer to spend it now, rather than wait until next year. But you would be prepared to wait if you were given some extra consumption, say 10% more, next year. So, absent taxes, a 10% rate of return would just be sufficient to make investing the $1 worth your while.

Now suppose the government introduces an income tax of, say, 20%. Not only is your 10% return now applied to an 80[ investment, but the return itself is taxed. Therefore, from an original $1 of income, you get 80[ if you consume it today, vs 86.4[ next year - a return of less than 10%. That's not enough to make you wait; you'd consume the $1 today.

What this really says is that there is no such thing as an income tax. It is simply a tax on consumption, present and future. Preserving the fiction of an income tax only insures that future consumption is taxed twice.

If Wilson, in other words, insists on taxing capital gains at zero, then his only efficient option is to tax all other income at zero as well. True tax neutrality requires that we admit the failure of the historical experiment in taxing income, and tax consumption instead. Call this new system a ''progressive expenditure tax'' (PET).

This doesn't mean some sort of souped-up sales tax. It would still be collected in the manner of an income tax, via an annual return. You would start with all income earned, without exception, just as under a comprehensive income tax. But you would then deduct all savings and investment - without exception. The tax would fall only on the remainder: consumption.

This would plug the holes in neutrality left by the comprehensive income tax. Gone would be the worry about untaxed sources of income: sooner or later they reveal themselves as consumption. No trouble, either, administering equal tax rates for various types of income: they would automatically be equalized, at zero. And the disincentive to savings would be removed, encouraging (or rather not discouraging) capital formation.

Start with your pre-tax dollar again. Under a PET system, you pay 20[ tax if you consume it now. But if you invest it, the whole $1 is tax-free. If next year you consumed the $1.10 you would have amassed, you would pay 22[ tax, leaving 88[ - just that critical 10% more than if you consumed your $1 today. Pre-tax and post-tax, your investment decision is the same. Tax neutrality, in other words.

A PET would provide all the impetus to investment that Wilson hoped to gain from the capital gains exemption, without the distortions. Instead of giving investors a tax holiday on the money taken out of a venture, it would spare the money put in.

One objection often heard is that a consumption tax is regressive. There is no necessary reason for this to be so. The progressivity of a tax system depends on the rate structure chosen, not the base. With the elimination of regressive tax deductions, and the integration of the tax and transfer systems in a guaranteed minimum income, the rate schedule under a PET need not be greatly steeper to beat the present system for progressivity.

POLITICALLY EXPEDIENT

But forget the theory. The real point is that a PET would be politically expedient. As Queen's University Professor Robin Boadway points out, we are already close to an expenditure tax base - much closer, in fact, than to a proper income tax. A PET would simply amount to tidying up all the differing special savings plans on the books right now, which because of their variety themselves distort investment, and in some cases are becoming another form of interprovincial trade barrier.

Tax reform in the U.S. has put root-and-branch tax overhaul at the top of every Western country's agenda. The Conservative government is looking to counteract a dithering image in the runup to the next election. And Michael Wilson wants to go down in history as a reform Finance minister. The timing for a move to a consumption tax could not be better.