NIXON'S TAX PACKAGE: A MODEST START ON REFORM

FOR an Administration that prides itself on careful deliberation, last week's tax proposals were put together with rather uncomfortable haste. Presenting the Nixon program to the tax-writing House Ways and Means Committee, Treasury Under Secretary Charls E. Walker sounded almost apologetic when Chairman Wilbur Mills complained that the plan touched only a few tax inequities. "We have tried to meet some of these things head-on," Walker conceded. "But after all, we have had less than 100 days."

Despite its 19-item brevity, the Nixon package calls for changes of considerable social--and perhaps political --consequence. It revives the nation's dormant movement toward greater income equality by proposing to tax rich tax avoiders more and to excuse the very poor, students and summer-job holders from paying any federal income taxes at all. In two surprise proposals, the President asked that the 1968 income tax surcharge be cut from 10% to 5% next January and that the 7% tax credit now allowed businessmen who invest in new productive capacity be repealed. That amounts to a sophisticated redistribution of tax burdens, with business losing and consumers gaining. Recognizing that taxation is a powerful instrument for setting and reaching national goals, the President pledged that the next step would be a "start" on two "high priority programs": tax credits to encourage investment in the turbulent ghettos and the sharing of federal revenues with hard-pressed state and local governments.

Reshuffling the Burden. The "most critical problem," said Assistant Treasury Secretary (for tax policy) Edwin Cohen at the House hearings, is to maintain "confidence in the tax structure." Nixon's program seeks to do that by reshuffling some $4 billion in tax liabilities without much altering the $165 billion federal income-tax take. Thus the impact on the inflation-ridden U.S. economy is likely to be small. The main thrust, as Nixon described it, is to "lighten the burden on those who pay too much, and increase the taxes of those who pay too little." He added: "We shall never make taxation popular, but we can make taxation fair."

Beyond the extra $1.8 billion a year in spendable income that Americans stand to retain if the surtax is reduced, only a few of Nixon's reforms would benefit the middle-income taxpayer. To help the poor, the Administration proposes a "lowincome allowance." It would reduce the taxes now paid by the 5,300,000 Americans (of a total of 26 million) whose annual incomes are near the official poverty line ($3,535 for a family of four). Some 2,000,000 families would be excused from taxes altogether. Above the poverty line, low-income persons and families would pay taxes at reduced rates. A family of four would begin paying taxes only at the $3,500-a-year income level, instead of at $3,000 under the present law; even then, it would not pay the full tax rate until its income reached $4,500 a year. By Treasury estimate, such relief would save low-income taxpayers about $700 million a year.

Closing the Loopholes. To offset part of that loss, Nixon would close some of the controversial loopholes used by the wealthy to avoid taxes. The most spectacular item is a proposed limit on tax preferences--or LTP, as alphabet-minded Washington dubbed it. It would place a 50% ceiling on the amount of a taxpayer's income above $10,000 that is eligible for favored treatment. Income would have to include the appreciated value of property donated to charity, and the ceiling would restrict the amount of deductions that a taxpayer could take for 1) oil-depletion allowances and intangible drilling costs, 2) excessive farm losses, and 3) rapid depreciation of real estate holdings. Nixon would also require taxpayers with more than $10,000 of tax-preferred income (including long-term capital gains) to allocate itemized nonbusiness tax deductions between their preferred and ordinary income. Total revenue gain: $500 million a year.

Treasury officials insist that the two schemes would have imposed tax liability on nearly all of the 155 taxpayers who paid nothing in 1967 despite incomes that exceeded $200,000. Even so, Mills and other Congressmen criticized the Administration for proposing no curbs on big incomes derived from lightly taxed capital gains or tax-free interest on state and local bonds. Walker defended the omissions. Higher taxes on capital gains might cripple private investment and so require more study, he said; and there are constitutional questions about Washington's right to tax municipal securities.

Other Administration proposals chip away at a variety of much-abused tax devices. These include some debt-securities popular with conglomerates, such tax shelters as farm losses and certain trust income. Another target is "multiple subsidiaries"--a method by which some companies split up into myriad separate firms to take advantage of the lower tax rates (22% v. 48%) imposed on businesses with less than $25,000 income. Nixon also took aim at some wild abuses by tax-exempt organizations. Among other things, private foundations would be required to substantiate their charitable activities and be barred from financial dealings with contributors, directors or other insiders. The investment income of social clubs and other tax-exempt organizations would be taxed. Churches would have to pay taxes on income earned by businesses they own or operate.

Under the new plan, tax rules would be relaxed in a couple of areas. The 30% limit on the amount of charitable contributions an individual can deduct from his income in most circumstances would go up to 50%. Tax deductions for moving at the behest of an employer would be substantially liberalized, permitting such costs as house hunting, temporary lodging or breaking a lease to be written off up to a limit of $2,500 per move.

Balanced Impact. Despite considerable grumbling among businessmen, repeal of the 7% investment tax credit seems almost sure to win congressional approval. Once a supporter of the tax credit, Nixon changed his mind last month after surveys showed that corporate spending on new plant and equipment was heading for an inflationary 14% gain this year. Its immediate repeal is intended to make a slowdown in actual corporate spending mesh with the time next year when a lowered tax surcharge would give consumers more pocket money.

Without question, repeal of the tax credit will crimp the profits of companies in capital-intensive industries. On Wall Street, which generally shrugged off the tax announcement, that prospect depressed stock prices among construction firms, computer-leasing companies, steelmakers and airlines which are in the midst of a costly modernization program. Some small and medium-sized firms may well choose to curtail their factory expansion. At General Motors, the tax credit amounted to $39 million last year, or nearly 4% of its profits. But G.M. does not plan to cut back on its $1.1 billion spending program (up 28% from last year).

Glaring Omission. The Democratic-controlled Congress seems more kindly disposed to Nixon's package than business is. Still, there was little applause from Ways and Means, where Mills hopes to hammer out much more substantial reforms than the President asked for. One particularly glaring omission is the 27 1/2% oil-depletion allowance which Mills maintains has become such a symbol of privilege that it is an essential ingredient of any tax reform.

Mills also faults the Administration's approach to loophole closing as merely papering over tax-system defects that ought to be attacked through more basic changes. The Administration concedes that it has made only a "first stage" effort, to be followed by fuller reform recommendations by the Treasury this fall. Though it disappoints tax-reform idealists, the modest first stage balances the claims of opposing interests deftly enough to make it politically palatable. It also goes much further toward genuine tax reform than almost anyone had expected.

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