The Christmas Tree Bill

In any ranking of urgent domestic priorities, dealing with inflation is clearly first. For the moment at least, it is more urgent than even the task of providing urban housing or filling other social needs. For that reason, probably the last thing the U.S. needs right now is a tax cut, however popular the idea. A cut would stimulate consumer spending, probably deny the Nixon Administration a budget surplus as a means of cooling off the economy, and throw the whole burden of combatting inflation onto a continued tight-money policy--to the distress of both home buyers and businessmen. In the longer run, a tax cut would absorb much of any "peace dividend" from lower spending on Viet Nam, thus dissipating funds that are needed to meet the pressing needs of the cities.

Yet last week the Senate passed a massive tax cut, the biggest since 1964, to take effect at the worst possible time for the economy. "A matchless performance in fiscal irresponsibility," declared the Administration's phrasemaker, Vice President Spiro Agnew, in a New Orleans speech. Many others agreed with him. Vermont's Senator George Aiken protested that "this Christmas tree is getting overloaded." Delaware's Senator John Williams, speaking with the objectivity of a politician who is retiring next year, blamed the "100 Santa Clauses" in the Senate. Added Williams: "When the American people get the bill, they'll be laboring for years to pay for it."

Failed Test. Unless the Senate bill is drastically revised in a House-Senate conference, it will provide a tax cut for individual taxpayers of $4 billion next year, minus whatever new revenue comes from tax reforms. Among other Christmas tree ornaments: a 15% boost in Social Security benefits, half again the amount the Administration had approved and without any increase in rates, plus new minimum monthly payments of $100 for single persons and $150 for couples. The new minimums, up from an intolerably low $55 and $82.50, would be paid by deductions from earnings up to $12,000 a year instead of the present $7,800--starting in 1973.

The Senate was, in effect, stampeded by an amendment proposed by Senator Albert Gore, who faces a tough election battle next year. By raising personal exemptions from $600 per person to $800, the Gore amendment would reduce taxes by 61% for a family of four earning $5,000 a year, by 27% for a family earning $7,500. Ignoring President Nixon's warning that Gore's proposals failed "the test of fiscal responsibility," the Senate last week passed them by a vote of 58 to 37.

The Administration shared the blame for misjudging the political appeal of the Gore amendment. Illinois Republican Senator Charles Percy had proposed a compromise, raising exemptions more gradually and with far less inflationary effect. But he failed to win the support of the Administration. When the Senate spurned Percy's amendment, Minority Leader Hugh Scott angrily took to the floor to denounce political blundering by the Treasury and, implicitly, by the White House. "The Treasury," he said, "has gone down to a resounding and, I suppose, glorious defeat. I do hope that my Administration will listen the next time we try to advise them that legislatively we understand more about tactics and strategy than they do."

Diminished Symbol. The Senate did make a modest start on tax reform, and further amendments were held over for voting this week. The 27 1/2% oil depletion allowance, which has stood as a symbol of tax privilege since the Administration of Calvin Coolidge, was reduced to 23% in the Senate, a kinder cut than the House version, which put the allowance at 20%. The difference --which amounts to about $100 million in tax revenues for each percentage point--will be resolved in conference. But neither the House nor the Senate ventured to restrict the oilmen's privilege to deduct for depletion long after the costs of drilling have been recovered many times over.

The Senate bill also breaches the real estate tax havens. At the price of slowing down construction, it would trim back rapid depreciation of new commercial buildings and deny tax advantages to later buyers. The rich would also be partially denied some of their favorite ways of avoiding taxes, most notably unlimited charity deductions, the right to cultivate tax losses on "hobby" farms, and the right to deduct the market value of donated stock or goods bought years ago at lower prices. To ensure that no one escapes taxes entirely, the bill requires that taxes be paid on at least 50% of all income. The Senate also blunted the effect of a presidential measure approved by the House: the repeal of the 7% tax credit that businessmen can claim on new equipment. The Administration wants to abolish the credit in order to slow down a capital-investment boom, but the Senate voted to exempt all equipment purchases under $20,000--an amendment that would cost $720 million of the $6.5 billion in revenue that the Administration hopes to gain from the bill.

President Nixon has threatened to veto any tax bill that contains too great a revenue loss, but he has left undefined the question of how much is too much. The Administration is counting on Democrat Mills to restore some of the lost revenues when the bill comes up in a Senate-House conference. The hope may prove illusory. Tax cutting is as popular in the House as it is in the Senate, and Mills says only that "I'm not ruling out anything."

Congressional leaders are convinced that they can easily pass the tax cut by the two-thirds majority required to override any presidential veto. As a further complication, the bill contains an extension to next July 1 of the 5% surcharge that Nixon has requested as an anti-inflationary measure. Thus the congressional Democrats have the best of all political--if not economic--worlds. If Nixon signs the bill, they can claim credit for tax reduction and blame the Administration for inflation. If he vetoes it, they can blame him for both inflation and high taxes. Last week Mills promised that the President would receive the final results of Congress's labors before Christmas.

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