The Sock-lt-to-Them Drive

WHATEVER their political persuasion, economists say almost to a man that a federal tax increase will be needed next year to pay for Government projects already in the works. Scarcely a politician can afford to agree--publicly. Too many voters seem fed up with the present tax system, convinced that what is needed is not a rise in their own taxes, but a plugging of loopholes that allow the rich to avoid a good part of their rightful obligation. Thus any general tax increase levied in the next couple of years will probably be preceded by an overhaul of the present tax code--no matter what administration is in power.

Last week two powerful Democrats, House Ways and Means Chairman Wilbur Mills and Senate Majority Leader Mike Mansfield, offered the latest in a growing number of tax-reform measures. If approved by Congress, their plan would require no fewer than 54 special tax preferences to be individually re-enacted by both Houses. The process would lead to a kind of annual debate on deadline. At the beginning of each of three successive years, starting in 1974, 18 of the preferences would automatically expire. These would range from widely criticized loopholes (such as the oil-depletion allowance) to favorite Middle American tax breaks (deductions for home-mortgage interest payments and property taxes) to hardship benefits (double exemptions for the blind and the elderly). Mills does not favor dropping all 54 provisions; he just wants to force a thorough congressional review of the laws.

Congress has stacked so many preferential tax options on top of one another that only a few economists and accountants understand the whole. Sweeping as it is, the Mills-Mansfield program would probably result in merely a different mix of such provisions rather than a new tax system.

By contrast, an expanding nucleus of other Democrats is demanding reform measures that would force high-income individuals and corporations to pay substantially greater taxes no matter how many avoidance schemes they might legally devise. The reformers' movement has centered on a bill drafted by Wisconsin's Gaylord Nelson and cosponsored by eleven other Democratic Senators, including Presidential Hopefuls George McGovern and Hubert Humphrey. On his own, as part of a massive plan to distribute more of the nation's wealth to those with incomes of less than $12,000 annually, McGovern has proposed reforms that would sock it even harder to high earners. Humphrey has optimistically promised to come up with his special reform plan within 90 days after winning the presidency. There is a common thrust to the Democrats' main points:

PERSONAL TAXES. In an astute political move, McGovern decided to bypass the myriad special-interest groups that have influenced previous tax-reform bills and simply propose a minimum tax of 75% of the statutory rates on all incomes over $50,000. The Nelson bill sets the minimum at 50% of the posted tax rate on income exceeding $12,000. Under McGovern's plan, for example, a taxpayer with an income of $150,000 could take advantage of all legal tax maneuvers on the first $50,000; but on the other $100,000, he would be liable for three-quarters of the posted tax rate (which is 50% or more). Estimated tax yield: $6 billion annually (McGovern), $3 billion (Nelson).

The advantage of McGovern's plan lies in its simplicity. It would allow wealthy individuals to continue getting some tax break, albeit a smaller one, by giving large sums of money to charity, say, or buying tax-free municipal bonds. But no one could avoid all federal taxes--as some millionaires do now--by funneling all his income for a given year into tax-free investments and gifts.

INHERITANCE TAXES. Both candidates would clobber the rich, heavily taxing inherited wealth. The tax-on-wealth idea is strongly supported by the young constituency that is the base of McGovern's "new politics." McGovern would impose a 77% levy on all individual inheritances exceeding $500,000 (at present, entire estates are taxed, and the maximum is 77% on $10 million or more). McGovern originally favored a confiscatory 100% tax on inheritances over $500,000 but backed off after receiving outraged mail from blue-collar workers. "I don't know whether people still think they will win a lottery or what," he said. Estimated tax yield from McGovern's plan: $5 billion annually.

CORPORATE TAXES. Neither Humphrey nor McGovern would alter the basic corporate tax rate (48% ), but both would dismantle the elaborate business-incentive system that has grown up since 1960. Nelson's group would tax overseas subsidiaries of U.S. corporations and knock out the recently approved accelerated depreciation and export-building DISC (for Domestic International Sales Corp.) programs. McGovern, in addition to all that, would eliminate the 7% investment tax credit. In effect, McGovern's plan would wipe out every corporate tax benefit granted since 1960 and raise effective corporate taxes by nearly 40%, or a walloping $13 billion a year. He argues that complementary programs in his platform, including $10 billion in public works to create jobs, would compensate for the businessman's reduced tax incentive to invest in new factories and equipment. But most businessmen are unconvinced.

There is a case for some kind of corporate tax increase. Since 1960, largely because of new legal write-offs for capital investments, the portion of gross corporate profits paid in taxes has fallen from 30% to 22%. On the other hand, many individuals profited along with the corporations. The business-priming incentives of the Kennedy-Johnson administrations helped produce the longest period of economic growth in the nation's history, from 1961 to 1969. Regardless of its long-term effects, McGovern's proposed increase in corporate taxes would run the risk of impeding the current recovery and aggravating unemployment. By canceling the investment tax credit for the second time in three years, it would label that and other expansionary tax provisions as unreliable faucets, to be turned on and off at political will.

Despite some egregious loopholes, federal taxes have not only remained fairly progressive over the years but have also served some admirable social goals. The real issue raised by the debate over tax reform is whether there is a method more efficient than tax incentive for achieving those goals. In effect, the Democrats would provide direct subsidies in place of such incentives, much like the centrally managed economies in Western Europe.

Considering the bruised state in which previous tax-reform measures have emerged after a trip through Washington's crowded lobbies, it is difficult to believe that anything less than a mandate for wholesale change will lead to truly equitable taxes. No matter how far-reaching the changes might be under a new Administration, they would still not perform the miracle that candidates sometimes lead voters to expect. The entire federal "take" under McGovern's anti-loophole raid on personal incomes over $50,000, for example, would meet only about a third of the federal deficit expected in fiscal 1975, unless federal spending is reduced. Thus one great danger of a prolonged campaign quarrel over tax reform aimed at a relative few is that it may obscure the more important question of whether the nation is willing to accept a necessary higher tax rate.

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