Taxes: Still an Uncleared Jungle

Motivated by their usual good intentions, tax reformers in Congress began moving about two years ago to clear the jungle known as U.S. tax law. Their goal: to eliminate the inequities that favor certain taxpayers--most often powerful corporations and wealthy individuals. Late last year, the House passed a mild 674-page reform bill. Last week, by a vote of 49 to 22, the Senate approved a loophole-riddled bill that is more than twice as long (1,500 pages) and, arguably, half as effective.

To be sure, the Senate version of the Tax Reform Act of 1976 would do several things for the average taxpayer. It would extend through next year the 1975 tax cut that slightly reduced withholding rates. It would allow each taxpayer and dependent a $35 credit (up from the present $30) to be subtracted directly from taxes owed through 1977. It would give some relief to many retired people by a simplified tax credit system. It would increase the standard income tax deduction this year to as much as $2,400 for single persons and $2,800 for couples.

Finely Tailored. But many sections have "special interest" items--60 at least--that benefit groups of middle-and upper-income taxpayers and, in several cases, individual companies. There is, for example, an employee stock-ownership provision written to specifications of American Telephone & Telegraph Co. Another part, liberalizing investment tax credits, would mainly benefit airlines and utilities. So finely tailored are some provisions that Senator Edward Kennedy, a reform leader, likens them to legislation for a "one-eyed, bearded man with a limp."

Even Kennedy and the other reformers concede that the immense complexity of tax laws creates situations where certain customized legislative tidbits have merit. But the reformers protest that there are just too many such tidbits in the Senate's bill, pushed through by special interests with the political muscle to get the legislation they want. Such actions upset not only liberals but also conservatives like New York's James Buckley. The bill, complains Buckley, "constitutes the worst possible collection of tax preferences for the lobbied interests, while specifically excluding provisions which would have made life easier for those who make the system go, the taxpaying public."

The reformers also argue that the Senate's bill actually will lose money for the Treasury, enlarging the federal deficit, and creating more problems for the economy and the average taxpayer in the future. This view is contested by Louisiana's Russell Long, chairman of the Senate Finance Committee and the bill's architect. He argued last week that the bill would raise $2 billion for the Treasury during the next fiscal year and $3.3 billion five years hence, helped in part by provisions that would make it slightly more difficult for wealthy individuals to avoid paying taxes altogether.

But the evidence so far runs against Long. The Joint Committee on Internal Revenue Taxation, which provides technical information on tax legislation to both House and Senate, claimed at one point in the debate that if all the provisions in the Senate bill became law, the Treasury would gain only $100 million in taxes in fiscal 1977. By 1978 it would lose $900 million, and the loss would rise to $2.8 billion by 1981. The biggest revenue losers would be some of the more politically popular items. Among them:

> Tax incentives aimed at energy conservation, including credits of up to $225 for homeowners and others for installing insulation and storm windows. Estimated loss: $259 million in 1977, $375 million by 1981.

> Various reductions in estate taxes. Loss: $1 billion by 1978, $2 billion by 1981.

> A credit to parents of $ 100 per student (rising to $250 by 1980) against the cost of higher education. Loss: $1.1 billion by 1981.

> Conversion of the current child-care deduction into a credit that can be used even by working parents who do not itemize deductions. Loss: $346 million in 1977, $483 million by 1981.

When the extension of the 1975 tax cut is added in, the revenue loss to the Government becomes $17.2 billion next year and dips to $15.5 billion by 1981, as provisions of the law are phased in. The largest part of such losses seems inevitable; both Congress and the White House favor sustaining the tax cut and are likely to have their way in an election year. If further debate on tax reform threatens extension of the tax cut --it is scheduled to expire at the end of September--lawmakers probably will do what they have done in the past: separate the tax cut extension from tax reform and pass it as a bill unto itself.

The next step, to be taken after next week's Republican National Convention, is for lawmakers to meet in a conference committee where they will attempt to reconcile the many differences between the Senate's new bill and the one already passed by the House. Speculation in Washington is that many of the Senate bill's provisions will not make it into the final version.

Even if that happens, however, the central question of genuine tax reform will remain. Critics say that reforms should result in fairness, efficiency and simplicity. But the traditional piecemeal approach seems to be, as Maine's Edmund Muskie noted during the Senate's debate, that "every good loophole deserves another." What may be emerging, nonetheless, is an encouraging feeling that the existing tax code simply cannot be revised to any significant extent --that the current system will have to be scrapped entirely and another one started from scratch.

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