BATTLING OVER TAX REFORM

Gerald Ford urged "giving greater relief to the so-called middle-income taxpayers -- those in the earning brackets of $8,000 to $30,000 a year."

Jimmy Carter promised to "shift the burden of taxes to where the Republicans have always protected -- on the rich, the big corporations and the special-interest groups."

With salvos like these, the candidates last week battled over the federal income tax. Ford was talking mostly about tax cuts, but Carter was urging re form to make the system more fair, a subject about which politicians usually talk a lot but do as little as possible.

First, powerful lobbies attempt to thwart all efforts to get major tax reform through Congress, even though nearly everyone agrees that today's system bad ly needs a total overhaul. Second, re form makes taxpayers themselves uneasy because they are unwilling to give up the certainty of a deduction in return for only a promise to lower tax rates. In Federal Tax Reform: The Impossible Dream ?, Tax Experts George F. Break and Joseph A. Pechman observed: "Circumventing this dilemma is a task worthy of a Solomon."

The U.S. income tax code is a labyrinth of 40,000 pages that provide employment for tens of thousands of tax accountants and tax lawyers. More important, the system, which last year raised $120.7 billion from levies on personal incomes, 42.1% of the Government's revenues, is laced with inequities.

By taking advantage of legal tax shelters, some high-income people greatly lower their taxes. Two typical examples: chiefly through investing most of his $151,000 income in Government-assisted housing projects, a St.

Louis lawyer reduced his taxable income in 1975 to $29,000. Because a Los Angeles taxpayer bought 300 head of cattle for $45,000 and borrowed $75,000 from a bank through a cattle-feeding loan program, he will be able to deduct about $55,000 from his projected gross income of $160,000 this year. Other tax shelters include silver options, oil leases, movie financing and sport franchises. These are all chancy businesses, and the tax breaks were set up to encourage investment in them.

Ordinary taxpayers cannot afford to use such shelters, which makes them unfair in the opinion of many tax reformers. On the other hand, most middle-income taxpayers can take advantage of far more significant special considerations.

People who own homes--two-thirds of all American families--can deduct the interest they pay on their mortgages, a powerful stimulus for the housing industry. But the mortgage-interest deduction discriminates against renters. It also favors wealthy taxpayers, who frequently have large mortgages. About 25% of the $60 billion in personal income that escapes taxation each year because of deductions, credits and exemptions is kept by people with adjusted gross incomes of $50,000 or more, a group that constitutes only 1% of all taxpayers. Making use of the same laws, corporations avoid paying taxes on about $25 billion of their annual income.

Treasury Secretary William Simon last year made the most drastic tax-reform proposal of all. He would "wipe the slate clean of personal tax preferences, special deductions and credits, exclusions from income and the like." By his reckoning, the Government could then slash tax rates by almost a third with no loss of revenue.

Simon was not speaking for the Administration, which ignored his proposal. So, too, did Congress, which generally gives in to special interests when considering major tax reforms. Only last year, for example, organized labor blocked efforts to eliminate the deduction for state gasoline taxes, arguing that it was the workingman's loophole.

As for the candidates, they agree on one point: both would end the double taxation of corporate income and dividends. Carter has not explained how he would end the dual levy, but Ford has proposed phasing in a combination of dividend deductions and stockholder credits that would cost the Government $13.3 billion by 1981. On other aspects of the problem, the candidates disagree:

FORD. He has never committed himself to general tax reform, but would reduce taxes by $10 billion, if Congress agreed to cut federal spending by the same amount. His tax cut would save corporations $2.5 billion by reducing their tax rates to 46%, from 48%, thus encouraging business growth. His proposal would also provide electric utilities with $600 million in tax relief to stimulate expansion of their generating capacity. For individual taxpayers, Ford would increase the personal tax exemption to $ 1,000 a person, from $750, which would cost the Treasury $10.8 billion. But Ford would partly offset the effects of this cut by increasing Social Security taxes by three-tenths of 1%.

Under Ford's plan, moreover, the taxes of many low-income families with children would actually be increased, because he wants to eliminate the "earned-income credit" enacted last year, available to families with dependent children at a rate equal to 10% of earned income up to $4,000, or a maximum credit of $400. Thus the Government would save $ 1.4 billion a year.

Ford also wants to reduce taxes on capital to spur investment. Among other things, he would allow working Americans with annual incomes up to $40,000 to defer taxes on funds invested in common stocks held for at least seven years. Other Ford proposals are written into the tax bill that awaits his signature (TIME, Sept. 20). They include a provision that has the effect of increasing the amount of an estate that is not taxed, now $60,000, to $120,000 next year and $175,000 in 1981.

CARTER. He is pledged to a comprehensive reform that would lower taxes for poor and middle-income people and raise them for the well-to-do. The net result would be to raise the same amount of revenue but with a different tax structure. Carter has not specified whose taxes would be raised, but Running Mate Fritz Mondale said that the basis of Carter's tax policy would be to close the loopholes that aid people with annual incomes of $50,000 or more.

Early in the campaign, Carter liked the drastic Simon tax reforms. Lately, however, he has voiced more modest goals. Carter apparently has no intention of ending the tax exemption for income from state and municipal bonds, which costs the U.S. Treasury about $4 billion a year. He would also continue the deduction for charitable contributions. But he would eliminate the capital-gains exclusion, which amounts to about $7 billion each year and chiefly benefits high-income taxpayers.

Further, Carter would end the practice of not taxing until it is brought into the U.S., income earned abroad by subsidiaries of U.S. corporations, and he would also eliminate all of the tax shelters that the new tax bill only reduces.

He once described the home-mortgage-interest deduction as "among the incentives that I would like to do away with." He later suggested that he would replace the deduction with some sort of direct subsidy or incentive to help low-income homeowners.

But these reforms are only ideas at the moment. According to Pechman, a member of TIME'S Board of Economists and an adviser to Carter, the candidate-has not yet worked out a detailed plan. Indeed, Carter has said that he will not come up with one until after he has been in office for at least a year. The more specific he is, the more trouble he could get into, as was illustrated last week when the Ford camp repeatedly attacked Carter after he made a confusing statement about raising the taxes of people with "higher" incomes.

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