Taking Aim at a 'Disgrace'

During his campaign, Jimmy Carter repeatedly condemned the U.S. tax system as "a disgrace to the human race." Indeed, the system was such a mess, Carter said, that he would need a full year in the White House to study how to reform it. Yet by last week, after barely five months in office, the Carter Administration had put together a smoothly functioning team that expects to have a comprehensive tax reform ready by the end of summer.

Though no final decisions have yet been made, the task force's goals are clear enough: making the tax code simpler and more equitable, and offering incentives for investors. The President is considering:

> Cutting individual and corporate tax rates. A particular target is the 70% top tax rate on "unearned" income --dividends, interest, rents. Treasury Secretary W. Michael Blumenthal believes that setting the rate so high penalizes savings: he wants to make the rate no higher than the tax on "earned" income (basically wages and salaries), which now tops out at 50%. Rates would also be cut on down the line; a few percentage points would be shaved off the 14% rate on the lowest taxable incomes. And taxes on corporate profits, now 48% on all income above $50,000 a year, might be reduced too.

> Taxing capital gains as ordinary income. At present, a taxpayer usually includes in taxable income only half of the profit he makes by selling stock, real estate or other assets held for a specified length of time. Making all such income taxable might seem to work against the Administration's stated goal of stimulating investment, but Blumenthal believes it would "help a great deal to simplify the tax system."

>Ending "double taxation" of dividends. At present, a corporation pays tax on its profits, and then a stockholder pays tax on the portion of the remaining profit that he receives in dividends. The simplest way of ending this process would be to exempt from corporate taxes the portion of a company's profits that are paid out in dividends. However, the tax-reform team also is studying various proposals for integrating corporate and individual taxes. A stockholder, like a member of a partnership, would include in his taxable income his proportionate share of the company's profits. Several formulas for dividing the tax on those profits between the shareholder and the company are being debated, but in any case there would be one tax on profits, not a profits tax and then a dividend tax.

> Increasing investment tax credits and depreciation allowances for business. The Administration may make a second attempt to raise above the present 10% the credit that businessmen can take on purchase of new plant and equipment (Congress shot down its first try this spring). Also the White House may propose shortening the length of time during which business equipment is considered serviceable so that companies could write off the cost of the equipment more quickly.

>Limiting deductions that individual taxpayers may take for interest. Carter has dropped any idea of ending the popular deduction for interest on home mortgage loans. But he is considering placing a ceiling on the total amount of interest--on mortgage loans, car-purchase loans, department-store charge accounts--that a taxpayer can deduct.

>Eliminating myriad special interest deductions that benefit corporations and people earning six-figure incomes. One possible target: regulations permitting individuals to deduct interest on borrowings they plow into real estate and other investments that provide little or no increase in taxable earnings, but climb in value. When the investor sells, he makes a bundle. Despite several efforts at reform, special interest deductions are still so numerous that 7% of the people with incomes of $200,000 or more pay an effective federal income tax rate of 15% or less.

How has the Administration managed to move so fast on such a tricky issue? If there is a single answer, it is Laurence Neal Woodworth, Assistant Secretary of the Treasury and operating chief of the tax reform team (Blumenthal is the overall director). Scrawling figures on a blackboard or explaining complex charts, the genial, graying Woodworth is a walking encyclopedia of tax law.

No wonder; he wrote the books. As a staff adviser to the tax-writing committees of Congress for more than 30 years, Woodworth had a hand in drafting no fewer than 1,000 tax bills. That background raises some eyebrows. Asks one skeptic: "How can you reform a disgrace when you hire as your chief reformer the guy who created the disgrace in the first place?" Woodworth himself is amused by the thought, but points out that he advised Congressmen as a technician. At the Treasury, he says, "I can be more of an advocate."

Woodworth heads a tax reform staff of about 120 experts, who develop proposals that go to Blumenthal for revision before the team reports to the President. So far, team members have held two three-hour meetings in the Cabinet Room with President Carter.

The final White House package, of course, must be sold to Congress, some of whose leaders--notably House Ways and Means Committee Chairman Al Ullman and Senate Finance Committee Chairman Russell Long--have their own strong ideas about tax reform. But Administration officials are convinced that seething popular discontent with the tax system will give their proposals a major push. Says Blumenthal: "I think the time is right and ripe for a really fundamental tax reform."

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