Energy Pushes Back Tax Reform

Loophole closing gives way to deeper cuts

While continuing to shift the scenery about backstage, the Carter Administration last week announced another delay in raising the curtain on its anxiously awaited tax-reform program. The news came from a weary Treasury Secretary W. Michael Blumenthal, after a grueling five-hour White House session on tax options in which the President and his top economic aides failed to resolve a number of key issues.

Completion of the package, which was once supposed to go to Congress by Oct. 6, has already been postponed several times, and Blumenthal now says that at least one more meeting with the President is needed before the proposals are unveiled, perhaps at the end of this month or early in November. The White House is fighting a self-imposed deadline: unless congressional hearings on tax revision begin this year, there is little hope of getting the program through Congress before the 1978 elections.

The prime reason for the delay is that the Administration wants to wait until the bitter congressional fight over the President's energy program is resolved, and thus avoid getting the tax-revision proposals entangled in that scrap. Also, the White House has lately become increasingly concerned about possible sluggishness in the economy next year, and about the stiffening resistance of businessmen and some Congressmen to the tax-reform plan, even before it has officially been announced. In order both to pep up the economy and, they hope, disarm critics, Administration planners are subtly shifting the emphasis of the tax package from a program of reform to one of stimulative tax cuts, especially for business.

Carter at one time spoke of a reform program that would shift the tax burden but would involve little change in Government revenues or none at all. However, by last month a Treasury planning paper called for a net tax reduction of $17.2 billion to be phased in over several years--$13.8 billion going to individuals, $3.4 billion to business. Last week Blumenthal reported that White House planners were considering deepening the net cut to as much as $22 billion--possibly $15 billion to individuals, $7 billion to corporations. The aim was to provide a better climate for profits and investment that would eventually perk up the economy. What form the enlarged business reductions would take--if indeed they are made at all--has not yet been decided.

For the shorter term, Charles Schultze, chief of the Council of Economic Advisers, is concerned about a possible slowdown in the economy during the second half of next year. The CEA has suggested that the President consider asking Congress for a "quickie" tax cut next year in the event that stimulus is needed before the tax-reform bill is passed. The President, at his press conference last week, stopped just short of endorsing the idea when he said that a tax cut "may come next year or perhaps later--I think next year." One idea is to propose lowering withholding rates as early as next April, in anticipation of passage of a permanent reduction in the tax package. No decision is likely on this option until early next year.

Though differences have existed among the President's advisers on what to include in the package, most of them have now been resolved. Most notably, the CEA has dropped its objection to a Treasury proposal that would soften the policy of taxing dividends twice--once as corporate income and again as individual income of shareholders. Though the method to be used has not yet been finally decided, some relief from double taxation is all but certain to be included in the package. Ultimately, of course, the decision will be up to the President, who is studying nine position papers containing about 50 options, each with boxes labeled "Agree," "Disagree" or "Want to discuss further."

So far, according to White House aides, the President has not given final approval to any of the major proposals. Still, not only the broad outlines of the package but some of the fine details are becoming clear--and they include more than a few surprises.

For example, Treasury has filled in many details of its proposal to tax capital gains at full ordinary-income rates, which will probably be the most hotly disputed part of the program. (At present, only half of capital gains--profits on the sale of assets, such as stock or real estate, held for more than nine months--are taxed.) Contrary to many predictions, Treasury proposed no exemption for the forest-products industry, which is heavily, dependent on capital gains for earnings and is likely to be a fierce opponent of the measure.

On the other hand, Treasury would take a more lenient than expected stance in taxing money from the sale of a family home. At present, profits on such a sale are not taxed so long as they are reinvested in another home within 18 months. Treasury now proposes in addition to exempt the first $75,000 profit on the sale of a home even if the seller puts the money in the bank rather than using it to buy another house.

Even more unexpected, Treasury, against the vigorous opposition of some liberals, has proposed to Carter that people selling assets held for ten years or more be taxed only on the amount of the profit that exceeds the rise in the consumer price index occurring between purchase and sale. Investors have long argued that it is unfair to tax them on long-term capital gains made illusory by inflation: if, for example, an asset held for ten years is sold at a dollar profit of 50%, but prices have risen 50% in that time, the seller has only held even in purchasing power.

To make capital-gains taxes more acceptable, the Treasury would liberalize the law on capital losses. At present, taxpayers are allowed to write off only half of all capital losses in any one year, up to $3,000. As the Carter package now stands, capital losses could be deducted in full from ordinary income, with one exception: only $10,000 of net losses on marketable securities (primarily stocks and bonds) could be deducted from ordinary income in one year. Assume, for example, that an investor sold some stocks at a loss of $50,000 but realized a profit of $20,000 selling other shares, producing a net loss of $30,000. He could deduct $10,000 from his taxable wage-and-salary income that year; the remaining $20,-000 could be deducted in future years.

In a surprise boon for multinational companies, Treasury also proposed to continue allowing subsidiaries of American corporations to defer paying U.S. taxes on profits made abroad until those profits are remitted to the U.S. as dividends. Carter had been widely expected to recommend taxing overseas profits as soon as they are earned--and he may yet reject Treasury's proposal.

With all the sweeteners, though, enough reform remains in the proposals to upset just about every taxpayer. One Treasury suggestion calls for wiping out federal deductions for general sales taxes, an important consideration in states like New York where such levies are high.

Treasury would also make deductible only those medical expenses that exceed 10% of an individual's income, v. 3% now--an idea that is sure to touch off howls of anger. Further, banks would have to withhold in taxes 20% of the interest paid to savers. At present, say Treasury officials, the Government loses $1.4 billion in taxes each year because taxpayers do not report interest.

Taken together, these proposals hardly seem likely to serve Carter's stated goal of making the tax system simpler; if anything, filling out returns would become even more complicated. The President's effort to make taxes fairer by closing loopholes and broadening the tax base has also had to be tempered by the political realities. Even so, Carter is determined to get as much reform as he can into the package, and the Administration seems ready to take on the many groups that are sure to oppose one or more parts of the program.

This file is automatically generated by a robot program, so viewer discretion is required.