Tussle Over a "Two-Bit" Tax Cut

The White House mounts a no-win war on capital gains

Jimmy Carter's much battered package of tax cuts and reforms has brought the White House nothing but headaches since it was introduced six months ago, and last week the problems multiplied still more. The trouble now is the Steiger amendment to reduce taxes on capital gains. Because of his loud but late opposition to it, the President has suddenly found himself facing a potentially explosive confrontation with Congress.

The House has been chipping away relentlessly at Carter's package. Congressional pressure has forced him to reduce the size of the tax cut he proposed from $25 billion to $15 billion. Meanwhile, the House Ways and Means Committee has scrapped one "reform" provision after another. Deductions have been retained for state and local sales and personal property taxes. A plan to tighten deductions for medical costs and casualty losses has been scaled back. The celebrated "three martini lunch" will remain fully deductible for businessmen.

Congressional pressure has also forced the Administration to abandon hope for enactment of the bill's capital gains provisions. The reforms, which would have raised capital gains taxes for some upper-income taxpayers, reflected Carter's populist belief that tax breaks on gains from sales of stocks and other property do little for the economy and benefit mainly wealthy investors. Though the White House would now be grudgingly content to see the tax remain at its present maximum effective rate of 49%, the Steiger amendment seeks to cut the rate to no more than 25%, the level that prevailed prior to 1970. The bill was introduced in April by Wisconsin Republican William Steiger, who has attracted broad support with his argument that a lower rate would benefit everyone by stimulating the stock market and boosting capital investment, thereby creating jobs.

The Steiger bandwagon has infuriated Carter, but not until last week did he fight back. At his press conference, he snapped, "I will not tolerate a plan that provides huge windfalls for millionaires and two bits for the average American." Nor, he said, would he accept a watered-down version of the amendment sponsored by Oklahoma Democrat James Jones.

The most the White House seems willing to accept is a bill with a $15 billion net cut in revenues but no reduction in the capital gains rate. At a Senate Finance Subcommittee hearing last week, Treasury Secretary W. Michael Blumenthal said that the Steiger amendment "should be called the Millionaires' Relief Act of 1978," a view shared by AFL-CIO President George Meany and other labor leaders. That did not especially please the six Senators present, half of whom can count their net worth in seven figures.-- The most heated exchanges came when Republican Senator Bob Pack wood of Oregon (net worth: $100,000) accused both Blumenthal and Carter of "demagogu-ery." Whereupon Blumenthal, himself a stock-option millionaire from his Bendix Corp. days, retorted, "This isn't demagoguery. It's facts." He added testily: "I'm not running for office, and I don't particularly need this job."

Carter's threat to veto any bill that lowers the capital gains rate is widely thought to be a bluff, but if positions continue to harden, he may make good on his threat. That could be calamitous. Congress almost certainly will pass some sort of cut in capital gains, but vetoing the entire bill just for this would hurt the economy. On Jan. 1, taxpayers face some $6.6 billion in additional Social Security levies and the expiration of about $11.5 billion in temporary income tax cuts enacted during the Ford Administration. Unless the resulting tax increases are offset by new reductions, the drain on consumer spending power could lead to a recession.

The Administration has misjudged congressional sentiments on tax matters of all sorts. Example: Carter's plan to place a heavy excise tax on domestic crude oil was laudably designed to encourage energy conservation, but the Senate has balked at the size ($12 billion a year by 1981) of the levy--one reason why the energy bill has been bottled up for nine months. Carter has warned that if the bill is not passed soon, he will put a $5-per-bbl. import fee on foreign oil, but the cantankerous Senate last week voted to restrict his power to do so. The House may not go along.

Carter can only aggravate his legislative problems by insisting on the moral Tightness of his capital gains proposals.

Doing so makes the Administration seem out of step with not only Congress but also general public opinion, especially after the passage of the tax-reducing Jarvis-Gann initiative in California. Says a leading committee staffer on Ways and Means: "Bill Steiger has got a tap root in the ground that's 20 feet long. You might have been able to blast him out six weeks ago, but not now. Where was Carter then?" Complains another Ways and Means official: "Carter has us so confused at this point that the issues are a mess.

The shape of the tax bill is made, and he can't change that now." If that is so, it might be wiser not to try. -

-- They are: Texas Democrat Lloyd Bentsen, Virginia Democrat Harry F. Byrd Jr. and Missouri Republican John C. Danforth.

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