Tax Fiasco

Carter's reforms are killed; the "disgrace"persists

After nearly a year of backstage bargaining, Jimmy Carter last January unveiled one of his most important programs: a $25 billion income tax cut and a package of 20 proposals to reform the federal tax system, which during his campaign he had called, not without reason, "a disgrace to mankind." When the House Ways and Means Committee last week began a final writing session on the bill, the cut had been reduced to $15 billion and all the reforms had been removed. Instead there will almost certainly be a slash in the capital gains tax, which the President opposes as a benefit primarily to the well-to-do.

There is plenty of blame to be shared in this three-ring tax fiasco. The White House staff blames Ways and Means Chairman Al Ullman for letting his committee spin out of control and Treasury Secretary W. Michael Blumenthal for ineffective and halfhearted lobbying. The Treasury Department blames Ullman for bending meekly with shifting political breezes and the White House staff for not paying attention to the changes in committee sentiment. Ullman mostly blames the White House staff and the President. "Carter has a singular view of things and says he always wants the ideal and the ultimate," complains Ullman. "But the ideal is not always the realistic. In this Congress and in this political climate, this is the best bill we can get."

Carter on assuming office took very seriously his campaign promise to reform the tax "disgrace." Typically, he set a deadline for his Administration to produce a major revision of the tax code. The goal was laudable: to eliminate certain tax shelters and a multitude of unfair deductions, thus enabling tax rates to be lowered without a big loss in revenue.

One of his key reforms was to abolish the capital gains levy and tax the profits from long-term investments as ordinary income. This income is now taxed at up to 70%; capital gains are taxed at a maximum of 49.1%. Carter contended that his reform would permit the maximum ordinary rate to be cut to 50%, and that the impact on investors thus would be minimal. Overall, the Administration said its reforms would mean substantial tax cuts for those earning less than $20,000 annually and tax increases only for those earning more than $100,000.

But when Carter consulted with Ullman and other congressional leaders, he found that they had no wish to take away anyone's assured tax break in return for a promise of lower rates--especially in an election year. Carter was not impressed by that practical argument, and he continued to urge the reforms.

The President sent Blumenthal around the nation last summer to rally support for his program. Speaking mainly to groups of businessmen, Blumenthal got a stony response. Yet when Carter finally announced his tax package in his 1978 State of the Union message, he stubbornly insisted once again on including reform proposals.

Predictably, the Carter plan soon floundered in a political swamp on Capitol Hill. As inflation mounted, Ullman argued that the basic tax cut was too great, and Carter agreed to scale it down to about $15 billion. The compromise was prudent, but it made Carter again appear vacillating and led to criticism that the cut barely offset scheduled increases in Social Security taxes. As Ullman's committee lopped off the reforms one by one, the Administration looked weak.

Carter turned his attention to other important matters, including his tough Panama Canal fight and the energy bill. Thus when Wisconsin Republican William Steiger introduced a committee amendment to slash the maximum capital gains rate to 25%--the very opposite of what the President had wanted--neither Carter nor his aides took the move seriously.

The proposal picked up considerable support in Congress, especially in the mood created by the passage of California's Proposition 13. While Ullman tried to reach a committee compromise with Steiger, Carter undercut Ullman's efforts by blasting away at any capital gains cut at all as "a huge tax windfall for millionaires." The Administration belatedly tried to sell an alternative capital gains cut only for homeowners and sellers of new stocks. Complained Ullman: "You can't throw in complicated new gimmicks at the last minute."

When Carter finally gets the bill sometime in the fall, he apparently will face the unhappy choice of vetoing a tax cut or accepting a capital gains provision that runs contrary to the reforms he had promised to deliver. While the President may claim that he fought hard for tax equity, any result that is so far from what he sought implies serious flaws in leadership.

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