Stewing in Its Own Largesse

By GEORGE J. CHURCH

Congress discovers that log rolling helped flatten the economy

To accountants and corporate lawyers, it is a wry wisecrack: the contention that any company still paying federal income taxes must be led by executives who have not yet read the new tax law. To economists and even some repentant legislators, it is too close to the truth to be funny. With gargantuan budget deficits looming for the next several fiscal years, indignation is rising over the log-rolling generosity that transformed last year's tax-cutting bill into the Great Tax Giveaway of 1981.

The legislation began as a straightforward Reagan Administration proposal to cut individual income tax rates and give businesses more rapid depreciation write-offs. But then congressional Democrats offered their own tax package, and both sides started tacking on sweeteners for regions and interest groups in an effort to win their support. The Administration's bill finally came out on top, but it was so loaded with goodies as to be unrecognizable.

Some of the added breaks went to ordinary taxpayers: a reduction of the "marriage penalty" for working couples, for example, and benefits for Americans living abroad. Many more went to corporations and the wealthy. Samples: a near elimination of estate and gift taxes; so-called All Savers Certificates paying tax-free interest; special write-offs for oil drillers, truckers, and developers who rehabilitate old buildings; so liberal a rewriting of the depreciation rules that many economists think it really will wipe out the tax liabilities of many or even most U.S. corporations over the next few years. One depreciation rule on telecommunications equipment could be worth an estimated $14 billion to A T & T alone.

Taken one by one, almost all of these breaks have something to be said for them. Those for individuals were thought necessary to remedy inequities in the tax code; those for corporations were supposed to stimulate investment that the nation needs. But most economists now agree that the effect of dumping them all into the tax code at once, on top of a 23% three-year slash in individual income tax rates, is potentially disastrous. James Schlesinger, a veteran of the Nixon, Ford and Carter Cabinets and a Ph.D. in economics, calls it "the most irresponsible fiscal action of modern times."

The individual income tax cuts will cost an estimated $557 billion over six years, a staggering figure; the breaks for business have ballooned the figure to $749 billion. Critics fear that the results will be stunning deficits that will fan inflation and keep interest rates high enough to abort a recovery from the present severe recession and possibly discourage the very business investment that both the Administration and Congress wanted to prompt. The latest Commerce Department survey shows that businessmen are actually planning a .5% cutback in their spending for new plant and equipment, adjusted for inflation, in 1982; such spending rose by a nearly invisible .3% last year.

Logic suggests that one way out of deficit problems would be to repeal most of last year's largesse. Some legislators, appalled at their handiwork, are talking of doing just that. Says Rhode Island Republican John Chafee, a member of the Senate Finance Committee: "I think we've got to step in and either delay or retract some of those tax cuts."

This is easy to urge but next to impossible to accomplish. Any attempts to take back last year's cuts would reunite the special interests that pressed for them so successfully in the first place. Even the most widely derided of the tax breaks have powerful defenders. Says Massachusetts Congressman James Shannon, a member of the Ways and Means Committee: "The loopholes that should be jettisoned first are the ones least likely to go."

Leasing is a prime case in point. Congress was concerned last year that the investment tax credits would be of little use to companies that needed to buy new machinery but had no profits and thus no taxes to reduce. So the legislators allowed such companies, in effect, to sell their tax breaks to wealthier businesses, which would buy the machinery on paper, take the tax credits and lease the equipment back to the poorer companies, which would then use it. Alan Greenspan, who was President Ford's chief economic adviser, calls the idea "the equivalent of food stamps for undernourished corporations." And well-fed ones too. Highly profitable IBM bought $100 million to $200 million of future tax benefits from money-losing Ford last year. Occidental Petroleum, which pays little U.S. tax on its large profits because all are earned abroad, picked up extra cash by selling its unusable benefits to an insurance company. The leasing provision is expected to cost the Treasury a total of $27 billion over the next five years.

"There is a feeling that it is a bum idea and ought to be changed," says Wyoming Congressman Dick Cheney, chairman of the Republican Policy Committee. But, surprisingly, the leasing provisions are defended by some of the very economists who most harshly assail last year's giveaways. Brookings Institution Economist Barry Bosworth grumbles about "all sorts of crazy things" written into the bill but says the leasing provisions will lead to "a reasonable redistribution of [corporate] wealth." Even Greenspan approves the idea. One possible compromise: forbidding the sale of tax benefits by companies like Occidental, which are profitable but pay few taxes anyway.

Rather than propose repeal of the tax breaks he unwisely agreed to last year, President Reagan seems sure to urge whittling the deficit by slashing away again at social spending and at week's end was still trying to make up his mind whether to propose some new tax increases. Moral: tax breaks, once granted, are devilishly hard to snatch away.

--By George J. Church. Reported by Evan Thomas/Washington

With reporting by Evan Thomas

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