Tax reform in U.S.

Press, 17 November 1977, Page 16

Tax reform in U.S.

By

JOHN WILSON,

of “The Press”

On the stump. Candidate Carter was a fiery taxreformer. He described the United States’ tax system as “a disgrace to the human race’’ and declared that he favoured ‘ a simplified tax system which treats all income the same, taxes all income only once and makes our system of taxation more progressive.” Mr Carter's calls for tax reform never failed to evoke a sympathetic response and appear to have contributed to his success in last vear’s elections. A vear later. President Carter has still not revealed what particular reforms he will propose to Congress. His proposals were first promised for the middle of September. then for the middle of October. Now they will probably not be made public until some time in the new year, at least not until his energy bill clears Congress. These delays in making his tax reform proposals known have aroused some fears that President Carter may be satisfied with less thorough tax reforms than Carter as candidate pledged himself to achieve. But Mr Carter is still, according to one aide, -a total flaming populist on this one” and is merelv biding his time until he has a reasonable chance of persuading Congress to implement radical tax reforms proposals. The genera! drift of the Administration's thinking on tax reform has been revealed. particularly by the recent leak of Treasury Department recommendations to the President. The aim appears to be to make the tax system both simpler and more equitab’e. One of the Administration'* main concerns anpears to be that although the United States’ tax svstem is “vertical!'’” progressive — with a few glaring exceptions. those enioving higher incomes pav more tax—it is “horizontally'’ inequitable. Peonle who draw incomes o. roughly the same size, but from different sources, pav very different amounts of This occurs particularly because wages are in general taxed far more heavily than monev earned from the sale of capital assets or income derived from interest on municipal bonds —on which no tax is paid at all.

One of the major elements of the Administration’s tax reform proposals is, therefore, likely to be the elimination of the special treatment enjoyed by capital gains and the taxation of such gains as if they were ordinary income. Thus someone selling a house, farm, factory or any other form of property at a profit would, if this reform is enacted, pay tax on the profit as if it were earned income. The special treatment which capital gains enjoy at present has encouraged the use of various devices to turn what is really ordinary income into a capital gain to pay less tax. If capital gains were treated as ordinary income, the Government’s “take” would increase, making possible reductions in the income tax paid by lower and middle income earners and a reduction in the maximum tax rate from the present 70 per cent to, perhaps, 50 per cent. There are also strong hints that President Carter’s tax reform proposals will not “sock” big business — even though to keep faith with Candidate Carter President Carter will almost certainly have to act on his nromise to reduce the deductions businessmen can make for expenses — the “three martini lunch” for example. But to promote investment and not harm business confidence, President Carter’s proposals are likely to include reduction in the rate of taxation on corporate income and increases in investment tax credits. He may also change the tax system to e'iminate the present double taxation of company dividends. Tax reform is clearly a complicated business; its being effected this vear or next is further complicated bv discussion about the need for a tax cut simply to stimulate an economy which is growing extremely slowly. Some advocates of tax reform fear that if President Carter attempts to cut taxes for economic reasons at the same time as he attempts a more general reform of the whole tax system he may fail to achieve either of his two objectives — stimulating the economy and achieving a fairer, simpler tax system, rs-victno a stimulatory t’X

cut which also advances the cause of “root and branch” reform of the tax system may prove extremely difficult.

But whether they are presented in conjunction with a stimulatory tax cut or separately, later, President Carter’s tax reform proposals will almost certainly not have an easy passage through Congress. In a recent poll, 80 per cent of those questioned declared that they thought the tax system unfair. But the poll also revealed that most taxpayers object to deductions claimed by others but believe their own are quite justified. Each present “loophole” is supported by a powerful vested interest. Even the popular proposal to reduce the deductions that can be made from business lunches has already provoked powerful lobbying — from the restaurant industry. More generally, opponents of tax reform fear precipitate reforms may unsettle the economy and result in new, unanticipated unfairness. When President Carter’s tax reform proposals finally reach Congress, they are likely to encounter opposition every bit as vehement as the current opposition to certain parts of the energy bill. This is especially true of the suggestion that the tax privileges which capital gains enjoy at present should be abridged.

In the event. 1978 may see no more than a tax cut and some minor simplification of the tax system to reassure those who cheered when Candidate Carter promised to reform the tax system that his commitment to such reform has not wavered. Major changes may not be presente,d by President Carter to Congress until 1979. after the mid-term Congressional elections. Americans have lived long enough with a tax svstem which is unfair, inefficient and outrageously complex (the tax code runs to 1100 pages and there are volumes of adidtional regulations and court rulings) that postponing for another year the decade-old dream of tax reform will probably not seem to most of them too serious a matter, provided only that President Carter does eventually live up to his campaign promises.