WASHINGTON -- A little-noticed tax break inserted into last weekend's budget agreement could turn out to be a bountiful loophole for wealthy investors and their lawyers and accountants, critics said yesterday, setting up a Rich vs. Poor showdown on the matter today in Congress.
The tax break, intended to help small businesses by rewarding investors in such concerns, was added to the compromise of spending cuts and tax increases to mollify the White House after congressional leaders rejected President Bush's proposal to cut the tax on capital gains from the sale of investments.
Lawmakers opposed that cut partly because it was considered a boon primarily for the wealthy. But Representative Dan Rostenkowski, D-Ill., chairman of the tax-writing Ways and Means Committee, says the tax break included in the budget compromise could end up just as unfair by providing huge tax benefits only for rich investors, and he is leading an effort today to try to derail the measure on the House floor.
"We worked for 2 1/2 years on what we thought the American people wanted," Mr. Rostenkowski said. "Now what they want to do is muck up the [tax] code . . . to provide opportunities for tax shelters."
David Brockway, tax partner with the law firm of Dewey Ballantine, said: "Basically, upper income taxpayers are going to get a big write-off if they invest in these securities."
But he said that the attractiveness of the tax break would depend greatly on how lawmakers translate the broad language of the agreement into the more detailed wording of the budget bill, and responsibility for that translation will be borne by Mr. Rostenkowski's committee.
White House Budget Director Richard G. Darman attempted to calm critics yesterday by pledging that the language would be restrictive, in hopes of minimizing any stampede of investors wanting to cash in.
"We do not believe it will become a tax shelter," Mr. Darman said, and he noted that tax benefits would be blunted because investors would be subject to the alternative minimum tax. But he admitted that the proposal could have "the potential effect of shifting investment" from large to small companies that qualify for the tax break.
The Bush administration also maintains that any tax benefits for the wealthy -- the Treasury Department projects $7.3 billion in lost revenue over the next five years -- would be more than made up for by the benefit the investments would provide to businesses.
Critics maintain that only a narrow range of companies would be in position to benefit economically by attracting such investments, although approximately 2.3 million businesses initially would be eligible. To qualify, a business' paid-in capital and retained capital would have to be less than $50 million, and it must do business in a field other than finance, stocks, real estate, insurance or personal services.
David R. Burton, manager of the tax policy center at the U.S. Chamber of Commerce, said, "It is a pretty narrowly circumscribed proposal and exempts a long list of corporations, partnerships and industries. . . . It is not nearly as positive an incentive for investment as its proponents think."
The biggest beneficiaries besides investors, Mr. Brockway said, would be accountants and tax lawyers who chart the way for wealthy investors. "If anybody thinks it's going to create any jobs other than for lawyers and tax accountants, then they better get back on Planet Earth," he said.
Although final language will be decided by lawmakers, the broad terms of the agreement propose that a taxpayer be allowed a deduction equal to one-fourth of his investment in an eligible small business, on investments of up to $200,000. In other words, the investor could get a tax deduction of up to $50,000. At the tax rate for the wealthy, a $50,000 deduction would produce a tax saving of $14,000.
Mr. Burton scoffed at the notion, saying any investment is a risk.