A tax bill that represents Congress at its wretched worst

Robert Kuttner

October 12, 1992|By Robert Kuttner

Let us now praise President Bush.

Mr. Bush is doing the right thing in resisting the tax bill. Unfortunately, he is doing it for the wrong reason. The White House has indicated that Bush will veto the tax bill even though it includes some provisions he likes because it would raise taxes, and thus would break his famous no-new-taxes vow a second time.

In fact, the tax bill, on balance, would reduce taxes very slightly. But it would do so by raising some taxes and lowering others. For example, the bill would provide tax breaks for enterprise zones, but would make up the revenue loss by raising other taxes. The bill actually would make minor increases in some 36 taxes, so that it can make offsetting cuts in others.

Bush has now painted himself into a corner, in which he and Congress can never alter the tax code, no matter how sensibly, except to slash taxes. Given the president's absurd logic, if Congress cuts one tax and raises another, that should be scored as a "tax increase"even if the net effect on the overall tax burden is zero. This is a recipe for total policy paralysis.

That said, I'm still pleased that Bush is resisting this particular bill, because it is a wretched piece of legislation. The bill represents Congress at its special-interest worst.

The key provisions of the bill would:

Liberalize the tax shelters available for Individual Retirement Accounts (IRAs), ostensibly to increase the national savings rate. But studies of IRAs have concluded that IRAs mostly induce people to shift money from existing savings accounts into tax-sheltered IRAs. They don't stimulate much new savings. On balance, the revenue loss to the Treasury exceeds the actual small increase in personal savings, so the federal borrowing grows and the national savings rate actually falls.

Even worse, Congress this time invented a new "special IRA," which allows people to withdraw funds, tax free, if they are held for at least five years. (An ordinary IRA allows you to defer taxes, but pay tax on the money as you withdraw it in retirement.) As Robert McIntyre of Citizens for Tax Justice points out, this device is particularly sneaky of Congress, since the revenue calculations that make the bill appear roughly "deficit-neutral" are computed only for the next five years. In future years, omitted from the bill's scorecard, this little provision would cost the Treasury on the order of $10 billion a year.

Partially restore "passive losses" for commercial real estate. This is the gimmick that allows investors to deduct purely paper real estate losses to shelter other income from taxation. It was this device that contributed to the massive overbuilding of commercial real estate in the early 1980s; Congress wisely closed this loophole in the 1986 Tax Reform Act, and it should stay closed.

Restore a loophole that allows donors of appreciated property to universities, museums, and the like to deduct the full amount against their own taxable income. Congress wisely repealed this loophole in 1969, because it was enabling some very wealthy people to evade taxation entirely. This special-interest loophole began as a narrow one-year provision for donations to art museums, but as the legislation evolved it grew into a general purpose tax break for all donations of appreciated property.

Repeal the luxury tax on private yachts, airplanes, expensive furs and jewelry. This special interest provision was inserted by legislators friendly to the people who make and sell luxury products, notably yacht-makers, who complained that the luxury tax was costing them sales. (The trade association that represents makers of foreign luxury cars orchestrated most of the lobbying campaign, but Congress, in a bout of jingoism, repealed the luxury tax for everybody except foreign carmakers.)

Give President Bush a stripped-down version of his cherished tax preferences for "enterprise zones," intended to attract business investment to depressed neighborhoods. This is what passes for an urban aid program at the Bush White House. Enterprise zones have few champions in Congress, and the provision got into the bill mainly because of a desire to throw the cities a few bones after the Los Angeles riots.

Increase the tax subsidy for corporate mergers and acquisitions, by allowing a tax deduction for intangible business "good will." This is hardly the thing to enhance American competitivenessanother boom in corporate takeovers.

In short, the 1992 tax bill is a truly craven piece of special interest legislation, with a dose of bad economics and budgetary cowardice thrown in for good measure. It is the kind of tax legislation that results when the White House fails to lead and the Congress defaults to its lowest common denominator as a servant of special interest lobbyists. In this case, Congress "compromised" the differences between the House and Senate bills by having the House give Senate Finance Chairman Lloyd Bentsen his pet tax-shelters, and in return the Senate backed the favorite shelters of House Ways and Means Chairman Dan Rostenkowski.

This debacle is a fitting closure to the Reagan-Bush era. The next time such legislation comes along, I hope the next president will reject it for the right reasons.

Robert Kuttner writes a regular column on economic affairs.

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