Return of the Loophole

April 26, 1993

Congress should be wary of President Clinton's tax package, which effectively reverses the sweeping reforms enacted in 1986 and opens the way for the return of the loophole, the tax shelter, the preferences and a lot of other gimmicks beloved by lobbyists, lawyers and special interests.

As a populist, the new president is getting mileage out of his proposals to increase tax rates on wealthy individuals and corporations -- initiatives that in themselves have some merit as deficit-reducers. But combined with this, he would reinstitute tax preferences for capital gains, for real estate loss write-offs, for credits on new business investment and for certain uses of energy.

At issue are some key philosophical questions. Should the tax code be used as an instrument for socio-economic policy, as Mr. Clinton intends, or should it seek the more neutral 1986-style course of treating all income alike? Should the tax code seek to influence the way people or corporations handle their assets, or should such choices be left to the impulses of the marketplace?

The latter approach came easily to President Reagan, whose zeal for cutting tax rates had the unfortunate consequence of bringing on devastating deficits. But say this much for the Gipper: He joined influential Democrats in pushing the 1986 reforms that mightly offended many of Mr. Reagan's friends.

President Bush, never sympathetic to the 1986 reforms, tried to chip away at them -- especially in seeking lower rates on capital gains. But it was left for his campaign rival, Bill Clinton, to seek fulfillment of this dubious counter-revolution.

Take capital gains, not an item the new administration likes to emphasize. Under Mr. Clinton's proposals, there would be a huge spread between the 39 percent tax rate imposed on the income of the very wealthy and the 28 percent rate maintained on capital gains. Though intended to spur investment, the spread could induce the affluent to shift assets in unbeneficial ways.

The administration's proposed "temporary" investment tax credit is already getting a cold shoulder on Capitol Hill -- and well it should. One has to wonder whether government should be targeting certain segments of industry for investment at the same time it is increasing corporate tax rates.

As for Mr. Clinton's energy tax package, we favor its conservation thrust. But the new mood for special tax treatment has created a bargaining frenzy in Congress. Pressure from farm states has eliminated taxes on ethanol. Pressure from New England has lowered the tax on heating oil. Oil patch legislators want their own breaks.

Because key legislators treasure their role in enactment of the 1986 reforms, Mr. Clinton's tax package may get the working over it deserves. This is all to the good -- provided the president gets the go-ahead to restore the revenue base in the battle against crippling deficits. In the end, that may require a national sales tax, or value added tax (VAT).

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