Washington Notebook

From Charles Bierbauer

Washington (April 1)--These are taxing times in Washington, in every sense of the word. Taxing, too, for most Americans contemplating the annual filing deadline for their tax returns--April 17, this year.

This coming week the House of Representatives will take up the tax cut provisions in the Republicans' legislative "Contract with America". Primary among these are a tax credit for families with children, a rollback in some of the taxes now collected on Social Security benefits, a loosening of restrictions on individcompromise.

Then, a coalition of several dozen moderate Republicans and Democrats served notice they would not support a tax cut until there were assurances that the deficit would be trimmed first. They believe they have enough votes to force consideration of their amendment when the issue is debated this week.

"There's a trigger mechanism," says Congressman Michael Castle (R-Delaware), a leader of the coalition. "Until we have put into place the necessary caps...to actually lead us in the direction of a balanced budget, the tax cuts can't take place. And after that, in each year we must reach a certain deficit reduction target, starting at $150 billion dollars and working down until we get eventually to zero in the year 2002." That's the same year the unsuccessful Balanced Budget Amendment to the Constitution would have required a budget in balance.

The House debate promises to be fervent. This is the last major item on the 'contract', and the debate comes just after the defeat of the provision calling for 'term limits'. Speaker Newt Gingrich hardly wants to wrap up his 100-day legislative blitz with two straight defeats. al retirement accounts--IRA's--and a lessening of the marriage penalty that shortchanges couples filing joint returns.

But there is opposition to these tax cut proposals, much of it coming from Republicans themselves. First, 102 Republican House members appealed to the leadership to curtail the tax credit for children. As written, it would provide a $500 per child credit for families earning up to $200,000. In fact, some benefit would extend as high as a $250,000 income where it finally phases The Speaker is getting strong outside help from a broad spectrum of lobbying bodies. The National Association of Manufacturers, the Family Research Council, the Christian Coalition, the National Federation of Independent Businesses and others are working jointly for passage of the tax cut bill.

But not everyone is clamoring for a tax cut. Freshman Congressman Bill Martini (R-New Jersey) has been canvassing the business community in his district.

"Without exception they all said they feel there is a commitment by this Congress to focus on deficit reduction and a balanced budget," Martini says. "They say if we can also do tax reduction, that's great."

In Jackson, Tennessee, Susan and Bob Roach have a two-month old daughter, their second. The Roaches--he's a community planner and she's a speech therapist--hit the statistical median for many income and tax criteria and have been helping us assess the impact of tax reform proposals. With a combined income just under $50,000, a mortgage and Samantha's arrival in their household, they could certainly find ways to use the $500 credit for each of out. That, the 102 membersargued, is decidedly more than middle class. They suggest a cap of $95,000. The House leadership has shown no inclination to their children. Bob Roach is not sure he gets good value for the taxes he does pay. But he says he'd forego the tax cut to see the federal government doing something more about the deficit.

There are bigger tax questions coming. House Ways and Means Committee Chairman Bill Archer (R-Texas) pledges to take up tax reform this year, once the House gets the budget out of the way.

"I want to take this current income tax, as we know it, and I want to tear it out by its roots and throw it away," Archer says, ripping a page from the 1040 form on his desk for dramatic emphasis.

Archer takes pride in doing his own income tax since the committee he chairs is where the nation's tax laws begin.

"I think if everybody had to do their own tax return, instead of shunting it off to the tax preparer, we'd have an absolute uprising in this country to do away with the income tax," Archer says.

He tells how he encontered a provision in the tax code allowing a deduction for expenses incurred as a congressman. But he could find no form instructing him how to claim them. He asked the staff experts who drafted the legislation what to do. They said they could "draw up on a yellow legal writing tablet a pencilled-in form that they thought would be acceptable."

"I used it! And I sent it in, and it has not been contested by the IRS," Archer says with incredulity.

Archer would replace the current tax system with a broad-based consumption tax. That's a tax on what people spend, rather than what they earn. He has not yet refined a proposal. But there are a variety of models to consider-- the European Community's "value added tax" (VAT), Canada's national sales tax. Several ideas are being formulated in Congress.

Senators Sam Nunn (D-Georgia) and Pete Domenici (R-New Mexico) will propose their "USA Tax". That stands for "unlimited savings account." It is a consumption tax stressing an incentive to save. The more you save, the less you are taxed--at least until you withdraw your savings or investments and spend them. "We want the American people sitting around in their home, or sitting in their financial advisor's office, or talking before the year starts in their kitchen and, if they're going to have an extra $3,000 or 5,000 and they're thinking about what to do with it, we want them to give a real serious thought to saving it," says Senator Domenici. "We think we have a shot at changing the culture of Americans' habits and put us back into the savings side." A universal concern among economists is that Americans do not save enough.

The Nunn-Domenici plan would give low-income Americans a substantial untaxed living allowance. It would tax the rest at three rates--14, 28 and 36 percent are contemplated--roughly equivalent to current tax brackets. It's the absence of tax on what people put into bank accounts, stocks, bonds and other savings vehicles--mattresses may not count--that's a change from current tax law.

Congressman Dick Armey (R-Texas) takes a different approach. The House Majority Leader is proposing a "flat tax"--everyone pays the same 17 percent on income. There would be an initial personal allowance--about $26,000 per couple--and exemptions for dependents that would create some progressivity and exempt the poorest from any taxation. Armey's file-it-on-a-postcard approach wins the simplicity vote.

We plugged in the numbers from Susan and Bob Roach's 1994 tax return and found they'd come out about $1,200 better with the Armey flat tax if it holds at the 17 percent rate. Many experts doubt--and Armey does not dispute--that he can raise as much revenue at that rate as the current system does. Armey would cut federal government spending instead.

Any of these and other plans will considerably restrict deductions, though it is doubtful that the deduction Americans most cherish--mortgage interest--would be wholly eliminated. Too many industries--housing, construction, banking--are intrinsically dependent on it.

Nor is the Clinton administration discernibly eager for tax reform.

"I think that scrapping the entire system is a high risk proposition," says Leslie Samuels, the Treasury Department's Assistant Secretary for Tax Policy. "No other developed country in the world has done that. We have a system that is complicated, but it works. It's based on the notion that taxes should be progressive, that is, people with higher incomes should bear a higher amount of tax--they can afford to pay more tax."

Washington's debate on taxes may be as inevitable as taxes themselves. At its heart is the sense that the system--not just the way taxes are collected, but the way they are spent--is not serving Americans as well as it should. This week's debate in the House will provide some clues as to how willing Congress is--or how much it feels compelled--to examine the nation's tax structure for fairness and efficiency.

Copyright © 1996 AllPolitics
All Rights Reserved

Terms under which this information is provided to you