Tax Experts 'Disdain' Contract Provisions
T is tax time in the United States and a lot of Americans are unhappy with the tax system.
''People are annoyed,'' says Charles Davenport, who teaches tax law at Rutgers University in New Brunswick, N.J. ''So they are willing to listen to a lot of snake oil.''
Professor Davenport was speaking of what he termed ''silliness'' in tax changes the House of Representatives Republicans passed as part of the Contract With America, as well as proposals for abolishing the Internal Revenue Service and replacing the graduated income tax with a flat tax of 17 percent to 20 percent.
A new survey of 500 customers of Quick & Reilly Inc., a discount brokerage firm, found 64 percent favoring a flat tax.
Max Sawicky, an economist with the Democratic-leaning Economic Policy Institute, sees among tax economists a ''unanimity of professional disdain for the substance'' in the Contract changes. ''It has no connection to any intellectual support from anywhere on the [political] spectrum,'' he claims.
Joel Slemrod, a professor of business economics at the University of Michigan Business School, terms the Contract tax provisions ''more or less business as usual,'' with a tax credit here and a tax preference there. ''They should be evaluated on political grounds rather than economic grounds,'' he says.
The tax measures can't pass in their present form, says Eugene Steuerle, an economist at the Urban Institute in Washington. ''Everybody knows that, including those who passed them. It is a political game.''
He and other tax experts expect the Senate to alter the package in a major way, for one thing reducing revenue losses.
For instance, Davenport describes one provision, called the ''neutral-cost recovery system,'' as ''the most cynical bill I have ever encountered.'' It changes the method of depreciation that business can claim on capital assets such as equipment. The complex change would raise revenue from business somewhat in the first two or three years after passage. Then revenue losses would begin and accelerate over time. In effect, it would wipe out any tax on the return from capital investment, and probably the corporate tax in general. Indeed, Mr. Sawicky figures the depreciation system would end up as a subsidy for business -- not a tax on business. He calls it ''most disreputable.''
The House looks at the revenue impact of tax changes only over five years. So the architects of the bill could claim it would be nearly revenue neutral in that time span. The Senate, however, measures tax impact on a 10-year basis. Thus it will see major potential revenue losses. Concerned about the budget deficit, the Senate will remove this provision, Davenport predicts.
Another provision, cutting the capital gains tax, was fought over in the 1980s and lost. Mr. Slemrod finds the same objections today: It wouldn't have much bang for the buck in raising investment; it would provide those holding investments already with windfall gains; and it would encourage a revival of tax dodges as investors seek to switch ordinary income into capital gains. Davenport notes that most of the benefits, in terms of tax savings, would go to those earning more than $100,000 a year, though beneficiaries would include many earning less than that.
Mr. Steuerle has some sympathy for the $500-per-child tax credit because it adjusts for family size, taking into account in some degree a taxpayer's ability to pay. But Slemrod says it will increase the deficit and do little to stimulate the economy.
Several other tax changes in the Contract -- ending the ''marriage tax,'' raising the earnings level before retirees lose Social Security benefits, tax breaks for adoption and elderly care, and a new type of Individual Retirement Account -- will expand the deficit from what it would otherwise be, the experts note.
Sawicky says the Social Security change will bring bankruptcy to the Social Security fund earlier. He further charges some Republicans with wanting to increase the deficit -- as President Reagan did at one point in the early 1980s -- to intensify the pressure for shrinking spending and thus the size of government.
''They want to create a [budget] crisis, or accentuate the crisis'' so that the American people will accept spending cuts with little consideration of their merits. ''It is a terrible way to go about policy,'' he says.
