Reagan Tax Revisions Worry Reform Backers : Critics Question Fairness of Expected Proposal to Restore Benefits Cut in Initial Treasury Plan

Times Staff Writer

Even before President Reagan completes the final work on his revised tax simplification proposal, advocates of tax reform are becoming increasingly wary of the new plan, convinced that it is likely to fall far short of the goals of fairness and economic efficiency.

"The White House should make more of an effort to come in very, very close to Treasury One (the original Treasury Department tax proposal announced last November)," Rep. Dan Rostenkowski (D-Ill.), chairman of the tax-writing House Ways and Means Committee, said in an interview last week. "If we don't start very high, we may just have a shell of tax reform left by the time the process is done."

Like the Administration's first tax revision plan, which was not embraced by Reagan, the new White House tax package that will be unveiled on May 28 would lower rates for individuals and corporations by eliminating a number of tax breaks aimed at particular interest groups.

But by agreeing to restore several key tax benefits for investors, business and charities that were eliminated in the earlier version, Reagan appears to be losing support among those who were most enthusiastic about sweeping reform and opening the way for other special interests to demand retention of their own tax loopholes.

"These delays are traps laid by special interests," said Sen. Bill Bradley (D-N.J.), co-author with Rep. Richard A. Gephardt of Missouri of a Democratic tax simplification proposal. "It is more likely that it is going to be filled with provisions that invite a Christmas tree."

Administration officials defend the modifications they are making to the original tax package, contending that most of the criticism is based on premature speculation about specific items that are expected to be in Reagan's tax package rather than on a balanced assessment of the overall plan.

In laying the groundwork for their new tax proposal, Reagan's top advisers have emphasized the Populist roots of their plan, arguing that their package will respond to public outrage against corporations that escape federal taxation and at tax laws that allow individuals with similar incomes to end up with radically different income tax payments.

"Our (present) tax code impedes and distorts economic growth, sending people into unproductive tax shelters," Secretary of the Treasury James A. Baker III said in a speech in Houston last week. "It creates the sense that whoever has the sharpest lawyer gets the biggest break. . . . You have the realization that high rates and numerous distortions not only discourage economic growth, but discourage fairness as well. This Populist sentiment is anti-big government, pro-market and pro-fairness."

Tax reformers concede that the final details of the Reagan tax plan are still not available. But they argue that the Administration is undermining its own public statements by considering several major concessions.

These include the plan to help investors by retaining a special tax break for capital gains; to aid the oil industry by keeping favorable provisions for drilling expenses; to favor wealthy benefactors of museums and other charities who donate property that has appreciated in value, and to benefit big business through easing of the depreciation rules for buildings and equipment.

"They still might be able to mitigate some of these disastrous giveaways if they put in a really tough minimum tax," said Robert McIntyre of Citizens for Tax Justice, a labor-supported tax reform group. "But unless the minimum tax is around 25%, I don't see how they'll be able to sell it as a Populist tax plan."

According to Administration documents that have been circulating on Capitol Hill for the last week, the new proposal is likely to contain a 20% minimum tax on both individuals and corporations that take advantage of tax breaks that will be preserved in the new package.

"The Administration proposals contain incentive provisions that depart from the measurement of economic income," the draft proposal states. "Consequently, a minimum tax designed to limit the number of high-income, low-tax returns should be retained."

In developing its new package, the White House has also been troubled that many of the changes proposed in the original Treasury tax plan would benefit mostly high-income taxpayers at the expense of lower- and middle-income groups.

To recoup revenues lost to tax breaks, the Administration has been forced to consider limiting a provision of its original plan that would have nearly doubled the personal exemption to $2,000 from the current $1,040.

The latest plan is to begin with a personal exemption of $1,500, scaling it up to $2,000 after a three-year period.

As a result, said one economist, who asked to remain unidentified because he does not know all the details of the final package, "they may have a real problem maintaining the same burden of distribution." He added: "We have to wait and see what the final package will contain, but by leaving the exemption permanently lower than the original Treasury plan, I don't see how they are going to avoid benefiting the upper income groups more than those in the middle and at the bottom."

Despite the changes in the first plan, there is no doubt that the White House tax proposal will shift some of the income tax burden away from individuals to corporations. The 60% of Americans who do not itemize deductions could all receive a modest tax cut.

For other taxpayers, the most obvious changes would be the elimination of the deduction for state and local taxes, and a cap on the deduction of interest expenses other than a family's principal residence, which would continue to be fully deductible.

Rate Structure Change

The current rate structure, with its up to 14 tax brackets ranging from 11% to 50%, would be collapsed into just three brackets--15%, 25% and 35%.

On the business side, the Administration is still torn over whether to restore tax breaks for the oil industry, which many in Congress see as a litmus test of the White House's willingness to take on entrenched special interests.

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