Demands of Political Bargaining Lead to More Complexity : Tax Simplification Being Lost in Shuffle

It was only a minor change in wording, but it proved to be a portent. When the Treasury Department released its proposals last November to overhaul the tax code, it trumpeted promises of “fairness, simplicity and economic growth.” But, by the time President Reagan disclosed his own tax revision plan six months later, simplicity had slipped to third place--and it has been falling in importance ever since.

The latest blow to simplifying the tax code fell just over a week ago, when House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.) put forth a series of compromise positions to serve as a starting point for committee action on tax overhaul.

More Complexity Seen

Rostenkowski, acknowledging that his staff’s approach would make today’s labyrinthine tax code still more complex, said that simplification would have to take a back seat to the demands of political bargaining and the attempt to shift some of Reagan’s tax cuts from the wealthy to the middle class.

“Unfortunately, when you try to add equity into the system, it doesn’t necessarily parallel with simplification,” he said.

Reagan continues, as he put it in a speech last Thursday in Cincinnati, to rail against the “jungle of deductions, credits and allowances” in the current tax code. He promised to hack away at the “whole weed-ridden, overgrown arrangement” under which corporations and wealthy taxpayers “hire bigger and bigger teams of lobbyists and lawyers ever more skilled in taking advantage of the tax code.”

Yet, in as diverse a nation as the United States, accommodating all the varied regional, economic and political interests does nothing to cut the dense undergrowth of today’s tax system.

Catering to Seats of Power

Reagan’s own Administration found that out when it designed its plan to satisfy centers of power ranging from the oil industry to Bob Packwood (R-Ore.), chairman of the Senate Finance Committee, which will take up whatever tax bill the House finally passes. The result of that exercise was a decision to keep a variety of complex tax breaks for oil drillers and to exempt nearly all fringe benefits from taxation, a Packwood cause.

“I don’t think there ever was much simplicity” in the tax overhaul plan, said Rep. Bill Frenzel (R-Minn.), a member of the Ways and Means Committee. “And now we’re no longer thinking simplicity, if we ever were.”

As the tax proposal grows ever more complex, advocates of tax overhaul fear, many Americans may grow suspicious that hidden provisions will do them more harm than good. So the easiest thing for Congress to do may be little or nothing at all.

“There’s no public clamor for tax reform,” said Rep. Robert T. Matsui (D-Sacramento), “so our bias is to cater to the status quo by trying to satisfy a wide variety of interest groups that have a stake in keeping things the way they are.”

Changes in the tax code, as Reagan’s proposal demonstrates, inevitably result in losers as well as winners. And the politics of tax revision is so tangled that each effort to compromise on the most controversial aspects of the White House plan generates new complaints and new complexities.

Quelling the Unrest

Consider, for example, the President’s plan to repeal the deductions for state and local taxes. When that triggered a storm of protests from local government officials, particularly in such high-tax states as California, Rostenkowski proposed a compromise--far more complicated than current law--aimed at quelling the unrest.

Under Rostenkowski’s approach, as under Reagan’s, sales and personal property tax payments would no longer be deductible. But the congressman offered a choice of two deductions for state and local income and real property taxes: either up to $1,000 in such tax payments ($500 for single persons) or any such payments that exceed 5% of a taxpayer’s adjusted gross income.

Rostenkowski’s complex proposal is aimed at forging a delicate compromise between those in high-tax states, who would be able to deduct the excessive burden from their local taxes, and those from low-tax states, who would still get deductions of up to $1,000.

So far, however, those who insist on retaining the state and local deductions are far from satisfied. Rep. Thomas J. Downey (D-N. Y.) said that the compromise was “worse than Reagan’s plan.”

And a study by the Coalition Against Double Taxation, which shows that Rostenkowski’s approach would particularly penalize several Southern states, may stir up opposition from a new quarter.

Similarly, Rostenkowski’s determination to provide the middle class with a greater tax cut than offered by Reagan led him to propose boosting taxes on those few corporations that had been strong backers of the White House tax package.

High-tech industries and retailers had formed the core of support for Reagan’s plan because they gain relatively little from the plethora of tax breaks in current law and had little to lose from seeing them trimmed. They liked Reagan’s proposals to reduce corporate tax rates to 33% from 46%, to cut the capital gains tax rate and to preserve the 25% tax credit for research and development expenses.

But Rostenkowski proposed an increase in the top corporate tax rate to 35%, higher rates for small business, no capital gains break for corporations and a limit on the R&D; tax credit.

“I don’t think Rostenkowski realizes that there is not much wiggle room among those businesses that support tax reform,” said John M. Albertine, president of the American Business Conference and a leader in the Tax Reform Action Coalition, a group of about 220 associations and firms, which backs tax revision. “These changes may not have made them jump ship yet, but it has made them very nervous and very unhappy.”

Dozens of Changes Likely

As the Ways and Means Committee begins the weeks-long process of revising the tax package, dozens of other modifications are expected to be included that will further complicate the already complex plan. One of the most difficult tasks facing the committee will be developing so-called “transition rules” designed to ease the shift from one tax system to another.

Indeed, none of the lawyers and accountants who thrive on the complexity of the current tax code seem to be particularly worried about the prospect that Congress will simplify it.

“The more tax reforms they want to do, the merrier,” said Larry Axelrod of the Washington tax office of Touche, Ross & Co. “I’ll be able to send my kids to college on just the transition rules alone.”