Cries of Doom Come From Those Pinched by Loophole Closings : Majority Seen Reaping Tax Plan Benefits

Listen to the tales of woe about the tax revision bill adopted last Saturday by congressional negotiators: Apartment rents will rise 20%; business investment will stagnate; local governments will cut back on public projects; giving to charities will collapse.

If all these complaints are true, why is Congress on the verge of approving such a monstrous bill?

The answer, according to lawmakers and economists, is that the criticism comes primarily from those who stand to lose the tax benefits they have enjoyed at the expense of everyone else.

By contrast, just about everyone else--the taxpayers who neither take advantage of most special tax breaks nor employ a high-priced lobbyist to defend them--stands to gain directly, proponents of the legislation say. These taxpayers, who are not organized to make themselves heard in Congress or the news media, are the ones who will benefit from lower personal tax rates, higher personal exemptions and higher standard deductions.

“Most of those who are complaining now are upset simply because we won’t let them escape paying their fair share of taxes anymore,” said California Rep. Fortney H. (Pete) Stark (D-Oakland), a leading House tax writer. “For everybody else, we may not make it any more fun to pay taxes, but at least they won’t feel like chumps.”

And in the view of many economists, the general public also can look forward to indirect gains as the impact of the tax bill works its way through the $4-trillion U.S. economy. Business decisions, they say, will be driven by considerations of economic efficiency instead of the pursuit of tax advantages. With lower tax rates and the elimination of most shelters, many more investments will be based on their ability to generate real profits--not artificial tax losses.

“The ideal tax system does not interfere with decisions in the marketplace,” said Joseph Minarik, chief tax analyst at the Urban Institute. “Our economy will be as prosperous as possible if people base their decisions on real business considerations rather than tax consequences. All the screaming you are hearing is just a measure of how far from that ideal the old tax system was.”

After decades of congressional tinkering not only to benefit special interest groups but to advance a variety of social and economic goals, the tax code had become a creaky system of preferences, loopholes and shelters. Hundreds of profitable businesses avoided taxes altogether, and nearly half of the richest Americans--those with incomes above $200,000--paid an average of only 11% of their income in federal taxes.

As a result, public trust in the essential fairness of the tax code gradually had eroded and been replaced by a widespread sense that the system is rigged in favor of the well-to-do and those with political connections.

Moreover, there is scant evidence that the current system’s generous array of tax breaks to business and the wealthy has accomplished even its own stated goals of improving investment in the U.S. economy.

Hits Loophole Strategy

“Congress has seen through sad experience that the loophole-based economic strategy doesn’t work,” said Robert McIntyre, director of federal tax policy at Citizens for Tax Justice, a liberal tax reform group. “Money has poured into empty office buildings, into tax-shelter farming and into more than a half-trillion dollars worth of corporate mergers and acquisitions.”

Many conservatives, coming at the issue from a different perspective, also believe that tax revision will be a boon for the nation.

‘Tremendous Liberation’

“Lower tax rates will make all investment decisions more rational,” said Jeffrey Bell, deputy director of Citizens for America, a grass-roots conservative lobbying organization. “If you make it in this country, you won’t have to worry immediately about how you’re going to shelter your money from the tax collector. I can’t put a price tag on that, but it’s got to be a tremendous liberation for the economy.”

Although the new tax system will leave several tax breaks intact, the lower rates mean that even the surviving ones will be worth less. Today, for example, a taxpayer in the top 50% bracket can rely on the government effectively paying him 50 cents for each dollar of borrowing expenses, individual retirement account contributions or charitable donations. When the new rate structure is fully in place in 1988, individuals will be able to save at most 33 cents in taxes on the dollar.

Campaign Under Way

Even before the new tax code is in place, however, those who expect to suffer from the switch are beginning a campaign to reverse several of the key decisions made by congressional tax writers.

House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.) “may want to hang a ‘gone fishing’ sign on 1100 Longworth (the committee’s hearing room), but I wouldn’t rent out the space yet,” said Sen. Lloyd Bentsen (D-Tex.), who will be the senior Democrat on the Senate Finance Committee next year.

Mark Bloomfield, head of the business-oriented American Council for Capital Formation, conceded that there is little chance of preventing lawmakers from putting their final stamp of approval on the tax bill when they return from vacation next month. “It’s a pretty difficult locomotive to stop,” he said.

But even before congressional negotiators began working to produce the final version of the tax overhaul bill, Bloomfield began laying the groundwork for a conference early next month to examine new tax proposals that might help restore such valuable tax preferences as the investment tax credit and the exclusion of some capital gains--profits on the sale of investments held for at least six months--from taxation.

“When the next recession hits,” he said, “Congress will be back looking at ways of undoing what they’ve done.”

Similarly, the U.S. Chamber of Commerce, which appears unlikely to oppose the bill outright, is beginning to talk about ways of altering it later. “I think there will be a lot of organizations, including ourselves,” said David Burton, the chamber’s chief tax economist, “who will be working for change in the next Congress, next year, repairing mistakes that were made.”

Regan Denies Rewrite

White House Chief of Staff Donald T. Regan, in an interview with reporters in California, where President Reagan is vacationing, denied reports that the Administration would seek to rewrite sections of the bill after it is enacted. “There is no such endeavor,” he said.

Regardless, congressional tax writers next year almost surely will have to make “technical corrections” in this year’s massive bill and that will open up an opportunity to make substantive changes. But some analysts are convinced that lawmakers will be reluctant to wade back into that swamp after spending nearly the entire last two years in it.

“Sure, there are going to be a lot of proposals,” Bell said, “but I think people want to take a breather.”

Indeed, just hours before the House-Senate conference committee completed action on the tax measure last Saturday night, the House’s chief tax writer made it clear that he does not want to go through a similar ordeal again.

“If I had known what we would go through when we started, I wonder whether I would have started all this,” Rostenkowski said. “We pulled the whole goddamn tax code apart and put it back together.”