The Taxed Bite Back : Taxes: Angry watchdog groups are barking about America’s tax laws and sending their opinions to the President.

The Democrats have blamed the Republicans, the Republicans have blamed the Democrats. The President has waffled. The nation has muddled on without a federal budget.

In the halls of Congress, members have squabbled about capital gains taxes and Medicare and luxury taxes and whether it will be the rich or the middle class that must pay to reduce the federal deficit by $500 billion.

Meanwhile, from coast to coast, a spate of watchdog groups with names like TRIM (Tax Reform Immediately) and TRAC (Tax Reform Action Coalition)--and with widely divergent political leanings and motives--have their own ideas about who ought to be paying what to the IRS.

For some, the greater good appears to be the goal; others just want to make sure it isn’t their ox that gets gored.

There is, for example, Tax Free America, headquartered in North Hollywood. In its view, the whole debate over whether to swap a tax increase for the wealthy for a cut in the capital gains tax is, well, irrelevant.

“The tax system doesn’t work and we can’t fix it,” says group founder-president Boris Isaacson, a retired businessman. “We have to get rid of it. There’s no way you can adjust, amend or fix the tax system to where it would be fair.”

Instead of income taxes, which in Isaacson’s view are an anachronism “invented by kings” and are oppressive and undemocratic, Tax Free America advocates abolishing all federal, state, county and city taxes and replacing them with a 2% “trade charge” on all purchases, to be split by the state and federal governments.

In California alone, Isaacson says, consumers spend close to $20 trillion annually on goods and services.

“We’ve done our homework,” he adds, and concluded that 1% of that “would bring in way more than they need” in Sacramento.

It’s an idea whose time has at least come to be tested. In November, Montana residents will be first to vote on such an initiative; initiative efforts in California fell so far short, Isaacson acknowledges, that “we didn’t even bother to count”--a fact he attributes to campaign under-funding.

As for the recent Washington imbroglio, Isaacson says, “We think the whole budget process is kind of a joke. If we’re successful, there won’t be any tax breaks for anybody.”

In Washington, the National Taxpayers’ Union is taking a different approach.

“We advocate a simple freeze on federal spending,” explains spokesman Pete Sepp, which would mean “keeping federal spending increases at, or below, the level of inflation.” If that happens, he says, the natural growth in revenue will catch up and balance the federal budget in a few years. The group has targeted for cost-cutting federal programs ranging from aid for Amtrak to uranium exploration subsidies.

The union, which claims 200,000 “average taxpayers” as members, is “most disappointed with the tax increase aspects of these budget plans . . . “ Sepp says. “We don’t feel anyone is under-taxed.”

Citizens for Tax Justice, also based in Washington, wants legislators to take back some of the big tax cuts granted in the past decade to corporations and to the nation’s wealthiest 5%.

It has a program that it believes will trim the deficit, curb tax shelters and protect middle-income families. Specifically, it advocates increasing the income tax rate only for the wealthiest 5%--those with an average income close to $200,000--from 28% to 38%, thus raising $142.3 billion by 1995.

The group also has targeted top corporations that it believes are not paying their fair share. Although some loopholes, such as investment tax credits, were largely closed by the 1986 Tax Reform Act, says policy analyst Doug Kelly, the group’s most recent study, deduced from annual reports, showed that, in 1988, six of Forbes’ top 250--the nation’s largest and most profitable corporations--not only paid no taxes but got refunds.

“In 1989,” Kelly says, “there were more companies not paying federal taxes because of all the leveraged buyouts, things like that.”

Privacy laws make it tough to get figures on individuals, he observes, but CTJ tracked the returns of the Helmsleys of hotel fame and found that they saved $38 million in taxes between 1983 and 1985--even before they “went beyond the law,” by taking advantage of capital gains provisions in effect before 1986.

CTJ is now casting a jaundiced eye on such things as “angel of death” provisions for avoiding estate and gift taxes.

TRIM, an affiliate of the Appleton, Wisc.-based John Birch Society, sees its role as “protecting the citizens against the excesses of government,” says director Jim Toft.

“We believe government’s proper function is to protect life and property, but not to provide for its citizens” in areas such as health and human services, for example. “Since World War II,” he says, “every dollar in new taxes has led to $1.52 in new spending. These guys just can’t hold the line.”

TRIM supports, in philosophy, repeal of the income tax. It is not much interested in what Toft calls “small potatoes”--budget debate items such as gas and capital gains taxes. “The overriding issue is of big government out of control.”

Toft says TRIM is “looking at the issue of taxing the American taxpayer to police the world,” specifically the Mideast, and whether this might be unconstitutional.

In Washington, TRAC, a coalition of associations and companies, was a major player in 1986 tax reforms. Then, says spokesman Dirk Van Dongen, “we all went back to the armory and hung up our uniforms.”

But the group, which advocates lowering individual and corporate income taxes, has renewed its work on Congress.

“We feel very, very strongly,” Van Dongen says, that “the marketplace is the most superior allocator of capital ever invented. You’re better off leaving the money with the people to begin with and letting them make business decisions based on economic considerations . . . rather than having people be driven into llama ranches (to gain tax shelters).”

As for the capital gains debate, Van Dongen says, “There is very little support in the business community for a change in the capital gains rate with the exception of a few like the tree people, the timber guys. This thing has a priority in the mind of the President far beyond what it has in the business community.”

The No. 1 target of the Washington-based National Tax Equality Assn., which represents small businesses and community banks, is what President Edward N. Delaney calls “government-sponsored competition, tax-free commercial activities that, in our view, have an unfair advantage in the market.”

These include the new thrift industry, some large credit unions with tax-exempt status and utility cooperatives, which still enjoy tax-exempt status to electrify rural America, although, Delaney notes, “that’s been completed for 20 years.”

Adding insult to taxpayer injury, the group notes, is that the users of subsidized power include the rich who visit exclusive resorts including Vail, Colo., and Hilton Head Island, S.C.

His group is a member of COFIRE, the Coalition for Fiscal Restraint, a number of whose members sent a recent letter to President Bush insisting on “genuine budget process reforms.”

The group supports cuts in the defense budget and increased excise taxes, including a 50-cent-per-pack cigarette tax. “The cost of smoking to the government is incredible,” Delaney says.

Ben Franklin notwithstanding, death and taxes were not always certain. America had no income tax until 1862, when Congress enacted the first, based on progressive taxation and withholding, to support the Civil War. Those earning between $600 and $10,000 paid 3%.

The income tax later was eliminated, then revived until, alas, in 1913 the 16th Amendment made it permanent.

Taxes now remain a fact of life--from which not even the President is not exempt.

President and Mrs. Bush’s 1989 return showed that they paid $101,382 in federal taxes on a taxable income of $456,780.