Betraying Tax Reform

IT was just three years ago that Congress, with great fanfare, enacted sweeping tax reform built on a Grand Compromise: lower tax rates in exchange for fewer loopholes and preferences. This revision of a tax code grown fat with byzantine complexities and special-interest sugar plums was hailed as a triumph of fairness and simplicity. Last week the House of Representatives stepped backward when it approved a bill reducing the tax rate on capital gains - earnings from the sale of stocks, bonds, property, farms, and family businesses. Whatever the bill's merits, and they are ambiguous, the vote is worrisome. It hints at a return to the days when the shelter-strewn tax code was used to achieve many objectives besides government revenue.

As now structured, the two-year tax cut will neither achieve its backers' rosy scenarios nor fulfill its opponents' dire warnings. It's hard to see how the temporary tax relief can do much to encourage savings, investment, and national competitiveness, as President Bush and other backers assert. At the same time, opponents' claim that a cut would result in a short-term revenue blip followed by deep losses after a few years - even if true - is irrelevant unless the cut is made permanent.

Everything about the bill and the debate was disingenuous: the two-year time frame - which moots most of the economic contentions; the confidence with which both sides trotted out problematic economic predictions; and the soak-the-rich, populist (but don't look too closely) alternative measure sponsored by House majority leader Richard Gephardt. (Have the Democrats learned nothing from three successive landslide losses to antitax Republicans in presidential elections?)

In the end, this legislation is about giving a tax break to a rather small number of owners of capital assets. (Not all of whom are wealthy; just ask the owner of a small farm or business or the retiree with a modest stock portfolio built up over many years.) Maybe that's good, maybe not. It's hardly a matter of grave national importance, though, and it has consumed far too much of Washington's time and attention.

Congress should index the capital-gains tax for inflation, and otherwise leave the Grand Compromise alone. Then, at a time of large national challenges, the White House and Congress should get back to their knitting.