New Loopholes Disguised as Tax Cuts

To tax reformers, the tax bill passed by Congress last week sounds like a dud.

"We have mucked up the tax system with a flotilla of new tax credits, deductions, and loopholes," complains Stephen Moore, an economist at the CATO Institute, a libertarian think tank in Washington.

The bill takes hits from critics at both ends of the political spectrum: liberal to libertarian.

The White House and congressional supporters praise the new measure because it proclaims a balanced budget by 2002. It also delivers lower taxes to politically powerful groups: middle-class families, wealthy investors, and corporations.

The result, say critics, is a complicated and tangled tax bill.

"Clearly we are moving away from the thrust or spirit of the 1986 tax reform bill," notes Martin Sullivan, an economist at Tax Notes, a weekly publication in Arlington, Va.

The 1986 legislation tried to simplify taxation by eliminating tax deductions. This raised revenues, thereby allowing a cut in income tax rates.

To economists, removing what they term "tax expenditures" - loopholes to the rest of us - makes the tax system fairer. And lowering marginal tax rates improves incentives, making the economy more efficient and competitive.

The new tax bill, however, produces a new range of tax breaks, some for the middle class, some of it "corporate welfare."

"This bill was designed to repeal most of the 1986 act," grumbles Robert McIntyre, director of Citizens for Tax Justice, another Washington think tank.

"Corporate-giveaway provisions" in the new bill, he calculates, amount to "many tens of billions" of dollars over the next 10 years.

The reformers take aim at both the Democratic White House and the Republican-controlled Congress.

President Clinton embraced a virtual sieve of loopholes: credits for children and college tuition plus a complex expansion of Individual Retirement Accounts.

Since these were billed as tax cuts, the Republicans went along.

Mr. Moore disparages such tax measures as "social engineering."

Tax reformers say they favor straight-forward spending to accomplish the same goals. But for political reasons, the president can't increase spending, though he can raise tax expenditures.

"There is nobody in this administration who is a strong voice for good tax policy," Mr. Sullivan says.

This proclivity for tax expenditures raises the question of whether the president will use his new line-item veto to purge dozens of special "corporate welfare" tax breaks in the bill.

Clinton plans to sign the tax and spending bills today. He then has five working days to use his veto power.

"There are a lot of veto-bait provisions in this bill," Sullivan says.

Skeptics might argue that one reason for corporate tax breaks is the near desperation of some members of Congress for campaign contributions. Though politicians can't promise a tax break in return for contributions, business lobbyists and others know that money gets attention.

"They get their favors returned in the form of special interest provisions," says Moore, who does approve of the capital gains cut in the bill. He describes the tax bill as "a hodgepodge of special interest benefits" for anyone who has political muscle.

He has a sympathetic ear even within Congress.

In January, Sen. John McCain (R) of Texas led a bipartisan group of senators who proposed a nine-member commission to identify "wasteful corporate welfare programs which are not in the public's interest and recommend them to Congress for reform or termination."

The independent commission would be modeled after a bipartisan group that advises Congress on closing military bases - another politically sensitive matter.

Senator McCain figures his commission could ensure that no one in Congress has an advantage in protecting "their special interest corporate pork."

So far the bill has passed through the Senate Governmental Affairs Committee, and McCain's office hopes for a Senate vote this fall.

Another effort to tackle corporate welfare was launched earlier this year by House Budget Committee chairman John Kasich (R), of Ohio. The 12 welfare items on his list were on the spending side, rather than tax expenditures.

Spokesman Bruce Cuthbertson notes successful cuts in coal and timber programs.

"We haven't hit any home runs, but we've had some solid hits," he says. "We knew ... it would be a tough, long haul."

Ralph Nader, the consumer advocate, says Rep. Kasich "is not getting very far" in this area.

Nonetheless, he hopes that tackling corporate welfare will be "the next focus" in Washington. "It drags along, drags along, and then suddenly it erupts," he says.

Martha Phillips, executive director of the Concord Coalition, a grass-roots group fighting for eliminating the deficit, is less hopeful. "For such a big target [corporate welfare], it proves amazingly nimble, how it avoids the bullets," she says.

One problem is that corporate benefits are "devilishly difficult to explain," she says.

Another factor is that the budget is moving into a surplus. "When you have extra money, what is going to drive you to take on these obscure provisions?" Ms. Phillips asks.