Assault on the Tax Code Begins

With IRS reform under way, Republican lawmakers turn their attention to simplifying or abolishing the US tax code.

Now that Republicans have succeeded in starting reform of the Internal Revenue Service, they have their sights set on even bigger game: the tax code itself.

But they face a long, hard trek before they can bag their trophy - if indeed they can capture it at all.

The House has already passed a measure that would phase out the current, convoluted tax code by 2001, an action President Clinton would almost certainly veto if the Senate follows suit. But if they keep control of Congress after next fall's elections, which at this point appears likely, Republicans vow to pursue measures to simplify the tax code, or to replace it entirely with either a flat tax or a retail-sales tax.

"The fact is that we have created a tax law which is so complex, so convoluted, such a mishmash of regulations and cross-purpose legislation, that it becomes basically unenforceable because it is not comprehendible," says Sen. Judd Gregg (R) of New Hampshire.

In the short run, Congress will limit itself to cutting taxes. First, the House and Senate must agree on a tax cut for the next fiscal year and then get Mr. Clinton to sign on. The House's budget resolution calls for a $101 billion tax cut over five years, while the Senate proposes a more modest $30 billion. Speaker Newt Gingrich (R) of Georgia and Senate majority leader Trent Lott (R) of Mississippi hint at a final figure of $60 billion to $70 billion.

GOP leaders want to alleviate the marriage penalty, in which some married couples pay more income tax than they would if filing single, the capital-gains tax, and estate taxes. The IRS bill, which most Democrats joined in supporting and the president says he will sign, indirectly cuts capital-gains taxes: It lowers from 18 months to 12 months the amount of time an asset must be held before a gain is taxed at the new, lower 20-percent rate. Democrats will try to direct any additional cuts towards lower-income taxpayers.

But Republicans are already trying to lay the groundwork for more radical action. House majority leader Dick Armey (R) of Texas and Rep. W.J. "Billy" Tauzin (R) of Louisiana have spent the past year crisscrossing the country, debating the respective virtues of a flat-rate income tax (Armey) and a national tax on retail sales (Tauzin).

Other, less comprehensive, proposals would simplify the existing system: Sen. John McCain (R) of Arizona proposes expanding the 15 percent bracket by extending it to individuals making $35,000 and couples earning $70,000. House Democratic leader Richard Gephardt (D) of Missouri proposes moving 75 percent of taxpayers into a 10-percent tax bracket by eliminating almost all deductions except that for home mortgages.

Not this year

Observers say action is unlikely this year, however. "Nothing in terms of fundamental reform will take place until at the very earliest next year," says Marshall Wittmann of the conservative Heritage Foundation, a Washington think tank. "Then it will be a question of whether Congress has the fortitude to move forward on this and also on whether they have cooperation from the White House."

Nor is it certain that Rep. Bill Archer (R) of Texas or Sen. William Roth (R) of Delaware, chairmen of the tax-writing committees, will move any specific proposals in the next Congress. While Representative Archer backs a consumption tax, Senator Roth "has not made up his mind on a specific solution," according to a Senate Finance Committee spokeswoman.

"The one thing that's certain is that we will continue to see heated rhetoric, much of which has a tenuous connection to reality," says William Gale of the middle-of-the-road Brookings Institution. "Bashing the tax system is good politics."

Who benefits?

It's not clear that the American people will buy into replacing the current system, says Mr. Gale, who favors a graduated income tax. For one thing, "both the flat tax and the sales tax would generate gigantic tax cuts for households in the top 1 percent of income levels," he says.

"If you're going to do that and maintain the same revenue levels, you're going to have to shift the burden to the rest of us."

Conservatives respond that they would reform the tax system and at the same time shrink the federal government so that the middle-class tax burden would not rise.

But doing either would take a consensus on both ends of Pennsylvania Avenue that doesn't now exist. That leads many to conclude that fundamental tax reform - if it occurs at all - will have to wait until after 2000 and will require Republican control of both Congress and the White House.

"You cannot make a major tax change without Pennsylvania Avenue and Capitol Hill working together," Mr. Wittmann says. Gale points out that the expertise needed to make any serious change in the tax code resides in the Treasury Department, which would have to cooperate.

Until then, Wittmann says, gradual change is most likely. "If Congress and the White House are unable to move on this question, I think what we'll see is incremental tax cuts over the next three years," he says.

While many Republicans think the issue is a winner, Gale disagrees. "If the Republicans held the White House and the Congress... they would attack this issue with the same relish that the Democrats attacked health care in 1992 - and they would be pummeled on it the same way the Democrats were pummeled on health care in '93 and '94."

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