Money for the Middle Class

The House rejects the President and votes a tax cut of its own

"What is the Administration proposal?" House Speaker Tip O'Neill inquired somewhat rhetorically last week.

"I don't know what it is. Does anybody know what it is?"

The subject of O'Neill's derision was that basic concern of practically every American: taxes. President Carter last winter proposed a tax cut of $24.5 billion to stimulate the economy, as well as a series of controversial "reforms" highlighted by a levy drying up the "three-martini lunch" as a business deduction. But as the economy recovered, the House Ways and Means Committee reduced the tax cut and threw out almost all the reforms as well.

Only two weeks ago, as the House committee was completing its work, did the Administration come up with a complex new tax bill. "Even the sponsors don't understand it," charged Ways and Means Chairman Al Ullman in the midst of last week's nine-hour debate, which touched on all aspects of the U.S. economy. His committee's bill, he said, is a "strong response to a nation worried about inflation and a message to the middle-class families of this nation that they aren't forgotten."

The House agreed (and the Senate will probably take a similar stand next month). It voted down the Administration's proposals, 225 to 193, and approved the Ways and Means Committee bill 362 to 49. That provides an overall tax cut of $16.3 billion. The message will not entirely appease the middle class, however, since the cut translates into an average of only about $163 per year in savings for the individual taxpayer. Because of the large increase in Social Security taxes scheduled to go into effect in January, many members of the middle class will be paying more to the Government than before, even with the tax cut.

The House bill trims individual income taxes by $10.5 billion, mainly through the device of widening the brackets so that people will not move so quick ly into higher ones when they earn more money; it thus softens the impact of inflation on taxes. Other elements:

> The personal exemption is boosted from $750 to $1,000.

> The standard deduction is increased by $100, to $2,300 for single persons and $3,200 for couples.

> The corporate income tax rate is shaved from 48% to 46%, thereby achieving an estimated saving of $5 billion a year to businesses.

> The 10% investment tax credit for spending on plant and equipment has been made permanent and has been broadened to include rehabilitation of existing structures.

> Capital gains taxes are cut $1.8 billion by reducing the maximum tax from 49% to 35%, a compromise with the amendment of Wisconsin Republican William Steiger, who proposed slashing the tax to 25%.

> Homeowners smarting from high property taxes are given a once-in-a-lifetime break. They can pocket up to $100,000 tax-free from the sale of their homes --but they have to pay the regular capital gains tax on any houses they sell after that.

> The capital gains tax is tied to the cost of living index, thus excluding from taxation any capital gains that result from inflation.

Carter's last-minute tax bill was not that much different from the one that was approved. It proposed a slightly larger tax cut of $18.3 billion that was tilted in favor of lower-income taxpayers. Those earning more than $50,000 a year would have received a smaller reduction; those making less than $15,000 would have got a bigger break. The taxpayers in between would have fared about the same. The Administration bill also accepted the capital gains tax reduction but offered a complicated graduated minimum tax instead of the flat 10% minimum rate in the committee bill. Of all the reforms proposed by Carter, the only significant one to survive in the House was the elimination of deductions for state and local gasoline taxes from federal income taxes.

What particularly baffled and annoyed Congressmen was the timing of the White House bill. The last-minute maneuver looked as if the President were trying simply to save face--and not succeeding. The White House prevailed upon two liberal Congressmen, Joseph Fisher of Virginia and James Gorman of California, to sponsor the measure. O'Neill scarcely concealed his irritation. "If the Corman-Fisher amendment had been brought here five months ago," he said on the House floor, "it would have sailed through the House."

While Republicans grinned and snickered, Good Soldier O'Neill defended the White House bill as another step toward an egalitarian America, but he did not have his heart in his speech. He actually sounded as though he were apologizing for the President, and he pointedly told the White House that he would not "twist any wrists" on behalf of the bill. Referring to the fact that Treasury Secretary W. Michael Blumenthal and other Administration officials were still hotly lobbying for the measure even as the bells summoned Congressmen to their seats, Illinois Republican John Anderson castigated the "late-blooming Blumenthal bill." Enough Democrats agreed, ensuring the measure's defeat.

The tax-cut vote was also a setback for New York Republican Representative Jack Kemp, 43, who has staked his promising career on the issue of a sweeping 33% reduction in federal personal income taxes over a three-year period. Kemp argues that the cut would be such a spur to the nation's production that the Federal Government would soon recover much of the revenues lost by the cut --a prospect that critics sneeringly refer to as a "free lunch." Under Kemp's prodding, many G.O.P. candidates are seizing on the issue; this fall the Republican National Committee plans to fly Kemp and the bill's cosponsor, Senator William Roth of Delaware, to various parts of the country to dramatize what they are billing as the "Republican tax cut."

As onetime pro football Quarterback (for the Buffalo Bills) Kemp approached the microphone in the well of the House last week, Democrats muttered: "He's coming out of the huddle; he's putting on his helmet." Indeed Kemp charged right into a fervid demonstration of what he calls the "No. 1 offensive play in the country." His right arm flying as he gestured toward a nearby chart, he assured the House that the cut would free the economy from its bonds and generate investment, jobs and federal revenues. Republicans came to his support. "All tax cuts are not inflationary," said New York Representative Barber Conable, senior minority member of the Ways and Means Committee. "If we can meet the capital hunger this nation has, then it will be anti-inflationary in the long run."

The Democrats just as solidly derided the proposal. "Blatant hucksterism," scoffed Majority Leader Jim Wright. "The glittering bauble of opportunism. Are we of the House of Representatives merely mirrors for every passing whim?" Added retiring New York Representative Otis Pike: "This motion shouldn't be voted down. It ought to be laughed down." Pike wondered what had happened to the cherished Republican doctrine of the balanced budget. "Weep, grieve, lament for the death of fiscal responsibility in the party of Coolidge, Hoover and Alf Landon. We all know the Republican Party is in trouble. But we didn't know that in its death throes it would be willing to sell its immortal soul." The proposal was finally voted down, 240 to 177--by no means a laughable margin.

When the tax cut reaches the Senate, it will probably be increased. Says Finance Committee Chairman Russell Long, who has a firm grip on his committee:"To be honest, I'm going to be for the biggest tax cut the Senate will let us recommend." That might be $20 billion, including a reduction in the maximum tax on capital gains to 19.5%. Asked about the Kemp-Roth proposal, Long said with a smile: "I find a lot of appeal in the amendment, but I just don't think it's going to become law any time soon.

I think it's mainly a political exercise." When the final tax bill reaches the President's desk late in the session, he is expected to ignore his past rhetoric about the system being "a disgrace to the human race" and sign it.

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