An Election-Year Tax Increase?

By GEORGE J. CHURCH

Confounding cynics, Congress weighs a $21.1 billion boost

It is widely thought to be one of those political impossibilities, like voting against a resolution in praise of the flag. Nonetheless, there is a growing chance that Congress really will raise taxes in an election year, just as it said it would when the budget was approved in June.

The budget resolution declared that taxes ought to be raised by $20.9 billion during fiscal 1983, which starts Oct. 1, in order to keep the prospective federal deficit from exceeding $104 billion. The crucial questions of whose taxes should be raised and by how much were left to be answered by later legislation, which many cynics doubted would ever be drafted.

Shortly before the July 4 recess, however, Senate Finance Committee Chairman Robert Dole of Kansas got the Republican-controlled unit to approve, by a party-line vote of 11 to 9, a bill that would raise taxes for individuals and businesses by $21.1 billion in fiscal 1983, and by $98.6 billion over the next three years. President Reagan last week gave his blessing; White House Spokesman Larry Speakes said the bill preserved "the basics of our economic program." Members of both parties expect that the Senate will pass the bill virtually intact shortly after it reconvenes this week.

That, in turn, will put pressure on the Ways and Means Committee in the Democrat-controlled House to report out a similar bill. Like several other committee members, Massachusetts Democrat James Shannon sees "a good chance" that this will happen, but quickly adds that there is no guarantee of passage. The catch: no one can predict the outcome of the battle on the House floor.

New York Republican Barber Conable sums up the conflicting pressures. On one hand, legislators know that unless they raise taxes enough to give some real hope that budget deficits can be kept from spiraling out of control, interest rates are likely to stay high and choke off a recovery from the lingering recession. Says Conable: "Wall Street is watching us very closely to see if we are serious or just playing games." But when the House takes up its version of the Dole bill, it is certain to be pounced upon by lobbyists for an extraordinary array of powerful interests: doctors, lawyers, airlines, aerospace contractors, banks, tobacco farmers and cigarette makers. Says Conable: "The Senate caught them napping, but now they have to take all these proposals seriously." The bill's fate might well be determined by the attitude of the White House. Says Shannon: "If the Administration wants to push hard, it can pass." If not, the House might reject any tax increase.

Nonetheless, many legislators are astonished that major tax increases have even reached the point of serious consideration, particularly since such boosts totally violate Reagan's campaign promises and the supply-side philosophy to which he remains committed--at least in theory. That is largely a tribute to the skill and persuasive powers of Dole, who put together a remarkable grab bag of 24 proposed tax hikes, many of them nickel-and-dime items that still add up to substantial money. For individual taxpayers, the major changes are: 1) a 10% withholding tax on dividends and interest--furiously opposed by banks, which would have to do the paperwork; and 2) a limit on deductions for medical expenses to those that exceed 10% of a taxpayer's adjusted gross income vs. 3% currently. Taxes on airline tickets and telephone calls would be increased, and the excise tax on cigarettes would be doubled, to 16-c- a pack.

Business taxes would be raised in a number of ways. New rules would boost taxes on professional corporations, such as those set up by doctors and lawyers to shelter income; aerospace and other government contractors would be required to speed up payment of taxes on their profits. More important, the bill would modify some of the excessively generous tax breaks enacted last year. New restrictions would be put on accelerated depreciation write-offs by businesses, and limits enacted on the right of businesses to buy and sell tax losses by engaging in paper leasing transactions.

Some such melange is probably the best that can be accomplished now. But it is far from ideal. There is a developing consensus that the best long-range way to reform the bewilderingly complex tax code is to scrap it entirely and start all over again with a so-called flat-rate tax law. Such a measure would eliminate all or nearly all exemptions and deductions and tax 100% of individual income at the same rate; 18% is one figure that proponents mention. Other versions propose a limited scale of rates, running perhaps from 14% to 28%. Corporate income also would be taxed at a uniform rate.

Variations of this idea have picked up support from Consumer Activist Ralph Nader on the left to Senator Jesse Helms of North Carolina on the right. Reagan last week called it "very tempting," though White House Chief of Staff James Baker later added that no proposal will be made until next year at the earliest. Dole promised extensive hearings by the Senate Finance Committee this fall. The Democratic midterm convention two weeks ago pledged the party to "lead the national debate" over a drastic simplification of the tax system.

Skeptics insist that "there is a lot more sizzle than hamburger in that issue," as one House Democrat puts it. Some liberals regard the flat rate as a violation of the principle that tax rates should rise with ability to pay. Those who now benefit from deductions would be loath to give them up, so some flat-rate schemes would retain deductions for charitable contributions and interest on home mortgages. Even one or two such "exceptions," however, might open the floodgates for many more, and that would destroy the basic principle. California Democrat Leon Panetta, a House leader in budget debate, predicts that three to five years of intense discussion will be required before even a mild variation of the flat-rate idea can be enacted. Probably so, but if Congress can seriously consider raising taxes substantially in an election year, anything may be possible. --By George J. Church. Reported by David Beckwith and Evan Thomas/Washington

With reporting by David Beckwith, Evan Thomas

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