Tax-code Rewrite Looms on Congressional Horizon

Kansas City Star

WASHINGTON _ Nearly a decade after Congress thought it had rehabilitated the tax system for ages to come, reformers are embarking on another march against tax complexity.

Amid tax-cut fever, a surprising consensus is forming to come back later to simplify the cumbersome, creaking tax code. Some reforms are so drastic they make the 1986 reform law look tame by comparison.

House Majority Leader Dick Armey is setting the agenda with a proposed 17 percent flat-rate tax and a tax form about the size of a postcard. Other would-be reformers are scrambling to catch up, including House Minority Leader Richard Gephardt.

When two lawmakers so ideologically opposed begin competing for the spotlight, something is afoot, experts say.

"Tax reform is almost laughed about inside the Washington Beltway," said Bryan Riley, an economist with the conservative Citizens for a Sound Economy. "But when you get out into the real world and deal with the anger and frustration people have with the tax system, you find a lot of support."

While there are no guarantees Congress will act on its impulses, reform might get an unlikely boost from deficit-conscious Senate Republicans. They could help steer the debate away from short-term tax cuts to long-term simplification.

Speaking for several other senators, Senate Finance Committee Chairman Bob Packwood said recently: "I put a lot higher priority on deficit reduction than I do on tax cuts."

The long-term plans: Armey proposes replacing the current tax code and allowing only personal and dependent exemptions. Unearned income, such as dividends, capital gains and interest, would be tax-free. Withholding would be eliminated, and taxpayers would send a check every month to Uncle Sam to help them measure government's true costs. Gephardt, a leader in the 1980s reform movement, will reveal his own plan in three weeks or so. It will contain three tax rates, not one. The Missouri Democrat's goal is to eliminate enough deductions to tax four out of five taxpayers at a 10 percent rate on all income, earned and unearned. Sen. Pete Domenici and Sen. Sam Nunn want a three-tier individual tax that would tax only the income that is not saved or invested. They propose a flat-rate business tax to accompany it. House Ways and Means Committee Chairman Bill Archer, along with many other lawmakers, advocates tossing out the current income-tax system entirely. He wants a consumption tax. Such taxes could take different forms, but they would largely resemble a national sales tax.

Hearings will begin this fall and action could take place as soon as next year, congressional aides say.

Despite the varying details, everyone's main goal is to create higher levels of national savings, to be invested in future economic growth and jobs. Most agree that the current system is too complex, too inefficient and too costly to administer.

"The federal income-tax code is un-American in spirit and wrong in principle," Domenici told the Senate last month. "Because it levies a double tax on dividends and taxes savings, it discourages risk-taking, entrepreneurship and the creation of jobs.

"It is hostile to savings and investment and tilted toward consumption. It encourages corporate management to neglect long-term investment in favor of focusing on short-term profits."

Armey argues that his tax would in effect provide all Americans with the tax equivalent of an unlimited individual retirement account. Almost all taxpayers, especially families with children, would get a tax cut, he says.

Flat-tax plans have won a second look from Senate Majority Leader Bob Dole. Congress should consider a flat tax, the Kansas Republican said, if it would simplify taxes without shifting the burden from upperincome to middle-class and lower-income taxpayers.

Critics charge Armey's plan would not meet Dole's test. By excluding unearned income, they say, it would effectively turn into a massive tax cut for the wealthy and perhaps leave middle-class taxpayers no better off.

"The majority leader has played fast and loose not only with logic, but with the facts," said Robert McIntyre, head of the labor-backed Citizens for Tax Justice.

Gephardt, in developing a Democratic alternative, is returning to an earlier era when Democrats controlled the House and his plan set the pace.

Just 10 years ago, Gephardt was touring the nation to stir up backing for an overhaul plan he was sponsoring with Sen. Bill Bradley of New Jersey. Compromises led to the 1986 reform, a law that Gephardt said fell short.

"The current tax system is crazy," he said. "Our last effort at reform wound up with more complications instead of less. I think we cannot micromanage the economy or people's economic decisions from Washington. I don't think we're smart enough."

Gephardt has not decided which deductions to jettison to reach a 10 percent rate. There could be plenty of losers, though _ from churches that benefit from the charitable deduction to homeowners taking the home-mortgage deduction.

"But if you believe in simplicity, and you believe in low rates, and you believe in people making their own economic decisions, you tend on the side of taking everything out and getting the rates as low as you can," he said.

One testimonial to the issue's toughness came last year from a special presidential commission studying entitlement and tax reform. Despite its mission, tax reform proved so untouchable that the panel's final report ducked the issue entirely.

"The biggest issue, in my opinion, is grassroots education," said Mark Weinberger, the panel's top aide. "You need to try to convince the American people that you are not throwing more taxes on top of the current system."

For Congress, the immediate question is whether to approve short-term tax cuts.

House Republicans have more than a dozen tax breaks in their "Contract With America." Clinton has countered with his "Middle Class Bill of Rights." Gephardt and Sen. Phil Gramm, a GOP presidential candidate, each have their own plans, too.

The key decision will be whether House Republicans can find

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