In any history of the Tax Act of 1978, Ed Zschau probably wouldn't rate even a footnote.
Zschau - the president of a small obscure electronics firm - testified for all of five minutes before the House Ways and Means Committee on March 7. He then participated in a panel of witnesses that was questioned by the committee for several hours. His experience is hardly unique. Before the hearings finish in mid-April, Ways and Means will have heard more than 300 witnesses on the proposed tax reduction and "reform" bill.
That number says a lot. The federal government now spends nearly $500 billion a year, but, for most people, the tax system is where government begins and ends. If government is just or unjust, efficient or inefficient, or simply "good" or "bad," it is the tax system that makes it so.
Just reading the witness list is an enlightening and entertaining experience. In addition to the usual assortment of business executives, labor leaders economists, investment bankers and utility company presidents, Ways and Means has heard or will hear from the following: COST, the Committee for Single Taxpayers (a group which in turn, includes such political opposites as former Sens. Eugene J. McCarthy (D-Minn.) and George Murphy (R-Calif.) and celebrities Gloria Steinem and Frank Sinatra); the Ad Hoc Committee for Low Income Housing; the National Council of the Churches of Christ; Bowie Kuhn, the Commissioner of baseball; the American Horse Council, and the International Council of Shopping Centers.
Even the most hardened cynic cannot review this list without feeling a flutter of sympathy for the average congressman. Each of these groups feels, rightly or wrongly, that its way of life depends on its own special tax break. Simply understanding the technicalities of these issues is an overwhelming intellectual job; satisfying this horde of witnesses defies the laws of political gravity.
Congress long has been torn between providing such tax breaks and using the tax system to redistribute income. Anyone who has enough money to benefit from a tax break belongs - almost by definition - to the upper-middle or high-income classes. It sounds nicer to aid the poor and downtrodden.
But there are political and economic dangers. People may decline to work harder simply to give most of their extra income to Uncle Sam. Investors may shun the riskiest enterprises if prevented from reaping bonanzas. The operating forces are greed and selfishness, emotions that no congressman likes to mention in public but that may ultimately work in the public interest.
Ed Zschau's story is a case in point. Zschau, 38, came to Washington to plug a relatively unpopular item: the special treatment of capital gains. This provision favors the wealthy; its elimination has been a top target of tax "reformers" for years. Zschau argues, on the other hand, that making investments more profitable for the rich spurs the creation of new companies and new jobs. Everyone benefits.
Beating the capital gains drum, of course, is nothing new. For the unfamiliar, a capital gain is the profit registered on the sale of a long-term investment, such as common stock, a home, a farm or a small business. Stock brokers and businessmen always have favored low taxes on these profits on the theory that lowering the tax rate raises stock prices.
But, since 1969, Congress has heeded reformers and raised the capital gains tax. Untill then, capital gains were taxed at only half a taxpayer's normal rate, up to a maximum of 25 percent. Congress now has eliminated the maximum 25 percent tax (except on the first $50,000 of gain), and the maximum rate now can approach 50 percent. In addition, the administration has proposed raising effective rates further by eliminating the 25 percent maximum on the first $50,000.
To hear critics tell it, these changes help explain a listless stock market and lackluster investment. Much of the fun and profit has been wrong from the investment game, they say. Investors won't be on small, new companies if the odds of losing big - if the company goes bust - aren't offset by the prospect of a jackpot. A jackpot means that when a company's stock quadruples, the original investors cash in. Higher capital gains taxes cripple this type og gambling.
Zschau attempted to personalize these arguments. His own firm found it difficult to raise new capital in the United States to perfect a new high-speed computer printer. Zschau wildly underestimated the printer's development costs, but only a Japanese group wall willing to underwriter the extra investimetn, which now totals $5.5 million.
Citing a survey by his industry's trade group, the American Electronics Association, Zschau contends his experience is common. Since 1971, according to the survey, new, small electronics firms raised an average of only about $345,000 in capital against $1.2 million for firms founded between 1966 and 1970. With less capital, the newer firms pile up more debt and become more vulnerable to bankruptcy.
The facts may be clear, but the source of trouble is surely more obscure than Zschau implies. In addition to the changes in capital gains, a lot of other things have happened since 1970. Business optimism - and presumably the willingness to take big risks - has faded sharply. That, in turn, he depressed the stock market, which means that investors have fewer funds to invest. All these changes presumably have made investment capital scarer.
But stories like Zschau's don't make life easier to Congress. Many businessmen believe that the progressive tightening of capital gains is slowly outlawying a rough-and-tumble enterpreneurship that performs a vital function of maintaining competition and advance technology.
It's hard to know. What is certain is that virtually every group that comes to plead its cause believes that its own special interest and the national intersts are one and the same. And some of them just may be rights.