The EPIC saga that has been unfolding here in recent weeks is a uniquely American story.

Like a great many other things that happen in the economy, the growth of EPIC into a billion-dollar network of new houses couldn't have occurred without the help of the U.S. tax code. And the trouble that has befallen EPIC illustrates with startling clarity what critics of that code regard as its distorting influence on the economy.

In little more than a decade, the founders of Equity Programs Investment Corp. (EPIC) built a billion-dollar enterprise by selling a single product -- tax shelters. Although EPIC investment partnerships came to own some 20,000 new houses across the nation, they did not build the homes or even cause them to be built.

In fact, it is difficult to argue that anything EPIC did was, in a broad economic sense, productive.

Yet thousands of people were willing to put up $25,000 or more each to buy what EPIC was selling. From their point of view, it was a perfectly rational decision. Over the past 15 years, inflation and progressive taxation have pushed even widows and retired secretaries into brackets where tax shelters can yield better bottom-line returns than traditional investments such as stocks and bonds.

But is a tax code that makes such decisions rational for investors rational for the country?

The United States faces a rapidly widening trade deficit as the strong dollar and cheap foreign labor allow overseas competitors to underprice American producers. One essential step that American companies must take to battle back is to improve their productive capacity by investing even more in modern plants, new production equipment and research and development.

Many economists, however, see the tax code as a major impediment to this effort.

"One of the major factors responsible for driving up the cost of capital, reducing its supply, and misdirecting its application is the tax system," the President's Commission on Industrial Incentives concluded in a report issued early this year.

"The individual income tax," the commission added, "has discouraged or distorted choices regarding work, saving and investment through high rates, numerous special incentives and penalties, insufficient inflation adjustments, and preferential treatment toward consumption and borrowing rather than investment and savings."

This view is disputed by the real estate industry, which argues that incentives currently in the code have served the country well. The industry notes that we are the best-housed nation in the world and that nearly two-thirds of Americans own their own homes.

Real estate trade groups have taken the position that the tax code "ain't broke" and that Congress shouldn't fix it. They acknowledge that the code doesn't always function as it should, but they argue that it can be adjusted to eliminate abuses.

But what is an abuse? Did EPIC abuse the tax code? The company's tax shelter programs operated on fundamental principles of the code: depreciation, deduction of interest and operating expenses, capital gain treatment of sale proceeds.

EPIC set up limited partnerships to acquire and rent out newly built single-family homes, including display-model homes, which were leased back to builders for use in promoting sales in subdivisions.

Investors were entitled to share in all the write-offs that go with rental property, write-offs that in EPIC's case were designed to equal $2 for every $1 the investors put up. "EPIC has determined that a 2-to-1 write-off ratio and an annual installment of $10,000 is a very marketable product," according to an internal EPIC study of its partnerships.

Ultimately -- usually after about four years -- the houses were to be sold, and if all went well, the investors would recover their capital and share in any profits.

Even if things did not go well -- and they haven't -- investors could expect to break even after taxes even if they got only 25 percent of their investment back, according to the EPIC study. If they were to get all their invested capital back, their after-tax return would be a tidy 30 percent, the report said.

Real estate has enjoyed exceptional tax advantages for many years because the industry has argued -- and it is plainly true -- that direct real estate investment involves difficulties that stocks and bonds do not. Unless investors got something to offset this "hassle factor," few would want to go into it.

But since 1981, real estate has had benefits that are good even by historical standards. These, combined with middle-class desire to escape taxes, have created a growth industry. Firms have sprung up that do nothing but package and sell real estate investments. And while they argue that their projects have sound economic underpinnings, it is plain that taxes are what make investors willing to buy in.

Office building construction has outrun demand in virtually every American city. One reason is taxes. Builders and investors know that with the write-offs they can get, they can live with a lot of vacancies.

And vacancies they have -- estimates range as high as 28 percent when sublease space and buildings under construction are included -- because the economic climate is such that it's a lot easier to build structures than it is to build viable businesses to occupy them.

But viable businesses are what the nation needs, and it is going to need even more as overseas competition intensifies. If we are to hold our own in the world economy, we must have a new tax code -- one that encourages investment in real economic activity, not empty shelters.