Carter administration tax writers, sensing congressional opposition to major portions of the President's coming tax revision plan, have recommended he soften one of its key elements - his promised elimination of special tax treatment of capital gains.
In a series of option papers prepared Sept. 2 for the President. Treasury officials suggested diluting the provision on capital gains by including an "inflation allowance" that would reduce the taxes on profits from the sale of assets held for 10 ears or longer.
Currently, only half of a long-term capital gain is subject to tax: the other half in most cases, is exempt. In last year's campaign. Carter proposed doing away with this preferencal treatment and taxing gains like ordinary income. But that idea has can sharply criticized by conservatives and moderates in Congress and House Ways and Means Committee Chairman Al Ullman (D-Ore.) has warned the administration it will not pass.
The inflation allowance would exempt from taxation that part of a capital gain attributable to inflation, leaving only "real" profit to be taxed, and is thus a compromise.
It would be the first instance of so-called indexing - adjusting tax burdens to offset inflation - in the tax code.
The option paper acknowledged that "Treasury recognizes the inequitities involved in indexing capital gains and not other aspects of the tax law. Nevertheless, the proposal is made because it is thought necessary in order to obtain the approval of the taxation of capital gains as ordinary income. The Teasury proposal, a copy of which has been obtained by The Washington Post, essentially confirmed previous reports about the contents of the tax plan, including an across-the-board tax cut for individuals and sizable taz reductions for corporations.
But there were some new details The Treasury paper proposed:
A gradual phase-in of the tax cuts for individuals, rather than putting them all into effect in 1978, as most outsiders and assumed.
The phase-in would include the President's plan to replace the present $750-a-dependent personal exemption and $35-a-person credit with a general tax credit of $250 per person. The plan would be to set the credit at $210 in 1979, $230 in 1980 and $250 in 1981 and later.
At the same time, tax rates for individuals would be reduced in three stages between 1979 and 1981 from the current 14 per cent minimum and 70 per cent maximum to 12 to 50 per cent, respectively. The 50 per cent rates ultimately would apply to single persons with more than $60,000 a year in taxable income and to couples with $80,000 or more.
An easing of the so-called "marriage penalty," which currently results in a tax increase when two workers marry. The proposal would allow the spouse with the lower income to take a special deduction of 10 per cent of the first $6,000 in earnings, for a maximum write-off of $600.
Abolition of deductions for sales taxes, personal property taxes, gasoline taxes and miscellaneous state and local taxes. But deductions would be retained for state and local income taxes and real-estate taxes.
A requirement that banks and savings-and-loans institutions withhold taxes on the interest they pay depositors as a means of preventing passbook-holders from escaping payment of taxes on their interest. The withholding rate would amount to 20 per cent of all interest paid.
Limiting deductions for business meals to 50 per cent of the cost. Deductions for other business entertainment expenses, such as club dues, yachts, tickets to sporting events and hunting trips would be eliminated.
The proposal also recommended a larger liberalization than has been reported in the investment tax credit for business which is intended to encourage new spending on plants and equipment.
Previously, administration officials had said only that they planned to propose extending the current 10 per cent credit to include spending on buildings as well as equipment, and allowing corporations to use the credit to offset 75 to 80 per cent of their other tax liability, rather than the current 50 per cent limitation.
The option papers, however, also propose extending the 10 per cent credit for spending on pollution-control equipment and boosting the limit on using the credit to offset other taxes to 90 per cent.
The papers showed the total Carter tax package would provide $17.2 billion in net tax reductions - $13.8 billion for individuals and $3.4 billion for business. However, administration sources said these figures probably would be larger in the final version of the package.
The Treasury advisers also urged Carter in the memo to consider a contingency plan for speeding up the tax cuts for individuals in his package if the economy starts to sag in the second half of next year, as some economists fear.
The administration doesn't expect Congress to finish action on the tax plan until late next year at best, and for political reasons it doesn't want to split the tax cuts the President is opposing from the loophole-closing" tax increases his plan would impose in the name of reform.
Carter thus could have a tax-cut timing problem. His advisers suggested he solve this by asking Congress to lower withholding rates "temporarily" early next year, and make the lower rates permanent when it passes the overall tax package.