Having abandoned hope for comprehensive tax reform during 1978, the Carter administration has tailored a combination of huge tax cuts and modest reforms which is supposed to bring the President a clear victory in Congress, according to administration.
The tax package - to be sent to Congress early in 1978 - includes several more "reform" provisions than previously reported, but still falls far short of earlier administration plans for comprehensive reform. Neverthless, administration strategists and their allies in Congress see a distinct possibility that the victory Carter hopes for will not be achieved.
Official sources say the administration feels trapped between Carter's campaign promises on tax reform and his weak position in Congress, where tax reform has no apparent constituency.
The administration feels it cannot abandon tax reform entirely, so will propose measures including the following:
Elimination of the "alternative tax" provision of the capital gains tax. This currently allows individual taxpayers in brackets above 50 per cent to save taxes on their first $25,000 of capital gains each year. They can pay the alternative tax, which is a flat 25 per cent, instead of the standard capital gains rate of one-half a taxpayer's general income tax rate. (Earlier the administration had drafted plans to eliminate the capital gains preference, but this was one of many bolder ideas that have now been dropped.)
Elimination of accelerated depreciation of real estate holdings. This would make real estate a slighly less attractve tax shelter by forcing all owners of real property to depreciate it according to standard formulas.
Tightening up of the minimum tax, which is intended to imposes some tax on wealthy people who make extensive use of tax whelters.
As previously reported, the President will also seek an end to certain incentives for exports and preferences for corporated income earned overseas, and will seek new restrictions on expense accounts.
All these proposals will go to Congress in a package that includes about $25 billion in tax reductions. The administration hopes it can win support for its modest reforms in conjunction with the popular tax cuts.
However, administration strategists foresee a problem here because of the need for large tax cuts to prevent a downturn in the economy. Privately, officials acknowledge that opponents of tax "reform" in Congress may be able to delay consideration of the President's package until the White House will have to agree to separating reform from reductions to get quick passage of the reductions.
Official sources also note that Congress may calculate that $25 billion in income tax cuts will only offset increase in Social Security and energy taxes, leaving most Americans with no net gain in purchasing power. This could prompt Congress to increase the size of the tax cuts another $10 billion or so, sources speculated.
Carter might not be able to block such an increase in his proposed cuts, though if it were approved it would eliminate the already remote possibility that he might really balance the budget by 1981.
Uncertain as the tax prospects look, administration strategists argue that Carter should be given credit for adapting his hopes and intentions to the political realities in Congress. One official suggested that the tax bill represents the first important occasion that Carter has tested the political waters before making a major initiative, and substantially altered that initiative as a result.
"He is learning from mistakes," this offical argued.
Adminstration lobbyists on Capitol Hill reportedly have found that even some liberals who are friends of more comprehensive tax reform advised Carter not to press for it at this time.
Congressmen have told the administration that tax reform has no constituency, though tax simplification would be extremely popular. The fact that 1978 is an election year dampens many House members' enthusiasm for tax reform, which usually angers special interests without pleasing the mass of voters.
Administration lobbyists have also found that some members of Congress who supported earlier Carter initiatives like the $50 tax rebate last winter or the original form of his energy program now resent the way these ideas were subsequently abandoned or altered. Members who share this resentment have acknowledged to administration officials that they are now more wary of supporting a bold tax reform plan.