THE TAX debate this year has been remarkably unencumbered by the sort of good government attempts to close loopholes and otherwise simplify the tax code that normally go by the name of tax reform. There is, however, one important move in that direction in the tax bill coming to the Senate floor. This is a provision ending a $1.3 billion tax dodge known as the "commodity tax straddle." Wait till you hear who's on which side of this jone: despite strong backing from the Reagan administration and bipartisan support in the Senate Finance Committee led by Chairman Robert Dole, the reform may now be jeopardized by a contrary Democratic-majority vote in the House Ways and Means Committee. This, it is feared, could fuel opposition on the Senate floor.
The commodity tax straddle is a complicated transaction in which investors contract simultaneously to buy and sell some commodity -- Treasury bills are the current favorite, silver used to be -- at future dates at a specified price. Depending on whether the price of the commodity goes up or down, one contract will show a loss and the other an offsetting gain. The trick is to space out contracts so that losses can be offset against high taxed income or short-term gains in the current year, while gains are deferred until they qualify for the much lower capital gains tax. Staying in the game from year to year can even allow people with millions in income to avoid taxation indefinitely.
The commodity tax straddle is a tax avoidance gimmick pure and simple. IRS studies show that if simple profit were the motive, a roulette wheel would offer better odds. In the dismal history of tax reform, however, standard practice requires that, while tax abuse be widley abhorred, any change be attacked as unacceptably disruptive. In this case the commodity traders are shrieking that closing the loophole will destroy the commodities market by robbing them of needed capital.
The specifics of the Finance Committee's reform, however, cast considerable doubt on the likelihood of a massive loss of liquidity in the commodity markets. The bill would require a once-a-year accounting of trading gains and losses (a simple matter in commodity markets since gains and losses on current positions are tallied daily) and a maximum tax on net gains, no matter how short term, of about 32 percent. Guaranteeing a low tax rate to all investors -- not just those who can cope with the intricacies of straddles -- will, the committee argued, attract as least as much capital as the loss of the specialized preference will discourage.
Having failed to make their case in the Finance Committee, the commodity traders pulled out all the stops in the House. With the help of yacht parties, big-time lobbyists and letters from NCPAC, they cajoled the Ways and Means Committee into a lopsided vote preserving the tax straddle for professional commodity traders but nobody else.
Now that the parties are over and the boys from the Chicago exchange have gone home, it is time for a little sober reconsideration in the House and continuing sobriety in the Senate. Commodity traders are, no doubt, important facilitators of the mysterious workings of the market. Some provision may well be needed to ease the shock to traders who would face big one-time tax bills on their large accumulated profits. But we know of no special claim to moral precedence that would entitle the traders, alone among society's many useful citizens, to a continuing free ride at the taxpayers' expense.