The House Ways and Means Committee voted yesterday to toughen considerably the minimum tax on individuals and corporations, and then moved to scale back tax provisions perceived as benefiting the well-off by approving a 20 percent cutback in deductions for business meals and entertainment.
The new minimum tax would bring in about $36 billion over five years, the amount that committee Chairman Dan Rostenkowski (D-Ill.) had requested. The current minimum tax raises roughly $3 billion per year.
The cuts in deductions for business meals and entertainment would raise $9.7 billion over five years, $3.3 billion less than Rostenkowski had first proposed but $4.7 billion more than President Reagan sought.
In a "Dear Colleague" letter to House members preparing to leave for their Thanksgiving recess, Rostenkowski revealed some of his plans for the unfinished portion of the bill. He said the package would "hold the top individual tax rate within two to three points of the president's target of 35 percent," while leaving the bottom two tiers at the rates Reagan proposed -- 25 percent and 15 percent. The top rate now is 50 percent.
In an early version of the letter (both drafts were sent to members), Rostenkowski also promised to raise the personal exemption from $1,040 to $2,000 for all except high-income taxpayers.
The increase, which Reagan proposed for all taxpayers regardless of income level, is seen by many House Republicans as a "pro-family" change.
Republican members have objected to Rostenkowski's proposed rise to $1,500, coupled with increases in the standard deduction that would give lower-income taxpayers the equivalent of a $2,000 personal exemption.
Committee aides said setting the personal exemption at $2,000 for at least some taxpayers was one option the chairman was studying to obtain support from the administration and from some Republicans.
Rostenkowski also was said to be considering making the reductions in personal tax rates effective six months after the cutbacks in deductions so that the tax plan would not increase the federal deficit.
The tax-overhaul bill is tentatively scheduled for a vote in the House before Congress leaves for its Christmas recess.
Ways and Means is scheduled to take up the remaining tax issues -- taxation of fringe benefits, the deductibility of state and local taxes and transition rules -- before returning to the question of the personal exemption. Committee aides said they were hopeful last night that all those elements could be covered today.
In the debate over deductions for businesss meals and entertainment, members voted 19 to 17 against an amendment by Reps. Wyche Fowler Jr. (D-Ga.) and Bill Frenzel (R-Minn.) that essentially would have left such business expenses fully deductible.
But the committee weakened Rostenkowski's proposal to let individuals deduct only 75 percent of the cost of business meals and 50 percent of business entertainment expenses, voting 24 to 12 to permit 80 percent of the costs in both categories to be deducted.
The panel also voted yesterday for a slight cutback in tax benefits for minerals.
On the subject of the minimum tax, committee aides said that as toughened by the panel, "significantly more" individuals would pay it than the 235,000 who did so in 1984.
Figures for corporations were not available.
Minimum taxes work essentially by restricting the extent to which taxpayers can take certain deductions or credits, known as tax preferences.
Under the current minimum tax for individals, for example, a wealthy taxpayer must add to the income on which he would ordinarily calculate his tax such additional preferences as accelerated depreciation writeoffs on real estate.
After all the preferences have been added back to income, the taxpayer must apply the minimum tax rate, currently 20 percent.
The Ways and Means plan follows the same outline as the current minimum tax but with a rate of 25 percent.
It also includes more preferences, which means wealthy taxpayers would have to pay tax on more income, raising their tax bills. For example, they could not count as losses -- for minimum-tax purposes -- amounts exceeding their cash investments in tax shelters.
The political fight over which preferences to include is as hot as were the battles over restricting the deduction in the first place. Colleges and universities, for example, fought to keep off the list of preferences the increase in value of gifts of property to schools. Currently, such gifts can be deducted at full market value and are not included in the minimum tax.
The school lobbyists lost but gained some minor concessions on how such gifts would be treated under the new minimum tax.
As with the current minimum tax, the first $40,000 in income for a married couple or $30,000 for a single taxpayer would not be used in calculating the minimum tax.