Douglas Cater, president of Washington College on Maryland's Eastern Shore, once courted benefactors by promoting the tax deductions that go with making charitable contributions. Now, he says, "I'll have to emphasize much more the satisfaction that goes with doing something worthy."

Alexandra Armstrong, a Washington financial planner, once steered wealthy investors toward real estate deals that generated big tax breaks as well as cash income. Now, she says, "I would look only at income-oriented real estate."

The force spurring these and many other changes is a radical proposal to overhaul the federal income tax. Best known for its proposals to slash tax rates and limit deductions, the Senate Finance Committee measure also would blunt one of the government's most powerful tools for shaping society.

Since creating the income tax in 1913, Congress has used it as much to guide behavior as to collect revenue. Special benefits have been inserted for everything from housing projects to oil wells, producing a Rube Goldberg-like system that aims to influence countless choices of people and companies.

"I believe we ought to use the tax code to accomplish worthwhile social and economic objectives," said Sen. Lloyd Bentsen (D-Tex.), a member of the Finance Committee. "The problem is, you keep adding them [tax benefits] on and never taking any off."

"What's the most efficient allocator of investment capital -- the market or the members of the congressional tax-writing committees?" asked Sen. Bill Bradley (D-N.J.), an early advocate of tax overhaul whose ideas inspired the Finance Committee bill. "My view is that it's the market."

The bill on which the Senate begins voting this week would repeal many tax benefits and, simply by lowering rates, devalue those that remain. With lower rates, people and businesses would save less on deductions and likely would be less influenced by them. They also would keep more of their income and would have less guidance from the tax code on using it.

The House earlier passed a tax-overhaul measure, and the Senate bill is expected to pass by a large margin, although not without contentious debate. This makes it almost certain that Congress this year will dramatically change the traditional relationship between the tax code and the economy.

That is not to say that the tax code would wither away as a social force. The Finance Committee bill would preserve breaks for home mortgages, charitable gifts, municipal bonds, oil drilling, timber, business meals, equipment, research, historic preservation and countless other activities.

With lower rates, however, each of these breaks would be less valuable. The tax code would still favor homeowners over renters, for example -- but not as much.

As Cater observed, donors in the top individual tax bracket of 50 percent now reduce their taxes $50 for every $100 contributed to Washington College. If the top rate is cut to 27 percent, as in the Finance Committee bill, they would save only $27 and might keep their money rather than give it away.

The corporate rate cut, from 46 percent under current law to 33 percent in the bill, would reduce by one-third the business incentive to give.

"The whole purpose of tax reform is to restore freedom to people to do things without having the government make them do it," said Cater, whose school depends heavily on charitable gifts. "If they don't use that freedom to give to worthy causes, then one of the major purposes, from my perspective, will have been undermined."

Like Cater, no one in Congress claims to know exactly how Americans will use this freedom. The influence of the tax code has always been open to debate, because numerous other factors influence economic behavior.

For example, both the House bill and the Senate Finance Committee bill would repeal the investment tax credit, a $38 billion-a-year subsidy to investors in equipment. Many analysts predict limited change, however, arguing that the credit spurred relatively little additional investment.

"Businessmen spend when they're optimistic, and they don't spend when they're pessimistic," said William J. Ruane, an investment counselor with Ruane, Cunniff and Co. Inc. in New York. He cited as an example the oil companies' belt-tightening spurred by the price slump, despite large tax advantages for oil drilling.

Portions of the Finance Committee bill almost certainly would slow or reverse certain investment patterns. For example, the bill would greatly increase the tax rate on real estate, leading many analysts to predict a slowdown in construction if the bill passes.

It also would repeal the use of "passive losses" from tax shelters to cancel out regular income that otherwise would be taxed. This would likely wipe out thousands of shelters -- more than half of them in real estate -- in which wealthy Americans have invested on the promise of large write-offs.

"There would probably be ingenious methods of continuing some of this activity, but for the most part, that industry would just fold up its tent and quietly steal away," said Fuhrman Nettles of Robert A. Stanger Co., a tax-shelter research firm.

The bill also would take the tax code out of the daily decisions of many individuals. For example, it would repeal the $2,000 maximum annual deduction for Individual Retirement Accounts for people covered by company pension plans, and it would do away with the interest deduction for car loans, credit cards and other consumer lending.

As a result, decisions on how to provide for retirement security and whether to go into debt to buy a car would likely be less tax-motivated.

A similar shift would occur in the business sector, according to Yolanda Henderson, an economist at the American Enterprise Institute. The business interest deduction would remain, but the lower rates would likely cause a large swing away from financing new investment through debt, she and others said.

Another key item in the Senate bill would repeal the tax advantage for capital gains -- now taxed at a maximum rate of 20 percent. Under the Senate bill, gains on stocks and other capital assets would be taxed the same as other income.

The current system favors companies that hold their earnings, paying them out as long-term capital gains rather than as dividends, which are taxed at the full rate. Gillian Spooner of the accounting firm of Touche, Ross said the proposed change would remove the bias in the eyes of investors.

Sen. George J. Mitchell (D-Maine), who enthusiastically embraced most of these changes, contends that portions of the bill have taken the government too far out of social policy-making -- particularly in redistributing wealth.

By having a top individual tax rate of only 27 percent, he said, the bill would give too many benefits to people with incomes over $200,000 and not enough to those in the middle-income range. For example, he said, people making $200,000 or more in a year would keep 1.4 percent more of their income after taxes, or at least $2,800, while those earning $20,000 to $30,000 would keep only 0.9 percent more, or $180 to $270.

He said he will introduce an amendment to create a rate of 35 percent, but a wide range of senators have argued in opposition that such a rate is too high.

Because the tax code likely will have fewer rewards for investors after 1986, financial planner Armstrong said, many investors are angling for ways to cash in.

She said she has counseled some clients to sell stocks before 1987 -- to take advantage of the current 20 percent capital gains tax rate, instead of the proposed 27 percent rate. Also, some owners of rental real estate should sell, she said, because the bill would curtail large depreciation write-offs, making those properties less valuable.

Former internal revenue commissioner Sheldon Cohen cautioned, however, that Americans will continue to seek tax breaks as long as they pay taxes and that the tax code will continue to shape people's lives whether they like it or not.

"Once upon a time, 50 percent sounded like a low rate," said Cohen, a Washington tax attorney. "I think gradually we'll think 27 percent is a high rate. After a while any rate looks high. People will simply say: It's money I could spend better myself than those dummies in Washington."