March 15, 1973
Page 8140
TAX REFORM
Mr. MUSKIE. Mr. President, last Sunday, Mr. John D. Ehrlichman, the President's chief domestic adviser, told a national television audience that the only tax inequities whose reform would generate significant amounts of new revenue were loopholes he identified as the personal exemptions for dependents and the deductions allowed for homeowners' mortgage interest and charitable contributions.
Mr. Ehrlichman was talking nonsense. I can only assume he did so because this administration seeks to preserve the special tax breaks it has enacted or perpetuated on behalf of the rich and of favored corporate interests. That policy of discrimination in favor of the affluent goes hand in hand with the policies of budget cuts aimed at the poor, the disadvantaged, the handicapped, the veterans and the elderly.
Fortunately, two articles in the Washington Post, an editorial yesterday and a column by Hobart Rowan today, do much to sat the record straight. The figures cited in those articles on tax subsidies for the privileged and the powerful are parallel to those I discussed in the Senate on January 23 when I offered my Tax Reform Act of 1973, a measure that would close or narrow 24 of the largest loopholes in our tax code, generate new revenue of $18.6 billion a year by 1975, and restore fairness to our system of taxation.
I recommend both these articles to the attention of my colleagues and I ask unanimous consent that they be printed in the RECORD at this point.
There being no objection, the articles were ordered to be printed in the RECORD, as follows:
[From the Washington Post, Mar. 14, 1973]
HOW TO FIND A LOOPHOLE
This morning we wish to help a reader, Mr. John D. Ehrlichman of 1600 Pennsylvania Avenue NW, look for the $15 billion that he mislaid on his way to the Inaugural. That $15 billion is in the form of tax loopholes. Mr. Ehrlichman says that he has no recollection of those loopholes whatever. Some of them are reported to have been dropped into the corporation income tax laws.
But Mr. Ehrlichman says that he has looked there, and could not find any loopholes. It is important to locate the loopholes because otherwise there will be no reform of the federal income tax. Mr. Ehrlichman is the President's assistant for domestic affairs, and frequently his spokesman on tax policy. Since he cannot find any loopholes to close, Mr. Ehrlichman concludes that the only way to broaden revenues is to start taxing contributions to the church on the corner, and the Boy Scouts. As Mr. Ehrlichman observes, no reasonable person would want to do that.
A lot of reasonable people can think of very reasonable ways to improve the income tax without going after the churches and the Scouts. Many of these proposals have already been discussed in the Ways and Means Committee's careful and intelligent deliberations over recent weeks. The chairman of that committee, Mr. Wilbur Mills, said this week that he expects to complete a bill within the next several months. But the White House evidently does not care for the attention being given to corporation and estate taxes, and to the tax shelters in the current congressional discussions. Mr. Ehrlichman is, in fact, leading the White House's campaign to persuade the public that tax reform will necessarily mean impoverishing the charities. He was very explicit last Sunday, when he appeared on the ABC radio and television program, "Issues and Answers":
"Mr. Ehrlichman: You don't raise very much money by making every taxpayer pay some tax. You don't raise very much money by making every corporation pay a tax. Where you really can raise money by closing loopholes is if you don't let the average householder deduct the interest on his mortgage any more, and you don't let him deduct charitable contributions to his church or to the Boy Scouts, or you don't let him take personal exemptions. Now that is where you can really raise a lot of money.
"Mr. Kaplow (of ABC News) : Are you saying there can be no significant tax reform? There is no combination of loopholes that can be closed that would bring in a significant amount of additional revenue?
"Mr. Ehrlichman: That is what I am telling you. I think you will see, as the House Ways and Means Committee goes through this process that there is no way to raise the $15 billion, for instance, that the spenders in the Congress want to run over the President's budget, unless you start digging into the average taxpayer's exemptions, or charitable deductions or mortgage credits or something of that kind."
No way? Indeed, there are a great many ways. One that comes immediately to mind, as a beginning, is to revoke the Accelerated Depreciation Range, a large tax cut for businesses that was put into effect in 1971. Next year it will cost the Treasury $2.7 billion. The business investment credit, enacted at the same time, was worth $1.8 billion in 1971, the last time the Treasury published a precise figure. The Domestic International Sales Corporation (DISC) dodge, also passed in 1971, is the kind of concealed export subsidy about which this country very properly protests in other nations' tax laws. It is currently costing the country about $170 million a year. That is a modest sum, compared with accelerated depreciation and the investment credit, but it is more than the administration intends to spend next year on urban renewal.
Mr. Ehrlichman is right in suggesting that substantial benefits go to the middle-income householder. In 1971, the Treasury estimated, the deductions for mortgage interest and property taxes cost the federal Treasury just over $5 billion. But taxing capital gains under the present law, rather than treating them as ordinary income, cost the Treasury $5.6 billion that same year.
Mr. Ehrlichman forgot to mention that one. True, the former Secretary of the Treasury, Mr. John Connally, once predicted that any attempt to tax capital gains as ordinary income would immediately result in the collapse of the capitalist system and the triumph of the forces of darkness and chaos. But there are other experts who consider the capitalist system strong and confident enough to support an ideal of fairness that taxes all income at the same rate regardless of source.
Estate taxation is a tangle of anomalies, and certainly deserves a place on Mr. Ehrlichman's list. When a wealthy man dies, his fortune escapes the capital gains tax altogether. It is subject to an estate tax, but it is never touched by the income tax. Gerard M. Brannon, research director for Tax Analysts and Advocates, a research professor at Georgetown University, recently estimated that the failure to collect capital gains taxes on estates costs the Treasury perhaps $3 billion a year.
Whether these specific tax benefits, or any acceptable combination of them, add up to Mr. Ehrlichman's figure of $15 billion is irrelevant. The first purpose of tax reform is not to raise a specific sum of money. The first purpose is to make the tax system more fair, and to increase the taxpayer's confidence that he is being treated equitably. That confidence has undergone a serious erosion in recent years because of provisions like some of those mentioned above. Congress is, altogether correctly, moving to meet this criticism. The challenge to the equity of the present income tax system are substantial and well-founded. Mr. Ehrlichman brings no credit to the administration by his absurd pretense that they do not exist.
[From the Washington Post, Mar. 15, 1973]
LOOPHOLES AND LITTLE GUYS
(By Hobart Rowan)
On ABC's "Issues and Answers" last Sunday, presidential aide John D. Ehrlichman said that "there is a lot of misinformation around in this business of tax loopholes," and then he did his best to spread some more of it around.
The basic point that Ehrlichman was trying to make is that it's not possible to raise a great deal of money by tax reforms, "unless you start digging into the average taxpayer's exemptions, or charitable deductions, or mortgage credits, or something of that kind."
That, as Mr. Ehrlichman must know, is simply not true. He was just trying the usual scare tactics that have been this administration's old reliable weapon against tax reform.
What is true is that the exemptions or loopholes he mentions account for a considerable part of the erosion of the tax base. But there is plenty more that he didn't choose to mention.
Could it be that Ehrlichman failed to point to other loopholes because the chief beneficiaries are businesses and the most affluent taxpayers?
For example, the exhaustive analysis of erosion of the individual income tax base by Brookings Institution economists Joseph A. Pechman and Benjamin A. Okner in January 1972, for the Joint Economic Committee of Congress shows that under a comprehensive tax system, the Treasury would pick up $55.7 billion in revenue it now loses to the leaky tax structure.
Of this total, $13.7 billion would come from taxing all capital gains, and gains transferred by gift or bequest: $2.4 billion from "preference income" such as tax exempt interest, exclusion of dividends, and oil depletion; $2.7 billion from life insurance interest; $9.6 billion from owner's preferences; $13 billion from transfer payments (welfare, unemployment compensation, etc.); $7.1 billion for the percentage standard deduction; $2.9 billion for deductions to the aged and blind; and $4.2 billion for other itemized deductions.
On the corporate side, Ehrlichman made no mention of the $2.5 billion in reduced tax burden that business will get this year through accelerated depreciation schedules (ADR) ; and another $3.9 billion via the investment credit. From 1971 through 1980, ADR will be worth $30.4 billion and the tax credit $45.2 billion (all U.S. Treasury calculations). And in that span of time, there will also be some $3 billion in give-aways through DISC – a tax shelter for export sales profits just created by the revenue act of 1971.
Another tax reform target Ehrlichman appears unable to see is income-splitting, which Pechman and Okner estimate causes a revenue loss of at least $21.6 billion annually, almost half of which is a benefit to a relative handful of taxpayers in the $25,000 – $100,000 income bracket.
But there's more to it than that. Ehrlichman pretends to be concerned about that "average householder" who would be hit if he couldn't take his mortgage interest as a deduction. But of the $9.6 billion that Pechman-Okner show lost to homeowners' preferences, defined as deductions for mortgage interest and real estate taxes, $5.3 billion goes to the tiny 5 per cent of taxpayers with reportable adjusted gross income of $20,000 or more.
And how about Ehrlichman's warning that Uncle Sam can't raise tax-reform money in significant amounts "if you don't let the average householder ... deduct charitable contributions to his church or to the Boy Scouts ... "? Is he really worried about the little guy?
The Tax Reform Research Group (one of Ralph Nader's operations) showed last year that when you divide the number of taxpayers in each income group into the total tax preference benefits of charitable deductions, other than education, you find this:
Among taxpayers in the $7,000 to $10,000 income bracket, the average tax benefit for charitable contributions was $17.44; for those in the $10,000 to $15,000 bracket, $33.11; for those in the $20,000 to $50,000 bracket, $199.09; for those in the $50,000 to $100,000 bracket, $1,211.16; and for those making $100,000 and over, a whopping $11,373.56.
So who is Ehrlichman trying to kid? If the administration doesn't have a decent tax reform program, it's not because it could wring the money only out of the little guy, nor because there aren't outrageous loopholes waiting to be plugged. It's just because Mr. Nixon must believe that his constituency likes the inequitable tax system pretty much the way it is.