Loophole Lobby

When the news broke last month that the Senate Finance Committee had agreed, by a vote of twenty to nothing, on a tax reform bill with a maximum personal income tax bracket of 27%, among other dramatic changes, editorialists erupted with awe and praise.
The media relied for almost three weeks on a 30-page summary of the huge bill prepared by the Senators. Then came the release of the actual bill — 1,489 pages in all — which revealed 174 special items for various companies ranging from General Motors, the Manville Corporation to the Houston Astrodome. The bulky legislation also included lots of other revisions not noted in the summary. This is public manipulation by a Congressional Committee that should not be repeated. In an age of computers and fast speed printing, the bill should not be announced until it is ready to be disclosed in full.

As it turned out, the Finance Committee bill has many good features. These include a minimum tax for profitable corporations, the exemption of 6 million poor people from paying federal income taxes, and two personal tax brackets (27% and 15%) made possible by dropping many loopholes and tax shelters.

Notwithstanding the hoopla, however, there is likely to be less charitable giving and maybe less venture capital because the deductions or gains would be worth that much less. Capital gains would be taxed at ordinary rates. The investment tax credit would be abolished.

I decided to call Charles Walker, Washington’s pre-eminent corporate tax lobbyist to receive his views. Walker is a tiger on business tax credits, rapid depreciation and almost anything else that will please his corporate clients. “Are you for this bill?” I asked. “Sure” he replied. “But how can you be for a bill that abolishes the investment tax credit,” I inquired. “Lower rates,” he declared. (The top corporate tax rate was dropped to 33% in the bill). Then he added confidently: “We’ll get the investment tax credit back in the next recession.”

In other words the merry-go-around starts all over again even if the House goes along with the Senate bill in most particulars. The loophole lobbies will start working to drill their special preferences in the new tax law almost as soon as it is signed.

The first in line will be the giant real estate lobby, assuming it will not be successful in keeping its present, unique tax advantages. The real estate heavies have lost credibility on Capitol Hill when they overbuilt office buildings and other structures, with all those tax loopholes. Politicians from Houston to Los Angeles do not like to see empty commercial buildings and condos. But when some limited real estate partnerships and other projects go under, the lobby’s cry in Congress will be to save the industry and the jobs that go with it. Count more loopholes as restored to the tax code.

Economic power prevails over good law when there is no strong constituency behind the law. Small taxpayers are not organized, while large potential taxpayers seeking escape from taxes are networked and give money to Congressional campaigns.

Now, of course, this prediction could turn out to be mistaken. But years of observing the ups and downs of tax reform, though granted never one this ambitious, have persuaded me that measures designed for the greatest good for the greatest number better have community roots. Absent that, the new tax code will become like the old tax code all over again.

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