DATE: Wednesday, July 16, 1997              TAG: 9707160013

SECTION: LOCAL                   PAGE: B12  EDITION: FINAL 

TYPE: Editorial

                                            LENGTH:   57 lines

TAX CUT REAL NEED IS REFORM

As Democrats and Republicans wrestle over a tax cut, they are ironically making the case for tax reform instead. The more they debate how much taxes should be cut and who should benefit, the more we are reminded how shameful the tax system really is.

It is a system where politicians compete to hand out tax breaks to their constituents - and contributors - and to deny such largess to the constituents of the opposing party. It is a system that does not simply raise revenues for needed government services.

Instead, it is a system that plays favorites, distorts markets, rewards those with enough power, money or clout to game the system and punishes average wage earners who don't benefit from the myriad tax breaks and who must deal with the absurd complexity created by a tax code as spoils system.

Note that the current tax-cut debate is not concerned with how to create a better system but with who wins and loses. Republicans want to bring more tax relief to those who pay capital gains and estate taxes. The Clinton plan places a heavier emphasis on tax relief for families with children and for those paying for a college education. His plan would even give a tax break to the working poor who pay no taxes.

One trouble with all this complicated tinkering is the consequence it intends, the attempt to please voting blocs. But the unintended consequences may be even worse. For instance, the ostensible goal of the tax credits and breaks for college is to help address the high cost of college. But they give no incentive to contain costs and could have the perverse effect of encouraging continued inflation.

The Wall Street Journal reports that the child tax credit could actually be wiped out in many cases by the minimum tax intended to keep the affluent from escaping taxation. It cites a two-earner household with four children earning $42,000. Weird kinks in the tax code could mean that such a family would keep only $18 of the $500 per child windfall being touted.

And once a tax bill is in play, every interest group with a wish list gets in the act. So the Clinton plan includes not just tax breaks for having children and attending college but for saving for college, donating computers to K-12 schools, maintaining a home office, constructing schools, doing business in Puerto Rico, giving appreciated stock to foundations, manufacturing orphan drugs and on and on.

The Republicans have their own long list of additions to the tax code. Some may be shameless boondoggles. Some may aim at laudable social ends, but taken together they only increase the mess. Each special break doled out increases the general tax on the average payer who does not benefit from such breaks. Each increase in complexity of the code swells the ranks of tax auditors, preparers, attorneys and planners needed to untangle the mess.

Thoreau wasn't talking about the tax code, but he might have been, when he said, ``Our life is frittered away by detail. . . . I say, let your affairs be as two or three, and not a hundred or a thousand. . . . Simplify simplify.'' It may never happen, but Congress should heed his advice. Instead of piling break upon credit upon loophole upon exemption, the real solution is to cut the code, eliminate the breaks and lower the rates. z

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