Tax Reform Focus Turns to `Small Potatoes'

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Goodbye, tax reform. Hello, tax relief.

A year ago, scrapping the income tax system and replacing it with a flat tax, a national sales tax or just about any other tax was a leading topic in Washington. This year, the focus is on handing out tax goodies.

The dividing line between the White House and congressional Republicans is whether to tie tax breaks to specific conduct, such as earning B's in college, or to make across-the-board rate cuts and let taxpayers decide how to use the money. The change can be seen in the statement that Rep. Bill Archer, R- Texas, who is chairman of the House Ways and Means Committee, issued right after President Clinton's re-election. It said nothing about tax reform. Archer, in an interview, said he still wanted to "tear the income tax out by its roots." But for the time being, he added, he will focus on more practical aspects. "Tax reform was in style last year," observed Donald C. Alexander, an internal revenue commissioner in the 1970s and now a tax lawyer at Aiken, Gump, Strauss, Hauer & Feld. "But what's in style for 1997 is, regrettably, ideas that will louse up the tax code even more than it is and make things more complicated." Max B. Sawicky, an economist at the labor-backed Economic Policy Institute, said that in terms of tax law changes in 1997, "We're back to small potatoes." Here are some of the tax favors being proposed for the coming year: * Capital gains -- Congressional Republicans want a broad cut in capital gains taxes, under which the current 28 percent maximum rate would be reduced to perhaps 20 percent and as little as 7.5 percent for people in the lowest tax bracket. Some kind of capital gains tax cut has good prospects for a number of reasons, not the least of which is that it might help cool down the stock market, where many people are holding on to stocks they regard as overvalued just to avoid paying capital gains taxes that would be owed if they sold. President Clinton, who during the campaign, said, "I'm not philosophically opposed to all capital gains cuts," said last month that he would consider the issue "only in the context of balanced- budget negotiations." He said he would judge any proposed capital gains tax change by a simple standard: "Does it give you jobs and incomes?" Reducing capital gains rates temporarily, say for three years, should bring more money into government coffers in the first two years, as people cash in appreciated investments, especially stocks that they had not sold to avoid a big tax bill. If investors believe, however, that any temporary reduction in capital gains rates might become permanent, then the effect of a tax "sale" on government revenues -- encouraging people to cash in and pay the taxes before rates go back up -- could be much less significant. …