NIXON'S SURPRISE CALL FOR MILDER TAX REFORM

EVER since the U.S. adopted income taxes in 1913, federal tax legislation has been marked by two main but contradictory trends: periodic rises in tax rates and, at the same time, increasing tax exceptions for certain industries, organizations and individuals. The tax-reform bill adopted last month by the House of Representatives moves in quite the opposite direction, and those who stand to lose by it--among them Wall Street corporations, the oil industry, and universities and hospitals--have been deluging Washington with complaints. Last week, as the Senate Finance Committee began considering the measure, the Nixon Administration presented its own, less stringent tax recommendations, informing Congress that some of the House reforms and tax reductions go too far, too fast.

Considering the Administration's determination to make federal spending match federal income, it was hardly surprising that Treasury Secretary David Kennedy asked the Senate to cut in half the $2.4-billion-a-year revenue loss foreseen in the House measure. Despite the rebellious mood of the nation's taxpayers, Secretary Kennedy recommended somewhat less relief for low-and middle-income individuals and families. In the most unexpected move of all, he asked that corporate income tax rates be reduced by 2 percentage points rather than increased or held at the current 52.8%. Nor would Kennedy move nearly so far as the House did in closing some controversial loopholes. In offering such a vulnerable package, President Nixon took a calculated risk. Though most of the changes would favor businessmen, who are certainly a powerful part of Nixon's political constituency, Administration strategists obviously figured that enough individual cuts remained so that the proposals would withstand political attack.

Bias Against Investment. The Administration's aim, Secretary Kennedy explained to a mostly hostile committee, is to counter the House bill's "bias against investment in favor of consumption." That favoritism, he complained, "could impede economic growth by curtailing the incentive to make productive investments." Accordingly, said Kennedy, Congress should cut taxes on individuals by only $4.8 billion a year instead of $7.3 billion, and the total corporate tax intake should rise by only $3.5 billion instead of $4.9 billion. "We simply do not know enough about the future to commit ourselves" to any larger tax cuts, the secretary said.

As a part of its benefits for middle-income individuals, the House bill would reduce basic income tax rates enough to grant $2.4 billion of relief after ten years and allow taxpayers who do not itemize deductions to take a standard maximum deduction of $2,000, or 15% of their income. They are now allowed only 10%, or $1,000. To allow the higher deduction, Kennedy said, would give an undesirable "double benefit" to middle-income taxpayers. To avoid that, he would raise the standard maximum deduction only to 12%, or $1,400. As for taxpayers near the poverty line, Kennedy proposed to give them tax relief of only $920 million instead of the proposed $2.7 billion a year by limiting "lowincome allowances" in the House bill. Some 5,000,000 poor people who now pay taxes would still be excused from paying anything, Kennedy reckoned. Despite his proposal to cut the basic corporate income tax, Kennedy would keep most of the House bill's provisions that raise business taxes. The biggest such provision is the proposed elimination of the investment tax credit that now saves businesses $2.7 billion a year.

Although President Nixon pledged during his campaign to keep the oil industry's depletion allowance at the present 27 1/2%, Kennedy accepted the House decision to roll it back to 20%. In doing so, he tacitly recognized that the allowance has become the paramount symbol of tax favoritism. Kennedy scoffed at suggestions that the reduction might force most independent operators out of business.

On the other hand, he urged the Senate to relax the House provisions aimed at closing four other tax loopholes. For presently tax-exempt foundations, he proposed a 2% tax on investment income instead of the House's 7 1/2% rate. He asked that the interest paid on municipal and state bonds remain taxfree; local officials insist that it would be extremely difficult to sell their bonds under House provisions that would make them partially taxable. Responding to protests by charitable institutions, Kennedy urged the Senate to drop House restrictions on the deductibility of certain donations.

Under intense pressure from the financial community, Kennedy proposed to water down the House's tough tax treatment of long-term capital gains. The House bill would scrap the maximum 25% tax rate on such gains and force investors to hold their stocks and other property for a year instead of six months to qualify for such favored treatment. Kennedy would retain the old rules, but limit the amount of gains to which they could be applied.

Political Trouble. The Administration's stand will unquestionably be popular with businessmen, but it guarantees political trouble. Several members of the Senate Finance Committee pounced on Kennedy's proposals. "You've taken $1.7 billion from the average forgotten American and given it to the corporations," complained Indiana Democrat Vance Hartke. Though some of the Administration's proposals--notably its defense of investment incentives--may make good economic sense, many of them are likely to be doomed by their lack of popular appeal.

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