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Can Democrats fairly claim "fairness' issue?

As the great tax debate of 1990 winds down, it is clear that Democrats have used the "fairness" issue with devastating political effect against the Republicans, who leave the battle bitterly divided and dispirited. What is not clear is whether the budget compromise struck by the Congress and the White House will live up to the claims of its supporters.

It is being advertised as the first serious effort in more than a decade to deal with the government's soaring budget deficits. No voodoo. No smoke and mirrors. Taxes would be raised; spending would be cut. This is a real deficit-reduction package, both sides are saying.

The plan is supposed to make the wealthy carry a greater share of the tax burden, slow the rate of federal spending, produce a balanced budget by fiscal 1994, reassure the business community and perk up the economy. About the only thing certain in all of this, of course, is that taxes are going up for most Americans.

The top tax rate would rise from 28 percent to 31 percent on income of more than $80,000 for couples filing jointly. Itemized deductions would be limited and personal exemptions phased out for upper-income taxpayers. The amount of wages subject to the Medicare payroll tax would rise from $51,300 to $125,000.

The poor, like everyone else, will be paying more for gasoline, cigarettes and beer and airline tickets. The rich will have to live with a 10 percent tax on their luxuries _ jewelry and furs costing more than $10,000, cars costing more than $30,000, boats costing more than $100,000 and private airplanes with price tags of more than $250,000.

With the politics of the fairness issue dominating the debate, short shrift was given to how the tax changes would affect economic growth and productivity. Some Republicans argued that it was a big mistake to increase taxes at a time when the country is teetering on a recession.

Economic analysts already are saying the budget plan is being oversold as a device for stimulating the economy and balancing the federal budget by the mid-1990s. Among other things, they say the budget's claims rest on shaky economic assumptions, including a lower rate of inflation and a higher rate of economic growth than many economists consider likely.

Democrats are still savoring their political achievement in the budget fracas _ shifting the debate from economic growth, where Ronald Reagan gave Republicans the advantage, to income distribution, where Democrats believe they hold the high ground.

They vowed that any budget package would have to shift more of the tax burden to the wealthy, and most analysts agree that Democrats succeeded in nudging the tax system in a more progressive direction. Preliminary government estimates show that people with incomes between $20,000 and $200,000 would see their taxes go up by 2 percent, while taxpayers with incomes above $200,000 would pay 6 percent more in taxes.

But in "soaking" the rich, the Democrats added a little bubble-bath oil to the water, mainly in the form of a 3 percent cut in the top rate on capital gains, from 31 percent to 28 percent.

"It's only a little bit more progressive than what we have," said Robert McIntyre of Citizens for Tax Justice, a labor-oriented organization. "The rhetoric was great, but at least they talked about fairness."

McIntyre estimates that the tax changes in the package will take away about one-sixth of the tax cuts the wealthiest taxpayers received in the 1980s. His biggest disappointment is that Congress agreed to a reduction in the top rate on capital gains from 33 percent to 28 percent, which he calculates will result in a tax cut for some upper-income taxpayers.

The Democrats targeted the "bubble" as a symbol of unfairness in the present tax code. Then they turned around and created a new "bubble" for the very wealthy.

The so-called "bubble" is an anomaly in the tax code by which someone making $1-million pays a top marginal tax rate (this is the rate paid on the last dollar of income) of 31 percent, while wage-earners with incomes between roughly $80,000 and $200,000 pay a 33 percent marginal rate.

Congressional and White House budget negotiators created a new "bubble," at higher income levels _ between $100,000 and $225,000 for individuals and between $175,000 and $275,000 for couples.

Taxpayers at these income levels would see their personal exemptions _ currently $2,050 for each dependent _ phased out, which would have the effect of raising the effective tax rate by one-half percentage point for each dependent. Another provision in the tax plan would limit itemized deductions for incomes above $100,000 _ the equivalent of 1 percentage point.

That means a family of four with an income of $200,000 would pay an effective tax rate of 34 percent, while a similar family with an income of more than $500,000 would pay an effective rate of 32 percent.

According to McIntyre's rough calculations, lawyers, doctors, executives and others in their high-income bracket could actually wind up receiving a tax cut under the plan, depending on the amount of their deductions and the sources of their income.

A family of four with a gross income of $300,000 could receive a handsome tax cut, he said, by using heavy deductions to push its taxable income in the range of the new "bubble" and taking advantage of the lower capital gains tax rate.

But some tax experts question McIntyre's calculations. They point out that the new plan increases the alternative minimum tax to 24 percent from 21 percent. This is the rate paid by high-income taxpayers who have unusually large deductions.

One of the few Democrats to defend the old "bubble" was Sen. Bill Bradley of New Jersey, a chief architect of the 1986 Tax Reform Act.

Bradley hung back as his Democratic colleagues assaulted the tax code they helped design. In fact, he was something of a party pooper, so much so that he was criticized by some House Democrats at their recent caucus. Some liberal Democrats are whispering that Bradley can forget about running for president after not pulling his weight in the latest tax fight.

Bradley is not into "soak-the-rich" rhetoric and 30-second sound bites when the issue is taxes. He seems more comfortable discussing the subject with tax experts than with other politicians.

Speaking at a forum on tax policy last spring, Bradley argued that the 1986 tax reform law made the system more progressive after the Reagan tax cuts of 1981, mainly because it dropped 6-million low-income people from the tax rolls and closed most of the loopholes wealthy individuals and corporations had used to avoid paying their fair shares of taxes.

He noted that between 1981 and 1986, for example, about 50 of the largest 250 corporations paid no tax. By 1988, after three years of the 1986 tax code changes, only seven of the 250 corporate behemoths wound up paying no taxes.

House Democrats had proposed postponing for one year the adjustment for inflation in tax brackets, which would have soaked all taxpayers, regardless of income. That proposal was dropped in the final round of negotiations.

In his remarks last spring, Bradley scoffed at what some Democrats fondly remember as the "good old days" of tax policy, the time between 1967 and 1982 when bracket creep and inflation increased the tax bills of Americans without Congress having to lift a hand. With all that extra money coming in, he said, Congress spent most of its time figuring out how to spend it.

"During that period, by far the biggest way that Congress spent its "inflation dividend' .


. was not by starting programs to clean up the environment and appropriating the money, not by helping the educational system of this country and appropriating the dollars, and certainly not by giving average families a better shake on taxes," Bradley said. "Instead, by far the biggest way that the money was spent was by increasing the number and the size of loopholes (in the tax code)."

The cost of all tax loopholes went from about $37-billion in 1967 to more than $300-billion by 1982, he said.

The senator let it be known that he thought the Democrats' assault on the so-called "bubble" in 1986 tax reform bill was phony. In a letter to his Senate colleagues Bradley argued that the "bubble" made the tax system more progressive, not less so as most Democrats charged.

Bradley's lack of enthusiasm for his party's tampering with the tax code reflected his concern that it would tempt Congress to get back into the loophole business. The senator told reporters recently that some Democrats had misunderstood his position on taxing the rich after he cast a vote in the Senate Finance Committee against a plan that would have burst the "bubble."

Bradley explained that he opposed the measure because it was tied to a capital gains tax cut, which he said primarily benefits people with incomes above $200,000, and because it included "new loopholes" for the oil and gas industry.

"On the one hand, you say the way you want to increase taxes is raise the rates, which I would support," Bradley said. "But don't get into a bogus increase, through special interest loopholes."

Bradley says "the most progressive element" of the 1986 tax reform act was the elimination of a separate tax rates for capital gains _ profits from the sale of real estate, stocks and other investments _ and wages.

Even though Congress gave in to Bush's demand for a reduction in the capital gains tax rate, Bradley told the New York Times last week he is satisfied that the new budget package did not do serious damage on the 1986 tax reform law.

The concern now is that this is just the opening round in rewriting the tax code, that congressional Democrats, looking for ways to keep the fairness issue from fading, will be tempted to make further changes as the next election season approaches.

The White House already has said that the first proposal Bush sends to Capitol Hill next year will be one calling for an even sharper reduction in the capital gains tax rate. And Democrats have said their first order of business will be imposing a surtax on millionaires, one of the few things they failed to achieve in budget negotiations.