THERE'S A WILD CONSPIRACY THEORY going around Capitol Hill, and it's not about Chinagate. Call it the mad-bomber approach to tax reform. Here's how it works: overload the tax code with a collection of mind-bending complexities, the likes of which haven't been seen for more than a decade. Give the Internal Revenue Service, which Rep. Bill Archer once said he wanted ""completely out of the lives of Americans,'' new authority over everything from education to welfare policy. Reduce capital-gains rates so that tax shelters take off again. And finally, force ordinary folks to line up outside H&R Block offices to receive meager tax benefits they barely comprehend. The result: far from thanking Washington for tax relief, Americans will rise in revolt against the income-tax code.
No one knows whether such a backlash will happen, of course. But this law is pretty much the one that Archer, the chairman of the House Ways and Means Committee, and his Republican-controlled Congress are about to give to the American people. It may even happen by the end of this month, as Congress rushes to reconcile House and Senate versions of the tax bills before the August recess. And President Clinton is almost certain to sign some version of the law, after more squabbling over ""fairness.'' The upshot is that a decade after the 1986 Tax Reform Act vastly simplified the tax code - and just a year after flat-tax fever nearly made the '96 campaign interesting - Washington seems about to thrust tax policy back into the Byzantine era.
The question is, why? Archer himself used to say America's tax code was so complex that he wanted to ""tear it out by its roots.'' Hence the mad-bomber theory. ""This bill could only have been written by a man who really hates the income tax,'' says Michael Graetz, a Yale University tax expert. Thomas Field, head of the respected Tax Analysts advisory group, is more blunt: ""It's the worst tax bill I've ever seen.''
Normally, of course, everybody likes a tax break. Critics say the problems with the current bill are twofold. First, middle-income and poor families will have to navigate complexities (like income phaseouts) once reserved for the rich, and the IRS will intrude in their lives as never before - passing judgment, say, on whether they qualify for college-tuition credits. Second, the new plan promises a blizzard of special provisions - about 300, affecting everyone from Alaskan fishermen to Vermont dairy farmers - and big differentials between ordinary and capital-gains tax rates. That in turn may create huge transfers of wealth from productive uses into new shelters and financial hanky-panky.
In truth, few Hill observers really believe that Archer, chief author of the House bill, is trying to sabotage the tax code, and he says he isn't. Last week Archer said the $85 billion in net tax cuts are ""dividends'' being paid out to Americans from their booming economy. Still, some critics think there'll be a backlash when voters see how hard it is to claim them. ""The only good that may come of it,'' says Steve Forbes, the flat-tax champion and former GOP presidential candidate, ""is that people are going to get so disgusted that I believe they will put immense pressure on Congress to simplify the tax code.''
That's what happened the last time Congress passed a giant tax-relief bill, in 1981. It helped create numerous loopholes, leading to the '86 fix. But the tax code soon began to metastasize again. Since 1990 Congress has added numerous special-interest deductions. One reason is today's belief that all new government spending is bad. So instead of handing out money to favored constituents, politicians hooked on pork have passed out tax breaks. The current tax-cut bill is a Christmas tree with presents for everyone. It is an education-spending bill, a child-welfare bill and a pension-reform bill.
Clinton administration officials say they've made a calculated choice: to sign off on policies they privately hate, like the GOP's capital-gains tax cut, to reach the larger goal of sealing last May's balanced-budget pact, which is part of an overall tax deal. Then, with the deficit eliminated - something that may happen thanks to the vibrant economy alone by next year - resistance to public spending may ebb, and no one will have to play games with the tax code. ""If we can get to a balanced-budget world,'' says Clinton economic adviser Gene Sperling, ""we can turn the focus to what's the most efficient policy rather than what side of the ledger it's on.'' Unless a mad bomber gets to the system first. ^
Where the tax bill could go wrong, with possible negative effects on the economy.
Proposal: Capital-gains rate cut, from 28 percent to 20 percent (House plan).
Potential damage: Huge shift to financial assets. Why build a business and have your income taxed at 39.6 percent?
Proposal: Education tax credits of up to 100 percent (Clinton plan).
Potential damage: Tuition may balloon as colleges match Clinton's $1,500 credit.
Proposal: Allow people to fund IRAs with either pre- or post tax dollars.
Potential damage: Government will have a hard time keeping track of IRA taxes.