Tax Legislation Worthy Only of The Trash Heap

If Republicans really want to honor the memory of Ronald Reagan, they should toss in the trash the corporate tax legislation making its way through Congress.

One of Reagan's greatest achievements was passage, with bipartisan support, of the 1986 Tax Reform Act. The goal of the landmark bill was to make the tax code simpler and fairer while boosting economic efficiency. Loopholes were closed, tax rates were reduced, and all sorts of distinctions were eliminated so that individuals and companies with the same income or profits were required to pay roughly the same tax.

Those principles, however, are violated on nearly every one of the 930 pages in the recently passed Senate tax bill and the 398-page draft released last week by the chairman of the House Ways and Means Committee, Bill Thomas (R-Calif.).

With a few exceptions, both bills are grab bags of special-interest provisions designed to reward the well-connected at everyone else's expense. They reward companies that have played cynical tax games and open up new vistas for the tax shelter industry. And while claiming that the purpose of the exercise was to create jobs in the United States, they will only enhance existing incentives for U.S. companies to earn their profits overseas.

Worse still, they are almost certain to add billions each year to a federal deficit that is already too high.

Let's begin with those provisions designed to favor particular companies or industries. In the Senate bill, these include cruise-ship operators, foreign gamblers, NASCAR track owners, insurers, timber companies, cattle ranchers, movie theater owners, and manufacturers of small planes, bow-and-arrow sets and fishing tackle boxes. And notwithstanding the fact that skyrocketing oil prices should provide all the incentive anyone would need to develop new energy sources, there's a couple of billion dollars a year in new tax breaks for energy companies already well-endowed with them. In a final, gratuitous insult to the taxpayer, there's even a provision for a blue-ribbon commission to study "comprehensive tax reform."

The House would leave out the energy provisions but add tax breaks for bourbon distillers and wealthy taxpayers in places like Texas that, poor things, have no state income tax to deduct on their federal 1040. High-tech industry tucked in a provision that would ensure its employees pay no payroll taxes on all those stock options. And in a shameless vote-buying effort, Thomas's draft would have the government pay $2 billion a year to tobacco farmers for the right NOT to pay them annual crop subsidies in the future, as if the quotas were some sort of property right.

The original reason for embarking on this legislative escapade was to eliminate a $5-billion-a-year tax break for U.S. exporters ruled illegal under world trade rules. But to "compensate" large corporations for their lost subsidies, both versions of the legislation propose reducing the corporate income tax rate by 10 percent for any company engaged in manufacturing -- which, if you read the fine print, turns out to include movie studios, farmers and software programmers, along with any "small business" that makes less than $20 million in annual profit.

And if all that weren't enough, there are the dozen provisions that would magically turn passive income into active, permit more-liberal use of foreign tax credits, allow companies to shift profits from one foreign country to another and grant a tax holiday for billions of profits parked overseas. In aggregate, these will boost after-tax profits at least $5 billion a year and give every company fresh incentive to locate operations anywhere other than the U.S. of A. To call this the "American Jobs Creation Act of 2004" is nothing short of political and economic fraud.

This may well be the worst piece of tax legislation to come along since 1986. If Sen. John F. Kerry (D-Mass.) wanted to steal the Reagan mantle, he would make plans now to return to Washington from the campaign trail and, Jimmy Stewart-like, lead a protracted Senate filibuster of the final bill. From his final resting place, the Gipper would be cheering him on.

Steven Pearlstein can be reached at pearlsteins@washpost.com.