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(1) travel, meals, and lodging expenses for pre-move househunting trips; (2) expenses for meals and lodging in the general location of the new job location for a period of up to 30 days after obtaining employment; and (3) various reasonable expenses incident to the sale of a residence or the settlement of a lease at the old job location, or to the purchase of a residence or the acquisition of a lease at the new job location. A limitation of $2,500 is placed on the deduction allowed for these three additional categories of moving expenses. In addition, expenses for the househunting trips and temporary living expenses may not account for more than $1,000 of the $2,500.

The bill also increases the 20-mile test to a 50-mile test, and provides that the 39-week test is to be waived if the taxpayer is unable to satisfy it due to circumstances beyond his control. Finally, the bill requires that reimbursements for moving expenses must be included in gross income. These provisions generally apply to years beginning after 1969.

Arguments For.-(1) 'It is appropriate to give more adequate recognition in the tax law to additional moving expenses which are incurred in connection with job-related moves. Moving expenses to a new job location may be viewed as a cost of earning income. From this, it may be argued that expenses reasonably incident to a job-related move should be deductible as are direct moving expenses under present

law.

(2) The present law unreasonably discriminates in favor of "old" employees who are reimbursed for their moving expenses, on the one hand, as contrasted to "old" employees who are not reimbursed and "new" employes, whether or not they are reimbursed, on the other. This is so because individuals in the former category are not required to report their reimbursements and include them in income for tax purposes. (Of course, they get no deduction for their expenses.)

(3) Mobility of labor is highly desirable and the more complete deduction provisions for moving expenses in the bill fosters such mobility.

Arguments Against.-(1) The general philosophy of the income tax law is to deny a tax deduction for personal, family and living expenses, and for capital expenditures. The bill violates this general rule, enlarges the present moving expense deduction and makes it more of a precedent for allowance of still other personal family or living expenses.

(2) Mobility of labor, though desirable, is not motivated by a tax deduction. If a job offer in another location is attractive on its own. or if job opportunities are scare in the employee's present location, he will make a necessary move without a tax reward.

(3) Existing rules for "old" employees who are reimbursed by their employers for a move required by the employer-the only situation where tax relief is warranted-are adequate to prevent hardship where the move is beyond the employees' control.

(4) The allowance of a deduction for the additional moving ex penses is primarily advantageous to the professional or managerial employee, who is most likely to move, as well as to incur substantially higher moving costs due to his more expensive mode of living.

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(5) The dollar limitations on the additional moving expense deduction are unrealistically low.

G. LIMIT ON TAX PREFERENCES

Present law. Under present law, there is no limit on how large a part of his income an individual may exclude from tax as a result of the receipt of various kinds of tax exempt income or special deductions. Individuals whose income is secured mainly from tax-exempt State and local bond interest, for example, may exclude practically all their income from tax. Similarly, individuals may pay tax on only a fraction of their economic income, if they enjoy the benefits of accelerated depreciation on real estate. Individuals may also escape tax on a large part of their economic income if they can take advantage of the present special farm accounting rules or can deduct charitable contributions which include appreciation in value which has not been subject to tax.

Problem. The present treatment, which imposes no limit on the portion of his income that an individual may exclude from tax, results in an unfair distribution of the tax burden. This treatment results in large variations in the tax burdens placed on individuals who receive different kinds of income. In general, high-income taxpayers, who get the bulk of their income from personal services, are taxed at high rates. On the other hand, those who get the bulk of their income from such sources as tax-exempt interest and capital gains or who can benefit from accelerated depreciation on real estate pay relatively low rates of tax. In fact, individuals with high incomes who can benefit from these provisions may pay lower average rates of tax than many individuals with modest incomes. In extreme cases, individuals may enjoy large economic incomes without paying any tax at all.

House solution.-The House bill provides a limit on tax preferences under which no more than 50 percent of the taxpayer's total income (adjusted gross income plus tax preference items) can be excluded from tax. The tax preference items to which this provision applies are: (1) tax-exempt interest on both new and old issues of State and local bonds (to be gradually taken into account over a 10-year period at a rate of one-tenth of the interest per year); (2) the excluded onehalf of capital gains; (3) the untaxed appreciation in value of property for which a charitable contributions deduction is allowed; (4) the excess of depreciation claimed on real property over straight line depreciation; and (5) farm losses to the extent they result from the use of special farm accounting rules.

The limit on tax preferences applies only to taxpayers with at least $10,000 of tax preference items for the year. A 5-year carryover is provided for disallowed preferences. This provision applies to years beginning after 1969.

Arguments For.-(1) The limit on tax preference is based on the premise that individuals generally should be required to pay tax on at least one-half of their economic income.

(2) The limit on tax preferences has the advantage of making sure that individuals generally pay tax on a substantial part of their

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income. It, therefore, serves as a second line of defense against the avoidance of income taxes, to back up the first line of defense against such avoidance offered by the remedial provisions in the House bill which limit the scope of specific tax preferences.

(3) The bill corrects the unfair discrimination in present law which favors those taxpayers who derive their income from the ownership of property as contrasted with those who earn their living from wages and salaries.

(4) The present law improperly encourages investment of capital in certain areas for tax consideration rather than good business reasons and violates the principle that taxes should have a neutral impact on economic decisions.

(5) Many individuals with large incomes benefit from tax preferences to the extent that they pay lower average rates of effective tax than many individuals with moderate incomes. This makes a mockery of a tax system based on the ability to pay.

Arguments Against.-(1) This limitation is an imperfect substitute for direct action on the preferential income tax provisions which cause today's tax injustice. Each particular item of tax preference should be considered on its own merits and should be adjusted accordingly.

(2) Enactment of a limit on tax preference complicates present law by imposing a new income tax system on top of our present system thereby compounding the complexity of the tax laws and adding considerable administrative difficulties to the existing system.

(3) This new approach could become the forerunner of a gross receipts tax on all taxpayers.

(4) The bill raises a constitutional question as to the power of Congress to tax income from State and local government obligations, particularly obligations already outstanding.

(5) The bill is inadequate; the excess of percentage depletion over cost depletion and the excess of intangible drilling and development expenses over the deductions allowed under straight line depreciation should be added to the list of tax preference items subject to the limit on tax preferences.

(6) The limit on tax preferences will discourage charitable gifts. (7) If Congress has seen fit to provide a specific tax benefit, there is no reason why it should be denied to some merely on the ground that it, in combination with other items, represents a large proportion of that individual's income.

(8) Since this limit will not affect individuals until the sum of their tax preference income equals one-half of their total income, it will still be possible for some individuals to exclude substantial amounts of tax preference income from tax.

H. ALLOCATION OF DEDUCTIONS

Present law. Under present law an individual is permitted to charge his personal or itemized tax deductions entirely against his taxable income, without charging any part of these deductions to his tax-free income.

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Problem. The fact that an individual who receives tax-free income or special deductions can charge the entire amount of his personal deductions to his taxable income in effect gives him a double tax benefit. He not only excludes the tax-free income from his tax base but he also, by charging all his personal deductions against his taxable income, reduces his tax payments on this taxable income. As a result, individuals with substantial tax-free income and special deductions and large personal deductions can wipe out much or all of their tax liability on substantial amounts of otherwise taxable income.

House solution.-The House bill provides that an individual must allocate his personal deductions between his taxable income and his tax preference items, to the extent that the latter exceed $10,000.

For example, a taxpayer whose income is divided equally between his taxable income and his tax preference income is allowed to take only one-half his otherwise allowable personal deductions; the remaining half of such personal deductions are disallowed.1

The personal expenses which must be allocated include interest, taxes, personal theft and casualty losses, charitable contributions, and medical expenses.

The tax preference items taken into account for this purpose are the same as those included under the limit on tax preferences (see item G) except for certain modifications. Tax-exempt interest on State and local bonds issued before July 12, 1969, is not taken into account. In addition, unlike the limit on tax preferences, the allocation provision includes in the list of tax preference items the excess of intangible drilling expenses over the amount of the expenses which would have been recovered through straight line depreciation and the excess of percentage depletion over cost depletion.

Taxpayers apply the limit on tax preferences before allocating deductions. Any tax preferences included in taxable income as a result of the limit on tax preferences are treated as taxable income for purposes of allocating deductions.

The allocation provision applies to years beginning after 1969, except that in the first year to which it applies only one-half of the taxpayer's personal expenses must be allocated.

Arguments For.-(1) The allocation of deductions provision is supported on the grounds that personal deductions are in fact paid for. out of an individual's entire economic income and not just his taxable income. For that reason the deduction should be allowed for these items only to the extent the income to which they relate is included in an individual's tax base.

(2) The allocation provision is specifically designed to minimize any possible unfavorable impact on State and local obligations since only interest on bonds issued in the future are taken into account and this interest income is brought in under the allocation provision only gradually over a 10-year period.

1 This example, in order to illustrate the allocation in a simple manner, takes all tax preference income into account and, for allocation purposes, does not reduce such tax preference income by $10,000 as under the bill.

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(3) This provision helps correct the unfair discrimination in present law which favors those taxpayers who derive their income from the ownership of property as contrasted with those who earn their living from wages and salaries.

(4) The provision recognizes the desirability of a tax system in which no individual can avoid his fair share of the tax burden.

(5) The present tax improperly encourages investment of funds in certain areas for tax considerations rather than good business reasons and violates the principle that taxes should have a neutral impact on economic decisions.

Arguments Against.-(1) The primary intent of the provision is to tax tax-preferred income rather than disallowing deductions, It would be better to consider the various tax-preference items individually and to take whatever corrective action is necessary directly on those items.

(2) Enactment of a system which allocates deductions on the basis of the relation between taxable and tax-preferred items of income complicates the tax laws and adds considerable administrative difficulties to the existing system.

(3) The bill raises a constitutional question as to the power of Congress to tax (even indirectly) income from State and local government obligations.

(4) Since most of the so-called "preferences" in today's law involves conscious decisions by Congress to encourage specific types of investments, those provisions should not now be heedlessly diluted under the guise of tax reform.

I. INCOME AVERAGING

Present law. Under present law, income averaging permits a taxpayer to mitigate the effect of progressive tax rates on sharp increases in income. His taxable income in excess of 1333 percent of his average taxable income for the prior 4 years generally can be averaged and taxed at lower bracket rates than would otherwise apply. Certain types of income such as long-term capital gains, wagering income, and income from gifts are not eligible for averaging.

Problem.-The exclusion of certain types of income from income eligible for averaging complicates the tax return and makes in difficult for taxpayers to determine easily whether or not they would benefit from averaging. In addition, taxpayers with fluctuating income from these sources may pay higher taxes than taxpayers with constant income from the same sources or fluctuating income from different sources. Finally, the 1333 percent requirement denies the benefit of averaging to taxpayers with a substantial increase in income and reduces the benefits of averaging for those who are eligible.

House solution.-The House bill extends income averaging to longterm capital gains, income from wagering, and income from gifts. It also lowers the percentage by which an individual's income must increase for averaging to be available from 333 percent to 20 percent. Arguments For.-(1) Permitting averaging for presently excluded come will result in simplification of the tax form and the averaging computation.

(2) In the case of capital gains, it is maintained that the 50 percent exclusion does not provide a form of averaging because it does not distinguish between taxpayers with fluctuating capital gains and the ant capital gains, and therefore avera