A proposal to give $11.1 billion in new tax breaks to small corporations is being criticized as opening the door for wealthy investors to duck their share of federal taxes. The Bush administration is pushing the new incentives as a substitute for the capital gains tax cut that congressional leaders refused to accept. Some of those leaders are suspicious of the substitute, which actually includes a small capital gains reduction. The proposal is attached to the $500 billion, five-year deficit-reduction agreement that President Bush and congressional leaders reached this week. The tax break proposal ``has very serious flaws,'' Sen. Lloyd Bentsen, D-Texas, chairman of the Senate Finance Committee, said Wednesday. ``I think it will lead to a substantial increase in tax shelters and great abuse.'' Rep. Dan Rostenkowski, D-Ill., chairman of the House Ways and Means Committee, also has reservations. If the proposals ``are growth incentives, he thinks they promise only to help tax shelters grow,'' an aide said. Public outrage about tax sheltering was a major factor in the sweeping income tax overhaul in 1986. Before then, many wealthy individuals and profitable corporations were able to cut their taxes to almost zero by making investments - many with no chance of success - that offered huge up-front deductions. A Chamber of Commerce official said the new provisions could be drawn tightly enough to avoid reviving such tax shelters. Bush said the plan would provide ``powerful new incentives for productive investment in the kinds of companies that account for much of America's job growth.'' The key part would allow a person to deduct 25 percent of the first $50,000 invested in a year in a ``small corporation.'' Such a corporation would be defined as one with non-borrowed capital of $50 million or less. Critics said the definition is so broad it could cover some giant companies so heavily in debt that stockholder equity falls below the $50 million threshold. Others noted the possibility a big company could split into smaller divisions in an effort to attract investors looking for tax breaks. ``It's an outrage and probably stands a shot at being knocked out of the budget package,'' said Robert McIntyre, director of Citizens for Tax Justice, a labor-financed group. ``We don't see the need to encourage people to invest their money in ways that don't make sense for them in the absence of a tax incentive.'' The special deduction and several other small-corporation incentives were written into the budget agreement at the administration's insistence. That occurred after congressional leaders refused to accept Bush's proposal to cut the capital gains tax, on grounds that nearly 80 percent of the benefit would go to those with incomes over $100,000 a year. Capital gains, the profits from the sale of investments, are fully taxed at the same rates as other income. One of the proposed incentives is a new capital gains tax cut - albeit a narrow one. It would allow an investor in a small corporation to avoid tax on up to half the price for which the stock was sold, as long as it was held at least five years. Steve Entin, an analyst with the conservative Institute for Research Into Economics of Taxation, who wants a broad capital gains cut, said the incentive package is so narrowly drawn that it would benefit ``only a handful of well-to-do people who could afford to sink a substantial portion of their money into risky small companies.'' Ordinary investors have to diversify to reduce risks, Entin said, and there is little in the package for them.
