A Cautionary Tale of Tax Reform

Originally published January 23, 1984

SOMETHlNG over a year ago, Senator Bill Bradley of New Jersey and Congressman Richard A. Gephardt of Missouri put forward a new scheme for the Federal Income Tax. Last summer they unveiled a revised and more thoroughly worked out version of their proposal. It should now probably be taken seriously because it has been substantially incorporated in a document entitled “Renewing America’s Promise,” released by a group calling itself the National-House Democratic Caucus. In any case, what has happened to Bradley-Gephardt during its gestation period is an instructive and cautionary tale.

First off, let it be stipulated that Bradley and Gephardt are men of good will – probably of liberal will – and that their plan is less harmful than many others that are being noisomely noised about. Among the latter is one by Republican Senator Jesse Helms of North Carolina, who would tax everyone at a flat rate of 11-12 percent. Another, by Democratic Senator Dennis DeConcini of Arizona, would be more generous with exemptions and therefore would have to set its flat rate at 19 percent. Various banker-sponsored proposals would abolish the income tax altogether, substituting sales taxes or the more sophisticated (and insidious) value added tax. Then there are nutty ideas like those of Robert Nozick, a professor of what passes for philosophy at Harvard, who thinks you ought to be allowed to choose the government activities you want to support, if any, and how much.

Bradley and Gephardt start with the premise that the present law is unfair and overcomplicated; on this no one is likely to say them nay. The current tax code, Senator Bradley observes, “spans more than 2,000 pages” and has more than 100 major loopholes that “will be worth at least $250 billion this year.” He doesn’t tell us how many of those pages and loopholes and billions are attributable to the personal tax and how many to the corporation tax, nor does he estimate how many of the loopholes he will close. If he closed them all, we’d be worrying about a surplus of $50 billion instead of a deficit of $200 billion. Don’t count on it.

In their original scheme, the Senator and the Congressman proposed to throw out practically the whole shooting match – medical deductions, veterans benefits, interest deductions, charity deductions, local tax deductions, shelters, the works. In place of the existing rates (which aren’t so progressive as they were a few years ago), they offered a three-step schedule: zero up to certain income, 14 per cent to another point, and 28 per cent thereafter. (I don’t remember – if I ever knew – what they planned to do with the corporation profits tax.)

The new version of their scheme isn’t quite so radical. Let’s let Senator Bradley explain it as he explained it last summer to the National Press Club: “For individuals the simple progressive tax would have three rates-14 per cent, 26 per cent, and 30 per cent. Roughly four out of five taxpayers will pay only the bottom 14 per cent rate. The only people paying the higher rates will be individuals with adjusted gross incomes above $25,000 and couples over the $40,000 mark.

“Our bill makes another significant change which is directed primarily at low-income people. Putting it simply, we want to increase the amount of money that a person can earn before having to pay any taxes at all ….

“To make this approach politically possible, we recognize that it is necessary to preserve certain deductions, credits and exclusions generally available for many years to most taxpayers. We thus propose to retain the $1,000 exemptions for dependents, the elderly and the blind. We also want to permit deductions for home mortgage interest, charitable contributions, state and local income and real property taxes, payments to IRAs and Keogh plans, some medical expenses, and employee business expenses. Lastly, we favor continued exclusion of veterans’ benefits, Social Security benefits for low and moderate income persons, and interest on general obligation bonds. These personal exemptions and itemized deductions would apply against the 14 per cent rate.”

As I look at the two versions, I see three main differences: (1) The new rates are slightly higher, though still far less progressive than even the present law; (2) practically all deductions and exclusions and exemptions are back in; and (3) regardless of your tax bracket, the deductions are limited to 14 per cent.

The first difference is no great shakes. The third is a grand idea that could and should be incorporated in the law. But the second difference gives the game away.

It is plain that Bradley and Gephardt have heard the insistent drums of The War March of the Priests – and of the college alumni associations and veterans’ organizations and senior citizens’ lobbies and real estate operators and IRA bankers and municipal bond holders and all the rest. Having heard that stern impassioned tread, and being practical politicians, they have fallen back on what they call “the best means available” and have surrendered-before the committee hearings-the issue of the complicatedness of the tax law as it relates to the ordinary taxpayer. H. & R. Block and all the tax accountants and tax lawyers, great and small, have nothing to fear from Bradley and Gephardt.

I hasten to stress that their bill includes provisions I’m ready to cheer. One is the abolition of special treatment for capital gains, which, as they point out, is scarcely necessary, since their regular rate is so low. They would also repeal indexing, another thing I’m always grumbling about. On the other hand, it seems to me that their treatment of depreciation is as cozy, for tax sheltering purposes, as anything now going, although it may be a slight improvement on the corporation side.

Now, you may wonder what the net effect of all this coming and going would be. The answer, in a word, is nil. At least that’s its declared effect, and one that the New York Times has (typically) praised it for. The sponsors themselves say that each “income class” will carry” approximately the same tax burden as under the present law.” I’m not sure how they square this statement with their claim that they “want to increase the amount of money that a person can earn before having to pay any taxes at all.” I further note that the proportion of Federal taxes paid by corporations would be unchanged, staying at the present 5.9 per cent (down from 26.5 per cent 30 years ago).

The exemptions and the loopholes and the corporate provisions of the present law are important because they exacerbate the unjust and uneconomic distribution of income in this country. Everyone knows that the Reagan-Kemp-Roth ironically entitled Economic Recovery Act of 1981 was intended to make the rich richer and the poor poorer, and that it succeeded in its intention. Yet Bradley and Gephardt, in what they called the Fair Tax Act of 1983 (now necessarily some other year), ultimately proposed to confirm this brutal unfairness and, by the title of their bill, to certify that it really is fair after all.

THIS IS, as I said at the beginning, a cautionary tale. What started out as a drive for reform (perhaps a misguided drive, but still an honest one) has become a desperate search for something some sort of majority will somehow agree to. Thus the really important reform – a redistribution of the tax burden – was abandoned at the outset: The gains rich individuals and corporations have made in the past 30 years – and particularly in the past three – are not to be disturbed, while for a few they will surely be increased. Thus the arguably useful reform of eliminating special exemptions and deductions was abandoned. Thus the certainly needed reform of deroofing tax shelters was scarcely attempted. In trying to get a comprehensive law that might be passed, Bradley and Gephardt have come up with one not worth passing – and this before being ground down by the legislative process.

The conclusion must be that comprehensive liberal revision of the tax laws is not possible in the present – or foreseeable – political climate. It will be hard enough to get piecemeal reform, as has been shown by the inability of President Reagan to muster even a Republican majority in favor of the innocuous withholding of taxes on bank interest, and by the inability of House Speaker Tip O’Neill to muster even a Democratic majority in favor of limiting the windfalls the rich got from the third round of Kemp-Roth.

On the record, the scary probability is that any enacted” reform” of the income tax will be in the direction of abolishing it altogether. If you’re not scared, ask your friendly banker what he hopes for, and remember that Treasury Secretary Donald Regan has already opined that “A move toward consumption taxes will probably be an absolute necessity.”

Senator Bradley and Congressman Gephardt have, as I’ve mentioned, a handful of good ideas that are worth trying to incorporate into the present law. Let them concentrate on those and forget their grandiose scheme. In any case, let Senator Bradley reflect on the fact that no sponsor of major tax legislation has ever been elected President, though there would be a certain piquancy in a race between a former professional basketball star and a former professional quarterback[1].

The New Leader


[1] For those who’ve forgotten, the author refers here to Jack Kemp, he of Reagan-Kemp-Roth

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