Politics & Policy

Time to Talk Tax Reform

What we need is a national debate on the issue.

If John Kerry ends up losing this election, it may not be because of what he did but of what he didn’t do. By overemphasizing his Vietnam record, he chose to ignore issues on which George W. Bush potentially is vulnerable. Among these is tax reform.

Tax reform has been one of the best Republican issues over the last 20 years. No wonder. Every poll that has ever been done has shown deep dissatisfaction with the tax system, quite apart from the burden of taxation. In other words, the way we raise revenue bothers people almost as much as the amount taken out of their pockets.

Historically, tax reform was primarily a liberal-Democratic issue. Under the leadership of tax experts like Stanley Surrey and Joseph Pechman, Democrats in Congress rammed the tax-reform acts of 1969 and 1976 down the throats of two Republican presidents. The main goal of these bills was to soak the rich by taking away their tax loopholes.

In the early 1980s, Republicans and conservatives joined the tax-reform fight, using loophole-closing to reduce tax rates. The Tax Reform Act of 1986 brought the top tax rate down to just 28 percent — its lowest level since the 1920s. This constituted a marriage of Republican and Democratic views on tax reform.

Unfortunately, there was a divorce shortly thereafter. George H.W. Bush abandoned Ronald Reagan’s vision by endorsing higher tax rates in 1990. He was joined back then by the leading Democratic tax reformer, Sen. Bill Bradley of New Jersey. Like Charlie Brown and the football, we were promised lower rates in return for closing loopholes. But shortly thereafter, the football was pulled away by Lucy and rates were raised without restoring the loopholes. The 1993 tax increase under Bill Clinton completed the double-cross.

Most Republicans still wanted tax reform, but unfortunately they split into two competing camps — those supporting a flat-rate tax and those favoring a national retail sales tax. The result was a dissipation of support for any reform. After 1994, when Republicans gained control of Congress for the first time in two generations, their interest in tax reform evaporated. They liked being able to add special provisions to the tax code to benefit their friends and did so with abandon. Republicans channeled what was left of their tax-reform agenda into scapegoating the Internal Revenue Service — blaming it for all the sins of the tax law.

Unfortunately, George W. Bush has never spelled out a tax-reform agenda. The many tax bills he got through Congress have in large part made the tax code more complicated. Reports by the Economic Policy Institute on the left and the National Taxpayers Union on the right agree on this point, if little else.

Villanova University law professor James Maule notes that even as President Bush was proposing a tax-reform commission at this year’s Republican convention, he also endorsed more special provisions for the tax code. “So which is it?” Prof. Maule asks. “The tax code is complicated and needs to be simplified? Or the tax code should be made more complex by adding at least two more special provisions?”

It isn’t as though the Treasury is unaware of the fact that the tax code has become more complicated during this administration. Journalist Ron Suskind recently posted on his website a memo to former Treasury Secretary Paul O’Neill from his tax policy staff on the need for tax simplification and how to do it. It proves that we don’t need another commission to study the issue, just a commitment to do something.

Lately, some journalists have argued that beneath the mass of new complexity and special-interest provisions that have been enacted over the last four years, Bush has been secretly engineering a massive tax restructuring. Writing in the Sept. 6 issue of The New Yorker, John Cassidy charges that there has been a virtual conspiracy to eliminate all taxes on the rich by abolishing the taxation of capital.

In his new book, Neoconomy, former New York Times reporter Daniel Altman says much the same thing. He argues that Bush’s ultimate goal is a tax system that taxes only consumption, which will be achieved by incrementally lowering taxes on saving and investment to the point where there is nothing left to tax except consumption. Although Altman favors such a tax change, he admits that it has involved “a bit of bait-and-switch,” where tax cuts for long-term growth were sold politically as short-run stimulus (although they weren’t).

I think John Kerry has missed an opportunity to score some points against Bush by making tax reform a campaign issue. It would be helpful to have a national debate on this topic during a presidential campaign. Only when the voters are engaged can we expect congressional action.

– Bruce Bartlett is senior fellow for the National Center for Policy Analysis. Write to him here.


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