Wednesday, October 24, 2012

How Tax Reform Became a Conservative Cause

By Steven Malanga

For decades liberals railed against the gradual evolution of the federal income tax into a morass of special provisions benefitting individual interests at the expense of the average taxpayer. Under that system, tax rates became meaningless for some households and companies because what they paid depended on how many special exemptions they could claim.
Today, some liberals in Congress are leading the charge against a new rewrite of the tax code, even suggesting that tax reform is merely a plot to cut the taxes of America's wealthiest. One of the leading Democratic opponents of tax reform, New York Sen. Charles Schumer, has even bizarrely claimed that the last bi-partisan tax reform effort, in 1986, was only possible because there was no budget deficit to contend with back then (in fact there was a whopping one which nearly eclipsed the entire 1986 reform effort). The more you listen to some of these opponents rail against the very notion of reform, the more you have to wonder if the truth isn't that they have come to love the complexity of our tax code even more than big business does, because the system is now as much a vehicle for social engineering as it is a way to raise revenues.
Discontent with the growing complexity of our tax code stretches back decades and was a favorite theme of Democrats. President Kennedy took office in 1961 with an aim to eliminate or reduce many of the special exemptions in the code. He appointed as assistant treasury secretary Harvard law professor Stanley Surrey, whose academic work argued that tax exemptions and incentives were far less effective as vehicles of social policy than direct government expenditures. Surrey crafted a series of reforms in the early 1960s aimed at getting the loopholes out of the tax code, only to see Republicans and Democrats alike help bury them.

In 1969, Lyndon Johnson's last Treasury Secretary, Joseph Barr, created a sensation when he released a list of 155 people who earned more than $200,000 annually but paid no income tax. But that merely resulted in passage of the Alternative Minimum Tax, which capped the number of deductions wealthy individuals can take. Jimmy Carter tried again nearly a decade later for broader reform, only to see his tax reform efforts disappear along with his political capital as his presidency struggled. Ronald Reagan followed and hardly began as the apostle of simplification. He even once referred to tax reform as a "liberal myth."
But a young liberal senator of the time, Bill Bradley, believed that simplifying the tax code could unlock economic activity and help restore people's faith in the income tax at a time when it was rapidly waning. A 1985 poll, in fact, found for the first time that Americans thought that the federal tax code was less fair than the state and local taxes they paid.
Bradley hoped to tap into that dissatisfaction. He had one idea, however, that liberals had not emphasized in pushing for reform. An All-American college basketball player, Bradley got a big contract to play for the New York Knicks and spent 10 years in pro basketball earning a hefty salary. During that time, Bradley saw firsthand how high tax rates distorted economic decisions. He told of being asked how he wanted to be paid in the NBA to minimize taxation: in property, through deferred retirement income, or into a corporation set up in his name. Bradley even devoted passages in his biography to ways he and his teammates tried to minimize their taxes. So Bradley came to believe that a simpler tax code that lowered rates but provided fewer loopholes and exemptions would not only be fairer, but less economically distorting.
Dollar Bill Bradley found common cause with a one-time professional entertainer, Ronald Reagan, who had earned big paychecks as an actor and so like Bradley understood the disincentives in the tax code. Still, Reagan wondered at the wisdom of pursuing tax reform when the bigger issue at the time was dealing with the deficit, which clocked in at $221 billion on a budget of $990 billion in 1986. Bradley, too, worried that his tax reform legislation would become a mere ‘sideshow' to concerns over the federal budget.
Still, gradually Reagan became convinced that the long-term effect of lower tax rates would be worth the fight. Members of his administration also came to see a historic simplification of the tax code as a singular achievement. Don Regan, the Treasury Secretary from Wall Street, started showing up to strategy sessions and announcing that it was time to "do away with Santa Claus."
Supporters came to include significant Democrats, including the powerful chair of the House Ways and Means Committee, Dan Rostenkowski, who gave a remarkable televised address in which he pointed out that a Republican president was advocating for something that Democrats like Truman and Kennedy had supported, and it was time for Democrats to sign on, too.
They eventually did, though it took several years and concessions on both sides. Republicans, for instance, originally argued it wasn't worth doing the reform unless they could get tax rates below 30 percent. They settled for a nominal top rate of 28 percent that was actually 33 percent with surcharges added in. Similarly, Bradley wrote in 2009 that, "the bill would never have passed had some Democrats not taken on an ingrained party orthodoxy - the belief that equity demanded higher tax rates."
The landscape has changed significantly since then. Most conservatives (though certainly not most Republicans) have come to see the range of incentives and exemptions in the tax code as wrongheaded, including those for businesses which smack of little more than corporate cronyism. This is in sharp contrast to 1986, when many Republicans in Congress resisted reform until a popular GOP president came along willing to take on the business community.
The leadership of the Democratic Party is different, too, led by Schumer on tax issues. Unlike Bradley, who had spent more than a decade watching the tax code work in a high-paying private sector job, Schumer is entirely a creature of the public sector. The Congressional Democrat leading his party on tax matters has never collected a private sector paycheck of any substance, having run for state assembly the year he exited law school at the age of 24 and held public office since.
Nominally, Schumer says he opposes tax reform because now is not the time to reduce tax rates given the steep federal deficit, even though some reform plans devote a portion of the savings from eliminating deductions to closing the budget gap. But his real objection seems embedded in an interview he recently did in which chided fellow Democrats who used the terms ‘loopholes' and ‘tax expenditures' interchangeably. Instead he defended some tax expenditures as "very important and very good policy." Ironically, the term ‘tax expenditure' was coined by a liberal Democrat, JFK's tax adviser Stanley Surrey, to illustrate his contention that Congress was misusing the tax code for social policy when other approaches to addressing those issues would have been more effective.
Today, by contrast, it sounds like the most dangerous place in Washington is becoming anyplace between Schumer and a tax expenditure.

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