A Cautionary Tale of Tax Reform

BROCKWAY, GEORGE P.

The Dismal Science A CAUTIONARY TALE OF TAX REFORM BY GEORGE P. BROCKWAY Something over a year ago, Senator Bill Bradley of New Jersey and Congressman Richard A. Gephardt of Missouri put...

...The conclusion must be that comprehensive liberal revision of the tax laws is not possible in the present—or foreseeable—political climate...
...Now, you may wonder what the net effect of all this coming and going would be...
...Thus the certainly needed reform of deroofing tax shelters was scarcely attempted...
...The third is a grand idea that could and should be incorporated in the law...
...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...
...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 per cent...
...These personal exemptions and itemized deductions would apply against the 14 per cent rate...
...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...
...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...
...and (3) regardless of your tax bracket, the deductions are limited to 14 per cent...
...Our bill makes another significant change which is directed primarily at low-income people...
...This is, as I said at the beginning, a cautionary tale...
...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...
...On the record, the scary probability is that any enacted "reform" of the income tax will be in the direction of abolishing it altogether...
...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...
...Last summer they unveiled a revised and more thoroughly worked out version of their proposal...
...They would also repeal indexing, another thing I'm always grumbling about...
...What started out as a drive for reform (perhaps a misguided drive, but still an honest one) has become a des perate search for something some sort of majority will somehow agree to...
...Roughly four out of five taxpayers will pay only the bottom 14 per cent rate...
...The Dismal Science A CAUTIONARY TALE OF TAX REFORM BY GEORGE P. BROCKWAY Something 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...
...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...
...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...
...Various banker-sponsored proposals would abolish the income tax altogether, substituting sales taxes or the more sophisticated (and insidious) value added tax...
...I don't remember—if I ever knew—what they planned to do with the corporation profits tax...
...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...
...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...
...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...
...Putting it simply, we want to increase the amount of money that a person can earn before having to pay any taxes at all...
...The first difference is no great shakes...
...on this no one is likely to say them nay...
...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 hasten to stress that their bill includes provisions I'm ready to cheer...
...H.&R...
...The only people paying the higher rates will be individuals with adjusted gross incomes above $25,000 and couples over the $40,000 mark...
...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...
...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...
...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...
...Block and all the tax accountants and tax lawyers, great and small, have nothing to fear from Bradley and Gephardt...
...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...
...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...
...Lastly, we favor continued exclusion of veterans benefits, Social Security benefits for low and moderate income persons, and interest on general obligation bonds...
...In any case, what has happened to Bradley-Gephardt during its gestation period is an instructive and cautionary tale...
...The answer, in a word, is nil...
...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...
...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...
...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...
...Thus the arguably useful reform of eliminating special exemptions and deductions was abandoned...
...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...
...If he closed them all, we'd be worrying about a surplus of $50 billion instead of a deficit of $200 billion...
...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...
...Bradley and Gephardt start with the premise that the present law is unfair and overcomplicated...
...The new version of their scheme isn't quite so radical...
...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...
...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...
...2) practically all deductions and exclusions and exemptions are back in...
...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...
...We thus propose to retain the $1,000 exemptions for dependents, the elderly and the blind...
...Let them concentrate on those and forget their grandiose scheme...
...Among the latter is one by Republican Senator Jesse Helms of North Carolina, who would tax everyone at a flat rate of 11-12 per cent...
...Don't count on it...
...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...
...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...
...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...

Vol. 67 • January 1984 • No. 2


 
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