Gephardt Takes His Case for Tax Reform to Business

When liberal Democrat Richard Gephardt appeared before a group of conservative business executives last weekend, the conversation ran along these lines.

Point: Get government out of the business of deciding which investments should be encouraged. Let the marketplace decide such matters. Revert to a tax code that is investment-neutral.

Counterpoint: Without government incentives, there would be no new businesses. Without help from the tax code, investors couldn’t be lured to the risky business of helping a company start up. They would simply put their money into something safer, like municipal bonds or mortgage-backed securities.

Nothing unusual there--except that the liberal Democrat was preaching free-market economics and the conservative businessmen were advocating government intervention.

“I find it very interesting . . . that here we have this liberal congressman in a den of conservatism, and it is the congressman who is espousing a free market and the business community . . . espousing a decidedly different view,” observed Andrew Paterson, assistant director of the Southern California Technology Executives Network, a trade group.

So it often goes when the 44-year-old chairman of the Democratic caucus and co-author, with Sen. Bill Bradley (D-N.J.), of a popular tax-revision bill takes his tax-reform crusade on the road, as he did last week in Los Angeles.

During a two-day conference on the economy sponsored by the New York Stock Exchange, the Los Angeles Times and the UCLA Graduate School of Management, and at a two-hour meeting with emerging businesses hosted by the Los Angeles office of the Price, Waterhouse accounting firm, Gephardt made his case for a tax system that would be fairer, simpler and neutral to all types of investments--except home ownership, which as the most cherished of all tax shelters won’t be tampered with by any politician interested in keeping his job.

“I feel more comfortable with the free market system deciding where capital should be allocated than with Dick Gephardt planning it,” Gephardt told businessmen.

Addressing decidedly skeptical business audiences, Gephardt proclaimed 1985 the year of tax reform and urged businesses large and small to actually figure their taxes under one of the tax-revision proposals before “fixating on the deductions you think you’re going to miss.”

Sharp Attacks

But fixate they did. The proposed elimination of research and development credits, accelerated depreciation, investment tax credits, state income taxes for individuals and favored treatment for capital gains all came under sharp attack. Some even belittled the notion of tax reform as a crude Trojan Horse, which in the guise of delivering fairness and simplicity would actually allow a tax increase and a shift in the tax burden from individuals to business.

“I don’t trust the decision-making process enough . . . to believe that, once they’ve traded you out of deductions, they won’t go back and raise the rates,” William M. Batten, former chairman of the New York Stock Exchange, said at the conference.

“You’re trying to make a donkey fly if you think you’re going to see tax reform in 1985,” added Dallas businessman Milledge A. Hart III. “There would be tremendous dislocation in this country if we go to anything like a modified tax plan.”

Even those businessmen who assured Gephardt that they support the concept of tax reform repeatedly criticized the way in which Gephardt and others propose to achieve it.

R&D; Credits

Noting that as a lawyer he has overseen the formation of several start-up companies, Clifton S. Smith Jr., a partner in the law firm of Musick, Peeler & Garrett, told Gephardt: “I can guarantee you that, but for individuals’ ability to deduct R&D; (research and development) credits, there is no chance those companies would have gotten started.” While Smith considers himself an advocate of tax reform and free-market economics, he predicted that an investment-neutral tax system would divert start-up money to safer investments, such as municipal bonds, and retard the formation of new businesses and jobs.

Confronted with the irony of businessmen advocating government interference in the marketplace, one Los Angeles executive told Gephardt, “there are very few people who operate on principle when it’s going to bankrupt them.”

“I’ve noticed,” rejoined Gephardt, eliciting laughter and applause from the small-business audience.

His pleasant way and obvious leaning toward conciliation and pragmatism endeared Gephardt to his audiences last week much more than his tax-simplification solutions did. On several occasions, he was lauded for his willingness to listen patiently while others took pot shots at his proposals.

Whether they agreed with him or not, it was clear that his Los Angeles audiences genuinely liked Gephardt.

So it has been ever since the pragmatic Democrat from Missouri was elected to the House in 1976. Far more people know him as a young, good-looking and bright new-breed Democrat than as the Democratic caucus chairman and member of the powerful Ways and Means Committee.

Lately, the talk about him has been equally divided between his tax-reform crusade and his ambitions. There is talk of a House leadership bid, of a Senate bid, of a run at the Presidency even. Of more immediacy, some say that only Gephardt, in his role as Democratic caucus chairman, can reshape the Democratic party and lead it out of the wilderness.

Enter tax reform.

Gephardt shares the belief of many Democrats that tax reform is the issue that will put the Democrats back in touch with America’s middle class. He points to the polls.

By a margin of 56% to 38%, respondents to a poll released last week in Los Angeles at the two-day conference, “The Major Issue Facing America: Public Policy and Economic Growth,” said they favor an easily understood, simplified income tax--even if they would have to pay the same or somewhat higher taxes.

“There is deep public concern about tax reform,” Gephardt said. “The current tax code is basically unfair, it is too complex and it is starting to cause detrimental economic outcomes. People are consulting the code for decision-making instead of consulting economic experts.”

One retailer, for example, told Gephardt last week that his company had diversified into the freighter business. “Now, we shouldn’t own freighters,” the retailer said. “But we were told it was a good tax dodge, and some bank gave us a line of credit for it.”

An advocate of tax reform, the retailer said he finds it hard to support a system that puts the biggest tax burden on the companies that are creating the new jobs.

“We hire a lot of people, but we get no deductions for that, so we’re a full tax bracket payer,” he said.

But overhauling the rules so drastically and so quickly when the game has already begun is enough to scare even the staunchest supporters of tax reform.

“My big concern is that . . . after so many years of using the tax code to impact social issues . . . to call for the kind of changes you are is to go through a disruption of a magnitude that no one has ever seen,” said John G. Nikkel, president of Unit Drilling & Exploration Co. of Tulsa, Okla.

To Gephardt’s response that “we’re going through a disruption every year now” as Congress tinkers with the tax laws to correct perceived abuses, Nikkel replied: “I can handle how a tax code change will affect my company car, but not my whole company.

“Your changes would mean whether or not my company might survive, and I hate to risk the whole farm on a political experiment.”

It is that type of concern that prompted Rep. Dick Cheney (R-Wyo.), also a conference participant, to say that the “massive revolutionary change” involved in proposed tax reform is something “I don’t think is called for and I don’t think is likely to be supported by the American people.”

Gephardt agrees that the battle for tax reform is likely to be “the most cataclysmic fight Washington has seen for some time.” But he--and a large number of businessmen who heard him speak last week--believe that it has a strong chance of succeeding provided that there is a long transition between the current system and the new.

“Changing the tax code need not freeze and cripple economic activity,” Gephardt said. “We can have change and still give people confidence that they can enter into transactions. It is all in the transition rules.

“And although they haven’t been written yet, there is a deep consensus in Congress and in the Administration that they need to be liberal.”

Besides advocating liberal transition rules, Gephardt proposes a flat 30% rate for corporations and rates of 14%, 26% and 30% for individuals. He would eliminate most deductions and credits for individuals and businesses and permit most remaining deductions to be deducted at only the 14% rate--even for taxpayers in the two higher brackets.

The tax distribution among income groups and between business and individuals would remain unchanged, capital gains would be taxed as ordinary income, state and local income and property taxes would remain deductible, as would charitable contributions. There would be no indexing for inflation and fringe benefits would be fully taxed.

Many of the Bradley-Gephardt Fair Tax Act provisions were adopted by the Treasury Department’s proposed Tax Simplification Act, a proposal Gephardt thus finds hard to oppose. He does, however, prefer his top individual rate of 30% to the Treasury’s 35%, and he said he would argue strenuously for the continued deductibility of state and local taxes, a deduction the Treasury would eliminate.

As to the continued favorable treatment of capital gains, the issue on which businessmen argued most passionately during Gephardt’s three-day stay in Los Angeles, the Congressman called that “a tough question, one we’ve already argued long and hard over and will continue to argue about.”