This Tax ‘Reform’ Plan Is Worth Junking

A lot of politicians tell me that nobody cares about tax reform. Apparently a majority of the House Ways and Means Committee believes that this is true. If they thought that voters really cared about progress toward a tax system that won’t need more “reform” in a couple of years, they wouldn’t have had the nerve to put forward the bill completed in the wee hours of the morning of Saturday, Nov. 23.

The Ways and Means proposal is tax revision, not reform. Anybody in Congress who dares with a straight face to call it tax reform should be required to sign a pledge that he or she won’t consider any further changes in the tax code for five years.

Believe me, no one is going to sign that pledge. The big players in the ongoing game of tax-code roulette, both inside and outside the government, know only too well that constant tax revision means power and money for them. The strategy is to make plenty of changes in the tax code every couple of years and call it tax reform. Loopholes are the key. You close some and open others so that all the special interests will realize that they better keep paying attention to what’s happening at the big roulette table in Washington where tax policy is made.

When you step back and look at the broad sweep of tax legislation, it becomes clear that the tax code is the new pork barrel for those seeking special favors from government. The game is no longer primarily directed at getting direct subsidies as much as receiving “incentives” through the tax code. Liberals try to use the tax code to redistribute income, while conservatives use it to stimulate faster growth. Taken altogether, this pork adds up to $400 billion a year in lost revenue.

In the average citizen’s view the tax code is simply out of control. It changes every year or two for reasons that are totally incomprehensible to the folks who have to sit down in the first three months of the year and work through myriad tax forms. A lot of people throw in the towel and hire an accountant. Subsequently they are subject to a varying and bewildering set of instructions from the accountant about record-keeping, the purchase of vacation property, possible tax shelters and an array of ways to spend money that no one would have dreamed of in the absence of all the wonderful tax incentives that are built into the code.

The business community is becoming fed up, too. Corporate treasurers are falling further and further behind as they attempt to stay abreast of tax-code changes. Investment decisions are more difficult to make because the after-tax returns are impossible to predict. Investment suffers.

When national leaders like President Reagan or Ways and Means Chairman Dan Rostenkowski (D-Ill.) raise the issue of the need for tax reform, most voters conjure up visions of politicians romping with special interests and playing a game that leaves them only more bewildered as time goes by. The President, great politician that he is, senses that this perception in the minds of most voters could someday explode into a downright tax revolt where compliance problems skyrocket. An ominous drop in taxpayer compliance has already occurred, and there is no way of knowing how close we may be to a shear point.

In other words, the tax-reform issue is a dangerous one. It’s dangerous for politicians because a lot of people are angry about the tax code and the sham of tax reform. They may not know exactly what’s wrong, but they do know that people in Congress are involved, and if they get mad enough they might vote against them in the next election. The other danger is that they might get mad enough to decide to opt out of the system that they consider absurd and arbitrary. Then we have a real problem on our hands. Rebuilding credibility is a slow and hard process. Just ask the Federal Reserve--it took five years for it to reestablish credibility with regard to the question of whether it was serious about controlling inflation. The transitional pain involved in building government credibility on any issue, be it inflation control or fair taxation, is tremendous.

The President’s instincts are right; the public does want tax reform. But it wants real tax reform. That means taxing a lot more things at much lower tax rates. The President has moved in the right direction, but he has been too timid. A simple tax on a comprehensive definition of income or expenditure levied at a 25% rate would yield as much as the current tax system does. The lower the tax rate, the less the payoff in the game of tax-code roulette.

If the President wants tax reform, the real kind that produces a tax code that won’t change and therefore puts the politicians and special interests now profiting from the endless game of tax-code roulette out of business, he should put his foot down, squash out the Ways and Means proposal and start fresh to produce a carefully researched plan in time for serious consideration by the 100th Congress. Meanwhile, the 99th Congress has plenty to occupy it in dealing with the deficit.