Taking the Radical Way, Senate Tries Tax Reform

In 1793, during the trial of Louis XVI, members of the French Convention delivered impassioned and eloquent speeches on the proposal to execute the king. Finally, the Abbe Sieyes stood up and offered his opinion: “La mort, sans phrases.” Death, without discussion.

The same thing happened in the Senate Finance Committee last week. Since January, the committee has been debating the fate of another ancient, regal and tradition-encrusted institution, namely, the U.S. tax code. After 2 1/2 months of hearings, the committee had made almost no progress. Committee members heard impassioned and eloquent pleas to preserve tax breaks for all kinds of special interests, from citrus growers to oil refiners. They ended up approving amendments that would lose $29 billion in federal revenues over five years. Finally, on April 18, Committee Chairman Bob Packwood (R-Ore.) suspended the voting and vowed to return to “square one.”

He then came up with a new proposal, radical in its simplicity: Broaden the tax base by eliminating all but a few deductions, then dramatically reduce tax rates. The proposal was not even put into writing until Sunday night. The committee took it up on Monday and Tuesday--after agreeing to a procedure proposed by Packwood: No amendment was allowed if it reduced government revenues. In other words, the debate proceeded “without discussion” of giving this or that special interest a tax break. All major amendments were defeated and, late Tuesday night, the committee voted 20-0 to do to the tax system what the French Convention did to the king: “Off with its head.”

A few weeks ago, tax reform, not the tax code, seemed to be the Finance Committee’s principal victim. When the committee suspended action last month, one senator observed that tax reform wasn’t dead, “But it’s certainly supine, comatose and in intensive care.” Once Packwood offered his new proposal, however, it was described as going “from immovable to unstoppable in 24 hours.” What explains tax reform’s miraculous, unexpected and quite sudden recovery?

Shame was one factor. After considerable presidential arm-twisting, a tax reform bill made it through the Democratic-controlled House last December. It would have been deeply embarrassing for the Republican-controlled Senate to let President Reagan’s No. 1 domestic priority die on its doorstep.

Pride was another consideration. Too many people had said that the Senate Finance Committee, known to be business-oriented, would never be able to come up with a tax-reform proposal. Lobbyists would overpower them. In the end, the lobbyists were overpowered. “Everyone is in a state of confounded disbelief” said one lobbyist.

There may also have been a “Deaver effect.” Former presidential aide Michael K. Deaver has been widely criticized for influence-peddling since he left the White House. As a result, lobbying has taken on a bad odor in Washington these days. “A number of us take pride in the fact that the lobbyists are all stunned,” said Finance Committee member Max Baucus (D-Mont.).

Packwood’s leadership was critical. When the Reagan Administration first proposed tax reform in 1984, Packwood commented, ominously, that he sort of liked the system “the way it is.” No one was surprised, therefore, when his committee seemed to pay more attention to preserving tax breaks than to simplifying the tax code. Packwood’s conversion came only recently, but he has embraced reform with the zeal of a born-again believer.

The very radicalism of Packwood’s proposal won the committee’s support. He proposed to eliminate deductions for state and local sales taxes, non-mortgage interest payments, individual retirement accounts (IRAs) and medical expenses; raise the tax rate on capital gains; end the investment tax credit for business and, most dramatically, lower the top corporate tax rate to 33% and the top individual tax rate to 27%, far below the top rate of 35% proposed by Reagan. Packwood’s plan would take 6 million low-income Americans off the rolls and provide a tax cut of 6.2% for the average taxpayer.

Why was it easier for the committee to pass a more radical measure? It’s like making a decision to clean out your attic. Once you start examining the items one by one, you discover that most have value. You end up keeping everything you started with and a bit more besides. The only solution, many homeowners have discovered, is a radical one: Throw it all out. If there are a few things you really need, take them downstairs and use them.

When the Finance Committee started work in February, Packwood set the tone by preserving tax breaks of special concern to him (the Oregon timber industry and certain fringe benefit programs). The other senators got the idea, and within weeks, they were all making deals. Fairness and simplicity went by the boards, as did a good deal of tax revenue.

It was probably this loss of revenue that pushed Packwood to reconsider his position. His conversion to a lower tax rate instantly transformed the mood of the committee. “Our earlier approach didn’t feel right, didn’t sit right, didn’t smell right,” said Baucus. “A lot of us were repulsed. There is now a significant sense of relief that we’re doing what’s right.”

Packwood’s proposal also changed the rules of the game. By agreeing that any amendment would have to be revenue-neutral, the tax reformers adopted a rule that applies equally well to attic reform: For everything you keep, you have to throw something out.

No deals could be made without destroying this delicate equilibrium. The result was a kind of truce. On Monday and Tuesday, the committee voted down every amendment that would have restored a tax preference (and raised, slightly, the overall tax rate in order to recover the revenue). As Sen. John C. Danforth (R-Mo.) explained, the Packwood proposal was so dramatic that everyone on the committee said, “I’d like to have the whole package rather than hang on to my own little preference.”

Of course we are still a long way from making tax reform a reality. The Finance Committee proposal has to be considered by the Senate as a whole, and the final Senate and House versions will have to be reconciled. The Senate proposal still retains many more tax breaks for business than the House version. Nonetheless, something important was demonstrated. On both the budget and tax reform issues, the U.S. Senate displayed remarkable political courage. On May 2, a strong bipartisan majority of the Senate voted to increase taxes in order to reduce the deficit. On Wednesday, a unanimous bipartisan coalition on the Senate Finance Committee voted to eliminate a wide range of tax preferences to achieve overall tax simplification. Those experiences demonstrate that, when there is an overriding sense of purpose and a fair sharing of costs, Congress is capable of acting in the public interest. Who would have thought it?