Equity Fever Is the Name of the Tax Game

To the astonishment of many, the U.S. Senate’s tax-writing committee voted unanimously for a genuine tax-reform bill. A decade of using the tax code to advance untested economic and social theories came abruptly to a close. So did a legislative process that featured the unholy spectacle of well-heeled lobbyists bargaining with senators for tax favors for their corporate clients, who have come to count on an endless supply of tax entitlements.

Capitol Hill gossips whisper about how the committee abruptly turned around--how one senator started each drafting session by reciting the case of W. R. Grace & Co., which hasn’t paid federal income taxes since Ronald Reagan came into office and yet has been paying millions in taxes to Moammar Kadafi’s Libya. Another senator repeatedly told the story of a wealthy friend who complained of being the only one in his club who still pays taxes.

It seems that the senators caught a case of a fever that most of us have had for quite a while. Is there a single American taxpayer who isn’t red-hot about the unfairness and inequity of our tax system?

Asked what they want from tax reform, voters say overwhelmingly that they don’t care so much about lower rates or simpler tax forms as they do about fairness and equity. They consider making everybody pay their fair share to be far more important than any other fiscal issue.

Wage earners are convinced that they’re being played for chumps. Unable to take advantage of the taxavoidance schemes that have proliferated in our tax code, working people have lost confidence in a system that allows huge corporations and wealthy individuals to use legal means to avoid pulling their own weight.

This message filtered up to the Senate Finance Committee.

The members had reached an impasse, and were left with a choice: They could stick with the tax thinking of 1981, when giveaways were the ruling principle, or they could reorient our tax code toward a basis of fairness and equity that has been the hallmark of American democracy since our Republic was founded.

The senators sensed this resentment, nudged on by press critiques of their initial concessions to the loophole lobby. If for no other reason than that it was impolitic to favor tax inequity, the committee chose fairness over 1981-style favoritism.

But the political victory for justice should not overshadow the real economic advantages that more equity in the tax code would bring.

Reducing almost everybody’s tax rate, as the bill now heading for the Senate floor would do, means that almost everybody would have more dollars to spend.

Making giant corporate tax avoiders like General Electric and W. R. Grace pay a minimum tax would make it possible for more than 6 million working families to be taken off the tax rolls altogether. We would no longer be taxing them into poverty.

Ending the special treatment of capital gains means that the richest families, who benefited so handsomely in 1981, would have to contribute something to the commonweal, to the upkeep of the roads, to the schools and, yes, to the defense of our country.

Closing real-estate tax shelters would free up capital that could be productively invested--in industries both old and new.

In 1981 the notion of equity lost political respectability. Instead, our leaders vied with one another to see who could pass out the most favors--especially to business and the wealthy. The political debate of the day was won by those who said that too much fairness hurt business and stifled society’s most productive and creative people.

The new economic thinkers of 1981, both Republicans and Democrats, thought that by enacting hugely expensive tax “incentives” they would unleash the nation’s productive forces. All ships were to rise with the swelling tide. As it turned out, the new theorists of inequality were at sea.

A relative handful of big corporations received hundreds of billions of dollars in tax breaks. They were supposed to redirect their windfalls toward new plants and new equipment. It didn’t work. Studies by Citizens for Tax Justice have shown that capital spending by American business since 1981 has grown at only half the rate at which capital spending grew during the 1976-81 period. Worse yet is the fact that 44 profitable companies, which since 1981 have avoided paying any taxes, actually cut their investment by 4%. Meanwhile, investment by companies that paid their taxes rose by 21%.

Tax giveaways skewed decisions by both businesses and individuals. Investments that afford tax-shelter opportunities make no sense in the marketplace but have in far too many cases won out over investments in real enterprises.

Equity is a goal, not a fully realized achievement, of the Senate Finance Committee’s bill. In many ways the House bill is better. But struggling for equity is intrinsically, essentially and fundamentally American. That’s why tax reform for equity was needed in the first place.