From Logrolling to Tax Reform
Just three months ago, tax reform seemed ready for an embalming. The American public was cynical and apathetic. The prevalant atti tude in the United States Senate was: If the people don’t care, why operate once more on a tax code that’s had eight major revisions since 1968? Former IRS commissioner Sheldon Cohen put it aptly: “We’ll take the devil we know for the devil we don’t know every time.”
Given that mood, the most relevant question was why the Reagan Administration made tax reform its number one domestic priority? The answer is complex but the most important factor is that tax experts in the Treasury Department and Congress came to consider the current system an abomination.
What was once an exemplary tax code had been riddled with $370 billion of preferances, making it as inefficient as an engine full of holes. Public confidence had eroded dramatically: Voluntary compliance with the income tax laws declined from 96% to less than 82% in 20 years. Between $90 billion and $100 billion in the underground economy escaped IRS computers. Almost half of all capital gains, mostly representing gains by the wealthiest segment of our population went unreported. People did care; the wrong way. Four out of five Americans thought the code was rigged against them. One out of five admitted to cheating--and you can figure they’re the honest ones. “If it ain’t broke, don’t fix it,” said Rep. Jack F. Kemp (R--N.Y.). “Well, the system broke.”
The IRS itself was bedeviled by the mushrooming antagonism of tax payers and the spider web of a system almost beyond comprehension. “The Service leads a somewhat schizophrenic existance,” IRS commissioner Roscoe L. Egger told the Ways and Means Committee of the House of Representatives. In 1984, 789 IRS employees were threatened or assaulted, half again as many as the year before. Between 1977 and 1985, the IRS had to add 28 new forms. The 1984 Deficit Reduction Act required changes in 75 more. “The 1984 Act is so wide-ranging and so complex,” said Egger, “that virtually no one understands all of it.”
What was understandable--and unfair--was the 1981 Economic Recovery Tax. Sen. Bill Bradley (D--N.J.), who learned about taxes when, as a 23-year-old basketball forward, he became a “depreciable asset” for the New York Knicks, called it “the granddaddy of tax giveaways.” Actually, it was more a King Kong of Supply Side economics. It created so many additional loopholes for financiers and businesses--about $100 billion worth a year, all told--that Wall Street accountants worked overtime trying to figure out what combination was most profitable.
John H. Bryan Jr., board chairman of Sara Lee, reported that one of his top executives managed to whittle his IRS tax liability down to $4,000 on an annual income of $1 million dollars--then quit. The man spent so much time manipulating tax shelters, he didn’t have time for business any more.
Bradley, in 1982, started tax reform moving. Because of bracket creep, the effect of inflation on exemptions, and the snowballing social security levy, most Americans were paying far more in constant dollar taxes than they paid in 1960. (The maximum social security tax, $144 in 1960, is now just above $3,000). On the other hand, almost one-third of the people with incomes over $250,000 a year pay an effective income tax rate of 10% or less. About 9,000 of them don’t pay at all.
Corporations watched their share of Federal tax contributions drop from 30.5% of the total to 8.5% in the last 30 years. Hundreds of firms earning billions in profits often paid no corporate tax, but managed to obtain massive rebates. Between 1981 and 1983 General Electric got $283 million from the Federal government to add to $6.5 billion profits. Tenneco received $189 million to bolster profits of $2.7 billion. Boeing had $267 million to sweeten profits of $1.5 billion.
For the Treasury it became a question of restoring Americans’ faith in the fairness of a tax system that seemed headed down the same road as Prohibition. Reformers in and out of Congress looked to boost the purchasing power of the ordinary American, while cutting back on loopholes and collecting a few more corporate dollars for the revenue bucket. Even many business executives realized they were making decisions based not on economic sense but on the fun house images created by the tax system--a “mad hatter’s castle,” David H.Brockway, chief of staff of Congress’ Joint Committee on Taxation, calls it. So a coalition bent on reforming the system emerged; it was time to make new law.
The question was whether the crusaders could hold off the lobbyists who were loading their computers and firing thousands of letters and phone calls at every legislator proposing to eliminate a tax shelter. It seemed unlikely in the House of Representatives, where tax experts refer to the Ways and Means Committee as Santa’s Workshop. But Dan Rostenkowski (D--Ill.), the committee chairman, accomplished the unexpected by locking the doors and leaving the lobbyists pacing outside. Then, in a series of turns that saw nearly all the Republicans voting against President Reagan and most of the Democrats for him, the House first refused to consider the bill at all, and then passed it in a bedlam of confusion.
Action on the tax bill then moved to Sen. Bob Packwood’s (R--Ore.) Finance Committee. The hearing room on the second floor of the Dirksen Office Building began to look like the scene of some sensational trial. On the curved dais, 10 Republican senators sat to the right of Packwood, nine Democrats to the left. Behind, hovering like bureaucratic waiters, were aides and committee staffers.
At tables directly in front of the dais hunched tax experts from the Treasury Department and the Joint Committee on Taxation. Behind them the crush of reporters and lobbyists created a congealing mass that spilled over into the corridor--”Gucci Gulch,” Majority Leader Bob Dole (R--Kans.) called it. Just in front of the dais, in an area resembling an orchestra pit, crouched a half-dozen still photographers who kept springing up like jacks-in-the-box, popping flashes in the face of whichever senator was speaking. Over all hovered the high-intensity lights of C-Span cable television, recording every vote for inspection by the Washington Political Action committees and the folks back home.
Packwood, a congenial Oregonian, said he kind of liked the timber of the current laws; the Northwest’s lumber industry wasn’t going to lose its preferences so long as he was chairman. That’s just fine, said Russell Long (D--La.), who’s spent 33 years on the committee and is known as the Senate’s tax master; you look after your natural resources, and I’ll take care of oil and gas.
A lobbyist’s judicious hint to a staffer or a note decorously passed to a senator and this tax shelter or that preference was preserved.
On April 18 Packwood went to lunch with the Senate Finance committee’s chief of staff, Bill Diefendorfer. Totaling up the largesses, they estimated a $120 billion revenue shortfall.
Now if it had been 1984 or 1988, that might have been the end of tax reform. But in 1986 Packwood has to run for reelection. True, he has raised $6 million, proportionately the most, based on Oregon’s population, ever raised for any senatorial campaign in American history, but that kind of money can be a mixed blessing. The New Republic was already calling him “Senator Hackwood,” and a cynic might soon misspell his name PACwood.
So he went to his fellow senators and said: “Look, how low would the top rate have to be before you didn’t care about your preferences any more?”
And they answered: “Oh, let’s say 25%.”
Few on the committee thought it could be done. But Brockway, the Joint Committee’s chief of staff, went to his 40 tax experts; they started pulling out ideas and programming them in the computers. By the time the committee reconvened in open session two weeks later, he’d worked out a system that could be sold as having just two rates, 15% and 27%, although in fact the top rate goes to around 32.5%. (By phasing out exemptions and the zero-bracket deduction, the Senate bill stays just about as progressive as the current 15-bracket code).
General agreement was one thing but individual senators weren’t about to give up the fight for favorite constituencies. Daniel Patrick Moynihan (D--N.Y.) and William Armstrong (R--Colo.), for example, worried about all the restaurant workers who would lose jobs if the deduction for business meals were cut to 80%. Sen. Long thought motherhood would suffer: “The ordinary sized community only has about one nice restaurant around town where they take mother out on the anniversary or birthday,” he said. “And the restaurants can’t stay open on just entertaining mothers on their anniversaries or birthdays. They have to have some regular business.” So if the big spenders declined, restaurants would close--no place to take mother.
Dave Durenberger (R--Minn.) abstained because of a conflict of interest: his son is a busboy. Lloyd Bentsen (D--Texas) observed: “I don’t have Dave Durenberger’s problem, and since I rarely pick up the check I can be totally objective.” The proposal to reinstate 100% deductions lost on a tie vote, 9 to 9.
The turning point came when John H. Chafee (R--R.I.) introduced a motion that all amendments offered would have to be revenue neutral. Any senator wanting to save some preference would simultaneously have to propose a means of paying for it.
But John Heinz (R--Pa.) had been absent earlier and was unaware of the revenue-neutral rule; he suggested that an amendment to preserve Individual Retirement Accounts for people who also have company pension plans should be “a non-revenue neutral amendment.”
“Say that again!” Packwood’s voice had the intonation of Wyatt Earp’s before the shoot-out at OK corral. Clearly, this wasn’t the same chairman who’d been sitting there two weeks before.
Sen. Spark M. Matsunaga (D--Haw.) had a suggestion: “Senator Long always used to say whenever there is a controversial issue, just vote. Don’t make speeches. Because you can always explain your vote, but you can’t explain your speeches.”
The requirement that every senator keep the checkbook balanced seemed to be a sobering experience--I suppose legislators usually leave that responsibility to their spouses. In any case, the opportunity for mischief declined and after only one night of logrolling on the transition rules, the bill moved out of committee. For the first time in 30 years, the tax code may be revised to put everyone on a more equal footing, rather than to add preferences for those who can afford them. But tax reduction and simplification are less the product than the advertising.
The biggest change is that you won’t be able to deduct so-called passive losses, from investments in businesses where you don’t play an active role, from your professional income.
But don’t despair. Russell Long saved the granddaddy of tax shelters, the one in oil and gas, from the hard-hearted revenuers. You’ll still be able to sit in a Century City office, put your money into a drilling rig and have the IRS look on you as a wildcatter on the lone prairie.
Beyond that, some real estate investors may try moonlighting as janitors to show that they’re actively involved in running an apartment building; and you might see San Francisco doctors hustling up to Napa Valley to stomp grapes in their vineyards.
Though it’s called tax reform, it seems more like a New Year’s resolution. For once, the legislators stood up to the lobbyists and voted to give preference to national over special interests; now we must wait to see how permanent is their commitment. The key is the realization that tax shelters aren’t free--that when Congress provides breaks for one segment of society, the general public is paying for them. If that lesson holds, then the lobbyists seeking favors for the tuxedo rental business or for sexually propagated plants will have a much tougher time in the future.
