The Tax Reform Shell Game : Touted Benefits Vanish on Closer Inspection

When people in Washington who favor the tax bill talk about it, they usually claim public support for it. The notion that millions of folks throughout the country are clamoring for passage of this bill is, however, just the first of many myths that cloud the subject of tax reform.

The reality is that most Americans don’t know a lot about the bill and few are enthusiastic about it. The last poll I saw indicated that 16% strongly approve of it, while 17% strongly disapprove; 25% think that it will lower their taxes, 36% think that they will pay more.

Some parts of the bill deserve support: We ought to impose a toughened minimum tax on wealthy individuals and profitable corporations that now pay nothing, and close some awful loopholes. But we ought to be able to do that without making the mistakes that this bill makes.

Most of those mistakes have been hidden by a series of myths as pervasive as the “public pressure” fable. While there is still time, let’s look at a few.

Myth: Tax reform would mean tax cuts. Reality: When fully phased in, the Joint Economic Committee estimates, 20 million Americans would be paying more--that’s 5.8 million people with incomes under $20,000 a year, 10 million with incomes between $20,000 and $50,000 a year, and 4.7 million who make more than $50,000. The myth tells us that middle-income Americans would be helped a lot by this bill. After all, we’re told, these aren’t the sort of folks who have been playing fast and loose with loopholes. The fact is, while they may not have been using questionable tax dodges, they have been taking deductions--for example, for sales tax, consumer interest and unreimbursed employee expenses, such as those for tools or special clothing. These would be eliminated or reduced in the name of curbing “the special interests.”

But even some of those who might do well on their taxes could find themselves undone when they look at their overall financial position. Rents would rise as the new code discouraged construction of rental units; tuition for higher education would go up as charitable contributions to educational institutions would go down; the cost of consumer goods would increase as businesses sought to pass along some of their $124-billion tax increase--the list goes on. So even if you got a few more “after-tax dollars” in your pocket, you could have fewer dollars left after paying “after-tax-reform” expenses.

Myth: Tax reform would ensure fairness. Reality: This bill would create and perpetuate a whole host of inequities. To begin with, there is the basic unfairness of timing; some provisions would apply retroactively, while others would cut in on existing financial commitments. For example, the bill would eliminate the investment tax credit as of last January. It also would phase out the deductibility of interest paid on current consumer loans. So, if you bought a car a year ago figuring that you could deduct the interest on the loan over the next four years, you would suddenly find the rules changed in the middle of the game.

Another unfair aspect of the bill would give some--but not all--homeowners a way around the repeal of the consumer interest deduction. Those with enough equity in their home could take out a second mortgage, use that money to pay for consumer items and deduct the interest on the second mortgage. Renters and homeowners with low equity would be shut out. So much for treating taxpayers with equal income fairly.

While millions of Americans would be affected by this bill, hundreds of corporations and individual taxpayers would be able to get out from under the new rules on the grounds that they adversely affect ongoing projects. These individuals and corporations had access to the tax bill conference committee.

Despite the promise of “reform,” more than $11 billion in special “transition rules” would be available to interests as varied as the oil and gas industry and commercial reindeer hunters. Many of the transition rules are justified, but simple justice suggests that other, similarly situated businesses and middle-income Americans should have been given the same consideration.

Myth: The new tax code would provide stability; it wouldn’t be changed for some time. Reality: Even as Congress prepares to vote on this bill, it is considering how the law might be changed again next year.

And the law will have to be changed again if it is to respond to reality. This bill ignores our primary economic problem, deficit reduction. It is designed to capture tens of billions of dollars in revenues generated by closing loopholes--and then use that money to fund uneven tax cuts rather than cut the deficit.

Even worse is the possibility that the one-time $11-billion windfall from loophole-closing might be used to juggle the books and make the 1987 deficit look smaller. Then, when this bill cuts tax revenue by $17 billion in 1988, there wouldn’t be any of the $11 billion from 1987 to act as an offset. This year’s windfall would become next year’s shortfall.

Furthermore, if we are going to reduce the deficit without increasing revenues, we will have to slash spending to totally unacceptable levels. The other option is to have a combination of spending cuts and revenue increases.

The odds are that if this bill passes we will turn to regressive ways to generate revenue, like a national sales tax or higher excise taxes on telephone bills. I am certain that we would not be willing to revise the income tax code to get the revenue, since we would have closed all the politically possible loopholes in this bill-- and we would have used that money to pay for uneven tax cuts rather than deficit reduction.

Myth: Reform would be good for the economy. Reality: No one knows what will happen to the economy. It is in a fragile state right now, and $124 billion in new business taxes might not be the spur to economic growth that some think.

The surest way to strengthen the economy is to reduce the deficit. Instead of using the new revenue from loophole-closing--and from a tough minimum tax on profitable corporations and wealthy individuals--to give uneven tax cuts, we could apply it directly to the deficit.

The pending tax bill has a lot of things going for it, but the biggest thing may be its wealth of myths. That wealth could make us poorer, both individually and collectively.

This is the wrong bill--and this is the wrong time to adopt it.