Tax Simplification Only Simplifies the Next Tax Increase
If the maze of complicated issues running through the pages of the tax bill on President Reagan’s desk has you wondering what’s simpler in this much-heralded “tax simplification act,” here’s the answer: The bill makes the always odious government job of raising taxes far simpler in the future.
Once we really have just two personal income tax brackets of 15% and 28%, the process of raising those numbers to whatever the party in power believes the political traffic will bear becomes temptingly easy. Past increases sent taxpayers scurrying in and out of real estate deals, shelters, pension funds and other tax avoidance mechanisms. As a result, earlier tax increases usually failed to raise as much revenue as expected, and the revenue they did raise came at the unfair expense of those without high-priced tax advice.
The new tax bill, slicing away the number of discretionary moves that a taxpayer can make to shelter income, creates a much more straightforward path. Now, as post-Reagan politicians face up to the mounting deficit, they can just tweak the numbers a little bit. If they are Democrats, they can claim that the affluent got too big a break in this year’s bill, and bump the 28% bracket up to to 30%, or 32% or whatever they believe necessary. If they are Republicans, they can claim the cause of closing the gap between the two brackets left by this year’s bill, and raise the lower one of 15% to 17% or 18%.
Either way, say the magic word and presto!--what you see is what you get in terms of revenue raised. No more messy adjustments of innumerable tax brackets. No more volumes of new IRS code to deal with the Byzantine escape hatches of the past. Just white out the old percentages, paste in the new ones, and for the first time in recent memory, the federal government has a viable mechanism to affect an across-the-board tax increase.
Indeed, the pliability inherent in the new tax bill may be the hidden reason Democrats rushed into their surprising show of support for the President, despite the fact that they could have chosen to begin the 1988 campaign by mounting a fight on this historically partisan issue of taxes. That a tax increase is coming seems to be more fact than hypothesis. Not even a month after House and Senate conferees finally hammered out their compromise tax bill, Democrat Dan Rostenkowski, chairman of the House Ways and Means Committee, declared in no uncertain terms, “Everyone knows we’ll need a tax increase to reduce the deficit.” He specifically recommended that the best way to raise taxes in the future would be to simply hike the percentages.
The President seems absolutely determined to stonewall current calls for a tax hike. That position only will serve to create a crisis for his successor, Democrat or Republican, whose first task will have to be biting the bullet Reagan refused to acknowledge, and raising taxes. The urgency of a tax increase will be all the greater, because even if the current tax bill proves “revenue neutral” (a steadily less likely scenario, the more experts examine its provisions), corporate America’s clever lobbyists will, by 1988, have managed a piecemeal reenactment of at least a few of the breaks lost in the sweeping broom of this year’s legislation. (The idea that loopholes can ever be permanently closed is hopelessly naive, and those who enunciate such rhetoric seem to forget how many times investment tax credits have gone in and out over the years, or how many times capital gains rates have changed). The bill the President is about to sign calls for the two-bracket system of 15% and 28% to be in place for the 1988 tax year. More likely than not, 1988 will be the first and only year those rates are in effect. If Rostenkowski has his way, they may even be changed before they ever take effect.
Call it tax reform or tax simplification if you want to, but when all is said and done, tax increases is what it’s about.
