Here's an Idea

Politics and policy.
Dec. 12 1997 3:30 AM

Here's an Idea

How Democrats can outfox the flat tax, and why they won't.

Talk to a Democratic pollster or consultant these days, and you're likely to hear a lament about the shortage of politically potent ideas. Looking toward the midterm election in 1998, President Clinton and his party have no rabble-rousing answer to the Republican promise of sweeping tax overhaul. Sure, they can point out that the most familiar conservative proposal--Dick Armey's Flat Tax--is a hoax. It would produce a huge revenue shortfall for the government and/or a big tax hike for the middle class. But you can't beat a horse with no horse. Republicans have on their side populist ire against the IRS, lobbyists, lawyers, and accountants. And filing your return on a postcard--or not having to file one at all--is a pretty appealing notion.

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In fact, there's a perfect Democratic answer to Armey's tax reform. It's called tax reform: good tax reform. The shared idea of both kinds of tax reform is cleaning the Augean stables of the tax code. You make everyone's life simpler, and you get lower rates by getting rid of loopholes and making the law neutral among different kinds of income; you promote economic efficiency. Resources go where the invisible hand directs them, not where they can get the most favorable tax treatment. Under the reform championed by Bill Bradley, which passed in 1986, the corporate rate dropped from 48 percent to 34 percent. For individuals, 14 brackets and a top rate of 50 percent shrank into three brackets and a top rate of 28 percent.

Jacob  Weisberg Jacob Weisberg

Jacob Weisberg is chairman and editor-in-chief of The Slate Group and author of The Bush Tragedy. Follow him on Twitter.

But the 1986 tax reform has been gradually undone by three intervening budget bills, in '90, '93, and '97. Preferences have crept back in, shelters are returning (see Slate's do-it-yourself tax shelter), and figuring out your taxes is more complicated than ever. Yet for some reason, the only major politician who has tried to latch onto the issue is Richard Gephardt. Gephardt, who was a sponsor of tax reform in the 1980s (the original bill was known as Bradley-Gephardt), has proposed to do it again. He points out that higher tax rates for higher incomes aren't what make the tax code complicated: You can get 99 percent of the flat tax's simplicity without giving up the principle of progressivity. Gephardt's version of tax reform would make the code more progressive. A basic rate of 10 percent would cover 75 percent of taxpayers. Four other rates, ranging up to 34 percent, would cover the rest. Gephardt would get rid of all deductions except those for home-mortgage interest, charitable contributions, and state and local taxes.

Illustration by Peter Kuper

Some version of this idea ought to be a natural for Clinton. As he made clear in an interview with the New York Times last week, he's fishing around for a tax proposal to include in his January State of the Union address. Unfortunately, the reports trickling out suggest that he is likely to suggest some modest tinkering--a small tax rebate, paid for by possible future budget surpluses, or more "targeted" incentives to promote the right kind of investment. Clinton seems to have no interest in bold and sweeping tax reform. Why not?

The most common explanations you hear are: 1) Dick Gephardt; 2) Bob Rubin; and 3) the interest groups. The Gephardt theory is based on political rivalry. Clinton and Al Gore don't want to be accused of copyright infringement. Under the most Machiavellian theory, the election of a Democratic Congress in 1998 would be bad for Gore, since he would have to run against Speaker Gephardt in 2000. This supposedly makes Clinton want to avoid excessively good ideas until after the midterm election. The Rubin theory is that the Treasury secretary has persuaded everyone to let well enough alone. With the economy swimming along so nicely, why meddle? The last theory, the most malignant, is that the Democrats are too much in the thrall of interest groups and fat-cat campaign contributors to assault their cherished tax preferences.

None of these explanations fully adds up. In politics, plagiarism is not only legal but also often effective. If Gore and Gephardt were both for tax reform, Gephardt would lose his best issue. "I thought of it first" is a pretty weak line in a debate. The Rubin argument may have a little more substance. Tinkering with the tax code is always hazardous. When lobbyists see the hood open, they all come running with their monkey wrenches--you never know what may get "fixed." But that's a better argument against the grab bag of breaks that Clinton is likely to propose (which will encourage special pleading) than it is against sweeping reform. The power of moneyed interests doesn't explain much, either. All the industries that benefit most from tax loopholes--real estate, oil and gas, finance--give much more money to Republicans. Only the unions, worried about the deduction for employer-paid health care, cut much sway with Democrats.

A better explanation for the failure to jump aboard tax reform is the wider political predicament of liberals. In the present climate, it is nearly impossible to spend money on new spending programs. But it is sometimes possible to disguise spending programs as tax breaks. Of course, a dollar of government revenue lost to an investment tax credit is a dollar added to the national debt as surely as a dollar spent on food stamps. In fact, the cost is usually higher, since indirect incentives tend to be less efficient than direct expenditures. But Republicans tolerate government-by-incentive, so Democrats rely on it. A clean tax code would foreclose this dodge.

Since he was a governor, Bill Clinton has recognized the tax code as an excellent hiding place for social policy. If he has any appreciation of the economic value of tax neutrality, or of the political appeal of simplicity, he has never shown it. In the 1992 campaign Clinton proposed not only higher rates on the rich and a new business tax to support worker training, but also augmented research and development credits, a long-term capital-gains exclusion, and various other bounties intended to support education and the environment. Although Clinton's 1993 budget plan indisputably strengthened the economy by reducing the budget deficit, it truly undid tax reform. It turned four rates into six and created a powerful bias in favor of capital gains vs. ordinary income. In 1997, Clinton drove dozens of nails into the coffin: The bill he signed created six different capital-gains rates, two kinds of IRAs, and so on. (Many of these were actually Republican initiatives, pushed by the very politicians out there denouncing the complex tax code and demanding a flat, no-loopholes system.)

The president obviously isn't an economic purist. But you still have to wonder how such a smart policy wonk can fail to be bothered by the perversities and complications of the tax code. The only other explanation is something we learned about Clinton during all that Whitewater business. Hillary does the taxes.

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