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The Origins of Tax Reform

The first step toward radical change is to delegitimate the existing system. A very good job of this was done by all sectors of opinion from the mid-1960s through the mid-1980s. Those who thought domestic government was far too big naturally thought they were paying too much for it. Those who approved in general of various governmental programs protested that the system taxed the poor too heavily and the rich not enough. The criticism's harsh edge developed from the growing feeling that "other people" were not paying their proper share. Between charges that the system was morally corrupt in favoring the well-to-do and economically irrational in encouraging businesses to seek tax losses the existing tax structure had few defenders.

But where were the centrists who usually can be counted on to defend the nation's institutions? Those actively involved in making tax policy, like former Representative Barber Conable, now head of the World Bank, believed that the tax code was complicated for a good reason:


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almost every provision existed in response to a cry for equity from some deserving group. But they lost support.

In a heartfelt statement to his Senate colleagues explaining how he became converted to tax reform, Senate Finance Committee Chairman Robert Packwood insisted that tax preferences were moral. In order to appreciate the position of many experienced legislators on tax preferences, as well as to empathize with their moral defensiveness, Packwood's words in describing witnesses at a tax hearing are quoted at length.

But, indeed, everybody in this country belongs to some special interest….

Blue Cross-Blue Shield, a nonprofit medical insurance group that exists in all of the States. They are, at the moment, not taxed. They very frankly said, "If we are taxed, we are going to have to raise the premiums for all of our subscribers."

Is that greed? Is that evil? Were they malevolently motivated because they did not want to have to increase the premiums that they charged to all of their subscribers? Are they a special interest?

Another witness: Bread for the World. This is a low-income, poverty group interested in feeding the poor throughout the world.

The Children's Defense Fund. An extraordinary organization that has done extraordinary things in this country in the last 10 years. A greedy, special interest?

The Coalition on Smoking and Health. They are trying to alert this country to the continued dangers of smoking.

Common Cause. Of all the groups that, I think, to themselves might deny being a special interest, it would be Common Cause although they often allege that others are guilty of that. They testified.

Environmental Action.

Hale House. That wonderful, wonderful organization in New York that Dr. Lorraine Hale founded that takes care of narcotic-addicted newborn babies that have become addicted and abandoned because their mothers were addicted. She had a problem with the tax bill. Greedy, special interest?

Next is the umbrella group that represents almost all charities in this country. They were worried about charitable contributions….

The solar lobby. A wonderful group of people who are trying to encourage the use of solar energy. We have solar tax credits in the law now, and they were afraid those might disappear.[4]

Preferences, Packwood argued, in our opinion, correctly, were mostly about worthy causes.

This party of balance found its voice drowned out by the cacophony of criticism. Therefore, the very desire of its adherents to legitimize American institutions led the centrists to worry that, whatever the cause, the tax system no longer commanded support.

The idea of a broader-based, lower-rate income tax has been in the


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air since the end of the Second World War. Among economists and tax lawyers, it had two main sources of support: liberals and libertarians. As tax preferences proliferated, Professor Stanley Surrey, an author and a Treasury official, mounted a campaign to have preferences called by what he considered their right name—tax expenditures.[5] Joseph Pechman and other economists joined in the criticism with calculations showing that tax rates could be much reduced if revenues were not siphoned off through these tax expenditures.[6] They hoped to make support of government programs more sustainable both by requiring a vote on subsidies and by keeping rates down. Pechman and his colleagues (at the Brookings Institution and throughout the liberal academic community) worked during two decades for reform, never suspecting that their most powerful ally would be, of all people, Ronald Reagan.

Preferences, to libertarians, were subsidies that distorted markets and at the same time increased the scope of governmental intervention. Far better to remove preferences so as to lower tax rates and simultaneously to lessen governmental intervention while enhancing the performance of the private sector.

The contemporary story began on August 5, 1982, when Senator Bill Bradley and Representative Richard Gephardt introduced their Fair Tax Act. Just as President Reagan liked to tell about how he cut back his acting schedule when tax rates became nearly confiscatory during the Second World War, Bradley, a basketball star, couldn't quite get used to being a "depreciable asset."[7] He, too, had considered how to reduce his taxes and, on behalf of the players' union, taxes of other athletes as well.[8] Bradley won a seat on the Senate Finance Committee in 1980 and began to immerse himself in tax provisions. At the same time, from his seat on House Ways and Means, Gephardt began to view tax preferences as a means of promoting special interests. The tax system, he thought, had gotten out of hand:

It is all vivid to you because you see the storm window manufacturer coming and saying, "We've got to have this credit for storm windows in order to have a good energy policy for the country." And you see it go in the code, and you see the regulations written three years later … and when you watch all that I think you begin to question what we're doing.[9]

Sometime in 1983, according to David Stockman, Secretary of State George Shultz, also a noted economist, had suggested a flat tax to the president. Perhaps the president was too far out of touch to see that the idea was unfeasible. In any event, he is reported to have scribbled a note to Secretary of the Treasury Don Regan on the back of an article on the flat tax saying the idea was a good one.[10]

Earlier that year, Jack Kemp met with a number of intellectuals


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identified with supply-side economics—Paul Craig Roberts, an economist with a year in the Treasury;[11] Lewis E. Lehrman, a business man who had narrowly been defeated for governor of New York; Jude Wanniski and Alan Reynolds, economic consultants; and Irving Kristol, professor at New York University, editor of The Public Interest, and an intellectual leader among neoconservatives. Kristol suggested that Kemp back the Bradley-Gephardt bill. "We all came to the conclusion," Kemp recalled, "that Kristol was right, that Reagan and Kemp should endorse Bradley-Gephardt. That would have thrown the Democratic Party into a state of real confusion because Mondale was getting ready to talk about a surtax [to reduce the deficit] and Bradley and Gephardt were talking about growth and jobs—just what supply-siders had been talking about in the 1970s."[12] The campaign group in the White House was leery of the proposal. But that was not to be the end of it.

Following the president's lead, and his own distaste for the jumble of preferences in the tax code, Secretary of the Treasury Don Regan wanted the chief executive to come out for a flat tax in the 1984 State of the Union message. Chief of Staff James Baker asked Regan to hold off, however, on the grounds that any precise plan would call needless attention to details, anger some people, and might subject the president to premature, possibly harmful criticism. Mondale's talk about an excise tax was target enough. Don Regan agreed to hold back, but he and the president wanted at least to signal their intent in his State of the Union message on January 25, 1984. They may have laughed when he sat down at the presidential piano, but they sang along when they heard the melody. "For the first time in a generation," Senator Edward Kennedy, hardly a Reagan idolater, boomed out as the Senate was considering tax reform in June 1986, "the impossible dream of tax reform is on the threshold of reality, and it is our responsibility to make it happen."[13] Getting from ironic laughter to a sing-along took two and a half years.


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