Why Not Tax Reform?

By Robert S. McIntyre

Despite all the hoopla last year about "middle-class tax cuts," most taxpayers filing their returns this April will not find much to cheer about. Only one in 17 taxpayers making less than $59,000 will see a tax reduction on this year's tax return. For the 80 percent of taxpayers who fall into that income group, the average tax cut will be $6. Even for the 15 percent of tax filers making $59,000 to $112,000, the average tax cut is only $81.

The truth is that the 1997 "Taxpayer Relief Act" was written mainly for those at the very top of the income scale. More than two-thirds of the "taxpayer relief" on this year's returns goes to the best-off one percent of Americans--whose incomes average $666,000. Their average tax cut is $7,135.

Then there's the extraordinary complexity that the '97 legislation added to tax filing. For example, 36 new, almost impenetrable lines were added to the 1997 capital gains tax form to deal with what are now five different categories of capital gains. Considerably more complication is in store in the future as various other parts of the '97 tax act take effect.

Some have charged the GOP Congress with hypocrisy for promoting radical, supposed "tax simplification" measures such as the flat tax or a national sales tax, while pushing huge new complexifications like last year's tax act at the same time. The charge of hypocrisy, however, is false. The current congressional majority strongly favors simplification if it cuts taxes on the wealthy. And it likewise supports new complexity if that's what it takes to let the rich pay less. There is no inconsistency here at all once one understands the underlying philosophy.

Obfuscation, on the other hand, is a fair charge when it comes to the current Congress and tax policy. Last year's middle-income tax cuts, mainly the per-child tax credits that will begin to take effect on next year's returns, were a Trojan Horse to disguise the act's retroactive capital gains tax breaks and its other upper-income windfalls, such as estate tax cuts, expanded tax-free savings accounts and new corporate tax loopholes. Similarly, promoters of regressive flat taxes or national sales taxes try to cover up the big tax increases that their plans inevitably would entail on the vast majority of non-rich taxpayers by, among other things, suggesting ridiculously low tax rates that don't come close to raising the same revenue as the taxes they're supposed to replace.

Even with these subterfuges, however, the specific GOP plans for radical tax change have enough specificity to create considerable nervousness among much of the public. In addition, flat tax and sales tax proponents waste no opportunity to trash one another's ideas. Hence, early this year we saw what was supposed to be the GOP consensus tax reform plan for the upcoming election: "The Tax Code Termination Act," sponsored by 153 House Republicans and 36 Senate Republicans. This thoughtful piece of legislation--bewildering slogan: "a tax form is a lot like a laundry list: either way you are going to lose your shirt"--would simply abolish the entire tax code, effective Dec. 31, 2001, with no proposed replacement at all.

GOP proponents of this gem saw it as the perfect way to take advantage of the public's dislike of taxes without the downside of having to explain any concrete alternative. Yet to their shock, recent internal GOP polls have found that a solid majority of the public thinks the idea is simply stupid.

So here's where we stand. Most Americans are discovering as they file their tax returns that last year's tax act was not designed for them. The two leading GOP income-tax-replacement plans--each grossly unfair and fiscally disastrous--face public distrust and internecine carping. And the GOP's fatuous no-alternative approach is falling flat. Maybe it's time for proponents of progressive tax reform to offer the public what it really wants: a simplified tax system built on the principle that taxes should reflect people's ability to pay them.

Already, House Minority Leader Dick Gephardt (D-Mo.) has introduced an updated version of his major tax-overhaul bill. It eliminates enough special-interest loopholes and deductions to put three out of four taxpayers in the 10 percent bracket or less, yet maintains progressive tax rates on the best-off people. We at Citizens for Tax Justice are working on our own similarly-directed (but even better!) tax-simplification plan--while we simultaneously start a new project to document the corporate abuses that recent tax legislation has produced.

None of this is rocket science. The idea is simply to produce a tax system that treats people with similar incomes similarly, that asks those who make the most to pay the highest rates, and that thus fits in with the public's ideas about fundamental fairness. So stay tuned. It may take a new Congress to enact it, but real tax reform could be a key progressive issue for the start of the new millennium.

Robert S. McIntyre is director of Citizens for Tax Justice in Washington, DC.

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