“THE INCOME TAX SHOULDN’T BE a fulllemployment program for accountants and economists,” says a leading tax reformer in the House of Representatives. ” The lobbyists who have rigged our tax code for decades” must be curbed, he says, and tax forms made so simple they are “printed on a small postcard.” The goal of this reformer, who sometimes likens himself to lack Kemp, is to ” slash tax rates across the board for all Americans” and to subject any tax increase to a national referendum. The IRS? He would have it dwindle “to little more than a mailing address.”
That’s not Dick Armey speaking; it’s Dick Gephardt, populist leader of the House Democrats and Al Gore’s likely opponent for their party’s presidential nomination. Lately Gephardt has resurrected his goal of overhauling the tax code. He wants 75 percent of Americans to devote no more than 10 percent of their income to federal taxes, with the rest paying between 20 percent and 34 percent. He also wants to eliminate every deduction, credit, exclusion, and adjustment, with the sole exception of the home-mortgage-interest deduction.
Gephardt is likely to use tax reform as a club not only to beat up Republicans in next year’s congressional elections but also to clobber Gore in the presidential primaries. It may be a winning issue. In their zeal to overhaul the tax code and move to a single tax rate — whether through a flat tax or a national sales tax — Republicans open themselves up to withering attacks from Democrats and perhaps some Republicans (as Steve Forbes learned in last year’s presidential primaries). These attacks have so frightened the GOP that instead of proposing across-the-board tax-rate reductions in this year’s budget, Republicans adopted Clinton-style targeted tax cuts. Similarly, Gore sits in a White House fundamentally uninterested in tax reform. Treasury secretary Robert Rubin, the most influential administration opponent of overhauling the tax code, recently asserted that it’s IRS officials “who basically fund our federal government.” This attitude won’t help when Gore wants to convince New Hampshire’s anti-tax voters he’s one of them.
Gephardt is one of the few congressional Democrats saying anything at all about tax reform. Sen. Bob Kerrey of Nebraska has advocated cutting the payroll tax and is a leader in IRS reform, but it’s an open question whether many other Democrats will join this effort. In the aftermath of the budget deal, few have turned their attention to the tax code. In fact, most Democrats want not sweeping tax reform but higher rates for corporations and wealthy individuals. Many share the suspicion of Brookings Institution economist William Gale that “a lot of the tax-reform movement is a disguised tax-cut movement.”
True, but that didn’t stop Gephardt from asking Armey and House speaker Newt Gingrich to let Democrats join in the GOP tax-reform debates being held around the country. Neither Armey nor Gingrich has bothered to respond to Gephardt’s letter, and one of their allies, Rep. Billy Tauzin, a leading sales-tax advocate, insists “nothing short of total reform is even worthy of debate.” If Republicans continue to shut Democrats out, says Gephardt, “maybe we’ll follow them around the country with a Democratic fair-tax caravan.”
Some GOP tax-reform advocates say the GOP should work with Gephardt. “Tax reform is too big an issue to be done in a partisan way,” says supply-side economist Bruce Bartlett. The Cato Institute’s Stephen Moore notes that two previous shake-ups of the tax code — the 1981 tax cuts and the 1986 tax simplification — were possible only with Democratic cooperation. Moore suggests it’s a mistake for GOP tax reformers to ridicule Gephardt’s proposal — Armey derides it as “about as flat as the Rocky Mountains” — because “it may actually be a small step in the right direction.” Yet so far Republicans have indicated an interest in trying to push tax reform on their own. This exclusivity could do for them, says Brookings economist Robert Reischauer, what health care did for Clinton and the Democrats.
The other reason Republicans should try to work with Democrats is that Gephardt may be serious about wanting tax reform. He and Bill Bradley sponsored the proposal that became the 1986 Tax Simplification Act and resulted in a two-rate tax code. Gephardt, in other words, has a track record on tax reform; and as the House Democratic leader, he wields considerable influence with his colleagues. If a bipartisan tax-reform coalition is to grow, it’s Gephardt who will make it happen.
Listening to Gephardt zing Republican tax-reform plans injects a dose of political reality into the GOP’s fanciful debate over whether America would be better off with a flat tax or a national sales tax. Gephardt calls the flat tax the “biggest rip-off of the century.” “Just imagine,” he told me, ” if you went to a 17 percent flat rate [the Armey proposal], what a huge benefit that would be for people at the top, lowering their taxes, while the people in the middle and people trying to get into the middle would have a huge tax increase to pay for the huge tax break for the people at the top.” Almost in the same breath he deplores the “giant, huge sales tax,” which he charges “would be highly regressive and difficult for middle-income and poor taxpayers.”
The sheer complexity of sweeping tax reform, coupled with the Clinton administration’s opposition, makes a major overhaul unlikely for the next few years. There is, however, a strong chance of IRS reform. “It has to be done soon,” says Bob Matsui, an influential Democrat on the House Ways and Means Committee. He favors cleaning up the tax code, but says the IRS will come first. Gephardt agrees. Shortly after the Senate’s IRS hearings, the minority leader told CNN that “what’s been happening with the IRS is an outrage, and it must stop.” He and the rest of the House Democratic conference met with Rubin on October 9 to discuss fixing the IRS. They’re smart to jump on the reform bandwagon: A recent Fox News poll showed 78 percent of Democrats agreeing the IRS has “too much power.”
For Republicans, the downside of pushing IRS reform is that it could dampen enthusiasm for immediate tax reform. Bartlett notes that if voters are convinced the IRS has been revamped, they may be willing to wait for major changes to the tax code. Another potential obstacle for Republican tax radicals is the state of the economy. “One argument for tax reform has been to build a stronger economy,” says Reischauer. “That argument isn’t as compelling when you’ve got healthy economic growth and 4.9 percent unemployment.”
GOP tax reformers, in other words, face a dizzying array of hurdles. Could this lead them to trim their sails and perhaps build a coalition with Democratic reformers like Gephardt? It could, but it probably won’t.
Matthew Rees is a staff writer for THE WEEKLY STANDARD.
