Tax Reform

Date: 2015-10-07; view: 392.

Tax reform proposals usually are so heavily influenced by interest groups looking for special benefits that they end up working against their original purpose. However, the basic goals of Reagan's proposals were met with relatively few major changes, and in 1986 Congress passed one of the most sweeping tax reform laws in history. By eliminating many deductions, the new policy reclaimed a great deal of revenue that had been lost through tax loopholes to corporations and wealthy citizens. That revenue was supposed to pay for a general reduction in tax rates for individual citizens. By eliminating many tax brackets, the new tax policy approached the idea of a flat tax—one that requires everyone to pay at the same rate. A flat tax has the appeal of simplicity, but it violates the principle of progressive taxation,by which the rich pay proportionately higher taxes than the poor. The ability to pay has long been a standard of fair taxation, and governments can use progressive taxation to redistribute wealth and thus promote equality.

In general, the greater the number of tax brackets, the more progressive the tax can be. The old tax code included fourteen tax brackets, ranging from 11 percent to 50 percent. Under the 1986 law, there were two rates—15 and 28 percent. (Technically there were only two rates, but there was a perplexing "bubble" that set a 33 percent rate for some moderately high-income taxpayers. Few people understand how this bubble sneaked into the rate structure, and you can live without knowing). The 1986 law did not become effective until 1988, when George Bush was campaigning for the presidency. Bush quickly allied himself with Reagan's tax policy and promised the Republican convention and the nation that he would tell Congress: "Read my lips: No new taxes." As president, however, he found that existing taxes did not produce enough revenue to control the deficit. By the spring of 1990, his pledge began to stick in his throat. On June 26, after fruitless budget negotiations with Congress, he admitted the need for "tax revenue increases" and reopened the issue of tax policy.

Many Republicans were furious with Bush for reneging on his promise, and key members in his party failed to support the new tax package that he negotiated with the Democratic leadership in a budget summit. When that plan failed in early October, Democratic leaders forced the president to accept their own hastily constructed deficit-reduction plan, which established a third tax rate of 31 percent for those with the highest incomes — and repealed the curious "bubble" in the old rate.

No one likes to pay taxes, so it is politically popular to attack taxation—which Reagan and Bush did with stunning success. But these Republican leaders may have created a problem for their party and for government. Initially, the American public was not worked up over taxes as much as Reagan was. When asked in 1984—the year Reagan won re-election over Mondale—which of five different economic problems they considered the worst, the public ranked federal income tax rates at the bottom of the list (only 5 percent of a national sample of registered voters chose tax rates as the worst problem). At the top of the list was the size of the national deficit (identified by 34 percent). During the last decade, however, Reagan and Bush placed "high taxes" on the national agenda and worked up the electorate on the issue. By committing their party to low taxes as a first principle, these presidents have limited their options, rejecting a conservative "pay-as-you-go" philosophy in favor of a liberal "deficit spending" approach. Has the tax burden on Americans been heavy enough to justify their stand?