TAX REFORM — A TAX ANALYSTS CONFERENCE SERIES
THE 1986 TAX REFORM ACT — WHAT ARE THE LESSONS FOR TODAY?
Friday, April 1, 2005
Executive Director, Tax Analysts
Former Member, House Ways and Means Committee
Co-author, Showdown at Gucci Gulch
Author, Making Tax Choices
Former Assistant Secretary of the Treasury
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MR. BERGIN: Thank you all for coming. My name is Chris Bergin, I'm the executive director of Tax Analysts, which as many of you know, is the nonprofit publisher of Tax Notes magazine, Tax Notes Today, State Tax Today, Worldwide Tax Daily, and many other print and online publications. We've been around a long time, and I'm delighted to see friends of the organization gathered in one place.
Welcome to the first in a series of roundtable discussions that we will conduct in the coming months on the subject of tax reform. Throughout this year, we plan to explore such important issues as just how much reform Americans are willing to accept, as well as the roles that economic growth, fairness, and simplicity should play in reform. Today, as we begin the series, we are asking a simple question: What lessons can we learn from the experience that led to the 1986 Tax Reform Act? I am a solid admirer of the 1986 act, and I come by that admiration first-hand. On October 22, 1986, I was younger, probably a little more naive, and writing about taxes. I was part of a writing team at Prentice Hall that had prepared a rather weighty guide to the Tax Reform Act of 1986.
It wasn't the first in tax law that I would write about, nor would it be the last, but it was the most inspiring to me. I was in my office that day listening to the radio for a specific purpose, and as soon as I heard the news that President Ronald Reagan had signed the Tax Reform Bill into law, I literally sprinted down the hall to tell my boss. I was excited, which was apparent to a colleague, who said to me, what are you so happy about? Don't you realize that bill just put half our tax lawyers out of business? I remember thinking, I guess that's the point, but only in a building full of tax lawyers. Besides, he said, they fixed nothing. It turned out that as a prognosticator, my colleague was mostly wrong on his first point and eventually mostly right on his second. If the Tax Reform Act of 1986 put any tax professionals out of business, it was only a short layoff, because if the Tax Reform Act of 1986 fixed things, they didn't stay fixed for very long.
The next year, Congress and the White House began dismantling whatever good they had done, and in 1988, our politicians enacted a tax bill that bears what is still my favorite name for a tax act:
The Technical and Miscellaneous Revenue Act, TAMRA. The name said to me it contains just enough confusing and various provisions to get the tax code back on the path to the kind of complexity we had before 1986. In the years since, the reforms of '86 have been under constant attack, and here in 2005, those of us who care about these things can all agree on one point: The tax law's an 18-karat mess.
So now that President Bush has brought tax reform back into the spotlight, what lessons can we learn from the last effort at tax reform almost 20 years ago? Of course, a cynic might say I'm glorifying the past, noting, like my ability to sprint down hallways, the past is the past. But I would respectfully disagree. It seems to me that if you're going to think about attempting tax reform again, you can learn a lot from people who were there the last time, who made it happen, or who had a ringside seat. And that's why we have assembled this impressive panel: to consider the lessons of our last major tax reform. Each of our panelists will speak for about 10 minutes, and we will follow that up with discussion, which I will moderate. We will break at about 11 o'clock.
Let me note something: We not only have an impressive group of presenters, we also have a very impressive audience, and we thank you all for coming. We not only encourage, but we need your participation. Not only will we learn from each other, but we can also have some fun along the way.
One other note: We will cover this event in Tax Analysts publications, and we will post the transcript on our Web site. We've also invited media to both participate in this event and cover it. With all that in mind, I'm going to ask that when you speak, you state your name each time before you speak and that you wait for someone to come to you with a microphone; we'll have a couple of people around the room.
Having said all that, let me introduce our panelists in the order of their appearance, and then we will get started. Joe Minarik is the author of Making Tax Choices, and has written extensively about tax policy. Joe was involved in the emergence of tax reform in the early 1980s from his desk at the Urban Institute, and he will discuss how the issue developed and what needs to happen for tax reform to gain the same kind of momentum now.
Ron Pearlman was the Assistant Treasury Secretary for Tax Policy during tax reform in the '80s. He will discuss the role the White House and the Treasury Department should play if we're going to see a successful effort at reform today.
Tom Downey was a member of the House Ways and Means Committee during that time. He will discuss the political dynamics on Capitol Hill that made reform possible and what needs to happen to repeat that success.
Alan Murray is the co-author of the well-known book, Showdown at Gucci Gulf — Gucci Gulch, sorry — a definitive history of the tax reform experience of 20 years ago. He will discuss the dynamics in Washington in the mid 1980s, how the stars aligned for reform, and what must happen to get the stars in their places again.
So having said all that, let's begin. Joe?
MR. MINARIK: We do have a wonderful panel here. I don't want to take too much time, and I've got too much to say. I'll cut to the chase very quickly in the spirit of Chris and sprinting down the corridor differently than we did a while ago. I do have pictures of my new granddaughter; see me after the meeting. If you don't get to see the pictures, I'll answer your question right now: Yes, she is the most beautiful baby on the face of the earth.
Now, back to — what were we going to — tax reform, yes. Again, I'll try to be brief and to abbreviate what I've written. If you take yourself back to the beginning of the 1980s and consider the environment, you'll see some outward similarities between the way the world was then and the way the world is now. I suspect that looking at those similarities, some might assume that there is a beaten path that tax reform can follow to get to conclusion now. As I look at it with perhaps too old an eye, I do come to the conclusion that there's some very significant differences between the way the world was then and the way it is now, and I'm very skeptical about the prospects for concluding a major tax modification now. And I'll try to suggest why.
One initial similarity between the world of the 1980s and the world now was that in the 1980s, we had very large budget deficits. Right now, we have very large budget deficits. Some people believed in the 1980s that tax reform was, to some degree, driven by a remote hope to deal with budget deficits, and some people probably believed that there is a similar motivation now. I don't believe that that is a reason to expect progress at this time. If you go back to the 1980s — and you want to keep in mind that number one, there was a ground rule set by the president, and that was that tax reform had to be deficit-neutral, and in addition to that, you would find that many of the advocates of tax reform at the time were criticized by others — notably, economists — for wasting policy effort at — on a major policy change that would not deal with what they viewed as the number one policy problem of that day, which was the budget deficit.
I would note, however, that there is another distinction between the situation now and the situation then: In 1986, President Reagan, although avidly antitax, had and retained in 1982 or 1984 significant tax increases for the purposes of reducing the deficit. He did have that measure of flexibility in his view of policy, and it was indirectly that flexibility on his part, that pragmatism, that allowed him to accept and even to suggest a tax reform that would borrow $25 billion per year — about $120 billion over five years — in corporate tax increases to finance individual — aggregate individual income tax reductions as a sweetener for a change in the tax law. And to be crass, given that it is the opinions of voters, rather than corporations, that helps shape a political environment, that flexibility on the President's part was probably a major contributor to the ability to get a package together that would pass political muster.
In addition to that tax kitty that the tax policymakers had to work with at that time, there was, in addition, the ability that they had to repeal and change several major tax expenditures on the corporate side that made the overall package more attractive and more acceptable to the corporate community. For example, the elimination of the investment tax credit gave the taxwriters the opportunity to reduce substantially the statutory tax rate on corporations. That gave many corporations the opportunity to look forward and see the possibility of reductions in their tax liabilities down the road, and that split what otherwise might have been a firm corporate opposition to tax reform that in aggregate raised their tax liabilities.
I think that that perspective on the situation is significant because if you look at the situation today, you might see a mirror image of that opportunity from 1986. In particular, right now, tax policymakers looking at the individual income tax face the problem of future scheduled and politically unsustainable tax increases from the Alternative Minimum Tax. The Congressional Budget Office has estimated the kind of a garden-variety fix for the individual AMT problem as costing — in very rough terms — about $50 billion a year over a horizon of the next five years. That being the case, and looking at changes in scale over time, if you compare the situation in 1986 with the situation now, in 1986 you had a tax kitty, as it were, to provide individual tax relief; now you have what amounts to a negative tax kitty equal in proportion to about half the size of the slush fund that you had to work with in 1986. That being the case, it will be much more difficult to make individual taxpayers happy today than it was in 1986.
One other limited possible pothole in the revenue picture for tax reform: When the administration began talking about its current effort, one of the items reported in the press as being a possible source of revenue to finance tax reform was the elimination of the tax preference for employer-provided health insurance. One doesn't have to look too far in the literature in the health area to see suggestions on the part of health care experts that they claim to use that money to provide for improvements in policy with respect to health care and particularly devoting that money to care for the young insured. So to that extent, one might consider that possible source of revenue as one of the most significant on the table for financing a tax reform now as being potentially encumbered. And if you take that seriously, and if you believe that there is a need to devote those revenues to the health care sector, then they can't be used either to reduce rates or to make a tax law change revenue-neutral.
There's one other part of the atmosphere that I think is worth pointing out. Those of us who were around in the early 1980s would probably say that although there was discussion of options other than reforming the income tax as a source of change in the tax system, there was a very broad consensus that we were working within that set of parameters to attempt to improve our tax system. I do not get the sense today that there is anywhere near that kind of consensus on the very broadest sense of what a change in the U.S. tax system ought to be. There are those, for example, who believe that we ought to change the tax base in its entirety from income to consumption. And when I think about that, I think there are two very big questions that have to be raised. One is, it is alleged by some that the income tax in our changing world with all of the developments in — not only in the economy, but also in the world of tax management on the part of — particularly of corporations — simply doesn't work anymore. I have to admit that when I was thinking about tax reform issues in the early 1980s, I never imagined a universe in which a U.S. corporation would buy and then depreciate and lease back to the original seller a city hall in a foreign country as a source of reducing its tax liability. I suspected if someone at that time had come up with that kind of an idea, it could have been pulled off in the 1980s. So to some extent, there is then, if you will, advancements in the technology for tax avoidance — or perhaps, looking at another respect, a deterioration of social norms of behavior that might make an income tax a less viable vehicle for financing the federal government.
Some people would say, therefore, we have to switch to a consumption tax. Well, I think there's a set of big questions to ask on that side of the argument also. Is it possible, and is a consumption tax a viable source of revenue for our federal tax — federal establishment taken as a whole? Would it be tolerable in terms of fairness?
Can it be made tolerable and workable given that, under the current income tax, we have substantial benefits for low-income households, particularly working households, which were enacted in the initial — with part of the initial motivation being to spare business the burden of paying an increased minimum wage; that was part of the argument for establishing the Earned Income Tax Credit in the first place. If we went to a system of wall-to-wall consumption taxation, would we be able to establish systems for that kind of low- income support in the absence of an income tax? Would we want to, perhaps, to compensate low-income households for their loss of those tax benefits to increase social expenditures in a magnitude that we see in developed countries around the world that have a higher reliance on, for example, Value Added Taxes? What about the situation in the states which rely today much more heavily on consumption taxation than the federal government does? What happens if the federal government begins to preempt that source of their revenues? Taking all of that together, it suggests to me that one might conceivable make a strong case against the viability of the income tax today, but I think that one has a very hard time justifying, as an alternative, greater reliance on consumption taxation.
That having been said, it seems to me that we've got a whole array of very big questions that we have to answer before we get to any kind of a resolution on such a large-scale change in our tax system. I don't think that those are the kinds of questions that could be raised and potentially answered by a presidential advisory commission at about the time of the All-Star Game break and yielding a final piece of legislation before the World Series ends; this is more than a one-year effort if we're going to talk about such a quantum change in the character of the tax system.
Just a couple of additional observations on the political environment: Most of us will recall that in 1986, we had split control of the federal government, with a Republican president, a Republican Senate, and a Democratic House of Representatives. Arguably, that kind of a situation imposes a requirement for negotiation and compromise that can yield legislation that is not only more likely to be enacted, but also better. It can be better because there is more of a requirement that a broad range of interests in the society has their hands on the discussion, and in the end, bless the outcome. I think it can be more likely to yield a result in the first place because the involvement of both political parties provides political cover to each in the result of the final product.
My immediate past boss, Congressman John Spratt of South Carolina, in one of the hearings of the House Budget Committee, spoke to the Republicans and said that they should involve Democrats in the negotiation over their budget resolution last year on the ground that even though the Republicans could do whatever they wanted with their majority, that Democrats could provide one thing to the Republicans, and that was political inoculation. Republicans did not involve the Democrats in that negotiation, and I might add as a footnote, last year, there was not a completed congressional budget resolution. Don't want to suggest that going to bipartisan negotiations necessarily would have gotten an outcome, but I would want to suggest that we do have clear examples of opportunities for achieving bipartisan results when we fail on a strictly partisan basis. I think that it would be instructive to go back and look at the congressional roll calls on the Medicare Prescription Drug Bill of two years ago and comparing them to the roll calls on the Tax Reform Act of 1986; I think you would see in 1986, a much more even distribution of votes for and against on both sides of the political aisle, and I think that is reflective of the kind of bipartisan dialogue that took place then and that it is — is very hard to imagine taking place now.
I think this is probably a good place for me to stop. I've got a few more pages left, but I'll save those for the Q&A afterwards. I hope I didn't run over my time too much, and I'm eager to hear my colleagues — what my colleagues have to say.
MR. BERGIN: Thank you, Joe. Ron Pearlman.
MR. PEARLMAN: Thank you, Chris. Good morning, everyone. I look around, I see a lot of friendly old faces who were around in '86, and I see a larger number of faces that are very young that I've never seen before, so I've concluded that we're comprised of a bunch of old codgers who probably can't remember much from yesterday, let alone 20 years ago, and some youngsters who probably were either not born or were in diapers in '86, and so, you know, how to deal with that group.
Chris's direction to me was effectively to give some direction, and I'm someone reluctant to offer advice to others. But with that qualification, I'll try to. I think it's at least instructive for me to think back at what the White House and Treasury did right in the period leading up to the enactment of the '86 Act, and since my perspective was Treasury, you shouldn't be surprised that my focus is primarily on Treasury, although I do have some observations about our experience with the White House. And before I do that, I want to mention a handful of factors that, from my perspective of Treasury, made it possible to perform as well as I believe the White House and the Treasury did perform during the tax reform period — the '80s, that is, from '84 through '86. And I have to say in retrospect I think both performed quite well.
First, we had — from Treasury's perspective we had an extraordinarily tolerant White House, and that I can't understate the significance of that. I mean, if you recall the president in his 1984 State of the Union Address, directs the secretary to take a study of the tax system with no constraints. And in fact, not only were there no constraints — or no affirmative directions except don't screw up the election. There were no private constraints. Not only was there nothing instructed in public, but there was nothing instructed in private, so that when we began the process of figuring out what do we recommend to him, we were able to go the ways that we thought that a good, serious look at the taxes should take us. The only constraint, in fact, that ever was imposed — as some of you may recall — came from a speech that the President made — I think it was in Texas — to the National Association of Homebuilders, if my recollection is correct. And after his speech, someone in the audience stood up and said, Mr. President, is every issue that might come up on the tax — in tax reform open, and the president, mouthing the party line, said, yes, everything's on the table. And this guy said, including the home mortgage interest deduction? And I would say within two hours, the — we got a call from the White House that said, there's one thing that is off the table.
Secondly, we have the opportunity to recall we do our work out of the spotlight. The early work at Treasury was done totally within Treasury, without consultation with the White House; without consultation with cabinet members, some of whom were quite frustrated by not being included in the process, or other agency heads; without consultation with members of Congress; or with the public. Now, there were — there's negatives to that, obviously. I mean, we — in one sense, we suffer from not getting the benefit of the input. On the other hand, I think — at least at the outset — it gave us an opportunity to do some serious work without the inevitable pressures that would come if the process were public.
Third, we were really fortunate to have the two Secretaries of the Treasury we had at the times they were there. Don Regan was an experienced businessman, he was interested in the details of the tax law, he ultimately became quite invested in the work product and committed to that work product, and having him there during the time we were developing Treasury 1 was very valuable. When he switched jobs with Jim Baker in early 1985, Treasury 1 was out, it was getting pretty beat up, as I think everyone expected, think they brought to the White House an extraordinary political astuteness. And through his relationship with the president and members of Congress, I think the recommendation that the president sent to the Hill — became — were much more viable than had he not been around.
I want to make one other point, my last in my handful of points — that isn't made often enough, and that is that we had an extraordinarily talented staff in the Office of Tax Policy. If — those are the names you might recall, people who were in that office during that time, including Gene, Eric, Patty, people who I see in the room. This was just quite an opportunity, I think, to assemble the group of lawyers and accountants and economists and the support staff together through this extraordinarily intensive period. Remember, it was not just tax reform, it was the Deficit Reduction Act of 1984, it was legislation preceding several years, and when I think back — I do that, I think that — back that way by looking at a photograph that the staff gave me when I left Treasury. And I look at that photograph and the accomplishments of the people who were there then, and sort of where they are now in their careers, and it just reminds me of how fortunate I think we all were that they were there.
So what do we do? Well, at the top of my list, I think, always will be Treasury 1. I believe that the invaluable contribution that the Treasury Department made to the tax reform process was the publication Treasury 1, that is — for those of you who aren't familiar with the reference to Treasury 1, it was the original Treasury recommendations to the White House in response to the president's directive, and it was released in October, November — I can't remember the month — I think October of 1984. That was an idealistic, to some extent politically naive document, but in my judgment, then and now, it was important, and I would submit, in retrospect, at least, perhaps essential in establishing a tax policy baseline that permitted the process to proceed through what everyone understood was to be an extraordinarily difficult legislative process. Everyone was on the table — literally everything was on the table, if you go back and look at Treasury 1 now, you'll see an extensive discussion of consumption-based taxation.
We devoted a good portion of that report to a discussion of the cash-flow income tax, called the consumer income tax. We devoted a volume of that report to Value Added Taxation. I looked at it a couple of days ago and recalled — I didn't recall before and then — that we even had forms — draft forms in that report. So we did a lot of work, well beyond just looking at the income tax.
The revenue neutrality constraint was really an idea of the Office of Tax Policy, it was sitting around thinking about, so how are we going to do this, and putting any kind of internal constraint on the process. And it became sort of obvious: Well, the only way you can do it is to say that the product has to be revenue-neutral. And so we began working that way, and the concept of revenue neutrality didn't — began being adopted as the work product proceeded through the Treasury Department, to the White House and to the Hill. It turned out that — obviously to be an extraordinarily important part of the process.
Following the release of Treasury 1 and Secretary Baker's arrival at Treasury, we went through an item-by-item reevaluation of every piece of Treasury 1 — there were many days that that was a very painful process for people in the Office of Tax Policy. We were invested in Treasury 1, and we were getting beat up pretty bad, so it was difficult from our perspective to have to sit there and listen, either from the Secretary or from lobbyists or others about the terrible things we had done. The benefit of that process, in addition to bringing Jim Baker's political judgment and reason to the process was that it invested the Secretary in the work product so by the time the president's proposals were finalized, Jim Baker understood and was a part of that work product. And so when he went to the Hill, and he was called upon to represent the administration on the Hill, he was representing something that he had spent a good time with and that he had been involved intimately with, and I think that turned out to be quite important.
And sooner or later, the president spent a good deal of time with the details — the proposals.
I think this part of the process is not as well known publicly, but there were numerous meetings, small group meetings, typically six people — three people from the White House, three people from the Treasury — the president, the vice president, and Don Regan, the chief of staff, Secretary Baker, and Dick Darman, the deputy secretary, and me, and we met in extended sessions, in a couple-hour to three-hour sessions with the president and reviewed with him over a period of time all of the significant pieces of the legislation. And there were days that we got into pretty significant detail about pieces of the legislation. I mean, I remember particularly the day that I was trying to explain interest indexing, and I couldn't, and I tried, and the president would say, I don't understand. And I'd try again, and he would say, I don't understand. And I thought to myself, my god, this is the president of the United States, and I can't explain interest indexing to him.
That had a similar impact, however, I think, because it put the president in the position where when his recommendations went to the Hill, that he had spent time with the substance of the package, and he was invested in the package. And so when he had need or opportunities to interact with members of Congress in order to reason about a provision or — if you'll recall — in House version to save a tax reform in the House, then he, too, was invested.
Now, let me say that — I don't want to overstate the significance of what the administration did in the tax reform process — I think it was quite important — but there was so much more that was involved in tax reform, so many pieces had to fall into place that it's — it would be unfair to list on a nostalgic basis, to wax too much about great things about the White House and Treasury. But I do think the experience does offer a few things that might be worthwhile to mention, and that's what I want to do, just as concluding comments.
For me, the first and the most important thing is that someone has to do the heavy lifting. Traditionally, the heavy lifting in tax policy area has been done at Treasury. And when I mean heavy lifting, I don't mean the heavy policy, the ultimate policy analytical issue, but I mean the substantive process of thinking out alternatives and thinking out how provisions will be implemented and how they will work. Someone's got to do that. I don't know where that's going to be done this time around, I don't know the extent to which it's conceived that the president's reform panel is going to that, I don't know whether it's the Treasury Department that's going to do that, I don't know whether it's going to be done on the Hill, which it certainly could be, at least conceivably. But someone's got to do that; at some point in time, the process has to get beyond just talking in generalities about the desirability of one kind of tax system over another or the desirability of specific broad concepts. And you have to get down to a point of talking about what is the proposal, and what is it going to look like, and how's it going to operate? I would observe that one of the benefits of heavily involving the Treasury Department in that process, is that the Treasury has the — has ready access to the Internal Revenue Service, and the Revenue Service's involvement in the process of getting policymakers to understand the implications of enacted provisions can potentially be very valuable.
The second thing that I think I want — that I take from the '86 process is the personal involvement and investment in the process by the leaders, and the leaders — generally from my perspective are the president, the Secretary, and whomever else it turned out it turned out — it was the Assistant Secretary and the Deputy one. I was there, could be different people in this administration, I don't know. But people have to be invested, they have to be committed, they have to understand what's being proposed, they have to be prepared to go out and advocate for their proposals in situations where the going oftentimes will be very tough going.
And third, at some point, there has to be some amelioration of the strident political partisanship. The process can't be always politically partisan. It was no cakewalk in '84 and '85 as tax reform was being worked up in the House and Senate; there were strong differences of opinions among members of Congress, my experience primarily being with Ways and Means, among members of the Democratic Caucus, or among members of Republican Caucus, not only across the aisle. But when the door closed on meetings that the Ways and Means Committee held before the hearings in the summer of '85, or doors closed on the little caucuses that the chairman organized in the fall of '85 to put — to try and work out specific provisions of the legislation. It was difficult to identify to a stranger who was the Republican, who was the Democrat sitting in the room. Members had different views, but it wasn't ideologically strident, and I think at some point, that's got to happen in this process. And it could well happen, even — because this is beyond what shows up in the headlines, but I think that is an essential part of the process. I've always thought myself to have been an extraordinarily lucky fellow. It was an amazing time to be in government, it was an extraordinary time to be at the Treasury Department, and I will always think back favorably on the experience of 1986.
MR. BERGIN: Thank you, Ron. And thank you for the segue because we can now go to the Ways and Means Committee. Tom?
MR. DOWNEY: First of all, thank you for inviting me. As I sit here, and I see Ron Pearlman sitting there behind a microphone, I feel compelled to ask him a series of nasty questions. I — in preparation for this, I began to realize I'm getting much older, and I'm afraid this is going to begin to sound like the reminiscences of an old veteran talking about his good old days with a couple of his mates who were there during it. I will try to be both cosmic and not cosmic in my efforts to respond to the charge of what was relevant today.
Let me say that in preparation for this, I had a chance to reread Jeff Birnbaum and Alan Murray's absolutely superb work, Showdown at Gucci Gulch, and it really was a trip down memory lane for me. I was a young lieutenant in the Illinois First Division on the Ways and Means Committee, and my focus and concern at the time was I was armed with a series of principles that I had learned from an extraordinarily able staff that existed on the Ways and Means Committee at the time. I had served two terms in the House prior to getting on the Ways and Means Committee in 1979, so my interest in tax policy was somewhat limited. Indeed, when I was in law school — I was in law school at night, finishing up at American University — I decided not to take Advance Tax because I feared that if I got a C or a D in advance tax in law school, that would look pretty bad as a member of the Ways and Means Committee. So I can't say that I came to this as a tax policy expert, but was armed with the belief that the tax code should be simple, it should be fair, and to the extent that it was possible, it should be economically neutral.
And these were the holy trinity that I held out, and as a Democrat on the Committee — and a fairly liberal one — I also believed that to the extent to which I could save the progressivity of the income tax, that this was a good thing. And to the extent to which I could remove poor people from the tax rolls, this was an even better thing. And if I could politically hurt the Republicans, then I would have the blessings of all three. So I started out in tax reform as a — as a solider has said, and as a young lieutenant, and it is very much hard to describe now what the feeling of the ésprit existed in the Ways and Means Committee because we had had a pretty rocky road in the '80s. In 1981, we — Chairman Rostenkowski and the Committee were defeated in their attempts to fashion a tax bill, and we actually went about that very badly; we made it a bidding contest in our attempt to deal with Kemp-Roth, that really did not do the Committee, in my opinion, very much credit.
In 1982, recognizing that we had gone way too far in cutting taxes and making a mess of things in 1981, we couldn't even in the Committee produce a product to ameliorate the damage of 1981. And we wound up — Chairman Rostenkowski did — and for those of you who remember him and know him, a very brusque, sometimes difficult man, but very proud, very strong, very willful, he was a Chicago ward committeeman, and that's basically how he ran his committee — so the fact that we had lost in '81, had to accept a Senate product in '82 set a tone for the efforts that we engaged in in '85 and '86 that put us a little bit on the defensive. And before I get to the cosmic consequences, I want to talk about some of the kind of — the peculiarities that existed.
First of all, Joe and Ron have said exactly what I believe on some of the cosmic points.
There would not have been tax reform without Treasury 1. But curiously, the reason there wasn't tax reform is after they produced Treasury 1, everyone — the lobbyists and the people who dealt with us said, oh, my god, we're not going to do this, are we? And they said, oh, no, no, no, no, no, no, this is just a bunch of theoreticians; we're not going to do anything like that. And in my own state of New York, the idea that the sacred cow, the deductibility of state and local taxes would in any way be touched was a major problem. And the curious thing — and I had a governor who was both my political friend — personal friend, political ally who decided that this was a very important thing for the New York delegation to be involved in, and bubbling beneath the people who were interested in preserving state and local taxes were a whole bunch of people who were making tremendous fortunes on tax indication, using the tax code to sell every form of tax loophole — I mean, there were a number of times that Pete Stark would show up in the Committee with the advertisements in The Wall Street Journal about these various tax schemes and using passive losses.
And so not only was there valid good reason to preserve state and local tax deductibility, but the party, the Democratic Party — and I was a willing participant in this, so much to my regret as I look back today and Tony Crow and others — of trying to get our money from a lot of these people who are busy syndicating all these things. So you had the Good Government Mario Cuomo saying state and local taxes must not be touched, and then you had all of the people who are making fortunes in New York on the tax code saying, absolutely right; state and local taxes shouldn't be touched. I mean, they felt that way, especially if they owned a lot of property, but they were more interested in seeing tax reform fail, and they had tremendous amount of influence in this process at the time.
Well, after Treasury 1 — clearly Treasury 1 wasn't going to happen, and we had — this was a process that occurred over a number of months and absolutely years for us as we thought about these things on the Committee. It was clear that with Treasury 2, we were engaged, and after President Reagan — speech to the country on tax reform remember Danny was going to do the response. We were pretty nervous about this in the Democratic Party because he would not be our champion normally on television; we had a number of other — as he referred to us — blow-dried guys who could probably do this a little better than he could. But he practiced, and you know, I was there for some of that session, saw some of them, and he did a fabulous job, and he — and you recall he said, write Rosty if you believe that this was a important effort that we should be involved in. And he was a very personally conservative guy; he was not a bomb- thrower — that's how we referred to most of us — but he was a Democrat, and he was very worried about his past failures in the Committee in '81 and '82, he was very worried, as were we all, about the idea that the Republicans would steal the march on us and be the party of tax reform. And so this idea of, well, we can't let them do it; after all, we are the party of tax reform — and guess what? This idea of lowering rates and broadening the base and cleaning up the mess that has been created are actually good things to do and things we should be involved in.
Now — I'm truncating a lot of this because it took us months and months and months, and if you have some time later, I'll tell you about Frank Guarini and his malaprops during the meetings, which were beyond understanding, or some of Charlie's comments about it, which would leave us all scratching our head wondering at one point, what in fact he'd said, but — we came basically to a consensus, a difficult one, that we should certainly proceed in a serious way on this. But for those of us who were worried about state and local tax deductions, we had to prove to Rostenkowski that yes, you could do tax reform, but you needed to allow for the deductions of state and local taxes or guess what: We were not going to vote for this plan. And there's a very famous interlude, you know, when Mario Cuomo comes to testify, and he embarrasses Dunkin in a question about, you know, state and local taxes — I won't go into it, but — and the Republicans were really kind of angry with Cuomo for doing this — I thought it was actually pretty funny — and in — when we started the markup, it wasn't at all clear to those of us who wanted state and local taxes preserved that Rostenkowski got it. And to whack him on the side of the head — which is sometimes what we felt — and the only thing we needed to do to our leader to move, at least in our direction — I and a number of others, much to our everlasting lack of credit, voted with Ronny Flippo on expanding the bad debt reserve of big banks. Now, I wouldn't have voted for this in a million years, but I wanted to make sure that he got the signal from us that we were prepared to play hardball with him, and I will never forget what Judd Gregg said to me when he looked at me when I voted for that. He leaned over, and he said, I always thought you were here for the welfare moms, not for the big banks. And I said, well, I am here for parts of the welfare moms, and the only way I'm going to get to help them is if they, you know, get to deduct state and local taxes. Well, after that loss, Rosty kind of reconsidered the whole process, as he had to. And the Senate, by the way, went through a very similar process when Packwood marked up with his bill initially; it became an absolute feeding frenzy for lobbyists and special interests. Rosty — I guess it was October — whenever it was when we did the markup of '85, he had H208 as his — you know where he would take us in — sadly, they've now handed it over to the vice president as heresy of the first order — but back then, he would sit in the back of that room, and he would call me and he looked at me, you know, and he was furious with me for voting for that bad debt reserve that won, I think, 17-13. And he said, I'm going to get you the goddamn state and local, but you got to be with me on everything else. Well, I was not exactly interested in being with him on everything else; I mean, New York did have an insurance industry that wasn't excited about the taxation of inside build-up, I had a bunch of fundraisers who were interested in making sure that were going to do something on passive losses, that it not be done retroactively, and — but Al D'Amato and I, an unlikely coupling, and in that summer had had a joint town meeting in Islip, Long Island, where 800 people showed up to make sure that we did not lose sight of the fact that the deduction of state and local taxes — which our governor had made a fairly big issue — was going to be lost. And both of us made impromptu — as political people often do — spontaneous, irrevocable promises to these people that unfortunately were heard by more than just our staffs. So I was not in a position to do anything to jeopardize the idea that as this process went forward, we couldn't — we had to get state and local tax deduction, and the chairman's word that we would have it as we went forward was really all that I needed. And so very reluctantly, I agreed to do that. And we eventually through many long, painful evenings in the backroom, which Ron did not get a chance to see, thank goodness, one time at 3:00 in the morning — I have to just say the same — Frank Guarini, very, very bright guy, Dartmouth undergrad, got his Master's from NYU in Tax Law. But on occasion, his language would get ahead of him, or some of his ideas. He, you know, once said to Secretary Schweiker under testimony — he said, these rates of infinite immortality are just unacceptable. I remember leaning over to him, I said, infant mortality, Frank. He would refer to economic modules, I think, and I'd say, no, those would be models, economic models. And this one evening, he also said to Carla Hill once — he said to her during one of the NAFTA meetings, Mexico is destined to be our neighbor forever. So that's — that's absolutely right. Let me write that one down.
So at the end of the evening — he can always be relied on to say something like this at a really important moment — and he said — he stands up — we're just all beat — he says, Danny, Danny, all we talk about is numbers. Numbers, numbers, numbers. What about the people? And Danny looks up and he says, Frank, how long have you been here? And we all burst out into laughter and then we went on our way and passed the bill after that.
We got it out of the House, and most of us, through the oddest of efforts — the rule was defeated initially, and the president came back and convinced the Republicans to do it — and then we voice- voted the bill. I'm amazed at the confluence of good luck and fortune that occurred to get the bill out of the House. You had very talented people working very hard, you had a chairman who had the respect of his colleagues, and let me turn for just a moment and shut up and deal with the cosmic consequences here that I think were indispensable then to tax reform and would be to do it today.
The first would be presidential leadership, which was ongoing and persistent. And Ron talked about the hard work the Treasury did, really substantive work, absolutely essential. At any moment, Ronald Reagan could have stopped this cold in its tracks; he didn't. I have a different memory than Ron did about the president's grasp of the details of tax reform, which I'd be happy to respond to in a meeting and a question later on. I never quite got the feeling he understood what it is we were doing. And my question to him once basically proved that point, but his leadership was absolutely essential, and it was ongoing and persistent.
Secondly — and this speaks to Joe's excellent point about bipartisanship — it was very much bipartisan effort. And overriding all of this, it was simple and understandable. You had this remarkable coming together of conservative Republicans who were interested in reducing rates and Democrats who were interested in reducing rates and getting the poor off the tax rolls and maybe helping some middle-class folks get a tax cut and simplifying the tax code, correcting all of the mistakes that had gone on in the past. So there was a natural bipartisan consensus over a number of understandable points, which in addition to presidential leadership made this absolutely essential.
Third and not — but not last, is the idea of the regular order. What was the regular order? In the House, and even in the Senate, the regular order was the process of preparation to be involved in this undertaking with weeks and weeks and weeks of hearings where experts around the country would come in and explain to you about the various facets of the tax code that you would be dealing with. Very smart, enormously talented people — it was great gift to participate in this process. It was like getting a graduate degree. We were forced to be there, we were given a schedule of when we had to be there from Rostenkowski — we all left at 4 o'clock to play basketball, so it didn't really matter who was there in the afternoon, but — in the morning and in the early afternoons, we spent quite a bit of time and energy in the House trying to understand in a thoughtful, sober way what the issues were that we were confronting. The Senate did the absolute same thing: Packwood, Bill Diefendorfer sat for hours and hours and hours listening to people, indispensable to the process of writing serious legislation, of going through the regular order of preparing yourself and being thoughtful about the process and being bipartisan.
Last is luck, which is difficult to schedule. The luck part of it is — what always occurred to me was the fact that all of the people who opposed this legislation never figured out a way to work together to stop this. And there, it was a series of acts of individual greed and self-serving that allowed them not to figure out that they had a common interest in preventing this from occurring. They were all worried about one section of Code or the other, and even though they might have figured it out, they never got to it, and they were lucky. I would be very surprised — and if we did tax reform again — that you would — that the forces of opposition wouldn't repeat that mistake. My guess is they wouldn't. As for — you know, the excellent points that Joe made about the tax kitty and the rest, I think what this approach to tax reform misses is that that if you're going to try and undo the income tax system with a Value Added Tax or sales tax, we'll all resurrect that great campaign literature Al Ohman, who lost in 1979, who was the Chairman of the Ways and Means Committee, had when he decided to offer Value Added Tax. He spent a whole two years with VAT is Dead brochures, which didn't save him. If they want to finish — if they want to do tax reform, they're going to have to be a lot more bipartisan than they've shown that they've been capable of on — I'm addressing this particular to my Republican friends — a tax commission with some very bright and talented people, but it is — will not be given any credit by Democratic members of the House or Senate as being really bipartisan. Presidential leadership — I don't doubt President Bush is a leader; he's strong, he's persistent — he's shown that on Social Security, which I hope he continues 'till October of next year when we'll win back the House if he continues his efforts — but I have no doubt that the presidential leadership is there. What I doubt is there is the simplicity, the focus, and the ability to be bipartisan that will be essential to any meaningful reform.
MR. BERGIN: Thank you, Tom. We turn now to Alan. Alan is, as I've told you — this is required reading for many of us at Tax Analysts —
MR. MURRAY: Still in print.
MR. BERGIN: Still in print.
MR. MURRAY: Go to Amazon.com right now.
MR. BERGIN: I'll get my cut after. And I think a lot to learn here. So you can bat cleanup.
MR. MURRAY: You know — well, let me just — let me first of all say for the younger half of the audience is, they listened to the people around this table tell all the reasons why this isn't going to happen, and I'm going to contribute to that — to keep in mind that had we been sitting around the same way in 1984, you would have heard the exact same tone. In fact, the only reason — I was Cub the Reporter at The Wall Street Journal, you know, I was Jimmy Olsen, I'd been there for like four months — the only reason I was allowed to cover tax reform was because everybody else thought it was a joke. Nobody took it seriously, and so they said, let the kid do it. Ron mentioned Ronald Reagan's speech at the beginning of 1984; to put that in a little bit of context, what was going on there was, you had this Bradley-Gephardt Democratic tax reform plan, and all the guys in the White House were panicked that Walter Mondale was going to embrace it. Now, in fact, he wasn't. You know, I interviewed Mondale after the election, and the truth is, the guy was not a tax reformer; he had no interest in it whatsoever. Nevertheless, everybody — it was one of the rare political miscalculations that was ever made at the Reagan White House; they thought, oh, my god, the Democrats are going to embrace this, we have to head it off. And so the president goes to the State of the Union Address, calls on Don Regan to study tax reform and report back to him in December, which was one of the rare times that members of the House and Senate had the disrespect to laugh —
MR. MURRAY: — at the president. When he said it out loud, you could hear it. Watching it — you know, even watching it on TV, you can hear them laughing at the fact that this was going to be done in December, which seemed to clearly indicate it was a political ploy. It was not serious, which ensured my ability to continue to cover the story. And in — that after the election, when people began to realize that the Treasury, at least — that Ron Pearlman and Don Regan were taking this pretty seriously, and they were going to put out a plan that was going to shake quite a few trees, then my colleagues at The Wall Street Journal — you know, the big feet started coming in and, you know, pushing me out of the way, and so let me call this source, let me call that source, and I was getting a little frustrated and angry, and I — one afternoon, I said, I'm getting out of here. I went out, and I walked over to the Treasury Department, sort of — I don't know what I was thinking. I think I was thinking maybe I'd run into somebody in the hallway who would unlock all the secrets of this plan that was about to come out. And I wandered into the Xerox room, and in a trash can there, I found a two-page summary of the tax plan, which I took to publish in the paper. Now, Ron and some of his colleagues raise questions about the journalistic ethics of all of this, but I think that can be the subject for another National Press Club meeting at a different date.
Anyway, let me just — let me talk about sort of two pieces, the political piece of this and the substantive piece of this, why it was able to happen, and why I also think it's going to be difficult to replicate this time around. Politically, there's been a lot of talk about bipartisanship. It was kind of a peculiar bipartisan deal in that Republicans had made lowering tax rates — this sort of supply-side notion of marginal tax rates — the Holy Grail. And at a time of deficits, tax reform was the way to continue to chase that Holy Grail. For a lot of Democrats, there was basic fairness involved, not so much distributional fairness — although in the end, the bill did do some good things for the very lowest income groups. But it wasn't so much distributional fairness, it was the notion that two people at two companies who were making the same income ought not to have tax bills that are wildly different. And at that time, it was easy to find cases of that, and it was offensive. And so you had the opportunity for that sort of notion of fairness and the supply-side notion of lower marginal tax rates to come together.
But — I think Tom was getting at this — it would be wrong to think of the bipartisanship that went on as being sort of this cozy, let's-get-together-and-cut-a-deal. In fact, what really drove it all through the process from beginning to end was what Tom cited as the fear that your party was going to be blamed for killing it. You know, that's why Ronald Reagan embraced it in the first place, because he thought Walter Mondale was going to do it, and he didn't want to look like he was against tax reform. That was why Rosty jumped on board with his Right Rosty speech, because he didn't want it to be preempted.
There's a great story about the night the House was having its final vote on this — and it was very close; I mean, there'd been one vote in the House where it was voted down — this was, like, Christmas 2005, a great deal of drama, you didn't know — and by the way, there was drama — there was kind of a "Perils of Pauline" story, which was what made it so much fun to write about. Great deal of drama about whether it was going to pass. Bob Packwood had his Christmas party that night, and staffers reported they couldn't get him to come to the Christmas party because he was sitting in his office staring at the television, watching the House debate, hoping against hope that it would die in the House so he would never have to deal with it because he knew if it passed the House and got in his hands, he was going to have to make it happen because he wasn't going to be blamed for killing it. So it was bipartisanship in that kind of negative way — the fear that the other guy was going to stick you with the blame — that kept the whole thing going.
One of the things, though, that strikes me that is so different about the environment today, you know — it wasn't — to say today — that things are more partisan today isn't quite right. I mean, it's harder to think of two people further apart on the partisan spectrum than Ronald Reagan and Dan Rostenkowski. But one of the things that is dramatically different today is that you had — and Ron Pearlman's a great example of this — you had this institutional structure of tax professionals whose goal was to make some sense out of the partisan hash. The professionals at the Treasury Department and the professionals on the Ways and Means Committee and the Joint Tax Committee were talking to each other all the time, trying to figure out, you know, okay, yeah, we've got these bosses who have their partisan needs; how can we take that and make good tax policy? They were non — I mean, I say nonpartisan; obviously they voted, but — to give — I mean, Ron Pearlman is a great example of this. It is inconceivable to me — that doesn't exist today as far as I can tell. You may argue with me on this, but it's inconceivable to me that today you could have a person do what Ron Pearlman did in the 1980s, which is work for Ronald Reagan for several years and then go and work for Dan Rostenkowski as the head of the Joint Tax Committee.
That kind of nonpartisan institutional framework — which still existed in 1986 — is pretty much gone now; everybody's a partisan. And I think that's going to make it very hard to do what Ron Pearlman referred to as the hard work of pulling something like this together.
So having made that comment about the political environment, let me just say a few words about the substantive problem. I don't know of anybody in this White House — and I've — you know, I've started talking to people; in fact, I think — I was — you know, I was one of the first people to write about the fact that the president — Bush wanted to do this. I don't know anybody who really thinks we're talking about a totally different tax system. The phrase that was used to me over and over again, was a consumed income tax — which is another way of saying, let's take the income tax and throw in more tax breaks for savings; we've been moving in the direction of a consumed income tax anyway. So I think we're talking about a tax reform similar to 1986 in the sense of, you know, what can we do to make the income tax better. The problem with that kind of effort — it's not a problem; it's just the absence of a revenue-neutral income tax reform — is that you're raising taxes on some people to lower taxes on others.
Now, it's been very easy for the administration to identify where they want to lower taxes. You know, they like to bring rates down some more, they'd like to give more preferences to savings, they've talked about giving more tax deductions for individual health care expenditures.
But in the current environment, it is a hell of a lot harder than it was in 1984 to think about where you're going to get the revenue on the other side to pay for that. Simple exercise — you can all do this at home — go to the Joint Tax Committee Web site, get the list of — I think it's the Joint Tax Committee, isn't it, tax expenditure list? — get the list of tax expenditures, they're arranged by order of size, and go down the list. You know, you've got the home mortgage deduction up there — well, President Bush, like Ronald Reagan, has said, we're not going to touch that one. I mean, personally, I think it would hurt some of us here in Washington, but you might be able to bring that cap down a little bit from a million dollars, but it's not going to happen. Charitable deduction — that's a biggie — we're not going to touch it. He has not said, interestingly, state and local, and that holds a certain political attraction to Republicans because it hits — tends to hit blue states, not red states, although one sizeable exception to that is Ohio; Ohio is number three or number four on the list of high tax states. But you know, the interesting thing about the state and local tax deduction is that without anybody recognizing or commenting on it, it's going away. It's going away because it's in the Alternative Minimum Tax. And so over the long term, even if you can get over the incredible political problems that Tom Downey has already outlined with getting rid of the state and local tax deduction, you're not actually raising a lot of revenue off the baseline because the baseline is — already includes this huge erosion of the state and local tax deduction under the Alternative Minimum Tax. So it's not clear how that gives you a lot of money to do all the good things you really want to do in tax reform, even if you could overcome the political obstacles of doing it.
Health care, Joe Minarik talked about. In some ways to me, this is the most interesting of the possibilities, but then tax reform really becomes more about health care than about tax reform. A number of people aligned with the administration have indicated their desire to create a system where the consumer of health care is more involved, is taking more personal responsibility for their health care. One way you do that is by giving individuals a tax deduction rather than what we have now, a tax system that sort of — that gives the deductions to companies and kind of pushes the system into employer hands. That costs money, of course, but you could easily balance that off with some sort of a cap that says, you know, here's what it costs to get a decent health insurance plan; everybody gets that and nothing more. We're going to stop paying for — you know, I can under my medicine program, I can do, you know — I haven't yet — I can do all sorts of cosmetic surgery — I certainly pay a lot — I have two daughters, both in braces, you know; I'm certainly paying a lot for that. I get a tax deduction for all of that. You could easily say — you could easily start to help bring some dramatic changes to the health care system by saying we're going to cap that, and we're going to let individuals deduct it. So that may be the most interesting.
Where else can you get revenue? We've already talked about the corporate tax, which was part of what Don Regan did and Ronald Reagan did back in the 1980s. That might be doable again; there are plenty of — it's not hard to identify some pretty large loopholes in the corporate tax that could be closed to raise some revenue, but I don't know where that gets you if your goal is to have a consumption or a consumed income tax. That seems to be going in the wrong direction. And then some people have proposed a Value Added Tax as kind of the revenue generator. Well, I — I mean, I've talked to Senator Mack about this; there's just no way that that is going anywhere in an environment where Republicans run the White House, the House, and the Senate. I don't think it'll ever come out of that committee because it's — they just see it as a revenue-generating machine. So I think under the current political alignment, you can pretty much write that one off.
So anyway, having said that, why don't we open it up?
MR. BERGIN: Alright, I'm going to open it up for discussions. I'm going to start around the table, but I'll make sure I look to — left and right and center. Please state your name — I know most of the people around the table, but I'm going to let you state your name. And just to start off, I want to turn to another player in the '86 tax reform, a good friend, Gene Steuerle. I'm letting you kick this off.
MR. STEUERLE: Thanks, Chris. I'm reminded as we all do our discussion here of the statement of Benjamin Disraeli when he got a little older and said we had all moved into our anecdotage.
I think we're close to that. I guess the first point I want to make is I think there are lessons from '86, positive and negative, but every moment has its opportunities. I mean, every good thing that happens to us provides opportunity; every bad thing that happens to us provides opportunity. The same is true in politics.
There are opportunities in the current moment. We should not think they are identical as the ones that we had historically. And so even though we're going to deal with the past, I think we want to be limited. In the end, it takes creative imagination and leadership to figure out how to take the new opportunity. For instance, I like the idea that in Treasury we were able to work internally to come out with a policy process. It doesn't mean that if you're sitting on a commission, there's not a way to make a commission work. Now, 5 percent of commissions work, and 95 percent fail, but there is something that happens in those 5 percent that work in terms of somebody looking at what the opportunity is that that's present.
What do I see similar today that's similar and promising? Well, this sounds like a negative statement, but it will turn out to be at least somewhat of a positive for reform. When I came to town in the mid '70s, there was this notion that reform was something you bought; that is, when times were flush, you could get Medicare reform, you could get tax reform, you could get all of this because you could buy off all the losers, you know, the losers in the — you know, the people were winners, and unfair winners in the current system didn't take anything away from them. The ones that were losers in the current system unfairly could move them up to the status of the winners, and everybody would be well off. And the history of the '70s — in fact, the history of — my, now, looking around Washington — is an empirical history, not a theoretical one — is that that's not true. When times are flush, Congress and the president have tended to be very unprincipled, they start to give money away to the first group that comes to the table or the one that has the most power at the table, and if you get $10 and I get $100, the, you know, the public tends to be happy, and there's no sense of really sticking to principles like fairness — by fairness, I mean, mainly horizontal equity: You know, equal treatment of equals, equal justice, those types of things.
When times are tough, and you've really got the — you know, the bullet is biting, there are deficits, and you've got to identify losers and — this period is similar to the early '80s in the sense that every major enactment, I think, going forward from 2005 is going to be like every major enactment going forward from 1982. It's going to identify losers. It's either going to be deficit reduction, or it's going to be systemic reform, you got to pay for what you do. And that means identifying losers. And we have been through a period over the last six years — if you look at the turnaround from surplus to deficit, we have never in the history of this country had that big of a turnaround from surplus to deficit. We've never spent — or had been on the giveaway side of the budget — as much as we have in the last six years, much more so than even '81, even though in '81, we ended up with slightly higher deficits as a percentage of GDP, we started out with deficits, we didn't start out with surpluses.
And so, the promising aspect of that that is, is I think that Congress and the president are going to have to turn the battleship 180 degrees in the opposite direction from what they've done the past — let me say the last seven years; it really started with the breaking down of the budget rules about 1997 and then just accelerated. And now, they've got to turn that battleship totally in the opposite direction, and it only gets worse as you move one, two, and three, and four years into the future because the baby boomers start retiring. In 2008, they start showing up in the budget. I've done some calculations that show if we just keep taxes where they are and Social Security, Medicare, and Medicaid where they are and assume some defense cut, there are no revenues left for anything else in the budget. Zero. Zero for anything else.
So times are tough, and I'm actually arguing when times are tough that Congress really does turn to principles because when it's all of a sudden got to tell Alan Murray or Chris Bergin or me, I'm going to do something, I'm going to take away something, I'm going to raise your taxes — though they really do try to appeal to principles, they almost have to have a principled reason for doing it, whereas on the giveaway side they don't. So that's the promising aspect in some sense of bad times.
Now, and I'll get to this next point — and this is in keeping with what every other speaker has said — is I don't see a process yet that's able to do that. I don't see the leadership in the executive branch, I don't see the leadership in the congressional branch. This turning a battleship 180 degrees is a lot of work, and it's not just leadership at the top in terms of having a vision about what you do — and there's no vision for the Tax Reform Commission, there's no really no vision about how to solve health reform, there's really — if you think about it — no vision on Social Security. Everything Alan said about only identifying winners in tax reform holds and stays with Social Security reform as well. It's like no vision on how you're going to really make this stuff come together.
But it's not just a vision at the top, it's this ability to do what I call bottom-up planning. I think every major movement we make, whether as a government or as a house or anything else, you sort of have some vision of where you want to go, but then you have a lot of work at the bottom about how you're going to start fitting this stuff together, the stuff in the middle that's really the hard work that the two years of whatever it is of — that we did at Treasury or Joint Committee or Ways and Means or whatever. We don't have the bottom-up planning going on either because what's happening with this political process, this becomes so partisan is that not only do you not have the staffs, really — the Treasury staff is not — although it's got things going on, it's not really systemically trying to figure out how to make all this stuff come together in tax reform. Joint Committee really isn't being asked to do — and by the way, Joint Committee and CBO and GAO, by the way, have its finest leaders — as I've ever — as we've had in Washington. So we have the capability there if we would turn this to some of these leaders, but you don't have — I don't see this sense of really doing the bottom- up planning. And the bottom-up planning is really crucial; I mean, it's so many details: legal details, economic details. I give just one tiny example from '86 is when Susie Nelson and I sat down and started looking at what we did with the distributional tables — this may sound like a really trivial detail — we discovered that the people who had shelters then, people who had $500,000 of wage income and $490,000 of partnership losses were showing up as $10,000-a-year taxpayers, and if we show the distribution table on increasing their taxes the old way — and by the way, the new way as well — I mean by the new way, the current way — they look like we're increasing taxes on the poor by taking away tax shelters. And that took a lot of work to try to figure out how to totally do those economic models to make sure they would show something we thought was fair and accurate. So all that bottom-up work really has to take place, and it's very hard to get it to take place when the people mainly designing the bills — and the tax bill at the end of last year is probably one of the worst examples in history — when the bills are designed by the lobbyists — it's not that the lobbyists are always wrong or that they're not — they're representing private interests means at times it's not in the public interest — but a lobbyist does not look across the stream of things and decide what's in the public interest. When bills are designed by lobbyists and by pollsters, you can't get that bottom-up planning going, and you can't get the information through the system, you know, the information that somebody at a joint committee has, or the information somebody at Treasury has. It doesn't get its way through the system because you filter through so many layers of political types that you can't get that good information at the top.
It sort of get — the noise drowns it out. And so what happens to make this process work again — and I think the process will have to reform itself because, as I say, I think we have moved to this work where we're doing systemic reform of deficit reduction, and we've got to go — move forward on the leadership front — I don't know how we're going to do that — but we've got to work forward on this sort of bottom-up planning front of how do we get the system so it can again get good information into the system.
MR. BERGIN: Thanks, Gene.
MR. TODER: Thanks, Chris. I'm Eric Toder.
MR. BERGIN: Good example.
MR. TODER: I have no anecdotes to talk about.
MR. BERGIN: No, I mean with the name. Thank you.
MR. TODER: Yeah, right. I'll really do whatever it does. And I've really enjoyed this discussion. People have made really interesting points. I just wanted to sort of take this to a sort of broader level and comment that, you know, the groundwork, I think — emphasized for 1986 was really laid many years earlier than that by the work of Joe Pechman and Stanley Surrey and the influence they had on thinking in the tax profession. And a general consensus developed that a progressive income tax was a good thing, and that a tax system with a broader base and lower rates was a good thing, and that was kind of the intellectual consensus that was behind all of that.
However, the 1986 Act was not uncontroversial in the economics community, and there was a very strong opposition to it from an alternative vision, which was a vision that the big flaw in the tax system was the fact that it taxed income from capital. And you can go back to 1986 and read articles — I think there was one in the Harvard Business Review by Larry Summers, it was entitled "A Bad Tax Bill for Business." So it wasn't just lobbyists who were opposed to the '86 bill; there was a strong intellectual movement on the other side. I think what we're seeing is, in this tax reform, is that that intellectual movement is the one that's the dominant and driving force between what's going on today. And I don't want to comment on whether they can or can't succeed; I think there are some very big difficulties. One, that the people on that side are not going to say we want to narrow the tax base; they do want to narrow it on capital income, but they don't want to say we want to raise rates to pay for that. So what can they do to pay for it if it's revenue-neutral? The only thing they can do, really, is do what Joe mentioned, state and local taxes or health care, and that really is getting into basically forms of expenditure reduction. You can reform those systems, but you don't get any revenue unless you're really engaging in social policy to cut spending.
So I guess my point is that we really do have a tax reform effort, but it's a very different one today than what we experienced in 1986; it's one that many people around this table might not think is a good tax reform. And I'm not going to say it will or won't succeed, but I think we have to come to terms with the fact that it's a very different direction the people are talking about.
MR. OOMS: I'm Van Ooms. I was sitting at the House Budget Committee in 1986, so I was not directly involved in the reform plan, but I've worked on taxes, and — at CD, where I am now since that time, and I want to just make a — one broad comment which follows up to some degree on what Gene was saying. I'm very persuaded by this hearing and this excellent discussion. I'm very persuaded that we're not going to move in the next couple of years, that the groundwork isn't in place, the politics aren't in place, the stars aren't aligned — even though Alan didn't get us directly into astrology. So in that sense, it's very hard to see much movement coming forth. The problem is with stopping there, and we all do this at some point, is when we revert to the — one of the great clichés, which of course, is Stein's Law, which is that when things can't go forever, they won't, and they will stop. And it's very hard for any disinterested observers, seems to me, to look at the budget situation over the next decade or two and not see a situation where we are simply going to have to have a lot more revenues. And that's not a sort of tax-and-spend kind of statement; that is to say, I think if you make the most generous assumptions that you might want to make with respect to what would be done in terms of budget savings, in terms of reforming the entitlement programs, and spending reduction, you are still left with a situation where revenues are going to go up.
Now, this is not a political environment where anyone is allowed to say that, but it is going to happen at some point. So therefore, I guess what I would suggest is that we need to be thinking about this a little bit in a slightly different framework, which is that given the fact that revenues are going to go up, how will that happen? Will that happen in the context of some kind of tax reform process where we — when revenues go up, they go up, and we — the same time manage to piece together a system which, to some degree, meets our goals for sensible and fair and efficient tax policy, or do revenues go up mindlessly because we are forced to raise revenues in a situation where the groundwork hasn't been laid, and will we simply then begin to raise income tax rates on what is, I think by the admission of most people around this table, a fairly dysfunctional system? And I think we do need — I mean, no one, of course, is now talking about increased revenues. I don't think, you know — the condition is certainly not going to, as a mandate, not to think in those terms, and it certainly isn't going to certainly think in those terms. But at some point, we have to start thinking in those terms, and then the question is, how does the higher revenue base fit together with what we want in terms of tax policy?
MR. MURRAY: Can I interject just very quickly, just very short comment because Van said he wasn't directly involved in the '86 Act, and as a reporter, I remember people who give memorable quotes, and it was Van who said to me in 1984, talking about what had happened to the corporate tax. He said, you know, it's like the Cheshire Cat; everything's gone but the grin.
MR. WEINBERGER: I couldn't agree more with what Van Ooms just said. It's — and I think while we — I think the speakers did an excellent job of outlining all the difficulties toward any kind of major tax reform, and I think the t-word, trust, is on Capitol Hill and the administration is — was there. Even though there was fear back in '86, and even though there was bipartisan — sometimes opposition, sometimes working together, I think that the administration and those who were invested in the process on the Hill really trusted that when their word was — when they said something, there would be follow-up, and I think that's real important to the process. And so I think that's a major obstacle.
That being said — and then it was just said, if we tax ourselves today at about 17 percent of GDP — and we're traditionally, since World War II, about 18 percent of GDP or so — and we look at the spending, as Gene said earlier, going to — by relatively modest projections 25 to 30 percent of GDP couple decades from now at the outset, it's just unsustainable that we will have this type of a gap.
And so we're — even if we bring spending down, you're not going to bring it down from 30 percent of GDP down to 17 percent of GDP, so we are going to see revenues probably on the table; I think it's inevitable. And the reason, though — and to Van Oom's point — how are we going to get there? I think it's going to be driven over confluent events in the next couple of years that will drive us toward tax reform of some sort regardless of all the obstacles, and that is, in 2008, we will have the baby boomers starting to retire, and the slope of the line of our spending starts to really skyrocket.
We will also have 30 million on the AMT, as opposed to 3 million today if we don't continue with these patches. That's a significant tax increase for a lot of people.
At the same time, when you're hitting 2008, you've got in the five-year budget window now the expiration of over a trillion-and-a- half billion — over a trillion-and-a-half in tax cuts that were the 2001 and 2003 Act. You have estate tax repeal, the individual tax rate cuts, the dividend capital gains cuts — major, major fiscal policy decisions that'll have to be addressed by 2008. And the real question is, there's going to be political pain in addressing those issues. And do they do it all at once and get tax reform on the table in addressing those issues, or do we make a lot of unconnected decisions over the next couple years to fix these problems and don't have a game plan as where we want to address the overall fiscal needs? And I think that's the real question that policymakers are going to grapple with.
MR. BERGIN: Sir?
MR. ALEXANDER: Chris, I'm Don Alexander, and I used to be a tax collector. Now I'm a taxpayer. Well, I was a taxpayer when I was a tax collector. But one thing we haven't talked about is the administrability of the current code and of what on earth we might do with it, if anything.
At 21 expiring provisions this year, some of them involve a lot of taxpayers, and they have no idea whether they're going to be entitled to this particular little benefit from the tax system or whether they're not. We've attempted in the last few years to solve every one of our economic and social problems through the Internal Revenue Code because we're unable, somehow, to substitute an outlay for an indirect outlay through the Code. It is getting incredibly, incredibly complicated. One perhaps good thing about the Alternative Minimum Tax is that it is quite simple. It is also quite unfair, and it's also quite unfair to have to compute your taxes both ways to find out whether you're subject to the AMT. But perhaps this commission might be doing a favor to all of us if they started off with the AMT with all its defects and then worked from there and got rid of a few of the thousand ornaments that are simply tax expenditures through the Code. And maybe they need a poster child. Tom, you spoke about Pete Stark. Remember Pete Stark's favorite phobia, I thought, was the jojoba bean. Pete didn't like to have the jojoba bean subsidized through the Internal Revenue Code because, as he pointed out, it didn't know whether it was a male or female until three years after it came into existence.
MR. WHITE: I'm Jim White from GAO with a question that is somewhat self-interested, as you'll see. But given the discussion about the fact that the groundwork that was in place leading up to '86 really isn't in place yet today — and there's been a lot of discussion about the role of Treasury then, the role of CBO then, JCT, GAO, think tanks, and so on — I — the question I've got is what that group of organizations — Treasury, CBO, JCT, GAO, think tanks — should be doing today differently than what we are doing to try to begin laying some of that groundwork. It gets to Gene's point about the lack of vision; it's not our role to develop the vision, but we can be doing things that provide the groundwork to help the leaders that should develop the vision to develop it. So anybody's got any thoughts on that. It's a self-interested question.
MR. BERGIN: Gene?
MR. STEUERLE: I'm going to respond very shortly. I think this has been especially a problem of the executive branch. When I first came to government, the executive branch used to put out studies and options. OMB now doesn't put out anything. I mean, all the analysis - - if it's good analysis, it's internal; if it's external analysis, it's — what in church terms they called defender of the faith. You know, you've already got your position, and you send out the analyses that protect it. I think all these agencies have not only a moral, but I think actually — I can even go to things like the — Responsibility Act, which I know Jim, actually, you guys have used — to say that you actually have a legal responsibility of putting out a lot more information about — in Don's case, what's not administrable, the IRS does not put out studies on what's not administrable. I think they are required to do that under these acts. They're afraid to it because they're afraid of being interpreted politically. Treasury doesn't put them out, OMB doesn't put them out, I think CBO, GAO, all of them could put forth a lot more options on some of these issues. For instance, if you're going to reform charitable contributions without getting rid of them, it's a really difficult action. Or some of these options on dealing with state and local: You know, since it's coming about indirectly through the AMT, the question of what are the options of how you reform AMT and what are some alternative cutbacks in the state and local tax, and what do they mean — there's some internal analysis, they're not out there, and we need a lot more. One thing that could be clearly be done — although it doesn't add it all up to a whole reform, but a lot more options and their implications — revenue implications, distribution implications, efficiency — they could be performed and put on the table.
MR. BERGIN: Clearly, I think what — for me, what Treasury did in the early '80s — and I've told Ron this — I mean, when Treasury 1 comes out, for me it said, there's a possibility. Has the executive branch helped this panel to develop something like Treasury 1, which sort of starts the whole motion? Is that possible with a panel?
MR. MURRAY: Well, it's because the trust is gone. There are no — people don't trust it anymore. Everything's partisan. Everything's partisan. Sorry.
MR. GIDEON: Ken Gideon. The only thing that I would say is more to reply to Gene and to defend the IRS just a bit. If you'd look at what the taxpayer advocate is putting out every year now, there is a powerful list of the unadministrable that's being made available with the facts to explain its unadministrability.
But secondly, I think that — I really want to reinforce what Mark said. In other words, if you don't think this can happen, think about what the alternative is. And to me, the powerful alternative is if you visualize complete political stalemate for the next five years, then what you're going to get is, basically the phase-outs are going to become the enactment of the revenue. And that's an ugly enough picture that people might change their mind.
MR. COHEN: I think we all forget the late '60s: Reform could start from the Ways and Means Committee. That is, Wilbur Mills, when he was chairman of the Committee, appointed any number of study groups to go off and study given areas of the law to see how they could be improved. Now, we've not seen anything like that because the members of the Committee haven't developed that interest, the members of the Committee have become partisans in one position or another, and they throw rocks at each other instead of saying, okay, if we were now going to make our own plan rather than Treasury make the plan for us, how would we make it. Nobody does that any more.
On the administrability side, I convey the endorsement Don said; that is, I used to be able to Wilbur Mills and say, it's October, I'm going to print the forms. If I print them in December, it's going to cost X-million dollars more. Can we shake hands today, and nothing will be effective — today is effective next year, and I could go print those forms. You couldn't do that today because the chairman couldn't give you that assurance because he can't control the Committee. It's too big and too unruly. What are we going to do with that?
MS. SAWHILL: I'm Belle Sawhill, and thank you, Eric, for recognizing the work that Joe Pechman did earlier because I was thinking of the same thing. I've — I really agree with all of this good government comments that have been made around this table, and like most of you, I'm pretty pessimistic. It seems to me there's going to be all kinds of reasons why the — we just simply kick the can down the road and don't deal with the issues that need to be dealt with. The deficit implications, I think most people around this table would say, are very serious, but as long as the Asian central banks are cooperating with us right now and lending us all the money that they are, I think this could go on for quite some time. I was at a meeting of the Brookings Panel on Economic Activity yesterday when we had a series of papers on the current account deficit and sustainability of that deficit, and there are some good arguments that that could continue for quite a long time.
I think — to me, the interesting questions are, given what was said earlier about the fear factor, that fact that in '86, neither party wanted to be blamed for not doing tax reform, what does the administration say a few years from now if we have simply kicked the can down the road? And I would guess that what they say is they do something very minor, and they call it tax reform, and they probably do something with respect to moving toward the consumed income tax and giving more preferences to saving, and then they can — they will argue — and of course, we can debate this economically — that this will increase national savings and that that's the ultimate objective here anyway, and we can be having more public do saving if we're having more private saving, and that their tax system is going to encourage that. That's what I would expect.
That doesn't mean that eventually some — everybody has argued then and in particular, I guess, most recently — we're going to have to raise revenues, and I think we do come back to a VAT then, and I guess my question to Alan is, yes, Republicans don't like it because it's viewed as a revenue machine, but isn't there — if we're eventually going to have to have some kind of bipartisan compromise and maybe extending the tax cuts go by the board as part of that — but maybe we go to a Value Added Tax on the grounds that it is a consumption tax, even though it is a revenue machine. Isn't there the potential of a grand compromise there? I'd love to hear more comments about that.
MR. MURRAY: I think that what Ken and Mark were saying, which is when you get into the 2008 timeframe, and you realize that those rates — those nice rate cuts — are going to away, does it then come on the table? But I can't imagine it happening much in advance of that.
MR. WEINBERGER: Can I answer that too? I think they're trying. I think it's really hard to compromise within the tax system to get to a Yes on any kind of major reform, but when you start bringing in the other programs that are going to be very much the center focus of debate, like growth and entitlement programs, you all of a sudden see issues that enough people can get involved in to give something up on to reach compromise. And that's why you hear many people talking about expanding the tax debate to these other issues, like Social Security and Medicare reform, where there's lots more room to provide for compromise. Doesn't make it any easier from a process standpoint, but politically it certainly brings everyone to the table.
MS. SAWHILL: Yeah, nobody's talked yet about raising the ceiling on the payroll tax.
MR. BERGIN: Actually, Tax Notes has.
MR. GLECKMAN: Howard Gleckman with Business Week. I actually like to pursue this a little bit more. Bill Thomas said — in public about somehow melding tax reform with Social Security reform. And I wonder, Mark and maybe Tom Downey, if you could talk a little bit about whether you think that's conceivable.
MR. BERGIN: Go ahead, Tom.
MR. DOWNEY: Thanks, Mark. I think that — looking at this from a purely political perspective, I think that President Bush has kind of shown kind of a remarkable stick-to-itiveness on an idea that the more he talks about, the less people like, and they don't even yet know or understand. I mean, I've seen some polling I know that the AFL-CIO has done. But people don't really know that you have to borrow a lot of money and, yes, benefit cuts for any of this to work because they don't believe it. They don't believe the president would actually propose such a thing. So they just don't like what they hear, and they're only hearing the good parts.
I guess at some point in the late summer, or the early fall, somebody's going to explain to the president that this is not going to happen, and maybe we need to join the idea of what your ideas are on Social Security with tax reform and save some political face by joining the two issues, which would be a curious way for him to deal with this, but I think politically essential because he can keep individual accounts and attempt to deal with tax reform, and then roll them in, and if they all fail, it becomes, I think, a little less of a problem for him, then he maybe can blame Democrats for that. But I don't — I see for him — I mean, I agree with all the comments about the percentage of GDP that go to taxes that it's going to have to ultimately increase, and it should be done thoughtfully. I think it's going to take another year or two for that for people to understand that.
And somebody asked the question — I think you did — about how does it come about. I'm trying to — I remember McIntyre's piece about corporations not paying tax, right? There was — in the '80s. What a thunderclap that was for us. And I don't know that there's — at least for the Democrats — to run around in our town meetings and say, this is absolutely unfair.
It's hard for me to imagine the set of principles, ideas, or PR program that you could go into a town meeting and suddenly start saying, look, you were just not paying enough in taxes. And let me show you a graph. Believe me, for one who attempted to explain the Social Security notch to people — for those of you who actually remember the Social Security notch, you're giving away your age — it strikes me that we're — the country's not ready for it, the political atmosphere is not ready for it. I think it's going to take a change at the very top and in the Congress before we get to it because this group is simply not going to do it.
MR. STEUERLE: Can I extend Howard's question, Tom, push you a little further? You know, a lot of times — whether it was '87 or '90 — you know, something happened: Stock market crash —
MR. DOWNEY: Right.
MR. STEUERLE: — you know, the — everybody gives this vision, you know, the Chinese stop lending to us, something like that, and all of a sudden — and this happens all the time, I mean, in fact, it happened in 2001, 2002, you know, whatever it was, you know, recession — and all of a sudden, there's this notion we've got to act, and all of a sudden, things go to Congress, and Congress grabs what's ever on the table. If they're tax increases, they grab it; if they're tax decreases, it doesn't matter: whatever's on the table —
MR. DOWNEY: Right.
MR. STEUERLE: — so they can prove they're reacting to the current event. So let's now give some current event that causes a push for Congress back. What does it do? What does it even pick?
MR. DOWNEY: Well, I mean, I don't — I mean, Belle mentioned the Asian banks not lending us money, I mean, some precipitous increase in interest rates. The problem that you have politically is you have all these members of the House and many members of the Senate who've signed these blood oaths not to raise taxes, and so if I think, well, you know, I've got this real crisis here, but by the way, I've got, you know, this — these various tax groups that I've, you know, I've signed on the line that I'm not going to increase taxes. I know that there's this internal political discipline in the Republican Party that I don't want to push too hard because it could cost me a Committee chairmanship. I think it's very, very difficult under the current political alignment — even with something like that — for at least the House, for them to raise taxes.
I just don't think they'd do it. And I think it would take simply a cataclysm that, you know, I can't foresee for them to change their minds. And then it would take real Republican leadership. I mean, I think that there's going to be a change — this is another topic for something other than Tax Notes — for us to be dealing with the Republicans in the House. I think DeLay's got some real trouble, and I think there may be some changes, but I don't think substantively they're in a position to make tax votes that would fly in the face of promises they've made.
MR. RIZEK: Hi, it's Chris Rizek. I think what I'm hearing around the table here is what I remember — maybe it comes from before Senator Moynihan, but he used to say, they want to starve the beast. And I'm hearing that the beast is — he's going to get hungry pretty soon, and it seems to me that — I always thought starve the beast was directed at not solving the problem by feeding the beast, but by letting the beast get a little bit smaller. I mean, that was the ultimate goal, was to cut back on the spending, and I see that — at least politically — as a more likely outcome when people do start focusing on these things three and five years down the road. Now, I'm wondering if — am I the only one at the table who sees that as the likely outcome?
MR. BERGIN: Yes.
MR. DOWNEY: Oh, yeah, no. I mean, I — that — they're simply not in —
MS. SAWHILL: We did a survey —
MR. MURRAY: Social Security, Medicare —
SPEAKER: That's the key, that's the key.
MR. MURRAY: So you're going to cut Social Security and Medicare spending?
SPEAKER: That's not going to help.
MS. SAWHILL: We did a survey recently of people, most of them senior Hill staff, but some others as well, equally divided between Republicans and Democrats who are involved in this process. And we asked them what the probability of getting spending cuts of more than 1 percent over the next, say, three to five years were. None of them thought it was going to happen. Now, that could change, I mean — you know, but it's very, very difficult. You're right about the theory, but the practice is different.
MR. BERGIN: Joe.
MR. MINARIK: Yeah. Gene's question and Tom's reaction — when the Congress has reacted in times of crisis in my memory, what they have done is small, incremental things. The most imaginative and far- reaching step that I can recall coming out of, for example, the 1990 deficit reduction conference was a luxury tax on yachts. If — the reaction, it seems to me, is not going to be major reform, even assuming that Republicans decide to eat the paper on which they wrote their blood oaths. It's going to be very, very incremental. If you think about the Value Added Tax as the "solution" to this problem, I mean, looking at the bigger picture, you know, saying that, okay, we're going to allow the expiring tax cuts to be renewed, but to compensate for that, we're going to impose a Value Added Tax. So you're cutting taxes on people at the top end of the scale, you're raising taxes on the people at the bottom end of the scale — think about all the other things you have to do to make that viable. You're talking about — I mentioned this earlier, but — major institutional changes in terms of relief for low-income households who would have to take all of that in the neck, and even if you don't believe that that's the right thing to do, you'll be forced to do that politically. This is not something that you do over a three-week period because you've got some bad newspaper headlines.
MS. MAGIN: Talking about the —
MR. BERGIN: Elizabeth —
MS. MAGIN: Oh, sorry. Elizabeth Magin, I'm with Deloitte & Touche. Talking about the politics and the blood oaths that have been taken not to raise taxes, is there any thinking here that at least some of the people who've taken these blood oaths have taken them because of the prevailing winds, and if a crisis pops up down the road, and the prevailing winds change, do we see some of those members of Congress sort of revoking their blood oaths?
MR. GIDEON: Ken Gideon again. I'm forced to remember 1990. It was beyond the luxury tax debacles that people were serious enough about deficit reduction then to violate their blood oaths, maybe affecting a presidential election later, and to say the r-word for the first time in a long time.
In other words, the major feature of a '90 Act was an increase in rates.
MR. WEINBERGER: I've just got one more thing. Yeah, in response to that question, I do think times will change over — over time people's attitudes will change. I understand there's blood oaths on not raising taxes, but as — Congress, you well know, every decision you make in Congress is a relative decision, and it's not made in isolation. No one would vote to raise taxes, but whether it's to cut Social Security or Medicare or raise taxes or have a $600-billion deficit, everything — some decisions become easier over time. And I think as that relativeness changes, and we see Social Security and Medicare as the baby boomers start to retire in 2008 to really eat up more and more of the budget you're going to see attitudes, I think, start to ameliorate to some degree.
MR. OCHSENSCHLAGER: Tom Ochsenschlager with the AICPA. Tom, you mentioned that there was a lot of sensitivity to repeal the state and local tax deduction back in the 1986 Act, and we've talked about the fact that so many people now are starting to fall into Alternative Minimum Tax, but that deduction's not available. I wonder if that cuts both ways in some respects. It would make it perhaps a little less politically sensitive to repeal the state and local income tax under the current rules, and in fact, at one time there was the argument that that was — state and local taxes, the repeal would be unfair because some states didn't have state and local taxes, they didn't have the deduction. Now that we have a sales tax deduction, there would be some element of fairness, I guess, if — to repeal it. At least it would be across a broad base of taxpayers.
Would you care to make any comment? Is that a little less politically sensitive now than it was?
MR. DOWNEY: No. I mean, I think it's an interesting point that indirectly it's disappearing.
You could always let it completely and indirectly disappear as long as you don't make a full-scale assault at it because once you do it, then it becomes a different partisan, political activity. And Alan's right; I mean, it's much of a blue state issue, though — Ohio is a notable exception — but I think that it would still be very, very difficult to do.
I — let me just say one point. When Michael Graetz wrote, I guess a couple of years ago, a very interesting piece about his idea of how you keep some progressivity in the Code, you keep the estate and gift tax, and you'd substitute a Value Added Tax, and you would eliminate 100 million taxpayers from having to file income tax. And so it's — it was a blended proposal.
I think that with the right leadership, that something like that might be possible, but it would require such clear sacrifice from both sides, and as Mark both capably and ably pointed out, you know, circumstances changes the context of it, you know, saving Social Security, saving Medicare, it becomes all of one big grand scheme. But it would clearly require the Republicans giving something that they don't want to do — namely, the estate and gift tax and keeping rates at a higher level — and the Democrats acceding to some things that they clearly don't want to do. I mean, it — that to me would be a basis for some sort of compromise, but as you said — I mean, I don't want to sound pessimistic here, I — you know, I spent a lot of time up there, I talk to these men and women all the time; I don't get a sense that that would change. But specifically on the state and local taxes, I think you would have the same fury visited today on it that you had in the past, and it would be even better politically for the Democrats because even those who wouldn't necessarily have rallied to our cause will see this as an assault on the party and welcome the battle with great zeal.
MR. BERGIN: We have a few minutes left. Let me see if I can get out and off the table for just a second.
MR. AINSWORTH: Richard Ainsworth, Taxware. We might want to remember that if we were talking about securities regulation right now, before Sarbanes-Oxley, I don't think anybody could anticipate Sarbanes-Oxley right now. And it wasn't a gradual change, Sox, they — there was a problem, and they reached out and picked something up off the table. If the Value Added Tax was on the table at a time when something like that happened, you might well see a Value Added Tax.
SPEAKER: That's a good point.
MR. AINSWORTH: And plus, Graetz did have a pretty good idea I thought, but it was a European-style Value Added Tax on the credit invoices and stuff.
MR. MINARIK: I was going to say something to Mark, the notion that if the world changes, people can do things that they said they wouldn't do. You probably want to keep in mind that by all probability, for a Republican member of Congress, that is a career decision because if you don't lose to a Democrat in the next election, you will lose to a Republican primary challenger.
SPEAKER: Right, excellent point.
MR. MINARIK: So couple of — just a couple of other observations. On the point with respect to now, we've got a sales tax deduction, so therefore maybe if we cut back on the deductibility of state and local taxes, it would be more fair than it was in 1986. You do want to keep in mind that in 1986, we did have a sales tax deduction; it was eliminated by the 1986 Act. So — yeah. It is — on a broad disclaimer for those of us old folks at the table — and Ron made this point, I think, already — I can recall conversations in the period from 1981 to 1985 with people who worked very hard on the Tax Reform Act of 1969 and the Tax Reform Act of 1976 who told me that we had achieved the best of all possible worlds. There was no way that a major tax reform piece of legislation could possibly pass. There's a wonderful, brilliant academic from Wisconsin who began a book with the words — a book about the subject of tax reform — and the first sentence in the book was, "Major tax reform will never happen." I'm — we had a panel at the political science meetings a year after that — he was a brilliant guy, it was a wonderful conversation, but — it's easy to say — it's easy to be cynical about the possibility for change in the future, and I hope I continue to learn things before I achieve my stable long-run equilibrium. I just have to tell you that from the perspective of everything that I think we've learned, you look at the circumstances now, you look at the circumstances in 1986; it's a much bigger mountain to climb now, both in terms of the failure to construct the infrastructure, the absence of the ideas on the table — Alan mentioned the Bradley- Gephardt bill, I'll just note that in passing —
MS. SAWHILL: Bradley-Gephardt literate.
MR. DOWNEY: If it wasn't for the state and local stuff, I would have been for it.
SPEAKER: I'll talk to you about that.
MR. MINARIK: He's still willing to deal.
MR. DOWNEY: Fourteen percent was not enough.
MR. MINARIK: But it's a very different world; there's going to be a very different hill to climb this time.
MR. WEINBERGER: Can I just — as Joe said — I — in clarification to what I said, I don't think an individual member is going to change anything without the bipartisan cover that was mentioned before. I'm saying I think the parties will come together at some point because they'll have to. Maybe I'm the only eternal optimist in the group, but I do believe that.
And the other thing I'll just say — we mentioned Graetz, and we say that the Republicans would never be for that. But remember, in the outbacks of President — the first President Bush, they were leaving, there was a proposal put in the inbox of the new administration that was a Value Added Tax, and it was very similar to the Graetz proposal. And so there have been stranger things happen from a Republican administration.
MR. BERGIN: Good way to end this is on a note of optimism. We are out of time, and it flew.
I want to thank everybody here; this was terrific. A commercial timeout just for a second. We have copies of our product H&D out there; the editors, for the first time in several years, have put out an April 1st issue. It used to be a tradition with us; it might give you a chuckle, so please grab one on the way out.
I want to thank everybody here and especially our panelists. This was just terrific, and if I may, I want to give you all a round of applause. And let me remind you all that we're going to have several more of these, and you're all invited.
(Whereupon, at 11:05 a.m., the PROCEEDINGS were adjourned.)
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