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February 19, 2013
Tax History: Back to the Future of Tax Reform
by Joseph J. Thorndike

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by Joseph J. Thorndike

Summary by Tax Analysts®

In Tax History, Joseph J. Thorndike argues that tax reform as envisioned by President Obama seems to embrace an older definition that sees reform as a progressive redistribution of the tax burden.

President Obama styles himself a tax reformer. In his State of the Union address, he invoked the phrase "tax reform" three times -- enough to give it real prominence. "Now is our best chance for bipartisan, comprehensive tax reform that encourages job creation and helps bring down the deficit," he told the nation.

Not everyone was impressed. Tax experts, in particular, have been especially dubious. They insist that Obama's version of reform is nothing of the sort. Rather, it's deficit reduction dressed up as tax reform. Even more to the point, it's a particular type of deficit reduction -- one focused on raising tax burdens for the rich, either through rate increases or targeted base broadening.

Obama's own words seem to confirm that suspicion. In reciting the goals and benefits of tax reform, the president gave special prominence to his famous "Buffett rule." The United States needs a tax system that "ensures billionaires with high-powered accountants can't pay a lower rate than their hardworking secretaries," he said. (Prior coverage.)

Jacob Lew made a related point in his confirmation hearings last week for the job of Treasury secretary. "Tax reform is going to have to be done in an environment where, as we broaden the base, we both contribute to deficit reduction and hopefully we are able to lower the rates," he said. (Prior coverage.)

"Hopefully" doesn't quite do justice to the venerated mantra of "classic" tax reform: broaden the base and lower the rates. Real tax reform takes both. Indeed, you can't have one without the other and still call it tax reform (any more than you can tell your daughter that her PB&J will "hopefully" include some peanut-flavored substance).

The experts are right: Obama's tax reform isn't tax reform, at least as that term has been defined in recent decades. In particular, the Obama agenda -- both as articulated in his State of the Union speech and as demonstrated during his first term -- bears scant resemblance to the totemic reforms of 1986. Tax Notes editor Jeremy Scott made that point in a recent blog post for

    For Obama, domestic tax reform seems to mean repealing oil and gas tax preferences, capping deductions at 28 percent, ending tax preferences for corporate jets, and other relatively small-change proposals to raise revenue. Those are revenue raisers, not a reform proposal. None of it would simplify the code, and, as a plan, it doesn't really provide Congress with a grand vision, like Reagan had, for tax reform.

That criticism is valid, as far as it goes. But it doesn't go far enough. The definition of tax reform -- the one that Obama ignores and tax experts venerate -- is not exactly carved in stone. That version of tax reform can lay claim to a long pedigree, dating back at least to the 1950s. But it's never been uncontested, and only recently has it been politically ascendant.

Indeed, through at least the 1970s, a different sort of tax reform held center stage in U.S. politics. We could call it pre-classic, since its roots are far older than the Stanley Surrey/Treasury I/1986 definition that we take for granted in the pages of Tax Notes. The version of tax reform I mean dates back at least to 1913, and arguably much earlier.

And now it's back.

The Protean Ideal

Tax reform has evolved into one of the emptier platitudes of U.S. politics. Politicians support "tax reform" the same way they support "a strong national defense," "fiscal responsibility," and "pro-growth economic policies." It's a brave statement in search of a challenge. Is anyone ever against tax reform?

In fact, the only thing challenging "tax reform" is reality. Tax reform is defined by what it's not: It's not the tax system we have. It's not the compromised structure produced by democratic governance. It's the tax system we want to have, rather than the one we do have. But beyond that inchoate expression of dissatisfaction, tax reform qua tax reform has no inherent, timeless meaning. Rather, it derives its meaning from the political and economic context in which the phrase is used.

Last December, Clint Stretch wrote a thoughtful post for Capital Gains and Games on the meaning of tax reform. In recent statements of administration economic policy, the president "gave no hint of interest in individual income tax reform, at least as that concept has been understood in the last several Congresses," Stretch writes.

But as Stretch explains, that concept used to be understood quite differently. He situates his explanation in a much broader reading of U.S. political history, in which reform movements have been movements of social justice aimed at improving the lot of ordinary people. In the first half of the 19th century, those included abolition, universal suffrage, public school reform, prison reform, and temperance movements. The 20th century saw wage and hour, child labor, food and safety, anti-trust, fair trade, and civil rights reforms. None of those movements focused on lowering the burdens on the wealthiest or most successful in our society, and each was undergirded by a combination of populist and religious fervor.

Old Tax Reform

Stretch is absolutely correct. And as he points out, the tax version of reform that dominated much of the 20th century derived directly from the broader tradition of political and social reform.

Tax reform -- defined as the progressive redistribution of fiscal burdens -- was a vital force during the Civil War, when it prompted Congress to adopt the first income tax. Fifty years later, the same definition of tax reform drove ratification of the 16th Amendment and the subsequent enactment of the 1913 income tax law.

And it didn't stop there. The tax revisions of World War I -- dramatic changes that pushed the top bracket rate from 7 percent to 77 percent in just five years -- were all driven by the progressive understanding of tax reform. That was redistributive taxation, but of a special sort. It wasn't about redistribution of wealth or income. Rather, as Indiana University law professor Ajay Mehrotra argues in his coming book on World War I taxation, it was about the progressive redistribution of tax burdens.

Later, during the New Deal years, Franklin Roosevelt invoked a similar definition of tax reform to justify heavy taxes on the rich. Occasionally, Roosevelt seemed to suggest that wealth was too concentrated and that taxes should be used to spread it around. But more often, he focused on using progressive tax reform to spread the fiscal burden. As I describe in my recent book, Their Fair Share: Taxing the Rich in the Age of FDR, tax reform in the New Deal was all about making the tax system more progressive -- a task made even more pressing as the size, scope, and cost of U.S. government grew exponentially during World War II and the postwar decades. But almost always, that stated goal was to make the allocation of tax burdens more equitable, not to redistribute wealth within society.

As Stretch notes in his blog post, the definition of tax reform as a progressive redistribution of the tax burden remained alive and well even into the 1970s. "In the Tax Reform Acts of 1969 and 1976, the provisions scored as tax reforms generally increased the relative tax burden on higher-income individuals and on corporations," he writes.

That version of tax reform didn't put rate cuts at the center of tax reform. Indeed, they weren't really regarded as tax reform at all. As Stretch recalls, "rate reductions and increased standard deductions were scored separately as tax relief" during the late 1960s and early 1970s.

New Tax Reform

When did the definition of tax reform change? One answer would spotlight the 1950s, when a postwar community of tax scholars first began to articulate the benefits of pairing lower rates with a broader tax base. The poster child for that sort of tax reform is Surrey, although he had plenty of company in defining that approach.

But Stretch asks a different question: When did rate cuts become the essence of real reform? According to Stretch, it was 1986. "Coincident with the 1986 Act, Grover Norquist and others took the traditional notions of reform through the looking glass and turned tax 'reform' into a synonym for tax reduction or limited government," Stretch wrote.

Indeed, tax reform after 1986 came unmoored not simply from the older tradition of progressive burden redistribution but also from the midcentury version of Surrey-style reform. To the extent that postwar tax reform required both rate reduction and base broadening, the definition of reform took on a distinctly un-Surreylike quality in the 1990s and 2000s.

Increasingly, reform was almost wholly defined by rate cuts and only notionally by base broadening. "The commitment to lower rates as the essence of reform is seen in how reluctant proponents of reform have been to identify the 'loopholes and other special provisions' that they would limit or repeal in order to lower rates," Stretch contends.

Over the past four years, Obama has mounted a challenge to that Norquistian definition of tax reform. He has obviously and forcefully rejected the post-1986 definition of reform focused heavily on rate cuts. He has reached back even further, past the Surrey-style reforms of 1986.

Obama has been trying to revive the much older definition of tax reform as a progressive redistribution of the tax burden. Judged by its years of political ascendancy, that type of reform is the most successful of the bunch, or at least the most durable.

Friendly observers might call it "progressive tax reform." Less charitable critics might prefer "class warfare" or "soaking the rich." But whatever you call it, it's a type of tax reform every bit as genuine as the 1986 version that experts yearn for today. And it's a version that Obama seems very intent on reviving.

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