- The Washington Times - Tuesday, April 20, 2010

ANALYSIS/OPINION:

Tax day was last week, and the following words were uttered longingly by many politicians: It’s time we had tax reform.

Well, I was there 24 years ago when Congress really did reform the entire income tax system. At the time, as a young Wall Street Journal reporter, I referred to the legislation as tax overhaul because “reform” is in the eye of the beholder.

Call it what you will, though, tax reform these days will not be easy, just as it was a struggle nearly a quarter-century ago. In fact, it probably will be harder to achieve these days, for plenty of reasons.

First, lawmakers love to say that they want a tax system that is both simple and fair. In fact, you cannot have both.

Almost everyone agrees that it’s only fair to have incentives in the law to encourage charitable giving and help people pay the interest on their mortgages.

But any simplified system would have to eliminate both of those breaks along with hundreds of others. A simple system would have no or very few exceptions and benefits and very low tax rates.

So, while fair and simple sounds like a great combination, it can’t be done.

Second, the Tax Reform Act of 1986 passed in part because the tax system was a serious mess and Americans knew it.

Corporations were paying very little tax and often got refunds while average Americans paid a healthy chunk of their income to Uncle Sam. Stories about tax sheltering were rampant at the time, and the public was on the verge of rebellion.

Without voluntary compliance, the income tax would fall apart, and we were on the verge of having that happen. Congress had very little choice but to act to preserve the federal government.

What’s more, the public was incensed about the inequities and was determined to push for change.

Currently, many citizens are mad about being highly taxed, but the entire system does not appear to be on the verge of collapse, nor is it in reality. Absent such a crisis or even a perceived crisis, a wholesale rewrite of the tax code seems unlikely, given the many opponents of change there are in the world.

Third, a remarkable consensus was formed back then about how to repair the income tax. It borrowed from the Republicans (lower rates) and from the Democrats (fewer special tax breaks) and the result was a blend that lawmakers from both parties could accept.

In addition, champions for the measure came from the highest level from both parties. The Democratic chairman of the House Ways and Means Committee, Dan Rostenkowski, linked arms with the Republican president, Ronald Reagan, and bulled the legislation through Congress in a way that does not even seem possible in these polarized times.

Indeed, partisanship is at a new high, and finding a new consensus is hard to imagine. What’s more, the balance between low rates and fewer deductions was possible in part because there was not at the time a demand for more revenue. The whole package was designed to be “revenue neutral,” neither raising revenue nor losing any.

These days, huge budget deficits demand that whatever change is made in taxes should increase revenue. Why do anything that’s revenue neutral when the government is in the red by a trillion dollars a year?

That fact puts the 1986 consensus out of whack with the current realities and probably makes the old compromise unworkable.

Fourth, organized interests were divided in 1986, a schism that is unlikely to happen again. Part of the business world wanted lower rates, and another part wanted to keep the rates where they were in order to hang onto the tax benefits that helped them.

The split in the business community weakened opposition to the legislation enough to allow it to pass. Business executives are not likely to allow that to happen again.

Fifth, the budget shortfalls are so immense these days that the most likely fix will come in the form of an add-on tax. Senior officials in Washington already are talking publicly about a value-added tax (VAT).

Such a consumption tax easily would raise billions of dollars - too easily from the perspective of many.

What’s more, adding a tax would not require an overhaul of the kind that happened so long ago.

Indeed, imposing a VAT not only does not require an overhaul of the law but probably is not what most veterans of 1986 would call reform, either.

Jeffrey Birnbaum is a Washington Times columnist, Fox News contributor and president of BGR Public Relations.


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