The Many Meaning of Tax Reform
As I watch the debate in Washington around “tax reform,” I can’t help but think of this conversation between Humpty Dumpty and Alice in Through the Looking Glass:
"When I use a word," Humpty Dumpty said in rather a scornful tone, "it means just what I choose it to mean -- neither more nor less."
"The question is," said Alice, "whether you can make words mean so many different things."
"The question is," said Humpty Dumpty, "which is to be master - - that's all."
We are having a Through the Looking Glass moment in Washington as everyone throws around the words “tax reform” while assigning their own meanings to them. Ironically, this is all occurring while we seek to avoid the real possibility that our Humpty-Dumpy budget could fall off right off the cliff.
Since the elections, President Obama has shown a sudden interest in individual “income tax reform.” But, as recently as late October, in his publication, “New Economic Patriotism: A PLAN FOR JOBS & MIDDLE-CLASS SECURITY,” the Presidential gave no hint of interest in individual income tax reform, at least as that concept has been understood in the last several Congresses. There, the tax reform debate has been framed as an effort to lower rates and, by the way, broaden the tax base to fund those lower rates. 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.
Clearly, President Obama is not committed to further across the board rate cuts. So, why his sudden interest in tax reform? I suspect that President Obama has a more traditional understanding of the word reform. In U.S. history, reform movements have been movements of social justice aimed at improving the lot of ordinary people. In the first half of the 19th Century, these 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 these 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.
In the area of taxation, the label of reform has been used sparingly, but until recently generally in a manner consistent with its historical use. For example, 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. In contrast, rate reductions and increased standard deductions were scored separately as tax relief. Our forbearers saw the share of taxes paid by higher income individuals as an important issue of fairness. They would not have seen the issue of top tax rates, apart from the distribution of tax burdens as an issue of justice or reform. Similarly, no populist or traditional religious movement would sign-on to limit high tax rates as a matter of fairness to the ordinary citizen or as a matter of conscience.
So what happened to our language? 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. Since then, we have lived in a policy world that lacks a precise vocabulary to describe tax changes. This almost certainly will not change. We can be sure that the next significant tax bill will be labeled as tax reform regardless of its content so that politicians can claim an accomplishment.
For taxpayers asked to support tax reform, however, the through-the-looking-glass quality of the tax reform conversation should suggest caution and the need for more honest and realistic discussion. The combination of our military commitments and our entitlement promises, even after reductions are made to them, will require federal revenues at higher than the 18 to 18.5 percent of GDP that typified tax collections in the last three decades. This fact is why the Simpson-Bowles plan and the Domenici-Rivlin plan called for real tax increases to 20.6 and 21.4 percent of GDP by 2020. Continuing to believe that tax reform is really about lower taxes and smaller government distracts us from the central issues of the deficit and could send Humpty Dumpty crashing to the ground and the country down the rabbit hole.