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« Back to The Tax Code main page    Transcript for: The Tax Codetranscript.715.html ANNOUNCER: Brought to you in part by ADM, feeding the world is thebiggest challenge of the new century, which is why ADM promotessatellite technology to help the American farmer be even moreproductive. ADM, supermarket to the world. Additional funding isprovided by the John M. Olin Foundation, the Lilly Endowment, theLynde and Harry Bradley Foundation, and the Smith RichardsonFoundation. (Musical break.) MR. WATTENBERG: Hello, I’m Ben Wattenberg. Tax time, it alwayschurns up a lot of strong feeling, and one of our guests, AmitySchlaes of the Wall Street Journal, claims to understand just howAmericans feel about taxes. She discusses it in her provocative newbook, The Greedy Hand, how Taxes Drive Americans Crazy and What To DoAbout It. She is joined on our panel by Gene Steuerle, a senior fellow atthe Urban Institute and co-author of The Government We Deserve; andSheldon Cohen, former chief counsel and Commissioner of the InternalRevenue Service under President Lyndon Johnson, and now a partner inthe form of Morgan, Lewis and Bockius (sp). The topic before the house, how greedy is that greedy hand, thisweek on Think Tank. (Musical break.) MR. WATTENBERG: Most Americans, most all Americans are fed upwith the Federal Tax Code. In truth, this goes with the territory. After all, America was a nation born out of a tax revolt, no taxationwithout representation was the rallying cry of Colonists fed up withKing George. 125 years after the nation’s founding, and afterdecades of argument, the United States ratified the 16th Amendment,creating a federal income tax. And when it started in 1913, the taxcode was a mere 14 pages long. In the time since, America has grownfast, but the tax code has grown faster, much faster. It is now over17,000 pages long. Today, unlike in Colonial times, we have anabundance of representation, but some would argue, an over abundanceof taxation. But is this, as Justice Oliver Wendell Holmes oncesaid, the price we pay for a civilized society? Well, there’s anargument, and it depends on who you ask. One side points out thatalmost 60 cents of every dollar goes to highly popular and importantprograms, such as Social Security, medical care, and nationaldefense. The rest, they say, goes to finance national parks, airtraffic controllers, highways, and much else of real value toAmericans. And, besides, they say, Americans are taxed nearly asmuch as citizens of other advanced nations. But, claim others, thetotal tax burden, that’s federal, state and local taxes combined, hasnever before taken a great bite of personal income. These criticssay that in a time of budget surplus, the government should give somemoney back to the taxpayers. One thing all sides agree on is thatthe current tax code is way too complicated. After all, Americansspend over 5 billion hours per year preparing their taxes. And,according to Amity Schlaes in her new book, Americans paid $100billion more in taxes than they needed to in 1997 because ofconfusion and uncertainty. Perhaps a big complex government likeAmerica’s necessarily ends up with a big complex tax system. Perhapsnot. What are some of the possible alternatives? To answer these and other questions, Think Tank is joined by ourexpert panel. Amity Schlaes, thank you for joining us; GeneSteuerle; Sheldon Cohen. Let’s divide this into three parts, one,about the tax code; two, about whether government is spending toomuch, as I think Amity believes; and, third, what should we do aboutit. Your book, the beginning of your book, has a catalogue of horrorstories about the tax code. Why don’t you give us just a sampling,just so we can know what we’re talking about. MS. SCHLAES: Well, a very important aspect to the book is thedegree to which taxation is hidden and complicated. And then there’splenty of evidence people feel that. Today, for example, more peopleturn to professional tax preparers than they have before at any pointin our history. And this when we have Turbo Tax, when we shouldn’tbe needing professional preparers as much. Or people find themselvesin brackets they didn’t expect to be in, and we have a code that ifyou’re left-handed on Tuesday it rewards you, if you’re right-handedon Wednesday, it punishes you. Often there’s perverse result. Thefamous marriage penalty, the high end of the scale, bottom end of thescale, couples find that when the woman works she pays a tax higherthan she might pay if she were single. Women have a tax bracket oftheir very own, married women who work. It’s not right, and a lot ofit is because of the complexity, a big problem. MR. COHEN: I testified in 1986, when the 1986 act, which wasallegedly for simplification, was working its way through, Itestified against many of the proposals, including the elimination ofthe marriage supplement, that is the married person got up to $3,000credit against the tax. And I remember my exact words. I testifiedthat any bill that rewards me, lowered my taxes, and hurts mychildren can’t be good for America. And my children had child caredeductions, they had the marriage double workers families, and avariety of things of that nature. Now, anytime you change theexisting structure, it is complicated. So that we start with theproblem that Amity mentions, that is that the code is complex, butput on top of that the fact that the Congress, whether it be Democrator Republican, really makes no difference, just about every year, orcertainly every other year, puts on hundreds of changes, many of themminiscule, many of them targeted to very specific problems. Thatmeans that 100 million people have to read that, because thoseinstructions have to include everybody. MR. WATTENBERG: So, here you’re a great society Democrat andyou’re agreeing with this conservative who says the tax code isbizarre and complex, too complex. MR. COHEN: But that assumes that I were king, and she’s assumingshe were queen, and she could rule. But you can’t. MR. STEUERLE: I think there are layers of complexity, and that’sthe reason the debate is so hard. The first layer is that as soon asyou tax, you have to go in, you have to measure what you’re taxing. You do distort behavior. That’s the first layer. MR. WATTENBERG: You distort behavior. MR. STEUERLE: You distort. You will inevitably distort somebehavior. The second layer is that we often have legitimateprinciples on both sides over which we’ll fight. Some people believeprogressivity is important to help low income people. Some peoplelike flat rate tax systems because they’re simpler. Those are bothlegitimate principles. You can compromise among them. The layer ofcomplexity that’s not needed, however, are those that really don’tfit within any principle. They’re not even compromises amongprinciples. They’re the types of things that Sheldon just mentioneda second ago, where special interests come in, get a special taxbreak here, where we go way beyond any bounds of what we think wouldbe legitimate under any principle. And that’s the layer I think thatmost Americans object to the most. However, reformers always promiseto get rid of all of it. And so, we always end up back in thisdebate about whether we like taxes or not. MS. SCHLAES: Well, are we getting to reform already? I stillwant to talk about their problem. MR. WATTENBERG: Unlike the tax code, we are not rigid here. MS. SCHLAES: There are a lot of things we assume, particularlywhen we’re working from Washington, that aren’t necessarily so. Forexample, progressivity, you’ll have a Democratic lawmakers who willsay, oh, everyone wants progressivity. Republican lawmakers will go-- MR. WATTENBERG: Progressivity means that people have higher --just tell us what progressivity means, not everyone knows. MS. SCHLAES: Well, interestingly, progressivity has a name thatsounds like progress, but many people argue it’s the opposite ofthat. It says, the more you earn, the higher rate you pay, graduatedrate structure. Diminishing marginal returns is another way to putit. MR. STEUERLE: Can I just make a quick amendment here, it alsomeans the lower your income, the lower the rate you pay. MS. SCHLAES: Yes, that’s right. But, I found many studies, whenI looked into this, dating back to the ’50s, that Americans don’tnecessarily understand progressivity, they don’t necessarily agreewith it. For example, Blueprint, the New Democratic magazine, foundthat only one in five Americans believed it was the job of governmentto redistribute wealth. And fewer Republicans, naturally, feel that. So you have one mind set in Washington that says, we have to haveall these principles. Complexity, we need it for fairness. Orprogressivity, everybody agrees with it, even Republicans are afraidto not be for progressivity. You know, they make a flat tax, whichis close to the other end, but they’re afraid of it, so they backaway from it. For example, one reason we have this marriage penaltydebate, Ben, is because the Republicans are afraid to do what they’resupposed to do, which is fight for a flat tax. They’re afraid to saythey’re opposed to progressivity. MR. STEUERLE: First, Amity is right about several things.Progressivity is way oversold as a debate. WE often can’t deal witha lot of other problems in the system, such as simplicity, becausewe’re always debating progressivity on both sides of the issue. Seehow we immediately jump to it here. MR. WATTENBERG: Or as the Democrats say, fairness, that’s thesimpler word for progressivity. MR. STEUERLE: So, we’ll abandon everything else. We’ll abandon asimple tax code. We’ll abandon a tax code that taxes people withequal incomes equally. We’ll abandon all these things over someminor debate over progressivity. But just a couple of facts aboutprogressivity. If you look back around the early ’60s, the systemwas essentially a flat rate system for 90 percent of the people. Itwas only the top 10 percent of people who started paying the muchhigher rates. The rates went up to much higher levels. MR. WATTENBERG: This would be the 1960s? MR. STEUERLE: The early 1960s, 90 percent of the people eitherpaid at a zero rate or a flat rate of 20 percent in the income tax. And the Social Security tax was only three percentage points, or 6percentage points if you combine together the employee and employerrate. MR. WATTENBERG: And now it’s 12-1/2. MR. STEUERLE: 15.3 in Social Security. But what happened overthat period of time is, we did move into the tax system to muchhigher rates, the upper middle class. That is, whereas before it wasonly the top 10 percent of people who started paying the higherrates, we moved it down to being the top 20, and the top 25 percent. And that did have an impact. In fact, it’s one reason why RonaldReagan won back in the late 1970s when that rate went up. The secondfact, real quick, the highest tax rates are paid by very low incomepeople when you combine together the effect of both the tax systemand the welfare system, because they start losing their earned incomecredits, and they lose their food stamps, and they pay higher taxesand Social Security deductions. MR. WATTENBERG: But that’s because you count in Social Securityand Medicare, and there you’re really buying a service. You’rebuying a pension. I mean, you haven’t lot that money. MR. STEUERLE: If you’re worried about distortions, if you’reworried about distortions, economists emphasize it’s the last dollaryou earn that you want to look at the most, because that’s whereyou’re making your choice right now. And the welfare populationfaces the highest tax rates of anybody as they lose those benefitsand they move into the tax system. I think Amity agrees with that aswell. MS. SCHLAES: Oh, yes. Well, in The Greedy Hand we have a classicmarriage penalty couple uncovered by June O’Neill (sp) when she wasCBO director. MR. WATTENBERG: This is Congressional Budget Office. MS. SCHLAES: Congressional Budget Office. A man earns $10,000,his girlfriend earns $10,000, they have four children. Between themthey decide to get married, household income $20,000. Their taxburden -- MR. WATTENBERG: They had four children before they were married. MS. SCHLAES: Before they got married, they do the right thing. The Christian Coalition is happy. MR. WATTENBERG: They do the right thing a little late. They dothe right thing a little late. MS. SCHLAES: The Christian Coalition is happy, they get married. They see their tax burden go up over $3,000. MR. STEUERLE: I’ll put it another way. I do it in a comparableexample. You have a couple like this, single head of household onwelfare. We’ve now pushed her or him, but usually her, to working,making about $10,000 a year. She marries somebody else making$10,000 or $15,000 a year, their combined income will fall by 30percent. MR. WATTENBERG: Most of the argument against complexity of thetax code, the serious, really, pungent, ferocious argument, comesfrom people who want less government. Is that a hidden agenda of taxreformers? It’s not just to make it simple, but to make it simpleand lower, to starve the tumor so this terrible government of ours -- MS. SCHLAES: But, Ben, you’re not talking about a secret group,you’re talking about most people. In The Greedy Hand, I talk aboutthis famous -- MR. COHEN: If it was most people, it would have happened. MS. SCHLAES: No, I don’t think so. You’re talking about theHarris Poll from the ’70s, they said, do you agree the bestgovernment is the government that governs the least? Well, in the’70s, most people did not agree with that. We were in a biggovernment moment. The same question again asked by a Democraticgroup, this Blueprint magazine, do you agree the best government isthe government that governs the least? A majority agrees with thattoday. So that’s -- MR. WATTENBERG: Ask them the next question is, do you want to cutMedicare, Social Security, and defense? Those are the three biggestthings in our budget, and 80 percent of people on Medicare and SocialSecurity go, what are you crazy. So, I mean, there is complexity inthis complexity. MS. SCHLAES: There’s complexity. In The Greedy Hand I tell aboutan episode from the Honeymooners, Jackie Gleason, Ralph the busdriver, called the income tax, which you can buy on Amazon.com,because I did, Ralph is very upset he owes $10 to the government. Hecomplains about the complexity of the code to Alice. She yells athim. They have one of their fights. Then he has a big classicchange of heart. He says to Alice, oh, we ought to give all ourmoney to the government. Alice, I’m so sorry, we owe this governmenteverything. And he kind of cries, and the strings play, just like italways is in the Honeymooners. And I saw this episode, and I said, Ican’t imagine this airing today in our post-Seinfeld culture, becausenowadays we have nothing like that consensus. This was an episodethat was made during the Korean War. So there was a national view ofwhat we should be doing, we should be fighting the Korean War. Andthis is the beginning of the interstate highway system. MR. WATTENBERG: If the consensus is so much against biggovernment, and you’ve had Democratic presidents with DemocraticCongresses, you’ve had Republican president with DemocraticCongresses. You’ve had almost every conceivable combination andpermutation, and yet taxes don’t really get cut. MR. COHEN: I don’t believe she believes in democracy, becausepeople vote their pocketbooks. And I don’t always agree with whatthey vote, but that group of folks down there, that 535 people up onthe Hill, represent us, and they do what we want to, more often thanthey should. Occasionally, they ought to vote their own conscience. MS. SCHLAES: Sheldon, here we are, we’ve had this wonderful thinghappen, we have this historic prosperity, it’s as big as theindustrial revolution, it is absolutely nothing to do withgovernment. That’s why people laugh at the Al Gore joke that -- themistake, this faux pas that he made where he said he invented theInternet, because people can tell that government wishes it inventedthe Internet. MR. WATTENBERG: You say it had nothing to do with government? Imean, if the government didn’t spend 50 percent of tax revenuesduring the Cold War on military, you think we’d have Silicon Valley? MS. SCHLAES: But very little from the ’90s. It has to do with --you know, you can argue it comes from lower tax rates, when theylowered tax rates in the late 1970s, the Silicon Valley -- MR. COHEN: But you just argued that taxes are higher than ever,you can’t have it both ways. MS. SCHLAES: Well, now they are. No, no, no, when they loweredthem in the late ’70s, that helped Silicon Valley to lay the roots ithas today. And the prosperity that we have makes us happy, and maybewe might -- this is called the wealth effect, maybe we might toleratea little more because, hey, your 401(k) is growing at 20 percent. Sogovernment’s take bothers us less. Tax reform comes in recession. We all know this. But people are very disillusioned about taxes. MR. WATTENBERG: There was a study -- let’s talk to that. Therewas a study recently, I guess commissioned by the Washington Post,and conducted by the accounting firm of Deloitte and Touche and itsaid, and I quote, 'Americans across the economic spectrum will payless of their income in federal taxes than they did 20 years ago.' MR. COHEN: That’s correct, they’re paying more in state taxes. She’s really lumping peaches and pears, and she gets a result. Statetaxes are much higher, but the federal taxes are lower. MS. SCHLAES: The federal taxes as a share of the economy arehigher than they’ve been at any point since 1944. In the economicreport of the president it says that. MR. STEUERLE: The average tax rate for all Americans has gone upin the federal tax, and it is at an all-time high. However, thedifferential between the all-time low and the all-time high is verylittle, because federal taxes for the most part have been relativelyconstant on average. What has raised them in the current period isthat the income distribution has become much more unequal, and wehave a few people at the top who are paying much, much largerpercentage of their incomes in taxes. So, you can get these dualresults, and they’re quite right. The average American isn’t payingmore in taxes, but the average tax rate across all Americans,including the richest of Americans, is at an all-time high. The twoexist coterminously. MR. WATTENBERG: Is the IRS, the Internal Revenue Service, arethey the villain in this story? MS. SCHLAES: No. They’re the proximate demon, but the demonbehind the demon is the code. MR. STEUERLE: I don’t think anybody here would say the IRS is theproblem. The IRS tries to administer what the policymakers -- whatthe Congress and the president give them. MR. WATTENBERG: The IRS, as I understand it, actually hasin-house debates with heavy contribution from people who are tryingto protect the taxpayer. MR. COHEN: Oh, absolutely. The interesting thing, oneillustration, there was a time when Lyndon Johnson decided we oughtto suspend the investment credit for a year because we had a littleinflation, and it was heating up. And so, we sent up a one-page billto the Congress. You will suspend the investment credit on day one,you will reimpose it, you will reallow it on day 365. The bill cameback 40 pages. The bill came back 40 pages because the airlineindustry needed something. Airliners take five-six years to build,and each one lined up with his exception. And Congress being what itis, the representative of groups, was susceptible to the lobbying ofeach particular group, and the IRS got back a 40-page document withexceptions for 20 different industries, which it then had to figureout how to administer. MR. WATTENBERG: Now, just one second. Speaking of the late,lamented Lyndon Johnson, he had a habit, as you know, Sheldon, atabout this time in a conversation, he would sort of look at you thatway and say, therefore what? That was his line. Therefore what? MR. COHEN: Therefore, discipline in the Congress. MR. WATTENBERG: What should -- MS. SCHLAES: Therefore what? MR. WATTENBERG: No, what should we do? You have a -- MS. SCHLAES: Therefore what? Therefore what? MR. WATTENBERG: In The Greedy Hand, you have a list of things weshould do. One of them is to have a constitutional amendment neverto allow federal taxes to go above 25 percent; is that right? MS. SCHLAES: I have five or six principles that I lay out. MR. WATTENBERG: Can you rattle them off really quickly? MS. SCHLAES: One is that taxes need to be simple. They need tobe visible. They need not to change a whole lot. Now we don’t justhave change, we have an accelerating rate of change, which is whypeople are so upset. That’s why we have this IRS rage, this symptom. Last time, you know, this ’86 experience was a very bitterexperience. MR. WATTENBERG: 1986. MS. SCHLAES: 1986, because the Republicans and Democrats togetherworked so hard to pass the imperfect but important tax reform and itwas turned to dust by a Republican, by the tax cutting party, withinfour years. MR. STEUERLE: As someone intimately involved in the ’86 TaxReform Act, I can tell you some of it does remain. MR. WATTENBERG: You were on the Reagan White House staff then? MR. STEUERLE: That’s correct, I was the economic coordinator ofthe Treasury’s effort, which was the proposal that went out that ledto the Tax Reform Act of ’86. MR. WATTENBERG: And did the Reaganites cut up their own tax code? That’s what Amity says. MR. STEUERLE: Well, interestingly enough, the tradeoff then wasfor lower rates, for base broadening and for lower rates. And someof that was achieved. We got rid of about 11 or 13 different creditsor provisions which had never been achieved before. MR. COHEN: And they put in now a half a dozen more, so we’reback. MR. STEUERLE: At the same time, there were a lot of compromisesmade that added to complexity. But we did, for instance, reducedramatically the extent to which taxpayers got involved in taxshelters. Today, still, that part of reform remains. The draft tofind out from your account and your lawyer the most intimate types ofshelters is less. It’s still there, but it’s less. MR. WATTENBERG: The Chairman of the House Ways and MeansCommittee, Bill Archer, said a couple of years ago that he has givenup doing his own tax return because he can’t understand the bloodything. And in point of fact, you see these pictures of regulations,literally that high, six times as long as the Bible, you all knowthose horror stories. And it seems as if, you know, the government-- we’re all agreed, the government needs some money. Amity saysit’s taking too much, Sheldon might say it’s about right. But isn’tthere any way that people who can send a man to the moon can’t designa simple code that people understand? MR. COHEN: It’s called discipline. There is no -- MR. WATTENBERG: But that’s not a code. MR. COHEN: It is. It is. MS. SCHLAES: You know, I have a -- MR. COHEN: The Chairman of the Ways and Means Committee who caresabout complexity, and who will hold down -- MR. WATTENBERG: But that presupposes you’re going to keep thebasic structure. MR. COHEN: With Amity’s amendment, you’re going to have constantchange. You can’t stop them from changing it. MS. SCHLAES: No, no. Well, a good solution is this, theproximate problem is the lobbies. You say, oh, let’s have a flattax, and the home mortgage deduction lobby, the realtors, forexample, says, no, no, no. MR. WATTENBERG: What’s the solution? MS. SCHLAES: Steve Moore (sp) of the Cato Institute has somethingcalled the alternative flat tax, and he lets you run the numbers onyour current form, and you can see how you come out with your homemortgage deduction, and if you feel you need to keep it, you can justuse the current system. Or you can try and run the numbers for yoursame return, but with the flat tax, 20 percent, 21 percent, and seewhich gives you a better bottom line. When do you have to pay lessto government. And you pick. And what you’ll find is very, verymany people, indeed, will come out better. They’ll have to paygovernment less when they pay the flat tax. MR. WATTENBERG: And the flat tax would eliminate a massive amountof complexity. MS. SCHLAES: The flat tax would be a rate like 20-22 percent, butwith a big exemption. The first $36,000 of income under some of thecurrent plans would be exempted. MR. STEUERLE: Which really means it’s not a flat tax. That’s tworates. MS. SCHLAES: Right, but it’s just code, flat tax is what theycall it. Anyway, this gives people an option to try where they dobetter. And a lot of people will find they don’t need the homemortgage deduction, or whatever else, the charitable deduction, orwhatever else has prevented reform in previous debates. MR. COHEN: And I suggest that to compute it twice is acomplexity. MS. SCHLAES: If you don’t, that’s not a problem. MR. COHEN: Well, if it’s not a problem, then it’s not a problemat the moment. MR. WATTENBERG: Hold on one second. We are overtime. I’m goingto ask you each for a simple answer to a simple question. Putyourself in a time machine and go out 10 years. Will the tax code,the federal tax code be substantially simpler? MR. COHEN: I hope so, but I don’t have any reason for that hope. MR. STEUERLE: I seriously doubt it. MS. SCHLAES: You bet. MR. WATTENBERG: I am with you on that. Thank you, Gene Steuerle, Amity Schlaes, and Sheldon Cohen. Andthank you. For Think Tank, I’m Ben Wattenberg. ANNOUNCER: We at Think Tank depend on your views to make our showbetter. Please send your questions and comments to New River Media,1150 Seventeenth Street, Northwest, Washington, D.C. 20036, or emailus at thinktank@pbs.org. To learn more about Think Tank, visit PBSOnline at www.pbs.org. And please let us know where you watch ThinkTank. This has been a production of BJW, Incorporated, inassociation with New River Media, which are solely responsible forits content. Brought to you in part by ADM, feeding the world is thebiggest challenge of the new century, which is why ADM promotessatellite technology to help the American farmer be even moreproductive. ADM, supermarket to the world. Additional funding isprovided by the John M. Olin Foundation, the Lilly Endowment, theLynde and Harry Bradley Foundation, and the Smith RichardsonFoundation. (End of program.) Back to top  Think Tank is made possible by generous support from the Smith Richardson Foundation, the Bernard and Irene Schwartz Foundation, the Lynde and Harry Bradley Foundation, the John M. Olin Foundation, the Donner Canadian Foundation, the Dodge Jones Foundation, and Pfizer, Inc. ©Copyright Think Tank. All rights reserved. 
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