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The Tax Code


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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, Iím 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 nationís 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, thereís 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, thatís 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 likeAmericaís 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. Letís 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 donít you give us just a sampling,just so we can know what weíre talking about.

MS. SCHLAES: Well, a very important aspect to the book is thedegree to which taxation is hidden and complicated. And then thereísplenty 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 shouldnítbe needing professional preparers as much. Or people find themselvesin brackets they didnít expect to be in, and we have a code that ifyouíre left-handed on Tuesday it rewards you, if youíre right-handedon Wednesday, it punishes you. Often thereís 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. Itís 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 canít 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 youíre a great society Democrat andyouíre agreeing with this conservative who says the tax code isbizarre and complex, too complex.

MR. COHEN: But that assumes that I were king, and sheís assumingshe were queen, and she could rule. But you canít.

MR. STEUERLE: I think there are layers of complexity, and thatísthe 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 youíre taxing. You do distort behavior. Thatís 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 weíll fight. Some people believeprogressivity is important to help low income people. Some peoplelike flat rate tax systems because theyíre simpler. Those are bothlegitimate principles. You can compromise among them. The layer ofcomplexity thatís not needed, however, are those that really donítfit within any principle. Theyíre not even compromises amongprinciples. Theyíre 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 thatís 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 weíre working from Washington, that arenít necessarily so. Forexample, progressivity, youíll 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 itís 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, thatís right. But, I found many studies, whenI looked into this, dating back to the í50s, that Americans donítnecessarily understand progressivity, they donít 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 theyíre 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 theyíresupposed to do, which is fight for a flat tax. Theyíre afraid to saytheyíre opposed to progressivity.

MR. STEUERLE: First, Amity is right about several things.Progressivity is way oversold as a debate. WE often canít deal witha lot of other problems in the system, such as simplicity, becauseweíre always debating progressivity on both sides of the issue. Seehow we immediately jump to it here.

MR. WATTENBERG: Or as the Democrats say, fairness, thatís thesimpler word for progressivity.

MR. STEUERLE: So, weíll abandon everything else. Weíll abandon asimple tax code. Weíll abandon a tax code that taxes people withequal incomes equally. Weíll abandon all these things over someminor debate over progressivity. But just a couple of facts aboutprogressivity. If you look back around the early í60s, 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 itís 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, itís 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 thatís because you count in Social Securityand Medicare, and there youíre really buying a service. Youírebuying a pension. I mean, you havenít lot that money.

MR. STEUERLE: If youíre worried about distortions, if youíreworried about distortions, economists emphasize itís the last dollaryou earn that you want to look at the most, because thatís whereyouíre 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 OíNeill (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: Iíll put it another way. I do it in a comparableexample. You have a couple like this, single head of household onwelfare. Weíve 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? Itís 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, youíre not talking about a secret group,youíre 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 donít think so. Youíre talking about theHarris Poll from the í70s, they said, do you agree the bestgovernment is the government that governs the least? Well, in theí70s, 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 thatís --

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: Thereís 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, Iím 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, Icanít 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 youíve had Democratic presidents with DemocraticCongresses, youíve had Republican president with DemocraticCongresses. Youíve had almost every conceivable combination andpermutation, and yet taxes donít really get cut.

MR. COHEN: I donít believe she believes in democracy, becausepeople vote their pocketbooks. And I donít 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, weíve had this wonderful thinghappen, we have this historic prosperity, itís as big as theindustrial revolution, it is absolutely nothing to do withgovernment. Thatís 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 didnít spend 50 percent of tax revenuesduring the Cold War on military, you think weíd have Silicon Valley?

MS. SCHLAES: But very little from the í90s. 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 canít have it both ways.

MS. SCHLAES: Well, now they are. No, no, no, when they loweredthem in the late í70s, 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. Sogovernmentís 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 -- letís 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: Thatís correct, theyíre paying more in state taxes. Sheís 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 theyíve 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 theyíre quite right. The average American isnít 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. Theyíre the proximate demon, but the demonbehind the demon is the code.

MR. STEUERLE: I donít 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 donít justhave change, we have an accelerating rate of change, which is whypeople are so upset. Thatís why we have this IRS rage, this symptom. Last time, you know, this í86 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 í86 TaxReform Act, I can tell you some of it does remain.

MR. WATTENBERG: You were on the Reagan White House staff then?

MR. STEUERLE: Thatís correct, I was the economic coordinator ofthe Treasuryís effort, which was the proposal that went out that ledto the Tax Reform Act of í86.

MR. WATTENBERG: And did the Reaganites cut up their own tax code? Thatís 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 weíreback.

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. Itís still there, but itís 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 canít 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-- weíre all agreed, the government needs some money. Amity saysitís taking too much, Sheldon might say itís about right. But isnítthere any way that people who can send a man to the moon canít designa simple code that people understand?

MR. COHEN: Itís called discipline. There is no --

MR. WATTENBERG: But thatís 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 youíre going to keep thebasic structure.

MR. COHEN: With Amityís amendment, youíre going to have constantchange. You canít stop them from changing it.

MS. SCHLAES: No, no. Well, a good solution is this, theproximate problem is the lobbies. You say, oh, letís have a flattax, and the home mortgage deduction lobby, the realtors, forexample, says, no, no, no.

MR. WATTENBERG: Whatís 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 youíll find is very, verymany people, indeed, will come out better. Theyíll 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 itís not a flat tax. Thatís tworates.

MS. SCHLAES: Right, but itís 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 donít 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 donít, thatís not a problem.

MR. COHEN: Well, if itís not a problem, then itís not a problemat the moment.

MR. WATTENBERG: Hold on one second. We are overtime. Iím 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 donít 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, Iím 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.)











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