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September 1995
Volume 13, Number 9


Tax Reform or Shakedown?
Mark Thornton

The Republican Congress has had nine months to reduce taxes. Even one percent would be appreciated. Instead, we get convoluted plans that will be "revolutionary" at some point in the far-distant future. Enough of welfare reform. It's time to reform taxes. 

The old ideas are out. Forget cutting the capital-gains tax, increasing the child deduction, much less reducing rates themselves. Instead, we are titillated by talk of eliminating the IRS, filing our taxes on a postcard, and scrapping the income tax altogether. Even the notorious taxers Dick Gephardt and Bob Dole have joined the tax reform game. 

I've just returned from a visit to the Belly of the Beast. I heard much of this talk firsthand. My advice is: hold on to your wallet. Tax reform, you see, has taken place, on average, every 30 months since the income tax was enacted in 1916. The long term trend is always the same. Taxes go up. 

Some tax reforms are better than others, but all tax reforms mean more business for Congress in the form of increased campaign contributions. Tax reform is particularly lucrative for the members of the powerful House Ways and Means Committee and Senate Finance Committee, who get to write and rewrite the tax codes. 

Changes in the tax code have dramatic effects on the economy. Individuals and their interest groups in Washington are willing to pay large sums of money to make sure the changes that do occur are in their favor. Next to spending government loot on their friends and supporters, tax reform is one of the most important products that politicians sell. 

Small changes in deductions, rates, or depreciation schedules can mean millions if not billions of dollars to affected industries. It's no wonder that hundreds of bills pass through Ways and Means and its subcommittees. Members of those committees receive more than their share of campaign contributions. 

Representative Bill Archer from Texas is chairman of Ways and Means. I heard him speak in Washington. He proposes to do away with the income tax and replace it with some as yet unidentified form of national consumption tax. After demonstrating the "efficiency" of his proposal, he predicted that he would be the chairman of this committee until the year 2000. 

All we have to do is "work with him" so that we can achieve this important result. The fact that he is not "wedded" to any particular replacement of the income tax means that you too can play an important role as long as you're willing to "play ball" with Bill. 

There's an old-fashioned word for this: shakedown. We either "contribute" to his efforts or we will be left out in the economic cold. There would be many winners and losers from imposing a consumption tax (and you can bet your bottom dollar that it would add to, not replace, the income tax). Both the potential winners and losers would spend enormous sums trying to influence the committee and the entire Congress. By raising the stakes Congress can increase contributions. 

Then there's Richard Armey's "flat tax" proposal, which would eliminate all deductions and charge a single tax rate on income. He promoted his proposal based on blackboard efficiency (fewer accountants, less paperwork, more postcards, etc.). His debate with Archer (who had already left the room for another appearance) was couched in terms of whose proposal was more likely to pass. 

It was a strange sight indeed to see the two politicians posing their "business" in the form of an academic lecture on economic efficiency. It was, however, even more distressing to realize that they failed to mention tax reduction and that their proposals were nothing but veiled calls for increased "support" for themselves and their careers in politics. 

The business of Congress is that you do well by doing bad. If you go for either the flat tax or the national consumption tax, you might get a seat on Ways and Means. If all you favor is the "lower tax," you are out in the cold. 

Neither is this game partisan. Greg Laughlin of Texas was a liberal Democrat who voted 80% with Clinton. Then he became a Republican, thanks to the attractive offer of a seat on--you guessed it--the House Ways and Means Committee. At some price, political philosophy is always for sale in Washington. 

If Republicans really wanted to reduce the burden of taxes, they could cut rates immediately. Because of fear of voter reprisal, it would pass with ease and the President would sign it. They could do the same thing every year until the tax was abolished. 

Politicians would have two problems with this: no citizen would have to contribute more money, and the politicians would have less money to spend on government programs, handouts, pork barrel projects, etc. Nothing in the trough, in other words, for them and their friends. 

Tax reform is like the shell game played on the streets of New York City. Every time the customer puts down his bet, he has every confidence that he will win. Every time it is the dealer who goes home richer as a result. 

The "revolutionary" ideas of the Republicans have allowed them to raise the stakes. But the game is the same, and the average American is always a loser. In Washington, D.C., that's just business as usual.


Mark Thornton is the O.P. Alford III scholar at the Mises Institute and teaches Economics at Columbus State College


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