Tax Policy Special Report
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The Rich Get Richer

By Robert Kuttner
Monday, October 6, 1997; Page A19

The Republicans have just launched what House Speaker Newt Gingrich calls a "national dialogue" on how to replace the progressive income tax. The timing is superb, what with recent disclosures about IRS bureaucrats abusing taxpayers.

Gingrich envisions a national traveling debate, which would produce a common GOP tax proposal to take into the 1998 election – a kind of Contract with America, Part II.

The flat-taxers, led by House Majority Leader Dick Armey of Texas, would scrap progressive income taxes in favor of a simplified tax with a uniform flat rate. Consumption-taxers – championed by fellow Texan Bill Archer, who chairs the House Ways and Means Committee – want a value-added tax or a national sales tax.

Of course, flat versus VAT is less a national dialogue over tax policy than a narrow family quarrel within the Republican right. Other brands of tax reform are conveniently off the table.

Either proposal means wealthy people would pay less, and the average American would bear higher taxes. For ordinary people, this "choice" is the fiscal equivalent of getting to choose between electrocution and hanging.

Whatever else is wrong with the current income tax, it remains (mildly) progressive. The rich actually pay taxes at a higher rate than the middle class and the poor.

"Class envy," sneers the right. But the logic of progressive taxation remains obvious and popular: Ordinary working people depend on their earnings to pay the rent and put bread on the table. Wealthier people have plenty of discretionary income left over after they pay for life's necessities. They can afford taxation based on ability to pay.

"But that's inefficient," counters the right. Higher tax rates for the affluent just punish society's most successful, deter incentive and retard growth.

In fact, the economy grew at nearly twice its current pace during the postwar economic boom, when federal income tax rates topped out at 91 percent. Today's lower top rate of 39.4 percent doesn't seem to be deterring an entrepreneurial boom and lots of new millionaires. Ted Turner and George Soros, for heaven's sake, are each giving away a billion dollars.

The supposed attractions of the flat tax are fairness and simplicity. All the complexities of the tax code would be abolished, and your tax return could fit on a postcard.

But if simplicity is the goal, we still can keep progressive rates. Multiplying your taxable income times the rate takes about 10 seconds. The hard part of doing your taxes is figuring out what's taxable.

If the tax code is complicated, it's because making a living is complicated. Scrap the complexity and you scrap the fairness.

Do we really want to abolish deductions for medical expenses, home mortgages, charitable contributions, retirement savings and business expenses? Even more basically, flat rates mean that wealthy people, who now pay higher rates, will get a tax cut while most taxpayers get a tax hike.

"Just cut government spending," responds the right. But that's a different debate. Whatever the size and mission of government, we should finance it with taxes based on ability to pay.

A VAT, or national sales tax, is even worse. It's expensive to administer, and it effectively taxes the working poor at a higher rate than the rich.

The poor, of necessity, consume nearly all of their income, so every nickel of that would be taxed. The wealthy can afford to sock a lot of their income away and avoid taxes on it.

This roadshow could backfire on the GOP, once the voters grasp that both proposals mean higher taxes for most people. But that would require some liberal politicians to step up to the plate and seriously defend progressive taxation. A real national dialogue would debate all the tax-policy options – including closing loopholes that benefit the well-to-do and giving tax relief to ordinary families.

Will we get a real tax debate? Well, both parties just voted to cut the tax on capital gains by more than a third. The top one percent of households will get more than half the benefit.

President Clinton, to his credit, is opposing Republican plans to fix the IRS by partly privatizing it. But if the New Democrats at the White House run true to form, they will probably "fight" the GOP proposal by coming up with some Republican-lite version that accepts the Gingrich philosophy, trims the roughest edges and claims victory.

That would be a shame. Defense of principle can be good politics – and progressive taxation is a principle well worth defending.

The writer is co-editor of the American Prospect.

© Copyright 1997 The Washington Post Company

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