If your nose is beginning to suspect that "tax reform" bears a certain olfactory resemblance to the aroma of putrified pork that occasional wafts downwind from Capitol Hill, let me tell you a story.
It's a typical Washington fable: foxes guarding the hen house, powerful special interests ripping off the taxpayers, politicians doing favors for their friends, indecipherable hieroglyphics in the tax code that translate into billion-dollar boondoggles.
It's a story that should give you a pretty good clue as to the kind of "reforms" that are likely to be foisted off on us, and it should suggest ways in which the future outrages might be kept out of the tax reform package. Or it may make you so cynical that you'll give up any hope of ever getting a fair tax system.
If you've followed the tax issue at all, some of the players will be familiar: Chairman Dan Rostenkowski (D-Ill.) of the House Ways and Means Committee, Senate Majority Leader Bob Dole (R-Kan.) and Donald Regan, Ronald Reagan's Tweedle-Dee Treasury secretary-turned chief of staff.
This is a story about what happened the last time Rostenkowski and Dole "reformed" the tax code. It's about a little loophole that Danny and Bob wove into the fabric of tax law in 1984, a loophole that was only supposed to be a $300 million payoff for a few rich tax dodgers, but which is turning out to be a genuine $1.2 billion scandal.
The story starts back before Donald Regan became a born-again tax reformer, back when he was a Wall Street whiz, the chief executive of Merrill Lynch Pierce Fenner & Smith. In those days, Merrill Lynch decided it could make money selling a nefarious tax deduction called a tax straddle.
A tax straddle is a commodity trading ploy that involves simultaneously buying and selling some commodity, usually gold or silver futures contracts. You are certain to make money on one of the deals and just as certain to lose on the other. But if you play your cards right, you can beat the tax man: you cash in on the losing deal on Dec. 31 and report a big loss on your income taxes this year. You cash in on the winning deal in January and make a profit, on which taxes won't be due for another 12 months. And next year you do the same thing again, rolling your tax liability forward forever.
The tax straddle game was played with such skill during Don Regan's tenure at Merrill Lynch that people got away with it for a decade before the Internal Revenue Service got wise. Tipped off by a Merrill Lynch employe who soon found himself looking for a new job, the IRS began hauling tax straddlers into court. The IRS spent five years closing the loophole, won two unanimous U.S. Tax Court decisions against straddlers and -- just to be safe -- got Congress to close the loophole.
One of the people who bought a tax deduction from Merrill Lynch was a Colorado oilman named Gilbert Miller. In 1979, he paid Merrill Lynch $3,447.50 for a tax deduction of $104,236.
Ultimately the IRS caught up with Miller, threw out his deduction and billed him for taxes on the $100,000. The case came up in tax court last month and -- thanks to Rostenkowski and Dole -- Miller won a surprising and costly victory.
You see, when the Deficit Reduction Act of 1984 was passed last year, it contained a special tax-straddle bailout provision that was slipped in during the conference committee negotiations by Rostenkowski and Dole. Neither the Senate nor House ever debated -- let alone voted on -- the bailout.
At the time, Rostenkowski and Dole claimed the bailout would only cost the Treasury $300 million and would only benefit professional commodity traders. (It was merely a coincidence, as Common Cause has documented, that Rostenkowski, Dole and other tax writers took thousands of dollars of campaign contributions from these same commodity traders.)
When the tax court read the law written by Rostenkowski and Dole, however, it came up with a far more sweeping ruling: the straddle bailout applied to everyone, not just professional traders, the court ruled recently in a 10-to-8 decision.
Rather than just helping out their friends with a $300 million bailout, the two top tax writers had let every tax straddler off the hook at a cost to the other taxpayers of $1.5 billion, the court decided.
Admitting they were distressed by the decision they were issuing, the judges said they had no choice, given the way Rostenkowski and Dole had drafted the law. "It is not, however, for this court to question the wisdom of the congressional mandate," the majority on the tax court bench concluded.
The decision was denounced as "a prime example of unfairness" and "tax shelter relief run riot" by Chief Judge Howard A. Dawson Jr. "This case is a prime example of why simplification and reform of our federal income tax laws are needed," he said.
It is also a prime example of why simplification and reform of the tax-writing process are needed. No genuine tax reform can be expected as long as a few powerful members of Congress can slip in special favors for their friends without public debate or a recorded vote.
Such abuses could be curbed by two modest reforms:
To restore faith in the integrity of the tax-writing process, each provision of the next tax bill should be approved by a public recorded vote of both houses of Congress. No more slipping in special favors in the conference committee reports. The cowardly Congress should be forced to stand up and be counted line by line on the next tax bill.
To restore faith in the honesty of Congress, every member ought to either stop taking money from people seeking special tax favors or stop voting on issues that have generated campaign contributions. Campaign cash has become little more than legalized payola. As long as payoffs are legal, the tax law will be perverted by them.
If they're not willing to clean up their act, members of Congress ought to be forced to disclose their campaign contributions and conflicts of interest every time they vote on a tax provision. Maybe they should wear the total amount of their contributions from special interests on a sign around their necks, like a prisoner's number.
TV stations could flash the contributions total on the screen when "tax reformers" speak, in the same way that batting averages are shown when a hitter goes to the plate.
If such provisions had been on the books a year ago, the $1.5 billion bailout for tax straddlers never would have happened. Neither Rostenkowski nor Dole would dare to stand up and proclaim, "I'm proud to be helping out these poor rich tax dodgers, whose colleagues have contributed so generously to my past campaigns. Let's give them $1.5 billion."
Nor would the tax writers be able to deny responsibility for this billion-dollar bailout for Don Regan's old customers. Now they are free to insist they really only meant to give away $300 million and blame the tax court for the other $1.2 billion.
In the context of future tax reform, it does not matter much whether Rostenkowski and Dole deliberately let a bunch of rich tax dodgers off the hook or did so by accident. Venality or ignorance? Which is worse? I'd almost rather believe they did it on purpose than learn that the two guys who are supposed to know more about taxes than anybody else in Congress gave away $1.2 billion without knowing it.
What's more unsettling is that the "tax reform" package submitted by the White House calls for ending the $1 check-off for public financing of presidential campaigns. It's all too obvious how that relates to tax reform.