The House Ways and Means Committee has just become the first tax-writing committee in history to report a tax reform bill that dramatically cuts tax rates and closes loopholes. Its fate on the House floor hangs in the balance. The president has so far given only modest support. Some Democrats and many Republicans are undecided about embracing it.
They offer several excuses for holding back. Some say that we need deficit reduction, not rate reduction. By all means, they say, close the loopholes, but use the revenues to balance the budget, not to reduce taxes for working Americans.
The main problem with this argument is that so long as the president promises to veto a tax increase, all talk of closing loopholes to raise revenueis simply blowing smoke. Besides, Americans deserve lower rates so they can keep more of the money they earn.
Another argument I've been hearing is that the Ways and Means bill doesn't do enough for savings and investment. It has been said that repealing the incentives in the existing law would turn America into a fast-food wasteland.
The flaw here is that the tax incentives we now have simply haven't worked. Savings provisions have proliferated since 1981, but the national savings rate is at an all-time low. Business investment hasn't picked up either. Four years after we enacted masssive corporate tax breaks, investment in new plant and equipment is no higher than it was in 1979. What this tells me is that opponents of reform care more about their own tax savings than about the nation's savings.
A third excuse is that the Ways and Means Committee bill is not real reform. But it is. For one thing, the Rostenkowski legislation represents real progress in easing the burden on most taxpayers. For families making $20,000 to $30,000, taxes would be lowered by almost 10 percent. For those earning $30,000 to $40,000, the reduction would be about 9 percent, while taxpayers with $40,000 to $50,000 would get an 81/2 percent cut. Furthermore, the reduction in rates and the number of brackets (four instead of 14) tells families that they wouldn't have to pay a higher tax rate with every raise they got. That's a reassuring message to millions of beleaguered taxpayers who already are having trouble making ends meet.
Not only would the Rostenkowski bill help middle-income families, it also holds out hope to 6 million impoverished people by taking them off the income tax rolls. This would be a good deal for all of us, because it would be a powerful incentive for poor people to choose work over welfare, dignity over despair.
The Ways and Means bill also would trim the tax cut the president proposed for the most prosperous Americans. Instead of the 15 percent cut in the president's measure, almost double what he proposed for middle-income Americans, the Rostenkowski reform scales back the reduction for the rich to below 6 percent and gives greater tax relief to the average taxpayer.
On the business side, the Ways and Means Committee has curtailed loopholes that have allowed some big corporations to pay no taxes at all and has reduced rates on innovative firms and small businesses that now pay more than they should. These changes mean that some huge defense contractors and other large companies, which for years have owed no taxes on billions of dollars of profits, will finally start paying their way. The committee also has restored a measure of economic rationality to the depreciation system that is currently distorting investment decisions, squandering scarce capital in tax shelters and hamstringing America's competitiveness in the world marketplace.
In the face of these achievements, the charge that Ways and Means has not produced real reform just doesn't hold water.
That's not to say the bill is perfect. Far from it. And Ways and Means Chairman Dan Rostenkowski has been the first to concede its shortcomings. But it is an important step toward lowering tax rates and closing loopholes, so we must make sure that it passes the House. To kill the bill now would be a big win for the special interests, and it would be a major setback for the economic security of working Americans who pay for these loopholes (which have increased from $37 billion in 1967 to over $400 billion today) through unfairly high tax rates. Imagine how low these rates could have been if we had resisted these subsidies to the politically powerful.
The American people won't be impressed by naysayers. They want tax reform. Every recent poll shows strong public support -- even from those who believe they'll end up paying more. This past September, pollster Lou Harris found that 86 percent of Americans are disgruntled with the current system because they believe that while most middle-income people pay their full taxes, the rich hire high-priced lawyers and accountants to help them avoid paying their proper share. And you know something? They're right. In August, the Treasury Department documented that in 1983, nearly 30,000 taxpayers making more than $250,000 paid less than 5 percent in taxes. No wonder people are outraged.
Moreover, the Ways and Means Committee bill is only the first word on tax reform, not the last. I hope the Senate will get rates even lower and close even more of the exotic loopholes that remain in the code. By the time a bill gets out of conference, we could have a tax system in which everyone has the lowest possible rates, equal incomes pay equal taxes and people invest money to make money, not to lose it for spurious tax reasons.
Finally, tax reform is not just about dollars. Restoring fairness to the tax code would bolster people's sense of security, of being in control over their own lives while at the same time having a government that is sensitive to their needs.
So tax reform is also about dignity and hope. That is why politicians cannot dismiss it without simultaneously diminishing their claims to virtue -- not to mention their prospects for reelection. Tax reform is a decision about the kind of country we want to be. Enacting reform will restore confidence in government's integrity and its courage to resist special pleaders in favor of the general interest. It will show commitment to a tax system that facilitates change and responds to demonstrated need, not one that enshrines the status quo, subsidizes the poltiically powerful and shortchanges our potential for growth.
That's why I hope and expect the House and the president will rally round Rostenkowski to lauch the Internal Revenue Code of 1986 and help make tax reform a reality.