ATR: Op-Eds: Tax Reform at the Grass Roots

Tax Reform at the Grass Roots

BY: Grover Norquist, special to Policy Review: The Journal of American Citizenship
DATE: September-October 1997
SECTION: Page 40

After 25 years of efforts to lower rates and simplify the tax code, tax reformers have little to celebrate. Three experts offer their thoughts on the past, present, and future of fundamental tax reform.

In the 1970s Representative Jack Kemp and Senator Bill Roth, flanked by the Wall Street Journal editorial page and leading neo-conservative intellectuals, marched supply-side tax cuts through the institutions of the Republican party. In 1980, Ronald Reagan, who had run for president in 1976 as a budget cutter, based his winning campaign on a "tax cut of 33 percent."

It has now been 16 years since Republicans have delivered any tax cuts at the national level. Between now and then there have been many reversals and betrayals: the 1982, 1983, and 1984 tax hikes, Bush's broken pledge in 1990, and the failure to stop the Clinton tax increase in 1993.

Now the tax revolt is gathering national momentum again. A Republican Congress is about to pass a modest tax cut that a Democratic president has promised to sign into law. And four decisions by the Republican leadership this year have put the tax issue front and center as a winning issue for the future.

The first was the announcement by Speaker Newt Gingrich and Senate Majority Leader Trent Lott that the Republican party is committed to abolishing the estate tax and the capital gains tax on savings and investment. In the past, Republicans had timidly called for small reductions in both levies, sounding like special pleaders asking for a loophole. Gingrich and Lott elevated the call for abolition to the level of principle: It is wrong to double-tax and triple-tax savings and investment; it is wrong to ask any American to visit the undertaker and the IRS on the same day. Republicans and taxpayer activists are now establishing coordinating committees in each congressional district dedicated to abolishing the estate and capital gains tax.

The second breakthrough was the announcement by Gingrich and Bill Archer, the chairman of the Ways and Means Committee, that the Republican leadership is committed to introducing tax-cut bills every year. President Clinton may veto tax cuts that are passed. But taxes, Archer has announced, are going in only one direction: down.

The third revolutionary change was Congress's decision to hold an annual vote on a constitutional amendment to require a two-thirds vote of both chambers to raise any taxes or to impose any new ones. This amendment, already in place in 10 states, will protect tax cuts from repeal and stop the imposition of new taxes.

Fourth, the flat-tax idea promoted by House Majority Leader Dick Armey and Senator Richard Shelby and introduced in the 1996 presidential primaries by Steve Forbes has now become a consensus issue within Republican ranks. Republicans are now preparing to hold a three-year debate about the advantages of moving to a flat-rate income tax or to a national retail sales tax. Republicans now agree on moving to a single-rate tax that taxes income only once. No matter what the outcome of the internal Republican debate on how best to scrap the present system and cut the tax burden, taxpayers cannot lose.

These four initiatives are also moving forward at the state level, where Republican governors are eliminating estate taxes, passing annual tax cuts and, in places such as Arizona and Connecticut, proposing radical reforms such as abolishing the state income tax altogether. State legislators and governors are lashing themselves to the tax-cut mast by signing the Taxpayer Protection Pledge against any and all tax hikes. The Taxpayer Protection Pledge now has 203 signers in the House of Representatives and 40 in the Senate. State taxpayer groups in all 50 states have challenged state legislators and governors to sign pledges against all state tax hikes; 767 state legislators have signed it to date -- 10 percent of all state legislators.

If Republican leaders keep their commitments, the modest tax cut of 1997 will be only the first step. Tax reduction will once again be at the center of American political debate.

The National Commission on Economic Growth and Tax Reform, chaired by Jack Kemp, issued a report on January 17, 1996, after months of hearings and analysis of the tax system. The Tax Reform Commission recommended that the current 7-million-word Internal Revenue Code be repealed in its entirety and replaced with a simpler, fairer system.

Although the Tax Reform Commission recommended a single low rate, taxing income only once, it did not recommend a specific rate of taxation. But the Commission did offer a set of principles to guide major tax reform. The following are excerpts from the commission's report on principles for a new tax system.

The present tax system is beyond repair: It is impossibly complex, outrageously expensive, overly intrusive, economically destructive, and manifestly unfair. It is riddled with special-interest tax breaks, and it over-taxes both labor and capital.

A new tax system should be created that is based upon a vision of America that places the individual -- not the government -- at the center of society. It should recognize that government doesn't create opportunity; citizens do, if only government will get out of their way.

We begin by asking what a tax system should accomplish. A fair and simple tax code must generate sufficient revenue for the federal government to carry out its legitimate tasks. It must not place a tax burden on those members of society least able to bear one. And, perhaps most important of all, it must not restrict the innovative and entrepreneurial capacities of Americans upon which rising living standards and our general prosperity so greatly depend.

Before devising a new tax system, the American people must engage in a dialogue about the basic principles upon which the new system will be based. The Tax Reform Commission developed six working principles for a 21st-century tax system. It developed these principles after hearing thousands of comments and concerns from the American people and after systematically reviewing the current tax code. These are not isolated ideas, but rather principles that link together to form a sequence -- a chain of economic DNA -- that can renew the health of our economy and release the entrepreneurial spirit of the American people.

Economic Growth. The engine of opportunity and prosperity can only be unleashed by a tax code that encourages initiative, hard work, and saving. Expanding opportunity, prosperity, and social mobility form the foundation of a free and healthy society. None of the myriad challenges confronting our nation -- poverty, crime, racial tension, welfare dependency, or the budget deficit -- can be solved without strong economic growth. Therefore, any new tax system must be predicated, first and foremost, on a commitment to revitalizing the American economy and lifting barriers to opportunity.

Fairness. A system must be based upon treating all citizens equally. The current code -- with its proliferation of rates, deductions, exemptions, and transfers of wealth from one constituency to another -- contributes to the overwhelming conviction of many Americans that the present system is unfair. By restoring basic fairness, we can restore faith in the system and keep the tax rate low.

Simplicity. The system should be simple enough that anyone can figure it out. Filing tax returns has become one of life's most nerve-wracking, gut-wrenching, and mind-numbing chores. The authors of The Federalist Papers warned, "It will be of little avail to the people that the laws are made by men of their own choice if the laws be so voluminous that they cannot be read, or so incoherent that they cannot be understood." A simplified, fairer tax system will let Americans get a handle on their taxes, a grip on their government, and a hold on their future.

Neutrality. A fair tax system should not pick winners or losers, or tax saving more heavily than consumption. The tax system should free people to make decisions based upon their own needs and dreams. The tax code should be used to raise revenue to operate the government while doing the least possible damage to the economy. As Senator Robert Bennett of Utah pointed out, "Neutrality means that the tax code should not be used to punish the bad guys and reward the good guys. We have other laws for that." Unfortunately, the current code strives to act as an economic traffic cop -- giving green lights to certain economic activities and flashing red lights at others.

Visibility. Everyone deserves an honest accounting of government's cost. Those who pay the price of government have a right to see the bill. The current system hides the cost of government behind a chronic deficit and a maddening multiplicity of taxes -- many of which are virtually invisible to the taxpayers who pays them. The invisibility of many taxes perpetuates the fantasy that government is free -- even as its real costs shrink our paychecks, sap our savings, drain our economy, and inflate the federal budget deficit. Goods and services don't pay taxes. People do. A visible system gives taxpayers an honest accounting of the expenses of government that they are paying for and will make it far more difficult for politicians to tinker with the tax code without democratic consent.

Stability. People ought to be able to plan for their futures without the rules being changed in the middle of the game. Uncertainty has a debilitating effect on the economy, making it very difficult for families and businesses, particularly small businesses, to plan for their future with confidence. A stable tax code must allow individuals to start a business, buy a house, take out a loan, put money into savings, or plan for their children's education without fear of what might lurk behind the next election cycle.

In his last public address, Abraham Lincoln said, "Important principles may and must be inflexible." By laying out these important principles, this commission hopes to help build a future of growing prosperity for many generations to come.

This summary of "Unleashing America's Potential: A Pro-Growth, Pro-Family Tax System for the Twenty-First Century" was prepared by Grace-Marie Arnett, formerly the executive director of the Tax Reform Commission and now president of the Galen Institute of Alexandria, Virginia, which specializes in health-care and tax-policy research. Copies of the commission's full report are available from The Heritage Foundation Publications Office; call 202-546-4400.

Members of the National Commission on Economic Growth and Tax Reform were: Jack Kemp, chairman (co-director, Empower America); Edwin J. Feulner Jr., vice chairman (president, The Heritage Foundation); Loretta H. Adams (president, Market Development, Inc.); Kenneth Blackwell (Ohio state treasurer); Herman Cain (former chairman and CEO, Godfather's Pizza, now president, National Restaurant Association); Carroll Campbell (president and CEO, American Council of Life Insurance and former governor of South Carolina); Pete du Pont (policy chairman, National Center for Policy Analysis and former governor of Delaware); Jack Faris (president, National Federation of Independent Business); Matt Fong (California state treasurer); Theodore J. Forstmann (founding partner, Forstmann Little & Co.); Dean R. Kleckner (president, American Farm Bureau Federation); Shirley Peterson (president, Hood College and former commissioner of the IRS); John Snow (chairman, president, and CEO, CSX Corporation); John Wieland (president, John Wieland Homes, Inc).

After 25 years, overall levels of taxation are as high as ever. As Figure 1 shows, taxes as a share of the nation's economic output of goods and services have remained essentially flat. A drop in the rate of federal tax collection over the years has been offset by countervailing increases in state and local tax rates (Figure 2).

Since 1978, the frequent and noisy battles over cutting federal income tax rates have obscured the slight rise of social security and other payroll taxes.

One victory for tax reform has been a flattening of marginal tax rates since 1981. Recent hikes in income taxes for upper-income brackets, however, have undone some of those gains.

GRAPHIC: Figures 1 and 2, Average rate of taxation by level of government (as a percentage of national output), Source: Cato Institute. Tax rates measured as share of net national output (goods and services minus depreciation).; Figure 3, Average tax rates for different federal taxes (percent of national output), Source: Cato Institute. Tax rates measured as share of net national output (goods and services minus depreciation). "Other taxes" include corporate, Medicare, etc.; Figure 4, Marginal tax rate of federal income and payroll taxes (percent of income), Source: Cato Institute