Retirement and Social Security Reform
Stealth Approach to Tax Reform
The Washington Times
November 1, 2002
By Ernest S. Christian and Gary A. Robbins
Unbeknownst to many of the loudest advocates
for radical change in our archaic tax code, fundamental tax
reform is already under way. Mercifully, this lack of awareness
extends to the opponents of reform -- of whom there are surprisingly
Aided by veterans of the last tax-reform wars, the Bush administration
seems to be quietly and efficiently putting in place the real
substance of tax reform. It is taking form through a series
of familiar and eminently sensible changes to the tax code,
identified in the 1990s, that eliminate the principal tax
impediments to economic growth.
This politically adept and economically wise approach is
in great contrast to the "radical" origins of tax
reform only a few years ago. A near rebellion against the
current income tax code arose during the first half of the
1990s. The code's huge size and mind-boggling complexity were
held up to ridicule. Examples of frightening invasions of
privacy and taxpayer abuse abounded. The tax code was a true
villain. Calls went up to "tear it out by the roots"
and to replace it with something better. It was all great
fun and it was all part of a conservative-led, anti-big-government
uprising that produced the Republican takeover of the House
of Representatives in 1994. Even Bill Clinton was moved to
declare that the "era of big government" was over.
To have listened to much of the bombast in the 1990s was
to have concluded that most tax reformers wanted to abolish
the tax code, not replace it with something better. Nevertheless,
the upheaval and debate did produce two valuable alternatives
to the current tax code: the "Flat Tax" and the
"USA Tax" (also knows as "Nunn-Domenici"
after its two senatorial sponsors). While both were much simpler
(the Flat Tax even promised to reduce tax returns to a postcard),
their main focus was on curing the very bad economics of the
current tax code. The USA Tax, in particular, illustrated
to many people, especially members of Congress, one very crucial
point. That is, it is easy to stay within the American tradition
of taxing income while at the same time (a) lowering the exorbitantly
high marginal tax rates that discourage work and (b) eliminating
the existing tax penalty on personal saving and the penalty
on business capital investment, both of which under present
law substantially depress productivity and wage gains. The
USA Tax and the Flat Tax also illustrated how to reform the
corporate tax, and, most significantly, the USA Tax showed
how to stimulate exports and good manufacturing jobs in the
United States instead of driving U.S. companies offshore as
does the current tax code. The USA Tax went even farther and
brought foreign companies within the ambit of the U.S. tax
system when they compete in our economy.
While both the Flat Tax and the USA Tax were good replacements
for the current code, they were destined never to be enacted
into law. Rhetorical excesses made them seem too radical and
experimental. Many thought the mental gymnastics required
to understand how these new tax structures actually worked
(really, very simply) too hard. In short, the good tax-reform
proposals of the mid-1990s were a symphony with too many notes
for Congress to play.
By 1998, however, the economic substance of tax reform had
been translated into five fairly easy and familiar amendments
to the current code - nothing frightening or radical at all.
The "Five Easy Pieces," as they came to be called
by many tax-reform cognoscenti, are: (a) lowering marginal
rates; (b) eliminating the double tax on corporate earnings;
(c) accelerating depreciation, ultimately to the point of
100 percent first-year expensing for business capital investment;
(d) expanding the Roth IRA to all personal saving; and (e)
excluding export and other foreign trade income of American
companies from tax in much the same way that other countries
do in the world marketplace.
"Stealth" tax reform is already under way. As the
accompanying graphic shows, all of the "Five Easy Pieces"
have either been enacted in some form, are in the process
of being enacted, or are about to begin that process. Each
has its own merits and a powerful political constituency.
Altogether, they add up to fundamental tax reform.
Ernest S. Christian is Washington lawyer who also works
with the Center for Strategic Tax Reform. Gary A. Robbins
is president of Fiscal Associates and visiting fellow in tax
policy at the Heritage Foundation.