Hoover Daily Report

Prospects for Tax Reform

Monday, December 27, 1999

What are the prospects for a flat tax, a national retail sales tax, or any major overhaul of the federal income tax in the near future? The flat tax has become the consensus position of four Republican presidential candidates (Gary Bauer, Steve Forbes, Orrin Hatch, and John McCain), a huge change since 1996, when only Forbes championed the idea. On the other side of the political spectrum, Bill Bradley was a major supporter of President Ronald Reagan’s Tax Reform Act of 1986, which reduced the top marginal rate of tax from 50 percent to 28 percent; Bradley has recently restated his support for the principles embodied in the 1986 act.

What’s behind the movement for tax reform? First, the level of federal income taxes is at a peacetime high. Rising tax burdens have historically fueled tax revolts, such as Proposition 13 in California and both the 1981 and 1986 tax-rate reductions achieved under President Reagan. Second, resentment of the Internal Revenue Service continues to grow. Third, the public believes that the present system is too complicated and unfair. And so on.

The forces against reform, however, are deeply entrenched. Thousands of well-paid lobbyists defend hundreds of professions with special interests in the tax code, which fear loss of their privileges if something as simple as a flat tax on a postcard were to replace the current code. Defenders of those special interests will demagogue the proponents of reform by threatening Americans with a loss in the value of their homes, a decline in charitable giving, a reduction in health care benefits, and the loss of countless other benefits.

Moreover, the times are different. At the time of Proposition 13 and when President Reagan took office, the economy was languishing under double-digit inflation and interest rates. Today, the economy is in the midst of its longest peacetime expansion, with technological innovation enhancing productivity. Unemployment and interest rates are low. The stock market and home values have risen dramatically, giving Americans a newfound sense of wealth and prosperity. The federal budget has moved from staggering deficits to surplus, and the national debt is being substantially reduced for the first time in decades. It is difficult for Americans to get riled up about the tax system during such great prosperity. Perhaps the time is not ripe for a major overhaul of the federal income tax.

But, as Howard Jarvis and Ronald Reagan demonstrated, one should never underestimate the power of ideas and leadership. When public support for reform reaches a crescendo, strong presidential leadership will be needed to overwhelm the tyranny of the status quo.