US taxation in 1995 - 21 April 1995

Our Constitution is in actual operation. Everything appears to promise that it will last. But in this world, nothing is certain except death and taxes.

Who wrote that sad maxim that every English speaking person has heard since babyhood? Benjamin Franklin, writing to a French friend only two years after the American Constitution and the form of government it set up had been ratified. Is there anybody alive who does not believe in the inevitability of death and taxes? Well yes. I know one American woman, belongs to a California cult that won't allow death, and there's a whole nation that after more than 200 years of dickering around with various forms of taxation, still feels that one of its signal failures is not finding a way to govern, to get along without taxes.

It was well said this week, that ever since the Boston Tea Party and the cry of no taxation without representation, our pragmatic nation has tended to reduce all philosophical issues about the scope of government to one word: taxes. It's true that at all times, at the beginning of every election campaign, whether for congress, the presidency, city mayor, treasurer, the first outcry, the first slogan to hit the placards and the television ads, is to do something new about taxes, preferably to reduce them.

Now of course nobody can reduce taxes drastically. The party quarrel is usually about where to cut spending and whom to tax. Only once in recent history did a saviour, a Moses, I mean a presidential candidate, come along and say, not only was he going to cut income taxes, he was going to take a cleaver. Fifty percent of all your earnings going to the government? Ridiculous, he said, let's make the highest rate for personal income tax, say 24 per cent and the government will bring in more revenue than it did before. Who was this medicine man, this snake oil salesman? His name was Ronald Reagan and he was so ingratiating – he wasn't fiery or bloodshot, like most reformers – he said, I'm just your ordinary Joe, most happy fella and this is my idea. People were so bedazzled by this promise that they voted for him in large numbers and he went, in 1981 sailing, into the White House.

Moreover he got through a bill and the Congress passed it, and the high rate for personal income tax dropped from 50 to 24 per cent. And once this Reagan reform came into effect – which is always about 18 months after a new President comes in – the government receipts from income tax, both personal and corporate, were dramatically higher than they'd been before. How so? A wider tax base, many more people paying smaller taxes. The Democrats said that Mr Reagan and his cockamamie ideas would ruin the country. He pointed out that one result of them was that during most of his presidency, the United States sprouted more millions of jobs than all the West European countries combined. Mr Reagan went thundering in, the second time, by a bigger majority than the first and at the end of his presidency he retired in glory to Beverley Hills, having left behind, the Democrats hissed, a trillion dollar debt and an unprecedented deficit. Remember however, it was only his initiative, the enabling bills were passed by Congress, Democratically controlled Congress.

The Republicans said then and they keep on saying, the deficit and the trillion dollar debt have nothing to do with Reagan's devastating tax cut and this puzzle will be argued to the end of time and there's no point in picking out an expert. If you go to John Kenneth Galbraith, a liberal economist, he will deplore the Reagan years and the legacy of his debt. But go to out to Chicago, to a conservative economist, Dr Milton Friedman and he will tell you that the relation of the deficit to the American G.D.P. gross domestic product, is healthier than that of the European countries. Forget the deficit, he says, and go on cutting spending and cutting taxes. He got his Nobel Prize, by the way, for advocating the nutty Reagan ideas, four years before President Reagan began to apply them.

In any year – election, non-election year – taxes as a personal problem always come home in mid-April because that's when our federal income taxes are due and last Monday was the deadline. In New York City, if you're a resident, it's particularly awful because you have to file federal income tax, New York State income tax, New York City income tax. But this year, for the first time that I can remember, there's a popular outcry which is not partisan at all. It is to scrap the whole federal tax system and begin again. However, whatever new method is devised, the hot argument will go on and on between the Republicans who are now in power in Congress and the Democrats on the defensive. The Republican insistence that cutting taxes, personal and corporate, again and again will provide more money for investment. This has always been their dogma, that if you cut the high rate of taxation imposed on the rich, they will have more money to build factories, create products, generate jobs, as if by magic.

Well, the new House under the leadership, you might say the dictate, of the Speaker – the Republicans' little Napoleon, Mr Newt Gingrich – passed a tax cut bill more spectacularly huge than anything I think even he had imagined: 189 billion dollar tax cut. On the last of the 100 days which he dedicated to what's been called the Gingrich Revolution, the Bill was passed and the House Republicans gathered in a festive hall and put on a show not matched since V.J. Day. To a tidal wave of cheers, Mr Gingrich said it takes the money from the bureaucrats and gives it back to the people.

I've not talked about the whole train of laws that the speaker managed to get passed in the House in his 100 days, because they are not law yet and are not going to be until they've gone through the pressure chamber of the Senate. In the flush of the Gingrich victory, a reporter went up to Senator Dole, the leader of the Republicans in the Senate, and said: "Is it true sir, Senator Dole, that you are going to sponsor the House Tax Bill?" "I hadn't heard," he said. "I was going to do anything of the sort." A Republican aide added, "What's Newt been smoking?" But last Monday the debate was not political but about the tax system, the horrible complexity of it, the appalling waste of time and money and paper that is spent with and by accountants and other humans. There's been a national poll on what the reforms should be. Only 27 per cent of Americans would like to stay with the present system which is an astonishing figure because three quarters of all taxpayers use a basic form, fairly simple.

They take a standard personal deduction: so much for each adult, so much for each child, they don't itemise allowable deductions, so they reduce their tax returns to two or three pages. And even people in jobs that allow expense deductions, the homework is much less than it used to be. Nowadays employers send statements of wages and salaries, taxes withheld, banks send interest and dividend statements, credit card companies send every month beautiful print-outs of where you dined and when and the bill. For the great majority of taxpayers it's simpler than it used to be. But if you put down your own deductions item by item, the forms can turn into a fat paperback. Of course everybody has some new wrinkle, legal wrinkle, capital gains, childcare credit, home mortgage interest exemption and on and on.

Anyway, in spite of the improving simplicity of making out your tax return, as I say, only 27 per cent want to keep the current system. Now here's the new note, a note that was first struck in these colonies 350 years ago. A flat tax. Four years ago, a Governor of California, one Jerry Brown, based his presidential campaign on this idea. He was dismissed as a lunatic. Now in both parties there are fervent advocates of it. Of the two proposed forms, over 30 per cent of Americans say they'd go for a flat tax of 20 per cent for everybody, with deductions allowed for home mortgages and for charitable contributions only. The other form, which 29 per cent would like, is a flat tax of only 17 per cent on income earned or unearned but no dedications of any kind, no credits, no exemptions, no charitable contributions. A friend of mine who has his own business and was, until Monday morning, entwined and gasping in octopus tentacles of forms, notes, calculations, computer print outs, bills, sighed, imagine what it must have been like 100 years or so ago. It was 1894 when the Supreme Court ruled that an income tax was unconstitutional. They changed their mind, you may have heard, since then.

If there is to be a flat tax it will not come soon. The chairmen of both the House and the Senate Finance Committees think it's a trap. Yet many Americans must have gone to bed on Monday night, dreaming the impossible American dream of the beautiful object promised by the flat tax people. A postcard with four lines. Name, income, minus 17 per cent, total to be paid. Bliss. There's another view of taxes that is not, I should guess, very widespread. The late immortal Mr Justice Holmes, the most towering intellect to appear this century on any English-speaking judiciary, was not a rich man. He could have been very rich indeed but he was an austere Yankee who embraced the law as he might have embraced a priesthood. When he died, at 94, he left his entire estate to the United States Treasury with the comment: "Taxes are the price we pay for civilisation." It's a sentiment that has no echo in the current debate.

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