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Q U I C K  T A K E

AN ISSUE NEAR AND DEAR TO MOST VOTERS, tax policy figured prominently in the GOP primaries and has become a dominant issue of the fall campaign. Looking for traction, Bob Dole has focused his message (as other Republicans have before him) on a platform of sweeping tax cuts, while Bill Clinton is pushing targeted breaks while warning that large cuts will "balloon the deficit." Ross Perot, for his part, dismisses large tax cuts but talks seductively of dismantling the Internal Revenue Service.

It's a complicated issue. First instituted in 1913, the income tax rate hit an all time high of 91 percent for upper income earners in 1962. John F. Kennedy, perhaps the first supply-sider to occupy the White House, brought the rate down to 70 percent arguing the high rate was stifling economic growth. That wasn't nearly far enough for Ronald Reagan, whose 1981 tax reform promised a 30 percent cut over three years. Five years later, a massive tax reform bill closed loopholes and brought the top rate down to 28 percent. Soon, loopholes were back, and George Bush raised the top rate back to 31 percent, followed by Bill Clinton who jacked the top rate to 39.6 percent in 1993 and gave Americans their current five-tier system.

Of course, the income tax is but one of many levies used to generate federal revenues. As the tax code has become increasingly complex -- more than seven million words and counting -- politicians from the left and right are pushing a more simplified tax code. Critics say the current maze of regulations has become a vehicle for special interest abuse, with high-priced lobbyists able to win tax code favors as ordinary Americans see their rates go up. Last year, Americans spent about $500 billion getting professional help to do their taxes.

Early in 1996, publisher Malcolm S. "Steve" Forbes generated enthusiasm for his 17 percent, no deductions flat tax proposal, an idea quickly adopted in various forms by other GOP primary candidates (Perot says he'd consider it, too). As an idea, the flat tax dates at least to the early 1980s when two Stanford scholars published a study extolling its virtues of simplicity and efficiency.

The flat tax, however, has proved an easy target for "fairness" watchdogs. Though Democrats as diverse as Leon Panetta and former California Gov. Jerry Brown have previously proposed it, most Democrats feel it's a giveaway to the wealthy who they believe ought to pay higher rates. Backed by a Treasury study of Rep. Dick Armey's flat tax plan, Democrats pilloried the flat tax as losing government revenue by more $100 billion per year.

Even many Republicans are squeamish about an idea that has all Americans, regardless of income, paying the same rate. The Forbes proposal also came under heated attack for not maintaining the popular deductions for mortgage interest and charitable donations. The idea not to tax investment income conjured unpalatable scenarios of unemployed millionaires paying no taxes while working stiffs picked up the tab (Forbes argued that under the current system investment income was effectively taxed twice).

Other radical proposals for revamping the tax code include replacing the IRS with a national retail sales tax (supported by House Ways and Means Chairman Bill Archer) and the value-added tax (VAT), used in many European countries. Under the VAT, products and services are taxed at various stages of their production. Proponents of these ideas cite simplicity and fairness, while critics point to potential problems getting business to comply.

About the only Republican candidate without a flat tax proposal was Bob Dole (though his tax commission, headed by Jack Kemp, came awfully close to endorsing the concept). Though he has traditionally stressed reducing the deficit before cutting taxes, Dole, in July 1996, called for a 15 percent, across-the-board tax rate cut and end to the Internal Revenue Service "as we know it." Backed by respected Stanford economist John Taylor and some other heavyweight academics, Dole began pushing tax cuts as the key to faster growth.

Dole and Co. argue they can cut taxes and still balance the budget by 2002, a goal both parties agreed to this year. Dole's plan, in part, relies on supply-side economic theory which holds that lower rates, by stimulating the economy and broadening the tax base, do not necessarily produce lower tax revenues and might even increase them. In response to critics who say the Reagan era tax cuts caused skyrocketing deficits, tax cutters say the real problem was Congress -- then controlled by the Democrats -- which did not control spending. With a Republican Congress, Dole says he could balance the budget and cut taxes.

For Democrats, most of whom reject the tax cutting-to-growth argument, it's simply an article of faith that the 1980s tax cuts resulted in massive deficits. Echoing that sentiment, Clinton has come out "unalterably opposed" to large-scale tax cuts as a boon to the wealthy and a budget buster.

The president's tax strategy relies on targeted tax breaks, which he says will stimulate the economy and provide relief to Americans who need it. Among his more recent proposals are:

  • A targeted capital gains tax cut for middle-income families who sell their homes.
  • A $1,500-a-year tuition tax credit for the first two years of college.
  • Credits to businesses that hire people off welfare.
  • Expanded tax-free Individual Retirement Accounts.
  • A $5,000 tax credit for adoptive parents

Dole, in addition to his 15 percent cut, has a laundry list of targeted tax breaks too, including:

  • A $500 per child tax credit for families.
  • A repeal President Clinton's 1993 Social Security tax increase on upper-income beneficiaries.
  • A halving of the capital gains tax from the current 28 percent to a maximum of 14 percent on profits made from the sale of stocks, real estate and other assets.
  • An expansion of Individual Retirement Accounts.
  • The elimination of the estate tax.

Populist Perot has picked up on the issue of tax simplification, promising to dismantle the IRS and overhaul the nation's tax code. Not committed to any one proposal yet, the Texan says he'll consider the flat tax, the consumption tax, the national sales tax, the savings tax, the value-added tax, and the financial transactions tax.

Updated 9/13/96

R E L A T E D  S T O R I E S

  • Calculating Dole: 15% or Bust His expensive tax-cut plan wins few plaudits from economists. He's hoping to do better with voters. By George J. Church, TIME, Aug. 19, 1996
  • Raise Gas Taxes Now! The U.S. pays a huge price for still-too-cheap gasoline. Higher fuel taxes can clean the air and lower the deficit. By Matthew Miller, TIME, May 13, 1996
  • Knock 'Em Flat Steve Forbes Has Wrinkled The G.O.P. Race By Spending A Fortune To Push His Flat Tax. But How Far Can He Go -- And Does He Help Dole? By Nancy Gibbs, TIME, Jan. 29, 1996
    P U B L I C  O P I N I O N
  • If you had to choose, would you rather see the current federal income tax system replaced by a completely new tax system, would you rather see major reforms made to the current system without completely replacing it, or would you rather see minor reforms made to the current system?
  • Total %
    Completely replace
    current system
    Major changes 34
    Minor changes 34
    No changes 3
    Not sure 7

    TIME/CNN Poll, conducted March 29-30, 1995.

  • As you know, many taxpayers take advantage of exemptions, deductions, and other provisions of the tax code in order to reduce the amount of income tax they owe to the federal government. In general, do you think those provisions mostly benefit people like you, or do they mostly benefit people who are richer than you?
  • Total %
    Benefit people like me 13
    Mostly benefit rich 80
    Benefit the poor* 1
    Not sure 6

    *Volunteered response
    TIME/CNN Poll, conducted March 29-30, 1995.

  • Do you favor or oppose an overhaul in the federal income-tax system, so that most taxpayers would pay a flat tax of 10 to 11 percent?

  • Total %
    Favor 62
    Oppose 28
    Not sure 10

    TIME/CNN Poll, conducted January 11-12, 1995.

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