Do you really want to save the code?

• Author: Graetz, Michael J.
• Position: U.S. Tax Code

Just two days ago -- at this very conference -- Tax Executives Institute entered the tax reform debate with your letter opposing the "Scrap the Code" movement. Like my young twin daughters when they test the waters in front of our house, so far you are only in up to your ankles, but you are in the water now. I want to welcome you to this tax reform debate.

Unlike Deputy Treasury Secretary Larry Summers who spoke to you yesterday, it is not my purpose to simply bestow congratulations for the wisdom of your position, despite my sympathy with your underlying concerns about the effects of tax law uncertainty on business planning. But we all know that businesses' ability to eliminate political uncertainty, to minimize political risks, is even less than their ability to eliminate economic risks. Moreover, this "Scrap the Code" business in my view is a political side show, more about staking out a political position for Republican or Democratic presidential candidates in 2000 than the future of the tax law. Partisan politics aside, the issue may be generating some tax restructuring momentum; whenever the National Federation of Independent Business sets out to get a million signatures on an issue, it should be taken seriously. The Clinton administration is firmly on the same side of the issue as TEI, and we know from its behavior on last year's debate on IRS restructuring legislation and the proposed shift in the tax law's burden of proof that the Administration will remain with you at least until it spots an unstoppable political train heading in its direction. But whatever the Clinton Administration is doing, TEI should not fall into King Canute's trap and assume that, simply by holding up your hand, you can make a rolling political tide come to a halt. Beware, for I believe we are seeing the beginnings of a rolling political tide.

The presidential campaign of 1996 was an extraordinary event in American tax politics. For the first time this century -- since the enactment of the Sixteenth Amendment in 1913 -- important presidential candidates made serious calls to repeal the income tax. Here, the politicians are following the people. The exit polls favoring a fiat tax showed far more popular approval than was revealed simply by looking at the votes for Steve Forbes, its chief proponent.

In the past 25 years, the income tax has fallen into disrepute and disfavor. The first part of my recent book, The Decline (and Fall?) of the Income Tax, explains why this happened. I will spare you that story here, but the key fact is this: Until 1972, the American people viewed the income tax as the most fair tax in the nation. Since 1980, they have consistently viewed it as the least fair. Do not expect any presidential candidate in the next election to forge a "Save the Code" campaign. Even the strongest proponents of the income tax, people like Dick Gephardt, are calling for a radical restructuring of the income tax.

So the question for you today -- members of TEI -- is where do you go from here? Welcome to the water. You oppose the "Tax Code Termination Act." What do you favor?

Let me begin by asking about the obvious counterpoint to "Scrap the Code" -- namely "Save the Code." Does it make any sense for TEI members to join a "Save the Code" movement? What is the state of this tax code that you don't want terminated? In a recent letter to Treasury you said it is a "labyrinth." You're right! Congress uses the current tax code as my mother employed chicken soup: as a cure-all for any ailment affecting the economy or society, an opportunity to soothe what ails you. If we have a problem of education policy in the United States, education tax credits are the answer. If we have a savings problem, welcome to the Roth IRA. And on and on.

This is not news. The tax code has long been used this way. And Congress often gives the people what it wants. That is why the U.S. tax law today is far more favorable to investments in housing and less favorable to corporate investment than the tax law of the other nations with which we compete in the global marketplace.

In this week's letter, TEI lamented the "folly of making tax policy by sound bite." We don't make tax policy -or any other government policy for that matter -- just by sound bite. We make it by asking the people what they want and then fashioning the sound bites. Tax lawmakers, like all of our elected lawmakers today, cannot get enough of public polls. They want to know what the public thinks, what it wants.

Tax policy is currently driven by public polling data and focus group inquiries. Polling data in 1996 and 1997 revealed that the public's major concerns with the tax system...