by Bill Bradley
Before Congress can appropriate money (which means to direct that it be spent), an authorizing committee has to determine the amount allowed for a particular project. The appropriations committee then decides the amount to be actually spent—usually something less than the authorized amount. For tax loopholes, there isn’t even an authorizing committee; in effect, it’s totally unaccountable spending. Getting loopholes into the tax code is one of the specialties of well-heeled members of the Washington club. That’s why a book about the Tax Reform Act of 1986 was entitled Showdown at Gucci Gulch, a reference to the hallway, lined with lobbyists, outside the Senate Finance Committee’s hearing room. All you have to do in order to cut taxes for, say, corporations that buy a certain kind of machine, or people who buy a house rather than renting, is to stick a loophole in the tax code for them. From a budget standpoint, the result of this kind of tax cut is the same as if it were a spending program: It increases the deficit. You might as well have sent a check from the government to the special interest. Rewarding these taxpayers means that taxpayers who don’t exhibit the encouraged behavior (by buying the machine or the house) suffer the consequences of a higher deficit.
There is more than $1.1 trillion of hidden spending in the form of credits, exclusions, and deductions in the present tax code. Most of them benefit some narrow interest—banks, oil companies, real-estate companies, insurance companies, mining companies, and charitable institutions, among others. So the rest of us pay higher taxes than we otherwise would, to make up for the lower taxes levied on the special interests. Russell Long, the chairman of the Finance Committee when I got to the Senate, told me one day, “If you give someone a tax cut, they never remember what you did. If you give them a tax increase, they never forget.” Still, politicians believe that the members of the special-interest groups will be appreciative and return the favor in either votes or campaign cash.
The narrower the loophole, the more likely, once it becomes law, that it will remain hidden in the 72,536 pages of the tax code. My favorite story is about the loophole that allows you to rent out your home for up to two weeks and pay no tax on the rent. When I asked how it got into the code, I was told it was the work of Herman Talmadge, the long-serving Georgia senator. Evidently he was petitioned by a few wealthy homeowners near Augusta National Golf Club, which hosts the annual Masters tournament; they wanted to rent out their mansions to other wealthy people who were coming to the Masters. Talmadge accommodated them, and the provision is still in the law. Without a superb tax attorney, no one would know it exists, but the wealthy have superb tax attorneys.
It seems to be a law of nature that whenever you eliminate loopholes, they always seem to return. In 1986, we cut the top individual tax rate from 50 to 28 percent and paid for it by eliminating loopholes used by the wealthy to reduce their taxes, including the exclusion for capital gains. The result was that profits from the sale of capital assets were taxed at the same rates as income from wages. Within months of the Tax Reform Act of 1986 becoming law, lobbyists were advocating for the exclusion’s reinstatement. I told them that if they succeeded, the top rate would inevitably rise to pay for it. They were not dissuaded. Capital gains taxes were cut to 20 percent, and the top rate went to 39 percent. The return of loopholes after passage of tax reform is like letting moths get into the closet and chew holes in your brand-new suit.
We can have an income tax system that has lower rates and fewer loopholes and brings in enough revenue for substantial deficit reduction. We can do this by eliminating loopholes and using some of the resulting revenue for a combination of deficit reduction and taxrate reduction. An alternative approach would be to raise the gasoline tax or institute an oil-import fee, with some of the money going to deficit reduction and some toward income tax or Social Security tax reduction or investment in infrastructure. If you increased the fuel-efficiency standard for cars to fifty miles per gallon, reinstated the cash-for-clunkers program, and phased in a one-dollar gasoline tax increase over ten years, citizens would end up a decade from now paying less for gasoline than they do today.
A third option would be to create a value-added tax and use some of the revenue for deficit reduction and some for credits that would reduce the tax’s burden on low- and middle-income people. In an economy where 70 percent of our GDP, in good times and bad, comes from consumption, this tax would guarantee the long-term fiscal health of the United States, just as it has in Canada since 1991.
A fourth alternative would be to cut corporate taxes and raise the top marginal individual income tax rate. This would encourage companies to keep jobs in America and would increase the progressivity of the tax code. In Denmark, for example, the top corporate rate is 25 percent versus our top corporate rate of 35 percent, and the top individual rate is 51.5 percent versus ours at 35 percent. Cutting corporate taxes would make American companies more competitive overnight. I know the CEO of a large multinational company who moved his company abroad to save paying our top corporate tax rate. The company saved $50 million that year, which he kept abroad. “I’d rather pay a lower rate in the United States,” he told me, “and use that $50 million to hire U.S. workers.”
A final alternative would involve neither income nor consumption taxes. It would tax financial transactions. There are more than 8 billion shares traded daily, largely controlled by computers. If each trade had to pay a minuscule tax, it would raise hundreds of billions of dollars each year to reduce the deficit—caused, in part, let us not forget, by the necessary government spending in the aftermath of the financial meltdown. The rationale here is that those responsible for the financial crisis should pay for its cleanup, while at the same time we would be discouraging the market volatility that works against the small investor—who, in a world of high-frequency algorithmic trading, doesn’t have much of a chance on his own.
Have senior citizens so traumatized our politicians that we will never duplicate the achievement of the 1983 National Commission on Social Security Reform? Have politicians become so afraid of the electorate that they won’t raise taxes, even on the rich? Are there no broad-based tax increases that the majority of Americans would support? Has the fear of terrorism become so great that we can’t cut even those weapon systems and military-force structures that were meant for the Cold War? Are there no additional reforms of Medicare or Medicaid that could lower the trajectory of healthcare spending? The answer to those questions will determine whether we remain perilously vulnerable to the decisions of our foreign creditors or seize control of our own destiny.
In the summer of 2010, Esquire magazine convened four former U.S. senators: Republicans Jack Danforth and Bob Packwood, and Democrats Gary Hart and me—all of us colleagues for many years in the Senate. We were given three days in which to balance the federal budget by 2020. Our negotiations were intense, but we did it. The big-ticket items were large defense cuts reflecting our current security needs instead of those of the Cold War; a dollar-per-gallon increase in the gasoline tax, phased in at fourteen cents a year for seven years, along with incentives to increase vehicular fuel-efficiency standards; reduction of most farm subsidies and implementation of a means test for those farmers who make $500,000 or more a year; and reform of the Social Security system by raising the retirement age to seventy by 2057 and changing the way cost-of-living increases are calculated. We improved the current tax code’s progressivity by allowing itemized deductions only against the 28-percent rate, and we retained the top rate at 35 percent. Each of us got something in the negotiation. Danforth’s major objective was to get agreement that when the budget was balanced, taxes would not exceed 20 percent of GDP (historically they’ve been 18 percent; today they’re at 15 percent). Hart wanted to trim the defense budget of its Cold-War fat. Packwood wanted to keep the top tax rate at 35 percent. I wanted (a) to make the tax code more progressive, (b) to establish an interim disability program for manual laborers if we raised the retirement age for Social Security, (c) to assure a higher miles-per-gallon standa
rd if we raised the gasoline tax, and (d) to avoid any cuts in Obama’s healthcare plan. Our interactions resembled the reunion of a string quartet that has played together for many years. Each of us knew how to interpret the others’ moves—what was a bluff, what was the bottom line, what each of us said we cared about and what we really cared about. Each of us had to compromise. Each of us knew that without compromise we could not balance the budget by 2020. Our three-day exercise showed that where there is respect and good will, a deal can be struck. Politicians simply need to put country ahead of re-election. The alternative to this course leaves America where it has never been and where no American should ever want it to go—bankruptcy, decline, and rapid loss of world leadership.
The Historical Perspective
For those who wonder what will happen in America given our current political gridlock in the face of truly dangerous economic times, there is no better clue than understanding what happened at other times in history when nations faced large debt issues.
Professor J. Rufus Fears of the University of Oklahoma, a man who has spent a lifetime studying the lessons of history, offers such perspectives.17 He has drawn some instructive historical parallels to our current debt crisis, pointing out that Plato and Aristotle believed that the very structure of democracies made them fiscally irresponsible. Rome in 70 BCE was a democracy and a superpower, but it had amassed an unsustainable private and public debt. It had an expensive professional army, and its citizens, who had become accustomed to entitlements such as bread and circuses (free food, chariot races, and gladiatorial games), paid no taxes—zero. Provincials provided all the state’s revenue. Politicians feared to cut entitlements or impose taxes. Attempts to reduce the debt were thwarted by partisan politics (sound familiar?). It took Julius Caesar to set things right. He solved the private debt crisis by decree: Debtors would pay back the principal they owed but not the interest. He eliminated the public debt by wars of conquest, by an equitable tax system for Roman citizens, and by giving Roman citizenship to the provincials with its attendant tax requirements. The ultimate cost of putting Rome on a sound fiscal footing was an absolute dictatorship.
In 1789, King Louis XVI of France had a gigantic debt problem. He had spent lavishly on his own government, especially its palatial seat at Versailles. Like his predecessors, he had also spent heavily on wars, including the American Revolution. The state’s revenues did not come from taxing the noblemen or the wealthy merchants. The cost of government was borne by artisans, small businessmen, and even peasants. But Louis needed even more taxes, so he called on Parliament to approve further increases. Instead, the French Revolution began, and he ended up without his head. It was the new National Assembly that had to deal with the French debt. Who would pay taxes? The answer was “Everyone.” The assessment of a general tax, however, failed to bring in enough revenue, so the National Assembly confiscated all the Church’s lands and used them as assets backing the issuance of government bonds called assignats. But the government issued bonds far in excess of the value of the Church’s property. The result was inflation, which by 1792 was out of control. Lifetime savings evaporated overnight. The mob took over, and by the time the Terror had ended it is estimated that as many as 40,000 Frenchmen had lost their lives. Still, the fiscal turmoil did not cease. Napoleon stepped in, and France, once again, was governed by an absolute despot. Napoleon, unlike Louis XVI, had a plan for the economy. He backed the currency with gold, taxed all French citizens, embarked on wars of conquest, and (like Caesar, whom Napoleon admired) looted and taxed the conquered.
Now, juxtapose these two historical experiences with the actions of the newly established government of the United States from 1789 to 1791. During the Revolutionary War, enormous debts had been run up by the Continental Congress and the individual states. The states and the congress had paid soldiers in paper money that soon became worthless. The result was a rebellion of former soldiers irate about their circumstances. The unrest and violence in Massachusetts, led by war hero Daniel Shays, alarmed many people, including Washington, Hamilton, and Franklin. It fell to Hamilton, the new treasury secretary, to figure out how to solve the debt problem. Fourteen million dollars was owed to foreign nations, especially France and Holland. The Continental Congress had also sold $42 million in bonds to supporters of the Revolution, both individual Americans and state governments. Finally, the states themselves had issued $25 million in debt.
Hamilton’s goal was to establish for the United States a credit rating and reputation for fiscal responsibility as good as those of any European country. The foreign debt was paid in hard currency, backed by gold and silver. The debt of the Continental Congress was paid at the face value of the bonds, notwithstanding the fact that a lot of the bonds were held by speculators who had bought them at a fraction of the face amount, because Hamilton wanted investors to consider future bonds of the federal government rock-solid. The third part of the debt had been accumulated by the states. Thomas Jefferson’s Virginia, along with North Carolina and Maryland, because of frugal management had paid off almost all of their debt, and did not want to pay off the debts of such spendthrift states as Massachusetts and South Carolina.
A stalemate ensued, and President Washington told Hamilton and Jefferson to solve the problem. Negotiations bogged down until Hamilton suggested to Jefferson that the capital of the United States be moved to the banks of the Potomac in exchange for Virginia’s support of federal payment of state debt. A deal was cut, and the federal government guaranteed the debts of the states. It was because of these decisions that, when the chaos of the French Revolution and the Napoleonic period swept the Continent, Europeans invested readily in U.S. government debt. And when Napoleon decided to sell Louisiana to pay for his European wars, Jefferson could seize the opportunity to more than double the size of the United States, knowing that much of the $15 million could be financed by the rock-solid credit of the U.S. government.
We need look no further than to our Founders for the answer to our current economic crisis and political stalemate. There is often no democratic alternative to political leaders from opposing parties sitting across the table from each other and agreeing on a plan. To do that, you need to know enough about your negotiating partner so that, like Hamilton, you can find the offer that will clinch the deal.
I would say, “Don’t count Congress out yet.” Good sense and true patriotism may well prevail. Even the staunchest opponents of President Obama are Americans before they are Republicans. I believe they will desist in their vitriol when they see that America is truly at risk without a Grand Bargain encompassing further short-term stimulus and mid-term deficit reductions that include spending cuts and tax increases. So far, that epiphany hasn’t occurred. But the prospects of mass unemployment and the stock market crash that could come with it is no gift to the next president, even if he or she is a Republican.
Ideology can drive a country over the cliff. We live at a time when we know what we need to do, but for whatever reason—fear, ambition, ideology—we don’t do it. That’s the ultimate self-destruction. Let us hope we can meet the challenge without the advent of a Julius Caesar or Napoleon Bonaparte. We’re now in uncharted waters. We cannot know whether good sense will prevail. It’s our choice.
Can we all do better?
4
Uprooting the Root of All Evil
At the core of the Washington culture is money. It rewards the politically connected. It burdens politicians with the need to raise it. And when they’ve raised it, it compromises them. The money culture angers taxpayers—it tells them they don’t count except as taxpayers who have to bail out banks “too big to fail.” It prevents us from breaking the logjam around the deficit. It builds weapons systems unwanted by the military and bridges nobody wants. It protects the old dying industries and ignores pioneering new companies. That kind of money can prevent the best ideas from becoming reality.
In my first campaign for the U.S. Senate, in 1978, I spent a total o
f $1.68 million for the primary and general election. When Jon Corzine ran in 2000 for the same seat, he spent more than $62 million—most of it his own. The 2008 elections cost a total of $5.3 billion.1 The 2012 contests could end up costing $6 or $7 billion. The only bright side? Many television stations would not be in business without political advertisements.
Lobbyists know their fields well, and their input to legislation can be valuable, but they should not be allowed to connect the provision of that knowledge with donations of money for a political campaign. There is something fundamentally wrong when a lobbyist—whether representing business or labor—comes to a legislator’s office to plead his client’s case and then four hours later appears at the legislator’s fund-raiser in a nearby restaurant with a $10,000 check. The link between money and policy must be broken.
