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When Tax Reform Means Soaking the Rich

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Tax reform has evolved into one of the emptier platitudes of U.S. politics. Politicians support "tax reform" in the same way that they support "a strong national defense," "fiscal responsibility," and "pro-growth economic policies." It's a brave statement in search of a challenge. Is anyone ever against tax reform?

In practice, tax reform is defined by what it's not: It's not the tax system we have. It's not the compromised structure produced by a messy democracy. Tax reform means striving for the tax system we want, rather than the tax system we have.

But tax reform has no inherent, timeless meaning beyond that expression of dissatisfaction. In terms of policy specifics, its meaning changes over time.

Since at least the 1950s, fiscal experts have defined tax reform as a bargain, of sorts. In exchange for giving up loopholes and tax preferences, taxpayers get the promise of lower rates. The exchange is supposed to be revenue neutral - for the system as a whole, if not for individual taxpayers.

My colleague at Tax Analysts, David Brunori, has challenged the foundation of this bargain. "For decades," he pointed out, "most people have believed that the success of tax reform is dependent on the reform being revenue neutral." But the problem is, revenue neutrality has never been what most people really want. Conservatives have yearned for tax reform that actually lowers tax burdens (despite or perhaps because of the resulting revenue loss). Liberals have hoped for tax reform that actually raises tax burdens, especially on the rich (and especially if that kind of reform raises additional revenue).

In other words, everyone pays lip service to revenue neutrality, but no one actually likes it. David made the case for putting actual, rather than ostensible, preferences on the table. And in doing so, he has history on his side. Revenue neutrality was not always considered the sine qua non of tax reform. Indeed, through at least the 1970s, a different sort of tax reform held center stage in U.S. politics.

Last December, Clint Stretch wrote a thoughtful post for Capital Gains and Games pointing out that tax reform was once defined in terms of social justice. It derived its meaning from the same populist and religious impulses that gave rise to other kinds of policy reform, including slavery abolition, universal suffrage, public education, and temperance. Tax reform, in this older tradition, was defined by the progressive redistribution of tax burdens.

This understanding of tax reform is as old as the income tax itself. It was a vital force during the Civil War, when it prompted Congress to adopt the nation's first tax on personal and corporate income. Fifty years later, that same understanding of tax reform drove ratification of the 16th Amendment and the subsequent enactment of the 1913 income tax law.

And it didn't stop there. The tax revisions of World War I -- dramatic changes that pushed the top income tax bracket rate from 7 percent to 77 percent in just five years -- were all driven by the progressive understanding of tax reform. Later, during the New Deal, Franklin Roosevelt invoked a similar definition of tax reform to justify heavy new taxes on the rich.

The progressive definition of tax reform remained alive and well into the 1970s. "In the Tax Reform Acts of 1969 and 1976," Stretch pointed out, "the provisions scored as tax reforms generally increased the relative tax burden on higher-income individuals and on corporations," he wrote. The 1970s version of tax reform didn't prioritize rate cuts. Indeed, it didn't recognize such cuts as tax reform at all, instead scoring them as "tax relief."

When did this definition of tax reform lose out to revenue neutrality? Politically speaking, not until the Reagan years, when Congress passed the Tax Reform Act of 1986.

But according to Stretch, 1986 was also the high water mark for that sort of tax reform; in the years since, the lower rates/broader base bargain was supplanted by a single-minded fixation on rate cuts, at least among Republicans. "Coincident with the 1986 Act," Stretch wrote, "Grover Norquist and others took the traditional notions of reform through the looking glass and turned tax 'reform' into a synonym for tax reduction or limited government." Increasingly, politicians have been quick to call for rate cuts but slow to identify tax preferences they were willing to sacrifice in the name of revenue neutrality.

Over the past four years, President Obama has mounted a challenge to this Norquistian definition of tax reform. Indeed, he has even rejected the older tradition of revenue neutrality, instead arguing for a version of tax reform that actually raises raises money, chiefly by raising taxes on the rich.

Friendly observers might call Obama's approach "progressive tax reform." Less charitable critics might prefer "class warfare" or "soaking the rich." But whatever you call it, it's a type of tax reform with deep roots in American political culture.

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