by Alan Murray
Moreover, the men who had their hands on the levers of the tax-writing system in Washington—Finance Chairman Bob Packwood, Ways and Means Committee Chairman Dan Rostenkowski, Treasury Secretary Donald Regan, and later, Treasury Secretary James Baker—were scarcely reformers. They all helped fashion the 1981 tax bill, and they all had done their part to create and preserve the tax breaks that riddled the existing system. They could hardly be expected to champion an effort to rid the code of special-interest tax breaks.
Bob Packwood was the unlikeliest reformer of the group. Again and again during his nearly two decades in the Senate, Packwood had proved his commitment to maintaining and expanding the vast web of social and economic incentives in the tax code. He was the author of countless provisions benefiting special interests, a man whom lobbyists felt they could count on to defend their tax breaks against the threat of a sweeping reform.
“On taxes, I’m as predictable as the sun rising,” Packwood told The New York Times before taking over the Senate Finance Committee in early 1985. His statement was irrefutable. He had always been, in his own words, “a big credit man.” He had peddled tax credits for parents who sent their children to private schools; tax credits for child-care expenses; tax credits for solar energy, wind energy, ocean energy, even biological-waste energy. “I sort of like the tax code the way it is,” Packwood admitted shortly after the Treasury Department unveiled a plan for a comprehensive overhaul of the tax system.
Packwood’s words were sweet music to those lobbyists battling to keep tax benefits, and they paid the piper generously. During his first year and a half as Finance Committee chairman, the senator received nearly $1 million in campaign contributions from PACs—far more than any other member of Congress. The money poured in from investment banks, insurance companies, auto companies, real estate companies, drug companies, steel companies, the carpenters’ union, the food workers’ union, the bricklayers’ union, airlines, law firms, the American Hospital Association, the American Dental Association, liquor associations—in short, from almost every organization with an interest in preserving the existing tax system.
If Packwood seemed an unlikely champion of tax reform, so too did Treasury Secretary Donald Regan. The silver-haired former chairman of Merrill Lynch was the very picture of corporate America. He was one of the many executives who chanted the mantra of “capital formation.” During his years on Wall Street, Regan frequently jetted to Washington to push for big-business tax benefits. His firm also aggressively marketed a type of tax shelter known as “straddles,” even though the IRS had raised questions about their legality. When Jimmy Carter was considering his own ill-fated tax-reform plan, Regan was quick to criticize. He was particularly contemptuous of reports that the president was planning to limit the special break for capital-gains income. “The market is going down,” he said in 1977, “and the administration is trying to kill off one of the few tax preferences coming to the individual investor, so why should he bother to take risks?”
When Regan became Treasury secretary in 1981, his tax philosophy seemed clear. He remained true to that philosophy, serving as the point man in the administration’s efforts to enact the biggest corporate handout in history.
James A. Baker III, the White House chief of staff who later swapped jobs with Regan, was also an unlikely reformer. A Texas lawyer, he became Treasury secretary in 1985 largely because the job of secretary of State—his top choice—was not available. Despite his training as a lawyer, Baker had no abiding interest in tax policy and at times seemed to have no interest in policy at all. His first love was politics, and he viewed everything through that prism. He encouraged the president to call for a tax-reform “study” in early 1984, largely because he feared the Democrats might make reform an issue in the presidential campaign. But he also listened closely to the advice of Republican pollster Richard Wirthlin, who said the public would be skeptical of any effort to “reform” the tax system and would probably view it as a tax increase in disguise.
The largest gulf between Baker and tax reform was filled with oil. Baker was a Texas aristocrat, and like many wealthy natives of the Lone Star state, his roots ran deep into the reservoirs beneath the tumble weed plains. His interest in oil was not only financial; it was cultural, societal—oil ran in his blood.
The problem was that oil and tax reform were like oil and water. The oil industry had been a major beneficiary of tax loopholes since 1918, when generous depletion allowances were first enacted to help drillers. Any legislation that did not cut back on the generous oil and gas tax breaks could hardly be called reform, but any legislation that did cut back those cherished breaks would be inimical to Baker.
Dan Rostenkowski, the big, blustery Democratic chairman of the House Ways and Means Committee, shared the Treasury secretary’s preference for politics. Raised under the tutelage of Chicago machine-boss Mayor Richard Daley, he too was no reformer. He joined the Ways and Means Committee in 1964 not because of a deep interest in taxes, but because the panel at the time had the power to determine which committees Democratic House members would be allowed to sit on. With his training in ward politics, Rostenkowski knew that the power of patronage reigned supreme.
Rostenkowski became chairman of the tax-writing committee in 1981, and his first year in the job was a trial by fire that marked him as anything but a reformer. Confronted with President Reagan’s effort to force a Republican tax bill through the House, Rostenkowski responded by “sweetening” his version of the bill with even more tax preferences in order to buy support. In the bidding war that followed, Democrats and Republicans both handed out tax breaks in a desperate grab for votes. The Democrats—and Rostenkowski—lost, but in the process, Rostenkowski found himself backing a tax bill with business tax breaks so generous that even business lobbyists were stunned. “This is nothing short of astounding,” said a surprised Richard Rahn, chief economist for the Chamber of Commerce of the U.S.A. “If you’d told me a few years ago that the Democrats would propose this, I would have said you were out of your mind.”
President Reagan also was, in many ways, an unlikely tax reformer. He had always thought the reformers’ notion of tax expenditures was a “liberal myth.” The government had no inherent right to a taxpayer’s money, he reasoned; therefore, forgoing taxes on any portion of that money could hardly be considered the same as government spending.
The president also had a natural antipathy for the corporate income tax. Speaking to a group of businessmen in Bedford, Massachusetts, during January of 1983, he shocked his political advisers by saying that “there really isn’t a justification” for taxing corporations at all. “The elimination of the corporate tax,” he said, was “something we ought to look at.” The incident sparked immediate retractions from his aides in Washington, but the inadvertent comments were a clear reflection of the president’s feelings. They certainly did not suggest that, nearly three years later, he would triumphantly sign a tax bill that closed dozens of loopholes and raised corporate taxes by $120 billion over five years—the biggest corporate tax increase in history.
But in one very fundamental way President Reagan was a natural advocate of tax reform; he had a passionate desire for lower individual tax rates. He had vivid memories of his days as a young Hollywood actor, when he was reluctant to make too many movies in one year because more than 90 percent of his pay would go to the government. All other concerns paled in the presence of this obsession; on his list of domestic priorities, cutting personal tax rates ranked first, second, and third. If closing loopholes and raising corporate taxes was the only way to pay for lower rates, then so be it.
It was that unswerving dedication to lower rates that compelled the president eventually to embrace reform. And it was his staunch support for the bill, despite his sometimes surprising ignorance of its details, that enabled tax reform to overcome countless obstacles and become the law of the land.
Chapter 2
The Beginnings
In the sprin
g of 1982, a young senator from the industrial Northeast met with a ragtag group of reporters to discuss an unusual idea. The meeting took place in the Black Horse Tavern, a dimly lighted restaurant on the edge of downtown Washington. The lawmaker was former basketball great Bill Bradley of New Jersey. His idea was to overhaul the federal income tax by shearing away the most coveted tax breaks enjoyed by the nation’s industrial giants and its influential well-to-do.
Politicians had suggested reforming the tax system before, to be sure, but Bradley had a new twist. He proposed a marriage of two ideologies, one traditionally Democratic, the other Republican. His plan would not only close loopholes, it would also provide a dramatic drop in the top tax rate. It melded his party’s concern for fairness with the new drive among Republicans to promote economic opportunity. It offered a rare chance for the goals of social equity and economic efficiency, which usually were in conflict, to work hand in hand.
“We should have a tax code in which all citizens with equal incomes are treated essentially the same way,” he said in his plodding monotone.
We should have a tax code that is simple enough for all citizens to have at least a basic understanding of how the system works and how their own tax obligations are determined. We should have a tax code which allows taxpayers to make their economic decisions on the basis of real value in the marketplace—with little, if any, regard for tax implications.
The lighting was so poor in the back-street eatery that the towering Democrat had to strain to read his speech. He vaguely remembers that a dog wandered aimlessly through the crowd as he delivered it, and that a man and woman sat quietly near the front without taking notes.
“The couple over to the left of me were there for lunch; they weren’t there to hear my speech,” Bradley remembers. “They kept looking up and wondering, ‘What is this guy?’ ”
After Bradley finished, the lone television reporter in the group walked up to the senator, stuck a microphone in his face and said: “Now senator, we’re both grown men. We know politicians are always talking about tax reform and never doing anything about it. Why should we think you’re any different?” The public and Bradley’s fellow politicians were equally unimpressed. The story was ignored by The New York Times, The Washington Post, and the three major networks.
It was an unaccustomed situation for the neophyte senator. Though he was not yet forty years old, he had been a national idol for nearly two decades. As an undergraduate at Princeton University, he was acclaimed as one of the greatest college basketball players of all time. But he was more than that. He was an athlete-scholar, the classic profile of a leader of men. He graduated from the Ivy League school with honors and went on to study at Worcester College at Oxford University, as a winner of the prestigious Rhodes scholarship.
He was, in short, a model youth. He was religious, claiming that much of his strength of heart and mind came from his belief in God; he taught Sunday school at the First Presbyterian Church even after the sleepless nights that followed big Saturday night games. The time between the game and Sunday classes was often spent in the library, where he would cloister himself for study. He was the picture of determined intelligence, with luminescent green eyes and wing-tipped eyebrows, the left of which arched upward on his forehead like that of Star Trek’s Mr. Spock.
Even his modesty was legendary. He liked to say he lacked natural athletic ability, that he was too short, not very fast, and not much of a leaper; yet, he was the most-storied amateur athlete of his time. He also was fond of saying he was not as bright as his Princeton classmates and had to work twice as hard to keep pace, but those who know him well are convinced that he remembers everything he reads.
Great things were always expected of Bradley, and he almost always delivered. In 1964 he was a member of the United States Olympic basketball team that won the gold medal in Tokyo. As a senior in college the next year, he led his team to the “final four” by winning the eastern regional championship in the National Collegiate Athletic Association tournament, a feat that Princeton had not accomplished previously and has not repeated since. Although the team lost its bid to become national champion, Bradley was elected the tournament’s most valuable player.
After his stint at Oxford, he became one of the most touted players in the National Basketball Association. He helped to bring the New York Knickerbockers to two national championships over a decade-long career. Once again, he proved himself to be more than just an athlete. In the midst of his pro-ball years, he wrote the highly regarded Life on the Run, a thoughtful autobiography about the itinerant life of a professional basketball star. A year after he retired from the Knicks, he was elected to the Senate as its youngest member.
Everyone who had contact with the talented and driven Bradley believed there was no limit to his attainments. For his memorable book about the college-aged Bradley, A Sense of Where You Are, published in 1965, John McPhee asked several people where they thought Bradley would be when he turned forty. “With the help of his friends, Bill could very well be president of the United States,” answered his high school principal, Edward Rapp. “And without the help of his friends, he might make it anyway.”
In 1982, however, at the age of thirty-nine, it looked as though Bradley would need a lot of help just to stay where he was. Political sentiment had turned away from him and away from his Democratic party. Bradley was elected to the Basketball Hall of Fame that year—but at the same time, he found himself locked in a losing battle against the rising tide of the Reagan revolution. It seemed possible that the New Jersey senator might be remembered best for his former life as a basketball star, not for his new life as a politician.
The year before, Bradley had been the sole member of the Finance Committee to vote against the deep business and individual tax cuts that were the centerpiece of Reaganomics. He took the view that the president’s program of tax cuts, combined with increases in military spending, would lead to burgeoning budget deficits. He was also convinced that cutting rates without closing loopholes compounded the unfairness already in the code. Bradley took to the Senate floor in 1981 to offer a long series of amendments to limit the tax cuts and to reshape them to help middle-and lower-income families more than high-income individuals, but the amendments all went down in flames.
When the smoke from the 1981 battle cleared, Bradley was undaunted. He did not want to remain on the defensive; he wanted to play offense, make a positive statement. He needed a new approach, a new idea that he could stand behind, both politically and substantively, an idea that did not deal with the symptoms of the problem, but with its root causes. He decided to pursue a subject that he had been examining since his days as one of the highest-paid players in the NBA: a top-to-bottom revision of the federal income tax.
As a professional basketball player, Bradley had developed a healthy disdain for the U.S. tax code. He made big money, and that forced him to wrestle with the complexities of taxation. During his first contract negotiations at the age of twenty-three, Bradley was asked by his attorney a question that startled him: “How much do you want to pay in taxes?” The attorney went on to explain that Bradley could take his pay as property, as a long-term consulting contract, as employer-paid life insurance and pension plans, or even as payment to his own corporation.
“I just want to play basketball and be paid well,” the young Bradley said.
“It’s not so simple,” the attorney replied.
Bradley never lost his distaste for the complicated tax system and was appalled by the economic contortions it forced his teammates to endure. In Life on the Run, Bradley records the inordinate amount of time and energy he and his teammates spent trying to avoid the tax man and their unalloyed contempt for the Internal Revenue Service. “I don’t pay taxes, period,” crowed Jerry Lucas, a teammate with a penchant for mental games and high-stakes business dealings. “But I do it legally. I’m not stupid.”
(Years later, Bradley found kinship on such matters with another formerly highl
y paid professional—ex-Hollywood actor Ronald Reagan. During a meeting in the cabinet room between the president and the Finance Committee, Bradley said, “Mr. President, you came to this [tax reform] because you were an actor who paid at the 90-percent rate; that’s why you want a lower rate. I came to this because I was a depreciable asset.”)
On the long road trips during his pro-basketball career, Bradley had plenty of time to think things over, and he spent many off-court hours visiting local politicians and reading widely. He read Milton Friedman, the University of Chicago economist, and was fascinated to learn that a flat-tax system with a rate of just over 20 percent would raise as much money as the existing high-rate system. He also read about the largely fruitless efforts of Stanley Surrey, the Harvard Law School academic who worked to reform the income tax during the 1960s.
Bradley brought these ideas with him when he ran for the Senate. During his 1978 campaign, he wanted to advocate a broad-based, low-rate tax as one of his campaign stands, but he lacked the sophisticated tools to put the idea into practice and abandoned the effort. Instead, he suggested a targeted, one-year tax cut to counter the three-year cuts recommended by his Republican opponent, Jeff Bell. When the campaign was over, and Bradley was safely in the Senate, he looked back and marveled at how well his conservative opponent had exploited the voters’ intense dislike of the federal income tax. He saw that he was not alone in thinking the tax code was unfair. “This is an issue the voters care about,” he thought.