Showdown at Gucci Gulch

by Alan Murray

  In 1979, Bradley met with his senatorial staff and said he wanted to draft a major tax-reform bill that eliminated loopholes and imposed a lower, flatter tax-rate system. They poured cold water on the plan. It was too ambitious, they chided him. But after the debacle in 1981, when his efforts to trim back the oversized tax cuts were thwarted, Bradley renewed his pursuit of tax reform. He was searching for a politically palatable alternative to the Republican tax cuts. So he plowed ahead to devise a wholly restructured tax system.

  True to his nature, Bradley did not take the enterprise lightly. He applied to his legislative endeavors the same dedication to detail and devotion to fundamentals that were the hallmarks of his success in basketball. During his teen years in Crystal City, Missouri, not far from St. Louis, Bradley, the only child of a banker, maintained a maniacal practice schedule. According to McPhee, Bradley would work out on the court for

  three and a half hours every day after school, nine to five on Saturday, one-thirty to five on Sunday, and, in the summer, about three hours a day. He put ten pounds of lead slivers in his sneakers, set up chairs as opponents and dribbled in slalom fashion around them, and wore eyeglass frames that had a piece of cardboard taped to them so that he could not see the floor, for a good dribbler never looks at the ball.

  In college, he could analyze every shot and every move down to its smallest components. A hook shot, he would explain, has five distinct parts: the crouch, the turn of the head toward the basket, the step, the kick, and the follow-through with the arms. He also would not quit until he got things right. He would never complete his daily practice routine until he had made at least ten out of thirteen of each of his shots from every location on the court.

  In 1981 and 1982, his drive for tax reform reflected all of the traits of his basketball days: discipline, painstaking analysis, and patience.

  During this period, Bradley could be seen loping wide-eyed through the halls of Congress, laden with books and briefing papers. He would breeze through volumes of tax tracts and reach out to a brain trust of tax experts both inside and outside of government. While other senators left details to their staffs, Bradley remained intimately involved in the minutiae of his income-tax proposal. He demanded explanations and would not relent until he understood. He wanted to know which tax breaks he was eliminating, how they got there to begin with, and why they should go. He took careful notes in spiral-bound notebooks. He sometimes spent eighteen-hour days at his task, studying and refining the proposal for a year and a half.

  The Bradley brain trust was led by Gina Despres, Bradley’s own hard-nosed legislative counsel, who would continue for years as a guiding force behind the scenes. She was assisted by a lanky, bearded economist named Joe Minarik, who worked for one of Congress’s information-resource agencies, the Congressional Budget Office. James Wetzler and Randy Weiss, two top-flight economists from the Joint Committee on Taxation, and Tom Troyer and Bob Klayman, two tax lawyers from Despres’s old law firm Caplin and Drysdale were also part of the team. Despres called these and other tax experts together for long lunches in Bradley’s office. They adhered to an agenda devised by Wetzler. During these gatherings, Bradley, in effect, was treated to a comprehensive course in federal taxation, in which he learned the most basic and arcane facets of the existing code, as well as the most widely discussed alternatives.

  Bradley used these ideas to compose his plan, but he did not rely on them exclusively. He drew his own judgments and rejected some of the common academic wisdom that declared the income tax obsolete. He also talked about his plan to anyone who would listen: farm groups, Wall Street moguls, town-hall meetings back home in New Jersey. He tested people’s reactions to the idea of trading off deductions that help the few in order to provide lower tax rates for the many. Slowly, and from these grass-roots encounters, he learned arguments to beat back attacks, and he came to believe that his plan would sell.

  Bradley’s colleagues in the Senate saw little of his touch for the common man. Many considered him aloof and dogmatic. To them, he came off more like a professor of political history than a politician. They would say they liked him, thought him quite able, and admired his hard work; but some also resented his Wunderkind reputation, his rapid rise to their exclusive debating society. His dry, cerebral wit was not funny to them, and at times he seemed condescending and arrogant. He was often moody, and not quite a member of the club.

  At home and on the road, Bradley conveyed a very different persona. Though he was a dull, even pedantic, speaker, he was warm and engaging one-on-one. When giving a greeting, he would wrap his long fingers around the hand of the greeted, bring down his face from its six-foot five-inch height, and look the person in the eye. This sudden attention was both a treat and a shock. Here was Bill Bradley, the legend—and a nice guy, too.

  Bradley was searching for something elemental in the American psyche, a message that struck a chord. He thought his tax bill would help achieve the American dream. When a taxpayer got a raise in salary, moved up the ladder of success, Bradley’s bill would allow him to keep more of the extra cash in his pocket. The top tax rate would be lower than it had been in half a century and far lower than proposed in any previous Democratic tax-reform effort—that was the opportunity it promised. In addition, when a taxpayer looked around at friends and neighbors, he could feel certain that they too were paying their share of taxes, unable to hide behind loopholes or shelters—that was the Bradley plan’s essential fairness.

  Like a growing number of young Democrats, Bradley was skeptical of the traditional big-government doctrine of his party. Instead, he laced his rhetoric with “Republican” talk about “free markets” as the “most efficient allocator of capital.” Lower rates and fewer distorting tax incentives would allow those markets to work, he reasoned, and lead to unfettered economic growth. He hoped to call the bluff of Republicans who spouted similar free-market rhetoric, while jealously guarding tax breaks that tilted the playing field toward their friends and constituents.

  At the same time, Bradley saw the populist attraction of tax reform. The fight would pit the special interests, who would struggle to keep their loopholes, against the general interest—lower rates for everyone. A central goal of tax reform must be to give the lowest possible rate to the greatest number of Americans, he said.

  At the start, Bradley made three key political decisions that determined the character of his plan and that distinguished it from previous tax reform efforts:

  First, he decided that his plan should not be used as a solution to the growing deficit problem. It must be “revenue neutral,” raising neither more nor less revenue than the current tax system. Previous tax bills had always either raised revenue or cut it, but Bradley wanted to avoid the harsh ideological battles that would undoubtedly follow if he pushed his measure in either direction.

  Second, Bradley decided not to change the distribution of the tax burden among income groups, except to provide some relief to the working poor. He believed that earlier reform plans had been dismissed out of hand by Republicans and moderate Democrats because they were Robin Hoodlike redistribution schemes, taking more money away from those at the top of the income scale and giving more to those in the middle and at the bottom. He meant to avoid that pitfall.

  Third, Bradley decided not to raise taxes on corporations to pay for tax cuts for individuals. Such a shift, he feared, would label the plan as anti-business and help ensure its defeat.

  A key challenge for Bradley’s plan—and for all the plans that followed—was how to sharply reduce the top tax rate without providing a windfall to the wealthy. Bradley sought a top tax rate as low as 30 percent—a twenty-percentage-point drop in the tax rate for high-income taxpayers. He had to find some way to guarantee that those at the top did not reap excessive benefits from the change.

  The solution to Bradley’s problem came from Joe Minarik, the Congressional Budget Office economist. In 1981, Minarik had done some work for Representative Stewart McKinney, Rep
ublican of Connecticut, who like Bradley was interested in an alternative to the supply-side tax cuts. Minarik drafted a plan with a bottom rate of 14 percent and a top rate of 28 percent, but the originality of the plan was the way it treated deductions and exclusions. Under existing law, a deduction is worth more as a taxpayer moves into higher tax brackets. A $100 deduction for someone in the 11-percent bracket, for instance, saves only eleven dollars in taxes; but a $100 deduction for a person in the 50-percent bracket saves a full fifty dollars in taxes. Minarik’s idea was that deductions should have equal value to all taxpayers, regardless of the person’s bracket. He rigged his two-rate scheme so that a $100 deduction could only be taken against the bottom rate, thus saving only fourteen dollars in taxes, regardless of a person’s income. High-income taxpayers, who would enjoy big tax rate cuts under the plan, would also lose much of the value of their deductions.

  Minarik was excited by his research. “I was surprised how low you could get the rate” by using this device, he recalls. But McKinney lost interest. Over lunch sometime later, Gina Despres enlisted Minarik and the McKinney plan as part of the senator’s quest for tax reform.

  Doubts ran high about the prospects for the effort, even among those working on the plan. “I remember it as an interesting exercise, and wishing them all godspeed and all that,” said the Joint Tax Committee’s Randy Weiss, who made important refinements in the Minarik scheme. “But I thought it was mostly pie in the sky.”

  At the conclusion of the plan’s laborious preparation, Bradley chose Democratic Representative Richard Gephardt of Missouri to cosponsor the bill in the House. Gephardt was a fair-haired, serious, and inscrutable young legislator who had ambitions of rising rapidly in the House hierarchy and of perhaps running for president. He served on the House Ways and Means Committee, the sister panel to Bradley’s Finance Committee in the Senate. If Bradley’s Fair Tax Plan had any chance of becoming law, it would first have to win the approval of these two tax-writing committees. Indeed, since under the Constitution, revenue measures must originate in the House, a foothold in Ways and Means was especially important.

  Bradley had known Gephardt casually since the early 1970s, when the then professional basketball player was flirting with the idea of running for treasurer of Missouri, his native state. Gephardt was a young alderman in St. Louis at the time, and Bradley sought his advice. Gephardt remembers that Bradley wanted to talk to a local politician near his own age. Bradley remembers Gephardt as clean-cut and hard working—not unlike himself.

  Their paths crossed again in Congress at the end of the decade. Gephardt was elected in 1976 from a district that, ironically, would later include Bradley’s hometown of Crystal City, along the Mississippi River. Bradley came to the Senate from New Jersey, his new home, in 1978. Both became part of a group of up-and-coming Democrats, who were being flagged as the vanguard of the party. They occasionally would go out together to make speeches intended to display the Democrats’ new face. They also both had an interest in new styles of taxation. Gephardt says he was studying income-tax revision independently of Bradley, but when told of the senator’s plan, he was glad to join the enterprise and lend it his name. Bradley was trying to do a favor for his House colleague, but events would later show that Gephardt was, in the end, only a fair-weather friend of tax reform.

  The final version of the proposal had a simple, progressive rate structure with three rates: 14 percent, 26 percent, and 30 percent. About 80 percent of all taxpayers would pay at the lowest rate. The plan would increase the personal exemption and the standard deduction in order to remove many low-income families from the income-tax rolls. To pay for this, the plan would repeal many deductions, exclusions, and credits. It would keep a few preferences that Bradley judged to be too politically sensitive to remove: deductions for home-mortgage-interest payments, charitable contributions, payments to individual retirement accounts and payments of state and local income and property taxes. These, however, would be limited as Minarik had envisioned: they would be deductible but only against the 14-percent rate, making their value the same for taxpayers in all income brackets. For corporations, the top rate was dropped to 30 percent from 46 percent.

  The Bradley-Gephardt bill contained the basic principles that would later become the Tax Reform Act of 1986, but when Bradley and Gephardt introduced their bill on August 5, 1982 (a second and final version was introduced the next year), most of Washington paid little heed. It was one of 2,151 bills introduced in the House during that session and 1,119 introduced in the Senate. At best, only a few hundred of those bills would ever become law. The Fair Tax Act of 1982 seemed to be one of the forgotten proposals, a noble but unrealistic idea.

  While Bradley studied tax reform, many of his colleagues in Washington focused on the deficit. Within a few months after the 1981 tax cuts were passed, the prospect of skyrocketing budget deficits was readily apparent. Projections showed that if left untouched, the nation’s fiscal shortfall would soon approach $250 billion a year—four times the largest deficit in the Carter years. President Reagan had promised to eradicate deficits, but now it looked like he might quadruple them. The situation was serious, and a profound embarrassment. It led to a series of tax-increase bills that were the precursors of tax reform, but also proved how tough it was to close even a limited number of loopholes in the face of interest-group opposition.

  Although the U.S. economy was mired in a recession in 1982, the president was compelled to accept and eventually work for the passage of the biggest tax increase in peacetime history. The measure, known in the argot of Washington as the Tax Equity and Fiscal Responsibility Act (TEFRA), raised $98 billion in revenue over three years, half of it from corporations.

  The legislation was largely the handiwork of Senator Dole, the chairman of the Finance Committee. Dole was a respected legislator with a reputation for a quick wit. A traditional Republican, Dole had little patience for the supply-siders who dominated the agenda in 1981 with their Kemp-Roth tax cut. Joking in early 1982, Dole told a group that he had good news and bad news: “The good news is that a bus full of supply-siders went off a cliff. The bad news is that two seats were empty.”

  Dole wanted to be president, and he was eager to demonstrate his leadership abilities in the Senate to help his cause. The deficit problem offered him that opportunity. The White House was reluctant to push for tax increases, and the Democrats were reluctant to cross the White House on such a controversial issue. So Dole stepped in and took the lead. Although the Constitution said that tax bills must originate in the House, Dole put together a package of miscellaneous revenue-raisers and “loophole closings” in his Finance Committee. He then tacked them onto a minor House-passed tax bill that had been stripped of all its original provisions, passed it through the Senate, and sent it to the House.

  The 1982 tax bill kept the hallway outside the Finance Committee room filled with lobbyists, who feared they would lose some of the generous tax breaks that they had been given in 1981. It was then that the hallways first took the name of the expensive Italian shoes that were worn by lobbyists. Toward the end of the committee’s drafting sessions, someone commented to Dole, “There’s wall-to-wall Guccis out there,” to which the chairman retorted, “Well, a lot of them are going to be barefoot after this is done.”

  In the House, special interests rose up to stifle action. Ways and Means Chairman Rostenkowski was unable to get his committee members to agree on a formula for a tax increase, because of resistance by the formidable oil-and-gas interests on his panel. It was a source of resistance he would never forget. In the end, he was compelled to go to conference committee—the forum where differences between House and Senate measures are resolved—without a bill of his own. It was a rare and humiliating position for the reputedly powerful chairman.

  Dole claimed that the bill finally signed by the president in 1982 was tax reform of a sort, but it was only a small step toward reform. It eliminated or curtailed a number of major tax breaks, bu
t it did not offer lower tax rates in return. Supply-side Republicans like Representative Newt Gingrich of Georgia complained that Dole was merely serving as “tax collector for the welfare state.” Nevertheless, Dole clung to his abhorrence of the deficit. He was also convinced that small or “incremental” efforts to close loopholes were the only way to go about reform. Broad, sweeping measures like that advocated by Bradley, he believed, would never work.

  Dole’s bill was a defeat for many powerful interests, but it was not long before they rallied again. Infuriated by the bill’s plan to require banks to withhold taxes from the dividends and interest they paid to customers, banks and other financial institutions launched a massive grass-roots lobbying campaign in 1983 that flooded the Capitol with postcards demanding repeal of the offending provision. Republican Senator Robert Kasten of Wisconsin led the successful campaign for the banks, and Dole was forced to accept repeal.

  As the budget deficit continued to rise, Dole and Senate Budget Committee Chairman Pete Domenici persuaded President Reagan in 1984 to ask for yet another tax increase, which they soft-pedaled as a “down payment” on the budget deficit. The three-year, $50 billion tax hike, much like the 1982 bill, was a collection of odds and ends. But again, the debate over the bill demonstrated the impressive power of the interests who backed certain tax breaks. Dole originally hoped to cut back the tax benefits of the real estate industry, which had benefited enormously from the 1981 bill and was responsible for most of the growth in tax shelters. The realtors’ lobbyists filled the hallways outside the hearing room as Dole completed his bill, and when the chairman stepped outside, he faced a phalanx of them clustered around their leader, Al Abrahams of the National Association of Realtors. “We weren’t treated fairly,” Abrahams complained, twitching nervously but speaking with conviction. Dole shook his head in disagreement. On the Senate floor, the Kansan continued to battle the realtors, but he was eventually overwhelmed by their lobbying power and forced to accept a compromise. Angry and vengeful, Dole complained: “They have been camping on our doorstep. They have been in the gallery. They have been in the lobbies. They have been in the elevators…. I know the precise office this storm has been created by. There will be another day.” (Indeed, there was to be another day, just two years later, but neither Dole nor the realtors imagined in 1984 how severe the retribution would be.)