by Alan Murray
Diefenderfer’s analysis of the problems of the stripped-down approach hit home with the ambitious chairman. The two men had often discussed how important it was for Packwood to prove himself a success. The senator’s extensive library was stocked with books about great men in history, such as Disraeli and Jefferson, and his office was decorated with biscuit tins bearing likenesses of Winston Churchill. Packwood took the examples of these men seriously. If the Finance Committee failed to approve more than a pale imitation of reform, Diefenderfer argued, it would be three or four years before Packwood could regain his reputation as a leader, before he could recoup his power. This was a possibility that Packwood was loathe to ignore.
There was also Packwood’s reelection to consider. On that day, April 18, 1986, Packwood was a month away from what he feared would be a close primary back home in Oregon, and his political opponents were beginning to make hay out of his committee’s many giveaways. Representative James Weaver, the Democratic aspirant, gave a major address that asserted Packwood was “floundering” in his first major test as chairman, and that he was sucking up to “special interests.” Oregon newspapers were also chiding him for taking huge campaign contributions from almost every interest group imaginable. He was quickly growing infamous as “Mr. Special Interest.”
Another solution was vaguely in the minds of both men. They had discussed the possibility for months and had even done some preliminary research on it, but the notion was so drastic, and its likelihood of success so remote, that almost no one thought it anything but foolhardy.
Packwood and Diefenderfer called it the “radical approach”: the paring away of enough deductions, exclusions, and credits in the code to halve the top individual tax rate to 25 percent from 50 percent. With a rate so low, Packwood reasoned, “people would cease to worry about whether or not the particular deduction or exemption they were concerned with stayed or disappeared.”
The idea was an extraordinary but simple one. Although many Americans fell into tax brackets as high as 50 percent, few Americans paid more than 25 percent of their income in taxes; there was no reason for the top rate to be any higher than that. The proposal Packwood and Diefenderfer were plotting would be even more audacious than Bill Bradley’s landmark proposal in 1982, and in some ways, even more far-reaching than the quickly dismissed Treasury I plan in 1984.
Packwood had dropped hints about his interest in the 25-percent solution before. During Finance Committee hearings, he had asked witnesses: “At what tax rate won’t deductions matter anymore?” He had even mentioned a 25-percent plan to the president at a White House meeting with congressional leaders in the summer of 1985, but almost no one took him seriously. Eliminating enough tax breaks to get the rate down to 25 percent was, most everyone in Washington agreed, politically impossible. Packwood himself had originally thought a 25-percent plan would have to be accompanied by a consumption tax to raise additional revenue. Now, however, he was considering something more sweeping. The president had ruled out any new taxes as part of reform; that meant the low rate would have to be paid for by eliminating tax breaks.
During the first pitcher of beer, the two men hashed over the options. They were well into their second pitcher when it became clear there was only one course to take: the radical approach.
These two men—one who had never faced public election, the other who represented a state that had little more than 1 percent of the nation’s population—were toying with the most massive redistribution of the tax burden in the nation’s history. Hunched over their sandwiches, they were plotting to take hundreds of billions of dollars out of the pockets of those who had made heavy use of tax loopholes and bestow those billions on everyone who had not. It was a plan that would cause fundamental changes in the very structure of American society. It would subtly and deeply affect the lives of every American household and every American business. Packwood, who had spent much of his Senate career poking loopholes in the tax system, was now suggesting the biggest loophole-closing package in history.
To a large extent, the idea that crystallized over beer at The Irish Times was a political ploy. The two men thought it might help quiet the criticism of Packwood at home, and that certainly could not hurt his reelection chances. His political opponents could hardly criticize him for doing what they were demanding.
The plan also had its appeal in Washington. During his seventy hours of meetings with the senators on his panel, Packwood noted that almost every one of them said that they supported “reform—real reform,” but of course, they always added, “real” reform was not politically possible. During the two-week deterioration of the markup, the members sometimes justified their piggish votes by claiming the initial Packwood proposal was not real reform anyway, so why should they hold back?
Well, Packwood now thought, if they say they want reform, I’ll give them reform. A radical, off-with-their-heads tax-reform plan with a rate as low as 25 percent surely would call the bluff of anyone who was trying to conceal distaste for reform behind a reformer’s rhetoric. It would be difficult for the self-righteous members of the Finance Committee to reject out of hand.
In addition, the radical approach had a substantive appeal for Packwood. By this time, he was convinced that 25 percent or thereabouts was a “magic” number for the top individual rate. If rates were that low, he believed, people would stop caring so passionately about their deductions and credits. He had come to believe that Bradley and Kemp were right: the lower the rate, the less political pressure for tax breaks and the more efficient the economy.
Packwood also liked the idea because it was bold, and the combative chairman enjoyed taking bold stands. Like his great-grandfather and father before him, he had a volatile nature. He cherished being unpredictable and independent-minded. If nothing else, the proposal would contribute to that image.
A more prudent lawmaker, steeped in the traditions and policy of tax law, would have concluded that the 25-percent idea would never work, that it probably was suicidal to even attempt it, but Packwood was in a desperate spot, and he chose a desperate strategy. Taking a half-inch-thick slice of onion from Diefenderfer’s cheeseburger and placing it atop his own, Packwood looked at Diefenderfer and said, “Why not?” They finished their burgers and a second pitcher of beer and walked back to the Capitol rejuvenated. They had made their decision.
Neither of them knew where their half-crazed plan would lead them. Later, in private, Packwood told several associates that he did not expect the 25-percent plan to succeed and that he was putting it forward mostly for tactical reasons. He and Diefenderfer both doubted the committee would go for it, but at least Packwood would have staked out the high ground on tax reform. Packwood conceded, “It was a long shot.”
“I’ve often described it as sort of like the end of that movie The Wild Bunch,” Packwood says. In the film, a gang of bandits sells out a young member of their crew to the other side, but later decides to undo the deed. “The next morning they get up and look at each other and strap on their guns and go to get the kid. They know they’re going to be killed, but they’ve got to do this, they’ve got to try it. Bill and I just felt, OK, this is something we’ve got to try. If we fail, we fail at a great enterprise. No guts, no glory.”
When Diefenderfer reached his office, he placed a call to David Brockway at the Joint Committee on Taxation. “David, we’re talking about this radical structure,” Diefenderfer said. “Give me a plan with tax rates of 15 percent and 25 percent, a 33-percent top corporate rate and make it revenue neutral. I don’t have time to give you the outline; you know roughly where we want to go. I just want a plan to show them that this is possible.”
Brockway was pleased—and shocked—to hear from Diefenderfer. Their relations had been strained. Brockway had been close to Rostenkowski in his struggle to get reform in the House, functioning as a de facto member of the chairman’s senior staff. But he and Packwood had never gotten along. The Finance Committee chairman suspected that Brockway a
nd his Joint Committee staff secretly wanted to tax his precious fringe benefits, and that alone was enough to make him distrustful. Indeed, at one of his first breakfast meetings with lobbyists after assuming the chairmanship, Packwood announced that he wanted to remove Brockway from his job, though he never acted on the intention.
Brockway was excited that Packwood might actually be interested in trying real reform. That was the kind of bill he and his staff had dreamed about for many years. But Brockway knew that his job did not rest on dreams. His honest, practical reaction to the radical idea, hewn from years of experience watching the tax scene in Congress, was pessimistic. Brockway knew that some of the most cherished deductions in the code, including those for mortgage interest and charitable contributions, might have to be on the chopping block to get the rate that low. “You realize,” he told Diefenderfer, “that no way this flies.”
At 2:15 P.M., Packwood and Diefenderfer met with Baker and Darman. The Treasury officials expected to find the senator and his aide in a downbeat mood. Darman had prepared an agenda for the meeting, as was his custom. The first item was designed to boost morale; it had new Treasury estimates showing the committee had not lost as much revenue as thought. The next few items were suggestions about how to build a new proposal with the help of a small group of senators, who might form a “core group.” The last item, titled “shots across the bow,” was the kicker. With the prospects for reform looking dim, Darman thought it might be time to use what he called “the big gun in the closet.” It might be time for the administration to begin placing blame on some troublesome senators for trying to kill tax reform, for selling out to the special interests.
To their surprise, Baker and Darman found that Packwood had made up his mind to take a dramatic new direction: the 25-percent solution.
The Treasury chiefs cautioned the senator that his plan could never become law. To get the top rate down to 25 percent would require slaughtering too many political sacred cows. Nevertheless, they said, they were willing to back the idea; at least it was a new starting point. Like Packwood, they thought the plan would at least serve to “call the bluff” of those on the Finance Committee who claimed they would only support real reform and not a watered-down version. As usual, they were willing to go along just to keep the process alive, confident that, somehow, they could shape the bill to their liking in the end. “We weren’t at all sure that it could be done,” Baker said later, “but we were certainly willing to give it a try … Anything would be better than the course he was following.”
Six days later, on Thursday, April 24, Packwood summoned his members to a meeting in the so-called exec room, behind the Finance Committee hearing room, where the committee held its private talks. Along the walls of the small, wood-paneled room stood several glass-doored cabinets that contained Senator Long’s tax library. Otherwise, the only diversions for the members in the room were several telephones, a picture window looking out at the Russell Office Building, and a large photograph of the Teton mountains.
Lobbyists and reporters were massed outside the room, restlessly pacing the corridor’s gray marble floors. All they knew was what Packwood had said publicly: that the committee was going to “start from square one” and that “nothing is sacred.” The lobbyists were worried, and anxious to find out what was happening inside.
The members took their places around the fifteen-foot conference table. They were as much in the dark about Packwood’s plan as those in the hallway were. They were handed two sets of papers. To the surprise of many, the first was a brief description of the original Bradley-Gephardt bill—the seminal document that launched the tax-reform movement four years earlier and that the Finance Committee had spent the past month repudiating. “This is the way Bill did it,” Packwood explained. The paper listed the tax breaks that Bradley had eliminated or curtailed in order to get the top individual tax rate to 30 percent. The senators were surprised to see the Republican chairman pushing this Democratic plan, and there was muttering around the table.
Then Packwood passed out the real surprise: the 25-percent plan Brockway and his staff had drafted in secret. It was greeted with stunned silence. Since the day of the two-pitcher lunch, Brockway and his deputy, Randy Weiss, had worked with revenue estimator Steve Lerch to come up with the plan. It was bare bones and to the point. It eliminated every single deduction for individuals, including the most popular, such as those for mortgage interest, charitable contributions, and state and local taxes. It had only two rates: 15 percent and 25 percent. The corporate rate was slashed to 33 percent. The preferential treatment of capital-gains income was completely eliminated. To avoid reopening the battles of two weeks earlier, the new plan completely skirted the corporate side of the tax code. It simply assumed that about $75 billion in new revenue would be raised from unnamed changes in corporate taxes—far less than the $120 billion in the president’s plan or the $140 billion in the House plan, but still a sizable amount. The plan also included a $25 billion increase in excise taxes to help pay for the drastic individual-rate cuts.
Even though it sidestepped difficult corporate tax reform issues, the 25-percent plan was still awesome in its scope. It was a collection of the toughest tax-reform provisions—at least for individual taxpayers—that had ever been seriously considered by any congressional body. Packwood’s plan did more than call the bluff of his members; it blew them away.
“Any interest?” Packwood asked. Remarkably, there was.
Voices of support popped up from all corners of the table. It quickly became evident that Packwood was not the only Finance Committee member who was shamed and embarrassed by the panel’s special-interest feeding frenzy of the previous few weeks. Many of the politicians had felt the sting of critical press reports; many realized they might suffer if their committee failed to act on the president’s call for reform. As a result, the impossible was starting to happen: The phoenix of tax reform was beginning to rise again from the dead. Compared to the unpleasant alternative of killing reform, approving some sort of radical reform legislation looked like a good idea, even to the unlikely reformers of the Finance Committee.
As Moynihan put it later, “You shouldn’t underestimate the ability for moral indignation, even among politicians.” Packwood gave this explanation: “It was a cathartic process. Maybe we had to go through what we went through or we would not have gotten to where we are.”
The 25-percent plan’s central attraction was the low top rate. It was so low that the members began to focus on its attractiveness rather than on the pain that their constituencies would feel from the elimination of tax preferences. John Chafee of Rhode Island called the deep cut in the top rate “the siren’s song” that lured support for the plan.
All of this was no revelation to Bill Bradley, who had pioneered the concept, so when Packwood associated his own plan with Bradley’s, the New Jersey lawmaker was quick to join the chorus of praise. He also began to play an unaccustomed role for such a young senator: the elder statesman. He had been making the case for his own plan for four long years. He knew all the arguments for it and against it. In an instant, he was transformed from being a junior member of the committee’s minority party—and, indeed, one of the few in that minority who favored reform—to a respected adviser on the most sweeping piece of tax law in over forty years. He began to help Packwood, his former nemesis, defend the radical approach. “Bradley was right,” Packwood would say later, in simple explanation of the startling reversal.
The first newfound reformer to speak up at the meeting was, in many ways, the least likely. Malcolm Wallop of Wyoming, one of the most conservative Republicans on the committee, said he could be interested. He had fought the reform effort fiercely, but the simplicity and the low top rate of Packwood’s plan attracted him. In public, Wallop had said repeatedly that he liked low rates and hated complexity. “Complexity,” he said, “favors the most powerful among us.” On that day in the exec room, Wallop made clear that he had not been joking.
<
br /> John Danforth of Missouri was the next to praise the package. A tall, slow-talking preacher and scion of the Ralston Purina dog-chow fortune, he had a tuft of white in his brown hair that prompted his staff, secretly, to call him Spot. Danforth congratulated the chairman and told the group about a top New York executive who had approached him at a party recently and said, “I pay taxes, but nobody I know pays them.” That was wrong, Danforth said, and something should be done about it. The 25-percent solution moved in the right direction, he said. Referring first to the old plan and then to the new one, Danforth concluded, “That was a bazaar; this is reform.”
Moynihan, a former Harvard professor, ambassador, and White House adviser, also had some good things to say. He told the story that would become known on the committee as the “Grace Report.” According to the 1985 annual report of W. R. Grace & Company, he said, the Manhattan-based conglomerate paid taxes to Muammar Qaddafi’s outlaw nation, Libya, but got a half-million-dollar refund from the United States. That was an outrage, he believed, that had to be stopped. Nevertheless, the New York Democrat was pessimistic about the political prospects for so large a change as was envisioned by the Packwood plan. Legislatures were incrementalist by nature, he argued; perhaps the minimum-tax route would be a more realistic, if less attractive, alternative.
Even Lloyd Bentsen of Texas, one of the most respected conservatives on the committee and a friend to countless special interests, said he was intrigued by the plan. Some of the other senators quietly gasped when he declared that so low a tax rate could even compel him to agree to the elimination of the special low rate for capital gains—a truly stunning concession from the man who had helped popularize the term “capital formation.”
But Bentsen reserved his support; the panel had to make a choice between two options, he said, and he personally was ambivalent about which option to take. The panel could either write a radical, low-rate plan, as Packwood was proposing, or it could write a stripped-down plan with a rate in the range of 40 percent, which did little more than impose a stiffened minimum tax and take families below poverty level off of the income tax rolls. Any middle-ground plan, he said, such as the one they had been suffering through, would be “the worst of both worlds.”