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Showdown at Gucci Gulch.

Showdown at Gucci Gulch.

Jeffrey H. Birnbaum and AlanS. Murray. Random House, $18.95. Publication date: June 29.

Saturday, May 3, 1986. Tax reform isbogged down in the Senate Finance Committee. A group of committee members who support the reform plan crafted by Chairman Bob Packwood are gathered in the committee room of the Dirksen Senate Office Building. It is a secret meeting; the hall outside, dubbed "Gucci Gulch,' for the lobbyists who normally lurk there, is empty.

The goal of the meeting is to eliminate $35billion in tax breaks. As rewards to themselves for supporting the controversial measure, the members of the group, in choosing cuts, make sure certain of their most favored tax preferences are protected. But to reach $35 billion, each senator must pony up some cherished breaks. Packwood offers to eliminate the preferential treatment on capital gains, which is important to his state's timber industry. Sen. Daniel Patrick Moynihan sacrifices the sales tax deduction.

As others follow suit, an inside joke develops:the senator giving up the break his constituent lobbyists expected him to fight for asks for "a note from the chairman.' This means that when the plan is revealed and the lobbyists descend, the senator has permission to claim to have struggled fiercely for the break, only to be defeated by the chairman, to whom the lobbyists can then complain.

These and other subterfuges in the name ofshared sacrifice are marvelously told in a new book* by two Wall Street Journal reporters, Jeffrey H. Birnbaum and Alan S. Murray, that chronicles the ups, downs, and ultimate victory of tax reform. In terms of offering insight into and conveying the drama of the Hill, Showdown at Gucci Gulch rivals Eric Redman's The Dance of Legislation. It is an important story. Tax reform was the first dramatic confrontation in more than a decade in which the special interests, and the politics of selfishness they represent, lost to the public interest.

No one seems to be eager to go through thesame exercise again. Reforming the tax code meant forcing the political system to work against some of its most powerful tendencies. The success of tax reform is seen by many as an anomaly--a sort of political solar eclipse that required a peculiar political arrangement and is unlikely to repeat itself for a long time. It was not heavenly bodies, however, that made tax reform happen, but people--politicians, bureaucrats, reporters, and others, only a small minority of whom were idealistically committed to the goal. Solutions to many of our most pressing and seemingly intractable problems, such as the federal deficit, also depend, at least in part, on getting government to adopt policies that run counter to the demands of narrow, moneyed interests. The larger these problems loom, the more tax reform, with all its setbacks and imperfections, may become the paradigm for dealing with them.

Lobbyists' relief act

Retrospective searches like this, which try toisolate the powerful forces propelling history, can leave you with a sense that what happened was inevitable. Plenty of seasoned Washington observers talk about tax reform as if its victory was not at all suprising. It's healthy, then, to recall just how unlikely tax reform looked to insiders at the time. When Sen. Bill Bradley, the "godfather' of tax reform, was peddling his "Fair Tax' plan to eliminate most exemptions in exchange for low rates, Sen. Russell Long derided the bill as "an attractive conversation piece.'

The odds remained bad even after the Reaganadministration adopted tax reform and the legislators began formally considering it. Rep. Richard Gephardt himself abandoned the issue, preferring hotter subjects such as trade protectionism and his own budding presidential candidacy. In the summer of 1985, Gephardt encountered a reporter who was still covering taxes: "That's not a good story,' the congressman advised.

After tirelessly driving tax reform throughthe House, Ways and Means Committee Chairman Dan Rostenkowski gloated over his success, content in his belief that the Republicans would be blamed when tax reform died in the Senate.

The cynicism was perfectly reasonable. Attemptsat reforming the tax code had an impressive record of failure even before the growth of special interest PACs. On this recent effort, the special interests poured resources into the fight to save their tax benefits. PAC contributions to House Ways and Means and Senate Finance committee members in 1985, the year the tax reform legislation was being considered, were $6.7 million, two and a half times the 1983 amount. Chairman Packwood was the Hill's number one recipient of PAC contributions. Industries and organizations paid such enormous fees to so many lobbyists that the tax reform bill soon became known in Washington as the "Lobbyists' Relief Act of 1986.'

One of the remarkable lessons of tax reform--one that should encourage attempts to apply the lessons elsewhere--is that you don't need many reformers to effect reform. The key players were not, for the most part, men who had lost sleep over the inequities of the tax code. Treasury Secretary Donald T. Regan had spent his years as head of Merrill Lynch lobbying for various investment tax credits. Pragmatic Jim Baker, a Texas corporate lawyer for whom oil and gas breaks were sacred, took Regan's job eagerly, but the tax reform cause grudgingly. Deputy Secretary Richard Darman had idealism, accompanied, however, by equally strong Machiavelian instincts. Rostenkowski, his roots in the Chicago Democratic machine, was infamous for his failed attempt to outbid the Reagan administration in giving tax breaks to special interests during markup of the 1981 tax bill. Robert Packwood was perhaps the most unlikely reformer of all; "I sort of like the tax code the way it is,' he said in 1985. Before tax reform landed in his committee, Packwood twice threatened to kill it if his favored tax breaks weren't preserved. There were precious few reformers in either Packwood's or Rostenkowski's committees; members generally seek appointment to Finance and Ways and Means for the purpose of giving tax breaks to favored and powerful constituents. "None of us is committed to tax reform,' declared Senate Finance Committee member Malcolm Wallop at one point.

Neither, in fact, was the public, as politiciansrepeatedly found out on their trips back home. This did not mean, however, that Americans cared much for the existing tax code. In 1972 Americans generally viewed the federal income tax as more fair than state and local taxes; by 1985, they saw it as less fair by far. A major reason was that congressmen loved to give special interests loopholes, which transformed accountants and lawyers into tax shelters. Between 1976 and 1983, the amount of money in tax shelters is believed to have risen ten-fold, from $2 billion to $20 billion.

The sense of unfairness coalesced around thekind of Outrageous Anecdote that had previously helped lead to reform. In the final days of the Johnson administration, for instance, Treasury Secretary Joseph Barr, warning about an impending taxpayer's revolt, released figures showing that in 1967 155 people with incomes higher than $200,000, 21 millionaires among them, managed to pay no taxes at all. The resulting press reports and constituent outrage caused newly elected President Nixon to agree to legislation that repealed many tax breaks.

The man behind the Outrageous Anecdotesthat led to the Tax Reform Act of 1986 is Robert McIntyre, a lawyer with Citizens for Tax Justice. With a computer and stacks of annual reports from the nation's largest companies, McIntyre discovered that, thanks in part to the Reagansponsored 1981 tax act, 128 large and profitable companies paid no federal income taxes in at least one year between 1981 and 1983. His study led to banner press headlines and changed attitudes; even James J. Kilpatrick started preaching against "corporate welfare.'

Changed attitudes toward corporate tax breakswere behind one of the great surprises of tax reform, "Treasury I,' the tax overhall plan drafted in 1984 by Donald Regan's Treasury Department. In his 1984 State of the Union address, the president directed Regan to "study' tax reform. The call was a largely cynical attempt by the White House to take the wind out of what it believed were Mondale's plans to make tax reform a central campaign issue. (Mondale, of course, had no such plans, despite entreaties by Bradley; Democrats were no less vulnerable to special interest pressures than Republicans.) But in the process of "Studying' the tax code, Regan--who, say Birnbaum and Murray, saw tax overhaul as a way to regain prominence for himself within the administration--underwent a remarkable transformation.

Throughout 1984, Regan kept himself and ahandful of top treasury officials locked up in secret tax-drafting sessions. There, sealed off from outside political influences, the secretary came under the intellectual sway of Ronald Pearlman, assistant secretary for tax policy, and Charles McLure, Pearlman's deputy. Both were die-hard conservative tax reformers who believed that the market, not the tax code, should guide the flow of capital. Putting that idea in practice meant wiping out virtually all deductions and exemptions--including corporate breaks backed by Reagan, and Regan, in 1981. These ideas delighted treasury bureaucrats, who kept the two constantly supplied with analyses to support their arguments. McLure, a conservative economist affiliated with the Hoover Institute, spoke in Regan's language--he called attempts to spur growth with tax breaks "tax code socialism.' Regan became a convert, openly delighting in the havoc his plan would cause. (Birnbaum and Murray point out that the secretary had a stong iconoclastic streak. On Wall Street, he broke ranks by advocating an end to fixed brokerage commissions and enjoyed the chaos he caused in other firms when he transformed Merrill Lynch into a financial services giant.) In drafting Treasury I, Regan agreed to hit just about every tax preference in the IRS Code and to raise corporate taxes by a staggering $150 billion.

The president praised Treasury I in his 1985State of the Union address. His support for reform, and his famous ability to charm rebellious legislators into also supporting it, would prove crucial for its success. His fondness for Treasury I, however, was apparently enhanced by his ignorance of certain substantive details. When asked by reporters about Treasury I's vast increase in corporate taxes--a clear 180 degree reversal of his 1981 corporate tax strategy-- Reagan was honestly shocked and dismayed such increases were proposed.

With its pristine fairness and huge corporatetax increases, Regan's plan was widely considered politically inept. Upon coming to Treasury in 1985, Jim Baker and Richard Darman devised their own, more accommodating proposal, and in so doing kept the reform process moving. But Treasury I played a orucial role: it planted the flag. Like Nixon's opening of China, it changed the politics of tax reform. Traditional Democrats, who feared crossing the special interests but who could always be counted on to chime in when the unfairness of the tax code was under discussion, could find nothing in the proposal to use as an excuse not to support it. One such Democrat, Chairman Rostenkowski, suddenly had several compelling reasons to become a reformer: he feared the Republicans would outpolitic the Democrats with the issue; he saw shepherding tax reform through Ways and Means as a way to regain a reputation as a powerful committee leader after the drubbing he took in 1981; and he saw the campaign contributions that might come his way. "I started to realize that, brother, I've got a lot of friends in the business community,' the chairman recalls. "I realized at that point that I was their salvation, because I wasn't going to move as far as Treasury I.'

Treasury I also proved invaluable to Republicantax reformers. In the early days of the tax bill's mark-up in the Senate Finance Committee, the prospects for reform had hit a new low. Committee Chairman Packwood was a reluctant reformer; it was an election year, and he did not wish to be seen as the man who stood in the way of his own president's worthy initiative. His way of moving the bill along was to try to meet the minimal parochial demands of every committee member. It was a losing strategy--with each concession came further demands. Sensing defeat, Packwood tried something desperate. Over burgers and beer at a Capitol Hill watering hole, the chairman and his top aide Bill Diefenderfer decided to propose what they called the "radical plan': a top rate of only 25 percent, a full 10 points lower than any previous plan. (Like Regan, Packwood enjoys an image of himself as a maverick; his support for radical reform made the senator think of the final shootout in the Sam Peckinpah western "The Wild Bunch.') To compensate for such low rates required not only relentlessly eliminating exemptions but raising corporate taxes. It was Treasury I that made those corporate tax increases possible. "If you're a Republican, there're certain things you can't backtrack on; corporate tax increases was one of them,' Diefenderfer told me. "Because of Treasury I, we weren't having to fight constantly for that ground.'

Tax reform yin and yang

The lack of public support for the tax reformeffort did not reflect a lack of public eagerness for reform but cynicism about the government's ability to achieve it. This created a maddening dilemma for politicians once tax reform became a real issue. They could support reform, a cause for which there was little outcry, and in so doing face the wrath of the special interests, or they could oppose it, and risk being tagged by the press, and perceived by the public, as having sold out to the money men. "It's paranoia on the Hill,' complained a lobbyist. "They're scared to appear to be caving in to the special interests.'

Behind their fear was the knowledge thatenough reporters actually understood the intricacies and significance of what was going on. Too often newsmen are so baffled by the complexities of subjects like tax policy that they are grateful when officials tell them what the issues are. Correspondents like Birnbaum and Murray, who modestly refrain from mentioning themselves or their work in their book, provided some of the debate's most comprehensive, and comprehensible, reporting. The Washington Post, however, not The Wall Street Journal or The New York Times, is the paper federal officials and politicians and staff members read most regularly. The Post and the hometown press are where they take the measure of how well they are performing. Even more key to tax reform's success, then, was the reporting of the Post's Dale Russakoff and her partner on the tax reform beat, Anne Swardson. "Dale understood what the fight was all about,' Robert McIntyre said recently. "It wasn't about technical gobbledygook, it was about money and politics and society. By just describing things clearly, she kept people from getting confused and kept the politicians from covering up.' In the early days of the House markup, when the Ways and Means Committee voted to give additional breaks to the banking industry, the Post ran this headline: "Tax Reformers Turn Recidivist; Bank Lobbyists Won Another Break From Ways and Means.' New Republic editor and tax reform champion Michael Kinsley also kept the heat on in his TRB column. Another article in the magazine dubbed the Senate Finance Committee chairman "Senator Hackwood.'

Shame and fear, however, were not enough toassure tax reform's passage. Seamier tactics were also employed. Chairmen Packwood and Rostenkowski greased up tax reform with transition rules--special breaks that exempt certain groups, industries, and companies from the first year or two of the new taxes--in order to keep the bills moving. During the final, delicate days of the House markup Rostenkowski openly threatened to withold transition pork from any member who crossed him. Richard Darman convinced legislators to accept a 5 percent "surcharge' on income between $100,000 and $250,000, thus raising additional revenue while maintaining a lower "official' top rate on income above $250,000. When Treasury discovered a $21 billion shortfall in Packwood's bill that might have lessened its chances of passing the Senate, Darman and Baker muscled the department into keeping the numbers secret; by the time the Joint Tax Committee made the same discovery, tax reform was already in the House-Senate conference.

With all the horsetrading and political gerryrigging,plenty of narrow interests, such as oil and gas producers, succeeded in protecting their breaks. But the narrow interest that came out best in tax reform was not an industry but a class: the rich. As a result of tax reform, the top rate dropped from 50 percent to just 28 percent, and with it, the heart of the principle of progressive taxation.

This was not a concession made in the heat oflegislative battle. Trading the rich tax breaks for much lower rates was a well-considered strategy dating back to Bradley, one he and others felt was crucial to achieving the larger goal of tax reform. They were right. Lower tax rates have an obvious and natural appeal to people of almost any political stripe, but especially to Republicans. With the rise of Reagan and Reaganomics, the appeal of rate-cutting reached a new high. In formulating his Fair Tax, Bradley consciously incorporated that appeal, fusing it with the loophole-closing equity that had long drawn Democrats to tax reform. That was the the brilliance of the plan. It gave each side something it wanted and asked each side to yield other things it wanted, the political yin and yang tied to a greater common good.

Yet there are costs to the new low rates fewDemocrats at the time apparently considered. The rules Bradley set up in Fair Tax, which Treasury and Congress then followed, was that tax reform would affect neither government revenues nor income distribution. This was an implicit call for accepting the low rate the rich, with all their deductions and shelters, actually paid, as the rate they ought to be paying. Tax reform, in a very real sense, conceded that all the lobbyists and tax lawyers and shelter hustlers who have profited from helping the rich outwit the IRS were ultimately in the right. A familiar rationalization for this was that high rates create incentives for the rich to undermine the tax code through lobbyists and accountants--as if, even with the new low rates, the rich wouldn't continue such schemes.

Journalist William Greider pointed out thepalpable costs of the top rate reduction. In Rolling Stone last November, Greider showed that the new rate will give a $20 billion tax windfall to 390,000 rich Americans who make more than $200,000 a year but aren't taking advantage of tax shelters. Tax reform also takes about $20 billion from those in the same top income group who are using tax shelters. Taking from the rich to give to the rich.

Writing in The Washington Post in April,Robert Reich articulated a less palpable, but more insidious effect. Reich likened the loss of the principle of progressivity to the informal exemption from military service the rich received with the ending of the draft in 1973. Both, says Reich, amounted to "a renunciation of social aspiration. The retreat signaled an abandonment of an important goal, and with it our sense of mutual responsibility and interdependence.' Sadly, the loss of the principle of progressivity represents the opposite of what tax reform, in its noblest light, stands for: the spirit of shared sacrifice for the common good.

Yet without the lower rates, tax reform wasdoomed--that's the persuasive justification for it. Indeed, the lower the top rate, the more loopholes had to be eliminated to pay for it. Rostenkowski's bill, with high corporate taxes and a top rate 11 points higher than Packwood's, did not seriously crack down on tax shelters; Packwood's bill, with lower but still substantial corporate taxes, virtually eliminated shelters. Yet the effect of both bills on the amount of taxes the wealthiest group of Americans paid was about the same.

Despite its imperfections, the Tax Reform Actis for the public good. Though the 28 percent top rate is a blow to the principle of progressivity, the new tax code will be more progressive in its effect than the loophole-ridden code it replaces. It takes six million of the working poor off the tax rolls. It eliminates billions of dollars of economically worthless tax shelters. It removes inequities between those who paid their full share of taxes and those who exploited deductions to reduce or eliminate their taxes.

But tax reform's most important victory is inshowing that politically irresolvable dilemmas can be overcome by appeals to, and strategies aimed at, the common good. The country now faces another such dilemma: towering deficits side-by-side with the need for immense amounts of additional government spending--for programs such as infrastructure repair, welfare reform, and care for the elderly. The best solution to these problems is to divert tax dollars from where they aren't essential to where they are, and to increase taxes. One becomes gloomy just thinking of the number of special interests arrayed against such a solution.

What makes tax reform an inspiring lesson isthat cracking the special interest gridlock doesn't require sweeping Washington clean of self-interest. A few key players in the right places can set things in motion so that even those disposed toward fighting reform see their own interest in backing it. There must be Bill Bradley-types able to fashion radical compromises that work. There must be reporters who understand federal programs well enough to see through press releases and distinguish fat from muscle. There need to be a few administration officials who, like McLure and Pearlman, can persuasively argue the case for ideal solutions. There's an equal need for a few others, like Darman and Baker, who can fashion the Machiavellian tactics to implement them.

Jaded Washington insiders may not believe it,but tax reform has widened the boundaries of the politically possible. It is not outrageous, then, to call for one simple legislative change that will correct the most serious flaw in the Tax Reform Act of 1986, plant a flag for the notion of shared sacrifice and, incidentally, brings us about $20 billion closer to the goal of deficit reduction: raise the top tax rate by, say, 10 percent.
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Author:Glastris, Paul
Publication:Washington Monthly
Article Type:Book Review
Date:Jun 1, 1987
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