Taxes: the time to reform is at hand.
I want to thank the Commonwealth Club for inviting me to speak to you today. We are about to enter a period where our leadership will be tested again and one of the defining questions will be an issue that most Americans love to hate - the federal income tax.
Benjamin Franklin made the off-quoted comment that "In this world nothing can be said to be certain, except death and taxes." No one likes either subject very much. There's not much anyone can do to improve on the inevitability of the first subject. But if we aggressively pursue a just and fair tax reform in Washington, we can make paying taxes simpler and fairer for all American families.
Just days ago, millions of tax forms started arriving in mailboxes all across the country. People are beginning to sit down at their kitchen tables, pulling their shoe boxes of receipts out wondering how much they owe Uncle Sam.
They see a tax code riddled with preferences, gimmicks and loopholes many of which they don't qualify for or certainly don't understand. They see a tax return that takes far too much time and effort to calculate. And to add insult to injury, they see taxes that are simply too high.
The tax code is fundamentally flawed. But there is also something wrong in an economy where people have to work so hard spending more and more time at their jobs away from their families, their friends, and their children. So today I want to talk about tax reform - not only the need for it, but putting it in perspective - the perspective of hard-working Americans.
'Republicans have capitalized on public anger about the economy through the tax issue but they are doing nothing to address the underlying cause of this anger - an unequal economy that is not lifting the boats of all Americans.
The economic status quo is not working for everyone. This isn't meant as a criticism of anyone. It's simply a reminder that we have more work to do to make the economy grow for all Americans. The recent good economic news must not excuse a failure to address the growing economic divide between the wealthy and everyone else.
The tax status quo is equally unacceptable. It rubs salt into the wounds caused by sub-par economic growth, at least by historical standards.
Just because Republicans have been more skillful in turning the anger about taxes into political gain, Democrats should not devalue that anger as selfish or unworthy of respect. We must fight for the values of working Americans. The Democratic Party must enter the debate fully and offer a principled, practical, specific alternative.
There is little I agree with the Republican leadership in Congress on, but I agree we must make radical changes to fix the system.
I supported reform of the Internal Revenue Service last year to stop the abuses and dean up the system. To help put the IRS on the side of taxpayers rather than on their backs. Despite bipartisan support, Republicans in the Senate have stalled action on this reform. Republicans were more interested in capitalizing on public anger than actually addressing the problem. Their delays mean that taxpayers will have to wait for relief.
Now the issue seems to be a call for the abolition of the tax code; a vote some say the Republicans in Congress want to schedule by April 15th.
I agree with Jack Kemp - "the current system is indefensible." Let's demand more of ourselves than empty resolutions, full of sound and fury, but changing nothing. Instead, let's vote on what we'd put in its place.
We need a tax code that works for working America. That asks everyone to pay their fair share, but doesn't require them to do acrobatics in the process. A tax reform that lifts up working Americans in their efforts to improve their lives, not one that drags them down.
I've argued for tax reform since first running for Congress in 1976. In 1982, former Senator Bill Bradley and I introduced the Fair Tax Act, a plan to reform the tax code by making it fairer and simpler. I'm proud that with the help of Jack Kemp and Bob Kasten and the leadership of Ronald Reagan we were able to pass the Tax Reform Act of 1986. But the 1986 Act didn't solve our problems - it might have even created a few. But it did show us that if we take the special interests head-on we can reform the tax code.
In the ensuing decade our work has eroded due to our temptation to tinker with the tax code. It has become a piggybank for politicians. Each week a new idea is touted on how to deliver relief from the burden of taxes.
Some of these approaches are worthwhile. Some were helpful for working people and enabled a reduction in their tax burden. To be honest, I've authored and voted for many of them. But, taken together, they add up to higher tax rates, a complex code and a system that undermines rather than enhances economic growth. The time has come to take action to reverse this trend.
We must not blithely assume that a new and fair tax code will magically rise from the ashes of the old system. If we tear down the code, we must begin work on what will replace it - today, not two years from now.
Over two years ago, I announced my vision for reforming the federal income tax system. Dubbed the Democratic flat tax by the pundits, it differs in many respects. My plan would reduce rates for all taxpayers, not just those at the top of the ladder. From a clerk at the neighborhood hardware store to the CEO of a Silicon Valley software company, rates would drop by as much as one-third.
My plan would have almost 75% of taxpayers pay at no more than a 10% rate. For most Americans, that would be a significant reduction from current rates. And my plan would drastically streamline the tax code through the elimination of deductions. A majority of taxpayers would not have to file an income tax return with the federal government. For those that do file, most could use a postcard-sized tax form.
To reduce tax rates, the current tax base would be dramatically broadened and $50 billion in corporate welfare would be eliminated. The proposal would retain the current progressivity of the tax code and would not increase the deficit. This reform would sharply reduce the $300 billion and 4.5 billion hours per year now spent on tax filing, tax preparation, and complicated strategies for tax avoidance.
Unlike a consumption or flat tax, the 10% tax treats all income the same. Whether a taxpayer earns money from hard work or from investment, the tax treatment will be identical. This reform would free the economy from a distorted tax code. My plan takes away the power from the back rooms in Washington and puts it back in the hands of taxpayers.
But there is a natural skepticism in the American people . . . a belief that politicians will not be able to resist the temptation to create new special interest loopholes and pay for them by raising the rates again. To prevent that - to protect fundamental reform once it passes - my proposal would require a majority of voters across the country to approve future income tax increases in a referendum.
Today, I'm announcing that I intend to introduce my plan by April 15th, and that I have made three major changes to it. The changes were made after listening to people share their concerns. The changes were made possible by the economic growth we've experienced over the last two years.
First, my plan retains the exclusion on employer-provided health care. Now the plan protects both your home and your health.
Second, my plan eliminates the marriage penalty, the feature of today's tax code that can actually impose higher tax burdens on married couples.
Third, we've increased the standard deduction and personal exemptions. A family of four would pay no federal income tax on the first $27,500 in income. And, we've been able to raise the coverage of the 10% rate so that the same family would pay no more than a 10% rate on income up to $61,000.
And you know what? My plan would cut taxes for 62% of American taxpayers.
These changes reflect my determination to enact a reform that both lightens the load and simplifies the process for the vast majority of American taxpayers. In every aspect from fairness to simplicity, to protecting the integrity of the balanced budget, to promoting economic growth, Democratic tax reform bests both Republican tax reform proposals.
Now let's talk about fairness. The Republican flat and sales tax cures are worse than the disease. They seek to enact the largest redistribution of wealth in our history and all in the wrong direction. And they seek to create a system which either explodes the deficit or forces deep cuts in education, the environment, and health care.
Progressivity is not designed to punish the wealthy for their economic success. The idea behind it is to lighten the tax burden on those who are working hard to move into and stay in the middle class. Republican plans gut progressivity under the guise of fairness. They shift the tax burden down the scale, lightening the load on the wealthy. This is the cruelest kind of class warfare by the wealthy, for the wealthy, paid for on the backs of working people . . . by Republicans who are constantly accusing others of class warfare.
According to some analysts, if progressive taxation were abandoned in favor of the Armey flat tax, a family of four earning $45,000 would have their taxes doubled, while a taxpayer earning $500,000 would have their taxes cut in half. A true fiat tax doubles taxes for those in the middle and cuts them in half for the rich.
The national sales tax is just as regressive. Removing savings and investment income from federal taxation altogether is a huge windfall primarily to one group of taxpayers - the well-to-do. Consumption taxes put a greater burden on lower-income taxpayers who spend more of their paycheck feeding, housing and clothing their families. The sales tax would fall heaviest on those least able to make ends meet. The Archer Consumption tax would have consumers in San Francisco pay $4.55 for a gallon of milk and $1.98 for a loaf of bread. For a family struggling to buy groceries every week, their bill could jump 20% or more.
Think about it - a $100 cart of groceries will cost $120. That means just one thing, less food on the table. Republicans don't understand that you can be fair to working Americans without having a purely flat tax system. My Democratic plan combines the simplicity of a fiat tax rate with the fairness of the progressive rate.
The Republican tax plans only target workers' wages for taxation. This is both inequitable and unfair. Why should a full-time teacher or police officer pay more taxes than a full-time investor? Most Americans still earn their incomes the old-fashioned way - through work, not speculation.
At a time when Americans are enjoying increased levels of employment but stagnant wages, it is imperative to give some relief to those struggling to support their families. My plan lowers the tax rates for all filers, providing a real benefit to working people.
Indeed, average taxes for the vast majority of people making less than $200,000 would be cut. Sixty-two percent of all taxpayers would see a tax cut under my plan. About one-quarter would see no change in their tax bill, although a simpler system will clearly be of enormous benefit. Only 13% of all taxpayers would end up paying more. They're the ones who have so abused the code for which everyone is forced to pay.
My plan accomplishes what the Republicans do not. My proposal reduces the rates paid by all taxpayers. The Republican fiat tax plan also would eliminate some deductions and loopholes. But they use savings largely to finance lower rates on the wealthy. Democratic reform insists that savings be used to lower tax rates for all Americans, not just those at the top.
For most Americans, the Republican flat tax is a tax rate increase masquerading as reform. My plan is reform for everyone and reduction for those who need it most.
Now let me turn to the issue of simplicity. The Republicans worship at the altar of tax simplicity, but their reforms have a huge price tag for working Americans. Both the 10% and the Republican flat tax would simplify tax filing. Under my plan, many Americans would not have to file at all. Both plans would enable individuals to file their taxes on a form the size of a postcard. But the Armey plan is simple - and simply unfair - by shifting the tax burden to the middle class.
My plan proves it is possible to have a very simple tax system without sacrificing the principle of fairness. My plan delivers both.
At first glance, the Republican sales tax appears to be simple and nonbureaucratic. But a closer look shows this could be the most complicated new system. State sales taxes are easy to collect because of their relatively low rate. But a national sales tax of 20% or more would invite noncompliance, and would require a whole army of new tax agents to effectively enforce.
Republican tax reform isn't always what it seems. The public should pause to consider that Republicans, while preaching the gospel of tax simplification, passed a tax law in 1997 that added 285 new sections to the tax code and 824 amendments. Only through the most Orwellian logic could this be considered simplification.
Their "simplification" has been a boon to the tax preparation industry. Intuit Corporation spent between 30,000 and 35,000 hours making changes to their tax preparation software based on the 1997 law. On the tax issue, Republicans are long on rhetoric but short on real achievement.
They have failed to deliver on simple tax reform, they failed to deliver IRS reform, and I believe that they will fail to create a fair and comprehensive reform.
Now let's talk about the deficit. Another test of tax reform is whether it is deficit friendly, whether it can accomplish its goals without blowing a big, new hole in the budget.
According to the conservative Policy Review, the Armey proposal, at a 20% flat rate, would require approximately $950 billion in spending cuts or an increase in the deficit. And no one really believes that the Archer sales tax, even at a 20% rate, would raise enough money to be truly budget neutral.
We turned our back on the "spend now, pay later" mentality of the 1980s and have restored some fiscal sanity. It took us 17 long years to dig out from a mountain of debt. We shouldn't return to an era of big deficits to finance tax cuts for the wealthy.
They continue to believe that trickle-down economics works. But they're ignoring the facts. Despite opposing the 1993 budget (remember, not one Republican supported it), that yielded the first balanced budget in more than 28 years, they now want to lay claim to any surplus.
I have a message for them - keep your hands off the surplus. It belongs to hard working Americans who have tightened their belts to eliminate the endless deficits of supply side economics. If and when there is a surplus it should be spent to ensure that the economy grows for everyone, and to give a tax break to working people.
Tax reform must not wreck our hard-earned fiscal health. My plan is fiscally responsible and revenue neutral. And unlike the Republican plans, it doesn't blow a hole in the deficit.
And now a moment on growth. We need this tax reform now . . . to provide relief and simplification to hard-working families who are not enjoying the full economic benefits of an expanding economy. And to free the economy to higher growth.
Let's recognize that almost 80% of current economic growth is the result of consumption-Americans are buying more and more every day. A consumption tax seeks to dampen consumption and, in turn, would undermine the growth that has been moving us forward. Adding 20% or more to the price of the products people buy every day isn't a sensible answer. Sure we want to boost savings, but not by taking food off the kitchen table.
Nor is a flat tax that takes money out of the pockets of those in the middle class and those struggling to get into the middle class the answer. As we look around the world, we see economies in turmoil and under siege. Let's not risk our economy on misguided tax reform plans.
My plan isn't the final word in this debate. To achieve real reform, there must be a bipartisan effort to combine the best elements of different versions of tax reform this year. But my 10% plan shows how Democratic values work for the middle class.
Until now, the sound of the Armey-Tauzin Republican tax debate has been the sound of one hand clapping. That's not a real debate. Once the American public can hear a real discussion, I'm confident that our ideas will carry the day.
The great American Oliver Wendell Holmes was correct in saying that "taxes are what we pay for civilized society." But as a civilized society, we must insist on a system that collects taxes in a civilized way, fairly and simply.
It's time not for a commission, but for a commitment. Not for words, but for deeds.
Let's work to achieve a system which will treat all Americans with fairness and dignity. And let's give all American taxpayers the break they deserve.
KEY FEATURES OF GEPHARDT'S 10% TAX PLAN
* Seventy-five percent of all taxpayers pay taxes at no more than a 10% rate, and tax rates are lower for all Americans
* The marriage penalty would be eliminated
* The deduction for mortgage interest and the exclusion of employer-provided health care are retained
* The 10% Tax closes all loopholes
* A family of four pays no more than 10% up to roughly $61,000 in income
* A single individual pays no more than 10% up to $30,400 in income
* A majority of taxpayers do not have to file a tax form. Tax rates could only change in the future by national referendum
* The 10% Tax taxes all income - earned and unearned - the same
* The 10% Tax does not increase the deficit
* The 10% Tax is as progressive as today's tax system
* The 10% Tax takes away the lobbyist's seat at the table
* The 10% Tax drastically reduces the more than $300 billion and 4.5 billion hours spent on preparing and filing tax returns
* The 10% Tax cuts corporate welfare by more than $50 billion
* The 10% Tax ends the distorting effect of the tax code on economic decisions and promotes more productive investment and jobs
* The 10% Tax helps us compete and win in world markets
* The 10% Tax allows dramatic cuts in the Internal Revenue Service
HOW IT WORKS:
Taxable income is computed by first adding your standard deduction (or mortgage interest if it is an amount greater that standard deduction for your filing status) and the amount of your personal exemption together. That figure is then subtracted from your income to arrive at your taxable income. For example, for a family of four, earning $55,000 per year:
Standard deduction ($9,000) + Exemptions (4 x $2,900, or $11,600) = $20,600
Income ($55,000) - $20,600 = Taxable income ($34,400)
Tax = 10 percent of taxable income, or $3,440
Married: $9,000 Head of Household: $6,600 Single: $4,500
Personal Exemption: $2,900
Tax Rates (Taxable Income)
Marginal Tax Rate of 10%:
Married: $0-46,000 Head of Household: $0-32,000 Single: $0-23,000
Marginal Tax Rate of 32%:
Married: $150,000-275,000 Head of Household: $75,000-137,500 Single: $75,000-137,500 Marginal Tax Rate of 20%: Married: $46,000-80,000 Head of Household: $32,000-40,000 Single: $23,000-40,000
Marginal Tax Rate of 34%:
Married: Income over $275,000 Head of Household: Income over $137,500 Single: Income over $137,500
Marginal Tax Rate of 26%:
Married: $80,000-150,000 Head of Household: $40,000-75,000 Single: $40,000-75,000
Include as under current law:
Wages and salaries Taxable interest Dividends Alimony received Business income or loss Capital gain or loss (elimination of 28% maximum rate) Other gains and losses Schedule E (rental real estate, royalties, partnerships, S corps, trusts, etc.) Farm income or loss Unemployment compensation Social Security (treated the same as under current law)
Exclude as under current law:
Inside build-up of pensions, IRAs, life insurance, etc. Employer-provided health insurance Self-employed health insurance deduction Social Security benefits (current law provisions)
Tax-exempt interest Fringe benefits (other than health insurance) Employer pension contributions
State and local tax refunds (because no longer deductible on schedule A)
Exclude part of IRA and pension distributions (to reflect non-exclusion of contributions)
Foreign earned-income exclusion
Alimony paid Half of self-employment tax Penalty on early withdrawals from IRAs, etc.
IRA contributions Keogh contributions
Add (remove from itemized deductions):
Investment interest Job-related expenses (with floor)
Earned-income tax credit Foreign tax credit
Child care credit Elderly credit
Eliminate all itemized deductions except the deduction for mortgage interest (investment interest and job-related expenses would be moved to adjustments).
A native of St. Louis, Dick Gephardt was elected in 1994 to serve as House Democratic Leader, the top-ranking Democratic leader in the United States House of Representatives.
Gephardt was first elected to represent Missouri's Third Congressional District in 1976. As a House freshman, he was given the rare opportunity of serving on both the Ways and Means and Budget Committees, where he quickly became a national leader on health care, trade, and tax fairness. In 1984, he was elected Chair of the House Democratic Caucus, the fourth-ranking leadership post in the House.
In 1987, Gephardt became the first Democratic candidate to enter the 1988 presidential race - a virtually unprecedented bid for a rank-and-file member of the House Gephardt ultimately withdrew from the race, but not before winning three statewide primaries and helping to frame the economic issues that dominated the election. Following that race, in 1989, he was elected by his colleagues to serve as their Majority Leader.
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|Title Annotation:||includes Gephardt's tax plan; House Democratic Leader Richard A. Gephardt's speech|
|Publication:||The National Public Accountant|
|Date:||Aug 1, 1998|
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