Woodrow Wilson, that incessant moralizer, said paying taxes is a “glorious privilege.” Few Americans have ever relished the glory, so until the 20th century the federal government relied heavily on indirect and stealthy consumption taxes—tariffs, which eventually amounted to almost 50 percent of the price of consumer goods. Tariffs were regressive, enriching manufacturers while punishing people of modest means who devoted a high proportion of their incomes to consumption. In The Great Tax Wars (2002), Steven R. Weisman writes that between 1860 and 1890, federal taxation increased sixfold and was paid primarily by the poor.
One American was pleased by the first iteration of the income tax, which was passed during the Civil War: In 1864, Mark Twain paid a tax of $36.82 on his income—plus a late-filing fine of $3.12, which, he said, made him feel “important” because it meant the government was taking notice of him. Republicans repealed the income tax lest its revenues lead to tariff reductions.
In the 1890s, one congressman opposed reviving that tax because it would hit only 2,000 people in his district, and poor people would feel “humiliated and degraded” by those 2,000 being elevated to a higher citizenship. In 1909, four years ahead of the federal government, Virginia enacted an income tax. Weisman writes: “After some tax agents sent to rural areas were never heard from again, Virginia repealed the tax, having collected less than $100,000.”
Now, with the Bush tax cuts less than seven months from expiration, the recovery still fragile, and unsustainable deficits looming, Sens. Ron Wyden (D-Ore.) and Judd Gregg (R-N.H.) are striding onto the dark and bloody ground of tax policy, which their proposal would improve. That is faint praise because the tax code is like daytime television—almost anything done to it would improve it. But the Wyden-Gregg proposal deserves robust praise.
Their approach is orthodox—pay for lower rates by broadening the base, and do that by eliminating most of the almost 10,000 complexities (deductions, credits, and other preferences) that distort the economic decisions of individuals and businesses. Individuals and couples with incomes up to $200,000 would do better, or no worse, under Wyden-Gregg than under current law. Wyden-Gregg would reduce the number of income-tax brackets to three—15, 25, and 35 percent—and would cut the corporate tax rate, currently the second highest in the industrial world (it is lower than Japan’s), to 24 percent. More than 95 percent of small businesses—those with gross annual receipts of less than $1 million, which are crucial to creating jobs—would be allowed to expense all equipment and inventory costs in a single year.
Also, Wyden-Gregg would encourage personal saving in a nation in which almost a third of all households have no retirement savings. It would enable a married couple to contribute up to $14,000 a year to tax-favored retirement and savings accounts.
Barack Obama, with his single-minded focus on enlarging government’s share of GDP, probably would prefer to pile a consumption tax (a VAT—value-added tax) on top of the income tax. He may hope the 18-member National Commission on Fiscal Responsibility and Reform will recommend a VAT to Congress. But any recommendation must be endorsed by 14 members, and Gregg, who is one, does not think there will be two votes for a VAT from the six Republicans appointed from Congress. Wyden-Gregg may be the only serious reform ready for consideration.
Wyden recalls that when Rahm Emanuel, now Obama’s chief of staff, was in Congress he sponsored an early version of the current proposal. Gregg says “there is no philosophical push-back” against the proposal on the GOP side.
The conservative Heritage Foundation concludes that the average family of four would have $4,095 in additional disposable income every year than under current law, America’s debt-to-GDP ratio would be 3.9 percentage points lower, 2.3 million more jobs would be created annually, and the aggregate net worth of American households would be $643 billion higher by 2020. This would happen because Wyden-Gregg would reduce the tax code’s “deadweight cost”—the value of the goods and services that would have been created were it not for taxation.
The IRS says Americans spend 7.6 billion hours (about the number of hours North Carolinians work) and $193 billion on compliance with the baroque tax code. Radically reducing this appalling waste would be another benefit from Wyden-Gregg. It is change Obama could believe in if he did not so ardently believe in creating prosperity by growing government.
George Will is also the author of One Man's America: The Pleasures and Provocations of Our Singular Nation and With a Happy Eye But . . .: America and the World, 1997—2002.