How to do taxes by hand
How Taxes Drive Americans Crazy and What to Do About It
By AMITY SHLAES
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THE GREEDY HAND
The father of the modern American state was a pipe-puffing executive at R. H. Macy & Co. named Beardsley Ruml. Ruml, the department store's treasurer, also served as chairman of the board of directors of the Federal Reserve Bank of New York and advisor to President Franklin Roosevelt during World War II. In those years Washington was busy marshaling the forces of the American economy to halt Japan and Germany. In 1942, not long after Pearl Harbor, lawmakers raised income taxes radically, with rates that aimed to capture twice as much revenue as in the previous year. They also imposed the income tax on tens of millions of Americans who had never been acquainted with the levy before. The change was so dramatic that the chroniclers of that period have coined a phrase to describe it. They say that the "class tax" became a "mass tax."
The new rates were law. But Americans were ill-prepared to face a new and giant tax bill. A Gallup poll from the period showed that only some 5 million of the 34 million people who were subject to the tax for the first time were saving to make their payment. In those days, March 15, not April 15, was the nation's annual tax deadline.
The Treasury nervously launched a huge public relations campaign to remind Americans of their new duties. A Treasury Department poster exhorted citizens: "You are one of 50,000,000 Americans who must fill out an income tax form by March 15. DO IT NOW!" For wartime theatergoers, Disney had prepared an animated short film featuring citizen Donald Duck laboring over his tax return beside a bottle of aspirin. Donald claimed exemptions and dependent credits for Huey, Dewey, and Louie.
As March 15, 1943 neared, though, it became clear that many citizens still were not filing returns. Henry Morgenthau, the Treasury secretary, confronted colleagues about the nightmarish prospect of mass tax evasion: "Suppose we have to go out and try to arrest five million people?"
The Macy's Model
Enter Ruml, man of ideas. At Macy's, he had observed that customers didn't like big bills. They preferred making payments bit by bit, in the installment plan, even if they had to pay for the pleasure with interest. So Ruml devised a plan, which he unfolded to his colleagues at the Federal Reserve and to anyone in Washington who would listen. The government would get business to do its work, collecting taxes for it. Employers would retain a percentage of taxes from workers every week--say, 20 percent--and forward it directly to Washington's war chest. This would hide the size of the new taxes from the worker. No longer would the worker ever have to look his tax bill square in the eye. Workers need never even see the money they were forgoing. Withholding as we know it today was born.
This was more than change, it was transformation. Government would put its hand into the taxpayer's pocket and grab its share of tax--without asking.
Ruml hadn't invented withholding. His genius was to make its introduction palatable by adding a powerful sweetener: the federal government would offer a tax amnesty for the previous year, allowing confused and indebted citizens to start on new footing. It was the most ambitious bait-and-switch plan in America's history.
Ruml advertised his project as a humane effort to smooth life in the disruption of the war. He noted it was a way to help taxpayers out of the habit of carrying income tax debt, debt that he characterized as "a pernicious fungus permeating the structure of things." The move was also patriotic. At Macy's, executives had found that a "young man in the comptroller's office who was making $75 or $100 [a week was] called into the navy at a salary of $2,600 and we had to get together and take care of his income tax for him." The young man, Ruml saw, would face a tax bill for a higher income at a time when he was earning less money in the service of his country. This Ruml deemed "an impossible situation."
Ruml had several reasons for wagering that his project would work. One was that Americans, smarting from the Japanese assault, were now willing to sacrifice more than at any other point in memory. The second was that the federal government would be able to administer withholding--six successful years of Social Security showed that the government, for the first time ever, was able to handle such a mass program of revenue collection. The third was packaging. He called his program not "collection at source" or "withholding," two technical terms for what he was doing. Instead he chose a zippier name: "pay as you go." And most important of all, there was the lure of the tax amnesty.
The policy thinkers of the day embraced the Ruml arrangement. This was an era in which John Maynard Keynes dominated the world of economics. The Keynesians placed enormous faith in government. The one thing they liked about the war was that it demonstrated to the world all the miracles that Big Government could work. The Ruml plan would give them the wherewithal to have their projects even, they sensed, after the war ended. Keynesianism also said high taxes were crucial to controlling inflation. The Keynesians saw withholding as the right tool for getting those necessary high taxes.
Conservatives played their part in the drama. Among withholding's backers was the man who was later to become the world's leading free-market economist, Milton Friedman. Decades after the war, Friedman called for the abolition of the withholding system. In his memoirs he wrote that "we concentrated single-mindedly on promoting the war effort. We gave next to no consideration to any longer-run consequences. It never occurred to me at the time that I was helping to develop machinery that would make possible a government that I would come to criticize severely as too large, too instrusive, too destructive of freedom. Yet, that was precisely what I was doing." With an almost audible sigh, Friedman added: "There is an important lesson here. It is far easier to introduce a government program than to get rid of it."
Such questions, though, had no place in the mind of a nation under attack. At the moment what seemed most important was that voters accepted the Ruml plan. Randolph Paul, a Treasury Department official and Ruml critic, wrote resignedly that "his plan had political appeal. Though he conceived the plan as getting people out of debt to the government, the public thought that Ruml had found a very white rabbit"a magic trick"which would somehow lighten their tax load."
The Amnesty Ruse
Congress got to work. Ruml followers joined hands. The Rumlites, as they were known, succeeded in passing a version of the Ruml plan. "The Current Tax Payment Act of 1943" included the only full-fledged federal amnesty on personal income taxes to take place this century, granting taxpayers forgiveness of 75 percent of the lower of a taxpayer's 1942 or 1943 liabilities. The ruse was on.
"Pay as you go" became the rule nationwide in July of 1943, or in the same weeks as Allied Forces landed on Sicily. Workers suddenly began receiving 20 percent less in their paychecks. "This amount is not a new tax," assured the Treasury in a breathless letter distributed to forestall panic. "[It is] in payment of your regular Federal Income and Victory Tax." The Treasury chose the same moment to inform Americans of a new piece of paper that would now enter their lives, the ancestor of today's W-2's: "After the close of the year your employer will give you a receipt showing exactly how much of your money has gone to the United States Treasury toward the payment of your taxes. Keep that receipt. It is your evidence of taxes paid."
At the time the whole arrangement was presented as just another contingency step taken in the extraordinary fight against the Nazis. But even in the mêlée of those war years it became clear that a new page was being written in the annals of public finance. America was a nation born of a tax revolt. For the first century of the country's history, its people and courts had rejected the income tax altogether. Yet here, after withholding, the planners' hopes were being borne out. It seemed that the average citizen really was willing to accept high taxes, as long as they were buried in a program like "pay as you go."
Now the big thinkers began to dream. Withholding would indeed do more than fund the occupation of Germany or victory over Japan. As 1943 and 1944 passed, with taxpayers obediently accepting their smaller checks, they got to work on the blueprints of their postwar projects. These were years in which everyone feared a return of the Depression. With the Ruml plan in service, they believed, they could spend their way out of future economic trouble. Emboldened by his own successes, Ruml himself compiled lists of new uses for federal taxes, among them to control inflation and "to express public policy in the distribution of wealth and income, as in the case of the progressive income and estate taxes."
Not many said it too loudly, but everyone came to recognize it. "Pay as you go" was the fiscal equivalent of the war's wonder weapons. It was a wonder weapon that would be deployed in peacetime, and that would change the way Americans felt about their government forever.
The Grandest Sticker Shock
Most Americans come face-to-face with Beardsley Ruml and his pipe at the moment that they get their first paycheck. First they look at the bottom number, rather less than they thought it was going to be. Then, and only then, do they start to puzzle over the items. "Gross," "income tax," "disability," "state," "F.I.C.A." Then, again, they look to the disappointing bit Mr. Ruml has left them. The name they give that amount reflects the fresh cynicism of people beginning to understand the way life works: "take-home."
That first-paycheck moment--call it the grandest of all life's sticker shocks--is something many Americans recall well. In fact most of us remember the sight of that check in our hands in much the same way we remember the dashboard of our first car. So this is adulthood, we said to ourselves. We like the car memory. We don't like the withholding memory, so we try to ignore it. Why remind ourselves of something that we cannot change? It is hard to imagine saving the amount we pay in tax each year, and then sending the money in one giant check come April 15. Confronted with the idea of sending $10,000 or $20,000 to the government all at once, some of us would surely revolt. But taxpayers no longer have a chance to do even that. The Internal Revenue Service calls our tax system "voluntary," but the IRS doesn't ask. It just takes.
This book seeks to capture the American experience with our tax structure, the strange and powerful machine Beardsley Ruml set in motion. Withholding does not describe the whole of our tax lives. Indeed, many of our taxes--sales taxes, property taxes--are not even collected through withholding. But in the half century since Ruml acted, withholding has become a valuable symbol of our tax experience, an experience we have come to question. Today, voters consistently name the income tax when asked what things they would like to see politicians change. They also name Social Security, another form of tax. And, very often, they name schools and property taxes, yet a third problem with an enormous tax component. Indeed, a Washington Post /ABC poll published in the summer of 1998 showed that education, Social Security, and overhauling the tax system--all three items matters of tax--were more on voters' minds than anything else.
When we stop to consider, this is not surprising. Today, taxes touch, edit, even limit our lives at every stage. Taxes tie down young workers from their very first day on the job. The rate of payroll taxes confronting an eighteen-year-old starting out at McDonald's today--7.65 percent--is higher than the income tax rate Congress reserved for millionaires--7 percent--in 1913, the year the income tax was born. Sales taxes punish our purchases. Property taxes rise, yet we find ourselves more and more dissatisfied with our schools. Income taxes pull down families: married couples pay more than two single earners with the same combined income. Married women who want to work pay a special surcharge to Uncle Sam for doing so, the so-called marriage penalty. Taxes punish midcareer Americans at the moment they are straining hardest to achieve--indeed, at the moment of their first successes. Professionals find themselves moving from cities--to avoid New York's unincorporated business tax, for example--or becoming avid conservationists to obtain one of the greatest modern tax bonuses, a formerly obscure advantage known as the conservation easement. Complicated tax rules often cast senior citizens in their sixties into a sort of purgatory, a purgatory where they have to be careful not to "earn too much." Sometimes, taxes even turn senior citizens into refugees--we euphemistically call them "snow birds"--who depart their homes rather than confront tax bills.
A world ordinarily as away from tax as one can get--the world of sports--saw an example of this in the summer of 1998. In the beginning of September, it became clear that Mark McGwire of the St. Louis Cardinals stood a good chance of breaking Roger Maris's season record of 61 home runs. When McGwire tied that record, speculators began calculating the worth of the historic sixty-second ball, which some sports experts put at $1 million. Before the game, the consensus in this, the best-hearted of sports, became clear: any fan who caught the million-dollar prize ought to nonetheless give it to McGwire, the man who earned it.
In stepped the tax experts. It emerged that receiving, and then giving, such a ball might mean that the bleacher fan would be subject to a $145,000 odd bill for "gift taxes." In the mini-firestorm of outrage that ensued, Congress moved to pass a special dispensation for the lucky fielder, and the IRS backed off. It issued a statement assuring that it would not dun any fan who instantly gave the ball back to McGwire. And indeed, the stadium staffer who retrieved the ball instantly returned it, telling reporters: "I just don't want to be taxed." A bright moment of summer serendipity dimmed as fans across the nation pondered this heretofore unimaginable thing: a tax on joy.
People are marvelously adaptable. Forced as we are to live in a world of tax, we have found ways to ensure that not all our tax experiences are unpleasant. Under the conservation easement arrangement, for example, wealthy property owners trade some of the rights to their property--principally the right to build new structures on that space--for a good-sized tax break. In this exchange, they are winners, for most of them never intended to develop their tranquil summer refuges anyway. Indeed, the fact that their property remains pristine actually adds to its value on the real estate market. At the middle of the income scale, taxpayers take a kind of vengeful joy in the credits that the tax man makes available to them. In 1998, 48 million taxpayers leveled their income tax bills--but not their social security bill--all the way down to zero by using such breaks.
Still, there is a sense this is a loser's game. It is not that Americans don't want to pay taxes; they do. It is that they feel that taxes have moved out of proportion to what is fair, or appropriate. Even if we approve of certain government-spending projects, we sense that the whole affair has moved out of control. We all say we want a smaller government, yet each year Americans are compelled to hand over to our treasury $1.48 trillion, or a sum of money equal to the size of the economy of Great Britain. Nobody who is working today signed on for this.
Long ago, the philosophers who inspired our country's founding and early years anticipated this dilemma. They laid out powerful images that depict the forces affecting our pocketbooks to this day. Adam Smith described the "invisible hand," the hand of free commerce that brings magic order and harmony to our lives. Thomas Paine wrote of another hand, all too visible and intrusive: "the greedy hand of government, thrusting itself into every corner and crevice of industry." Today the invisible hand is a very busy one. Markets are wider and freer than ever, and we profit from that by living better than before. But the "greedy hand of government" is also at work. Indeed, in relative terms, the greedy hand has grown faster than the invisible hand. In the late 1990s, economists noted with astonishment that federal taxes made up one-fifth of the economy, a rate higher than at any time in American history outside of war. We can not assign the blame for changes of such magnitude to Beardsley Ruml, who was, after all, not much more than a New Deal package man. The real force here is not even withholding, whatever its power. Behind Ruml's withholding lurks Paine's greedy hand.
The modern thinker who dedicated himself to the study of the greedy hand's expansion is the Nobel Prize winner James Buchanan, the father of a school of economics called public choice theory. Public choice theory says that government is like any other industry: it wants to survive, and it wants to compete. Like a business in the market, it will work hard to damage challengers, even other parts of government. Government offices compete with private businesses. The IRS competes with individuals for their livelihood. Government grows reflexively, often in spite of the best efforts of reform-minded government officials. When it happens upon a tool like withholding, and marshals that tool in its service, it begins to grow very fast. The shift frightens people--it is what leads them to refer to Government. with a capital G. It is what transforms a reasonable public sector in a reasonable society--ours--into Paine's flamboyant greedy hand.
There are several things Americans know about the way the greedy hand works today. One is that the greedy hand is, indeed, greedy. Every year the Tax Foundation, a Washington-based think tank, does math that confirms the impression of a growing burden. The Foundation starts by calculating the "Tax Freedom Day" for that year. It adds up the total tax burden on Americans, federal, state, and local, and then tabulates the number of days that the average American must work to pay all those taxes. In 1902, the average American had to work to January 31 before his annual tax obligation, something like one-twelfth of his income, was met. By 1940, the date was March 8. In 1974, or a year when the nation was feeling the full pain of bracket creep, Tax Freedom Day was May 2. In 1997, it was May 9. In 1998, it was May 10, the latest day in history. Americans must work more than a third of their year before Paine's apparition stops taking and they begin to keep what they earn. The Tax Foundation found another troubling fact: each year Tax Freedom Day is set to move up the calendar--as long as we keep the current system.
Then there is another problem: the degree to which taxes intrude on the average American family. The Tax Foundation's charts show that in 1957, a family with two earners paid something like a quarter of their budget in taxes--well under the amount the family spent for food and housing. In 1998, that same two-earner family gave back nearly 40 percent to local, state, and federal authorities in taxes. That means the family pays more in taxes than it spends for food, clothing, and housing combined.
we are not aware of the full extent of the tax take. The average cost of a restaurant meal today is $40. Eleven of those dollars go directly to taxes. Twenty-nine dollars go to making the meal and serving it. Americans for Tax Reform, a conservative Washington tax group, compiled a list of all the taxes that make up that $11. That list was longer than many a menu. There were federal income taxes, federal payroll taxes, state income taxes, state sales taxes, and state use taxes. There were unemployment insurance taxes, workers' comp taxes, state property taxes, business license taxes, local property and income taxes, telephone taxes, utility taxes, and liquor taxes.
Indeed, the burden is even bigger than the better-known numbers suggest. In 1997, Americans spent just a tad over 20 percent of the gross domestic product on federal taxes, indeed the highest level since the United States was striking back at the Japanese and Hitler. Widen that to include all the other levies we pay and the figure rises to 30 percent of the gross domestic product, another peacetime record.
So the greedy hand takes more than before. But, as important, it also takes in a different way than it used to. The American tax system has changed, changed while most Americans were not looking. In the 1960s, for example, the tax treatment of business was a principal preoccupation. So too were the high marginal tax rates on individuals and the outlandish tax deductions available to them. The word loophole was associated with top earners. As recently as 1990, one economics textbook instructed students that complications like tax loopholes were largely upper-crust affairs: "because of our progressive tax system, many tax loopholes are beneficial only to taxpayers in higher income tax brackets."
Taxes still slow businesses' growth today. Shareholders, a group that now includes many tens of millions of citizens, lose out because of double and triple taxation on their stock. Income taxes still punish the very wealthy, although not at quite the same rates as before. Indexing the bracket in our tax schedule to inflation has stopped many of the hidden tax increases that were the rule in the 1970s and 1980s. The 1986 tax reform pruned back many of the older, more picturesque deductions--tales of incorporated yachts and three-martini lunches come to mind.
These days, though, the middle class is the one mired in tax troubles. Social Security, once a marginal levy, is now a giant one. If you count our employers' share of our Social Security tax, as most economists do, the burden looks particularly heavy: Social Security is the greatest tax for a full 70 percent of Americans. If private school enrollment is any measure, our schools, one of the more important tax purchases, disappoint us more now than ever before. Income taxes also punish us in a new way. We no longer have the inflationary bracket creep that punished us in the 1970s. But we have what economists call "real bracket creep"--as we earn more, we move into tax brackets we never expected would apply to us. Even the lofty loophole has become a middle-class project. One of the Book-of-the-Month Club choices in 1998 was even titled 101 Tax Loopholes for the Middle Class. The jacket copy stressed carefully that the book was "geared specifically to MIDDLE INCOME taxpayers." And these loopholes often prove to be snares, particularly for the harder workers among us.
The third thing we dislike about taxes is that they are unpredictable. Today our tax code is so large that no one, certainly not the civil servants at the IRS, can consistently apply it. The internal revenue code has a total of 1.3 million words, or over twice the length of War and Peace. The tax-code regulations that are the sibling to the code number 5.75 million words, or just about eight times as many as the Bible. Citizens doubt, legitimately, that such a voluminous body of law can be consistently applied.
For the wealthiest of Americans, people long accustomed to complicated rules, this costly and time-consuming paperwork may not matter so much. They have their tax attorneys and their accountants, with whom they may work in sometimes cynical symbiosis: "It's a game," as one attorney in the Paramount film of John Grisham's The Firm told another. "We teach the rich how to play it so they can stay rich--and the IRS keeps changing the rules so we can keep getting rich teaching them." Even the wealthiest have lost track of why the taxes are being exacted.
For most citizens, though, the complexity is unnerving. Americans make their best effort to pay their tax bills. For many years, they were so good about it that American public finance was the envy of European and Asian tax collectors. But the system has become so complex that it is hard to tell if we are doing the right thing, no matter how industriously we try. Will Rogers, a humorist who regaled the nation earlier in the century, put it this way: when we Americans fill out a tax return, we don't know whether we are a crook or a martyr.
This uncertainty damages our lives in a subtle way. It makes honest people live in fear that the government may one day tell them they are something that they never intended to be--scofflaws, cheats. This is why so many Americans follow hearings featuring IRS horror stories with fascination. It is why ordinarily sedate citizens are moved to empathize with tax protestors or even outright tax-evading kooks.
In the 1960s, IRS audit rates were relatively high. In 1968, for example, the IRS announced that one in twenty-five taxpayers could expect to be questioned on exemptions they had claimed, their charitable deductions or medical costs. Today the IRS conducts audits at half that rate. Yet more Americans, particularly lower earners, know they have legitimate reason to fear they might be audited. Their fear magnifies the might of the IRS.
Indeed, there is concrete evidence of how Americans fear the tax man. In 1997, individuals across the country paid about $100 billion more in taxes than they needed to. That meant they forsook several billion in interest their money could have earned had they kept it--the price of security. Self-employed citizens who are not subject to withholding and must calculate their own tax bills quarterly are particularly frightened. Indeed many complain that they would rather have the security of withholding than the fear of being audited that comes with their freedom. The game has turned so treacherous that the withholding cage has come to feel like a safe place. At some firms, employees even ask management to begin withholding. In other words, in America today, people beg to be taxed.
This is a modern version of a phenomenon Adam Smith described precisely in his Wealth of Nations. When there are no fixed rules, the philosopher wrote, we are all "more or less in the power of the tax gatherer." In a society with a tax code like ours, a code even accountants cannot decipher, people are no longer sure that they are safe on theirs, the legal side of the society's great divide. The moment you sense that you yourself may one day have to do battle with authorities is the moment you find yourself beginning to empathize with the fugitive.
Still, there is something else troubling Americans. The issue is not merely the scale of the taxes, however extraordinary that scale. It is not merely the changes, however unintended their result. It is not merely the unpredictability, although that unpredictability is infuriating. There is a specific cause for this new detachment and anger. It is that, in modern America, the greedy hand isn't merely greedy, or different than before, or unpredictable. It is also meddling, bossy, intrusive. Today our tax code doesn't stop at merely taking its share. It also wants to tell people how to live.
This last change has been, in large part, intentional. In this half-century, the era of our modern tax life, lawmakers have not contented themselves with writing tax laws with the aim of capturing revenue. They have indeed absorbed New Deal-era lessons and used Ruml's tool to try to change behavior and lives. And in recent decades, as welfare has fallen from favor, their tax-meddling habit has become stronger. Republicans and and Democrats agreed that social engineering through entitlements wasn't yielding the results they sought. So they began pouring all their energy, energy that used to go into constructing welfare projects, into the tax code. The fussier and more specific the project, the more attractive it seems. The tobacco tax legislation of 1998, legislation that did not, in the end, become law, is a classic example. Lawmakers sought to use taxes to punish one group--smokers--so they could reward another group: married couples. The Earned Income Credit is another example. This tiny program, a tax rebate designed to hearten low-income workers and keep them from dropping out of the workforce, has morphed into a $30 billion project that shapes millions of Americans' lives.
Such projects are well intended. But it is important to stop to consider how the taxpayer views them. In Ruml's days, the exigencies of the war made us want to give to the government. Even after the war--in the Eisenhower administration, say--well over half of tax revenues were going to outlays the average citizens understood and approved of: building a military capable of facing down the Russians, laying the interstate highway system. The national tax commitment stretched into the 1960s, when voters felt that their tax money might work to justify great social wrongs--urban poverty, or racism.
A 1953 episode of Jackie Gleason's The Honeymooners dramatizes the commitment to taxes Americans once felt. Ralph Kramden, the down-at-the-heels bus driver, is at first angry at discovering he owes the government $15 in extra taxes--he had saved that money toward a new bowling ball. But when he considers the matter, he decides he is glad to pay the tax. "We're living in a great country," he tells Alice, in a display of lachrymose remorse one is hard put to imagine finding in our modern post-Seinfeld sitcoms. "I didn't mean that before what I said about the income tax. Boy, we should give everything to the government. Especially this government."
Today though, very few Americans feel the sort of connection that Ralph spoke of. And little wonder--the cold war has ended, and they have become skeptical of the efficiency of Great Society outlays. Today, more than half of the budget goes to social transfers mandated by expensive programs whose value many Americans question. Working citizens sense that someone is getting something, but that someone is often not they.
The avid tax haters who pop up occasionally in the news are the expression of this national unease. Their froth-mouthed manifestos strike us as extreme--how many of us truly want to "kill the IRS"?--but they reflect something that all Americans feel to some degree. Even the most moderate of us often feel a tick of sympathy when we hear the shouts of the tax haters. We think of our forefathers who felt compelled to rebel against the Crown for "imposing Taxes on us without our consent." We know we live in a democracy, and so must have chosen this arrangement. Yet nowadays we too find ourselves feeling that taxes are imposed on us "without our consent."
Washington doesn't necessarily recognize the totality of this tax frustration. The purview of the House Ways and Means Committee is limited to federal taxes, and so the committee writes tax law as if the federal income tax were the only tax in the country. The commissions that monitor Social Security concern themselves only with the solvency of Social Security, and so ignore the consequences of raising payroll taxes, or taxing pensions, at a time when income taxes are already high. Old programs with outdated aims stay in place. Newer ones, added piecemeal, often conflict with the old.
"Rube Goldberg machine," "unstoppable contraption"--none of the stock phrases adequately captures the complication that is our tax structure. As William E. Simon, a former Treasury secretary, once said, "The nation should have a tax system which looks like someone designed it on purpose."
A good share of the blame for the current situation lies with the nation's powerful lobbies, which often operate in a predatory mode that seems to confirm their reptilian reputation. Each of many dozens of tax loopholes in our code--tax "expenditures" in budget language--has its own representation office on Washington's Dupont Circle, or in Virginia. Their colorful battles have preoccupied journalists who covered Washington for the past twenty years. Today Washington boasts some 80,000 lobbyists, double the number from the mid-1970s. Senator Tim Hutchinson's staff calculated that with each 10,000 additional lobbyists, we have added 100,000 new words to the tax code.
Over the years, there have been various efforts to right this situation. There have been attacks on withholding. After war's end--after the emergency that was supposed to justify it ended with peace--withholding again faced its challenges. Some of those came from regular citizens, who were shocked that the process continued after the war. In the late 1940s, a Connecticut cable-grip maker named Vivien Kellems actually tried to create a movement to protest the withholding. She refused to withhold for the hundred-odd employees of her company, and challenged the IRS collectors in federal court. She even wrote a fiery volume of protest titled Toil, Taxes and Trouble.
"Under the hypnosis of war hysteria, with a pusillanimous Congress rubber-stamping every whim of the White House, we passed the withholding tax. We appointed ourselves so many policemen and with this club in our hands, we set out to collect a tax from every hapless individual who received wages from us." Kellems supporters packed tea bags, their emblems of tax protest, into envelopes to send to Wilbur Mills, then the powerful chairman of the House Ways and Means. Her protest even earned her respect in serious quarters: Harry Reasoner compared her battle to that of Gandhi and Martin Luther King. Most people, though, depicted her as a kook: Kellems spent her waning years holding forth at the soirees of the far-right fringe.
The Adolph Coors family also tried to protest. The papers reported Coors wanted to show workers the scope of the government take. It gave them their full pay--without withholding--for two months. In the third month it took out three months' worth of withholding. Yet soon Coors abandoned its no-withholding experiment. Years later Coors's executives recall the event as an artifact from ancient history.
In recent decades, at different points, politicians have also tried to challenge withholding. Ronald Reagan talked about challenging state withholding in his campaign for California governor--but did not follow through while in office. In the mid-1990s, House majority leader Dick Armey pushed through a plan to end withholding with his flat-tax proposal. Instead of the annual 1040 reconciliation, Americans would make monthly payments in their tax bill--"rather like a monthly car payment."
Alarmed at Americans' anger and goaded by IRS horror stories, Congress in 1998 raced to pass an IRS reform law. But the 1998 IRS reform, like other IRS reforms that preceded it, merely addressed the symptoms. In the summer of 1998, after the law's passage, taxpayers were still naming an overhaul of the tax code as a change they heartily desired.
From time to time our leaders have even launched attacks on the tax beast itself. In the 1960s, the Kennedy administration led a historic and successful effort to pull down rates. In the 1980s and 1990s our federal deficit--a deficit that resulted from government's commitment to projects many voters questioned--stalled tax-cutting plans. Nonetheless Ronald Reagan and a Democratic Congress pulled together the powerful tax reform of 1986, a reform which did much to fuel the growth that we have seen since that point.
But politicians, however hard they have tried to right things, must be called to account. The Democrats' damage has come mostly as a result of their cloth-earned focus on equity. Americans move with incredible alacrity up and down the social ladder. Many families rise from poverty to the middle class in one lifetime; and many travel in the opposite direction. Democrats have generally ignored this, treating citizens as if they were locked into their social classes like so many characters in Upstairs, Downstairs. the British soap opera about an Edwardian household. The result has been laws that often punish people for making it into the parlor and even remove them, from time to time, to the scullery.
Conservatives have done their share of the dirty work. Republicans led the way in replacing the welfare state with the tax code as government's principal social engineering tool. Sometimes, as in Friedman's withholding story, the results of their work were unintentional. At other times the conservatives planned their damage. President Bush and his colleagues knew what they were doing--although they didn't, perhaps, think it through--when in 1990 they led the move to undo the only solid tax reform in recent years, the 1986 Act. In a panic over the budget and the Gulf War, Bush reversed his campaign pledge of "Read my lips: no new taxes" and raised income tax rates. This soured voters on politicians' talk of tax reform--if betrayal came so easily, why trust new promises? As important, the switch so disillusioned many of the leaders who had pushed for 1980s changes that they are hesitant to step forward to lead tax reform now.
Lately both parties find themselves mired in a new and vicious cycle. The cycle starts with taxpayers, who cry out to lawmakers for tax relief. The politicians are eager to respond. The Republican party was so eager in 1994 that it made taxes one of the planks of its Contract with America, and made abolishing the marriage penalty its priority in 1998.
But rather than adopt whole-scale reform, the lawmakers try to give relief through tiny, symbolic projects. The family child credit of the Contract with America was one such project. The White House and Democratic lawmakers focus on helping the family by expanding the Earned Income Credit, a cash rebate for low earners. They cobble together new versions of IRAs, or obsess about improving day-care credits.
In the short term, voters seem to like these devices. The idea of tax relief plays well in focus groups, a fact all-important to our anxious politicians. Little tax breaks, even win elections. Only later, after the election, after these little efforts take effect, do voters discover the puny size of a break, or the hidden perversities that attend it. Then they turn angry. Indeed, their anger about tax is one reason they check out of the political process. This sets the politicians rambling about "political disillusionment." And it panics them into yet another round of engineering. The president speaks of targeted tax breaks; lawmakers plan further fiddles. Voters turn away. Our tax weariness is an important counterpart to our general political disillusionment, the sort of weariness the writer E. J. Dionne sought to convey in his thoughtful book, Why Americans Hate Politics.
There is a way out of this confusion. It is to drop the pursuit of solutions for a moment, a moment in which we actually consider the problem. It is to review how the whole apparatus functions, how it pervades, dampens, and makes knots of our lives. It is to go back and take a deeper look at the underlying assumptions of the tax writers--that taxing "the rich" is the best way to bring us all justice, that tiny targeted breaks are the best way to help families--to see whether they really make sense in the context of a freer and more fluid society. It is to understand how we have all, even the politicians, become servants of this improbable regime. The first step to shutting out the greedy hand is to unveil it at work.
(C) 1999 Amity Shlaes All rights reserved. ISBN: 0-375-50132-0