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For true tax reform, up the deficit, slash the jobs

Congress is talking again about a potential change in the tax code. Excuse me if I am skeptical about this process, but the ultimate result of every new tax act that I have seen instituted in the last 25 years has been just about the opposite of what was intended.
Do you recall the one that was called the Deficit Reduction Act? I don’t think that worked. Do you recall the Tax Reform Act of 1986 that was supposed to make the code simpler and more fair? I would argue that the retroactive changes in that law were not fair, and I don’t think anybody thinks the current code is simpler than it was before 1986.
The other theme of previous tax acts has been the taking away of benefits from taxpayers, while at the same time providing some good things. However, shortly after passage, the good things are taken away while the negatives remain.
A case in point is the Tax Reform Act of 1986, which severely reduced the deductions taxpayers could use, but at the same time reduced the tax rate to 28 percent. Well, none of the lost exemptions has been reinstated, but the 28 percent rate has been increased several times to the point that it reaches a maximum of close to 40 percent today.
Is there some chance that this time we will be able to re-create the tax code into something that makes sense? I think there are three things that are necessary to accomplish this objective.
First, we have to start over, possibly along the lines that Congressman Dick Army has suggested with the “flat tax” proposal. Secondly, we have to pass major campaign reform so that every special-interest group in the United States isn’t in a position to push its proposals on its representatives through campaign contributions. Third, there has to be a consensus that the federal government is going to start spending less of a percentage of gross domestic product in the future than it does now.
One of the reasons that past attempts to reform the tax code have failed has been that the federal government has increased its spending at a pace much faster than inflation; therefore, the total percentage of the economy going to taxes had to increase.
So, if we completely revamp the tax system, pass campaign reform and commit to spending less of our total economy on taxes, we have a chance for success. Why would that be important? The three main reasons are the following:
First, we then would be able to construct a tax system that would reward those who invest as opposed to those who only consume. The result of reducing or eliminating the capital-gains tax and lowering marginal rates on ordinary income–the key points of the flat-tax proposal–would be the creation of additional jobs and a faster-growing economy. This would mean that more and more jobs would be created in the private sector, and that many of the problems that have led to the creation of an underclass might be eliminated the old-fashioned way: by providing new jobs.
Secondly, a faster-growing economy probably would create greater tax revenues even at the lower rates. This could reduce the deficit. Third, and most importantly, a truly simplified tax code would restore confidence in the system, confidence that has been tremendously eroded over the last few decades and could lead to serious non-compliance if not turned around.
John Kennedy said in 1962 that “a rising tide raises all boats.” A new tax code with the emphasis on simplicity, capital formation, jobs and growth would be a way to introduce more and more people to the real American dream.
To make sure this happens, I propose calling the new tax act, “the Deficit Increase and Job Reduction Act of 1995.” If the act does the opposite of its original intention–as they all have seemed to do up to this point–we’ll be just fine.
(John Mooney is president of Essex Investment Group Inc., a diversified financial-services firm and real estate developer.)


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