The Ludwig von Mises Institute

The Mises Institute monthly, free with membership

November 1997
Volume 15, Number 1

For fifteen tedious years, Republicans demanded that Congress give the president the "line-item veto." Reaganites concocted this policy gimmick as a diversionary tactic. It allowed them to blame Congress when the budget wouldn't balance and spending soared. If only the president could eliminate pork, line by line, spending wouldn't be perpetually out of control.

Buried in detailed fiscal history--in which the media were never interested--was the actual truth. The Reagan budgets were usually higher than the ones Congress finally approved.

Then Congress gave the president the line-item veto, as if the executive branch needed more power than it already has with the IRS, CIA, FBI, and ATF at its disposal. The Republicans celebrated a great victory, oblivious as to why Clinton might have been pleased to sign the legislation.

But far from scrapping actual pork from the budget, as the GOP promised would happen, Clinton vetoed tax breaks inserted by Congress. Making matters worse, Republicans proceeded to celebrate this as simplifying the tax code. But there's something worse than complexity: high taxes.

Republican leaders seem to have a knack for seizing on diversions that end up being used as clubs to whack the American taxpayer. Having sold out every principle the GOP ever claimed to stand for in the 1997 budget compromise (which raised taxes and spending), the party now faces a problem. It must rally its base-line supporters as the 1998 Congressional elections approach.

Scratching around in the policy dirt to come up with proposals that are popular, noncontroversial, and ideologically oriented, the GOP has a new plan. As Paul Gigot, writing in the Wall Street Journal, tells us, the Republicans will concentrate on three separate items to heighten the differences between them and those tax-and-spend liberals.

TAX REFORM -- Pay careful attention to the word "reform." The advantage is that it endorses something everyone favors, since no one likes paying taxes. To "reform" taxes sounds like making them less burdensome, just as "tort reform" implies reducing lawsuits. But tax reform does not necessarily mean tax cuts. It's a weasel phrase that can even mean the opposite.

"Tax reform" shares this in common with "education reform": whatever new system the politicians slap together will have huge transition costs, make massive payoffs to the pals of those in power, and ultimately make the present system worse by expanding and centralizing it even more.

But as with education reform, it pays to look more carefully at what kind of reform the Republicans have in mind. The flat tax is a perennially popular idea, and Steve Forbes traveled far with it in the last go-round. Tax rates will be harmonized across the board, this theory says, so they'll be simple, easy to pay, and create strong incentives for investment.

It sounds great until you notice that flat doesn't necessarily mean lower. It was several weeks into Forbes's campaign before he started adding "low" to the word "flat." But by then, voters had picked up on his desire to repeal the home mortgage deduction, and perhaps even the charitable tax deduction--windows of freedom in an otherwise oppressive system.

Consider the hysterical war the New York Times and the Wall Street Journal are waging on Archer-Daniels-Midland, the company that produces a substantial part of the nation's stock of ethanol. Tax breaks for the production of corn-based fuel were instituted in the Carter years as an alternative to petroleum use. Today, the "privileges" ADM enjoys still consist entirely of tax breaks, not government subsidies. Thus, those who scream for their repeal are calling for new taxes to be imposed on the ethanol industry--a morally indefensible idea.

As this example illustrates, the flat taxers suggest a dangerous political gamble. Most advocate doing away with all deductions and equalizing all rates and at the same time reducing the overall burden (but not overall revenue, which is--of course--the key burden). But if this reform follows precedent, we'll end up with the bad parts (higher taxes through repealed deductions) but the good parts (lower rates) will be either nonexistent or so back loaded as to make them easy to repeal.

Thus, focusing on "flat" instead of "low" is another example of a diversion. There's no economic virtue in flatness: after all, the hated Social Security tax is as flat as its investment returns. If lower taxes is what the GOP wants--and it is not self-evident that it does--it should say so. That way the public debate can center on important matters, like the size of government, instead of arcane matters like the effects of progressive rates on revenue collection.

Another supposed virtue of the flat tax is its simplicity. But extracting $1.7 trillion a year from the private sector is necessarily complex. This is not all bad, since "complexity" includes not only the number of forms that have to be filed, but also the rigmarole required to pay less in taxes.

And, please, can we stop the attacks on accountants who prepare tax returns? Not everyone should do his own taxes, any more than everyone should wax his own car or build his own house. It's all part of the division of labor. The best tax preparers are heroes, struggling to make sure taxpayers keep every dime they are entitled to under the law. No wonder they are hated in Washington.

But in terms of diversions, even worse are those who want a "national sales tax" to "replace" the income tax. There is no virtue in replacing one high tax system with another high tax system. The transition costs would be draconian for American business. Proponents say it would mean the end of the IRS, but that's abracadabra: if taxes exist they will be collected, and no tax is voluntary by its very nature. In addition, the states will be required to administer the tax for D.C., a huge violation of federalism.

The end result is easy to see. The proponents of the national sales tax will gladly trade lower income tax rates for the opportunity to proclaim "victory" with a new sales tax. Both taxes will then creep up together, with doubled enforcement.

AUTO CHOICE -- Here's another clunker from the Republican Party.

No, this isn't the automotive equivalent of "school choice," where government, in the name of market competition, gives car vouchers to the welfare class so they too can ride in BMWs. No, in this context, "auto choice" means a federal law to allow consumers to purchase car insurance that covers only economic losses associated with claims, but not "pain and suffering." The ostensible idea is to cut the trial lawyers out of this lucrative business, which would be good for Republicans and bad for Democrats. The problem is that it would ride roughshod over state laws and centralize the regulation of the insurance industry in Washington.

Gigot says "auto choice" is the "sleeper issue of 1998." Zzzz. With all the problems in the country --nearly all of them traceable to growth of government--how has this petty idea become a central part of the Republican agenda?

RACE QUOTAS -- Here is the final item mentioned by Gigot as part of the new Republican agenda. The model is California's Proposition 209, which outlawed race discrimination (either for or against a particular group) in government programs. The idea is to take it to a national level by abolishing all explicit racial quotas in federal programs.

Since the entire Republican leadership has shunned the idea and went AWOL during the California election, it's doubtful if they'll have the courage to pursue this idea now. Neither will they deal with the real problem, which is not quotas in government, but government anti-discrimination laws themselves.

These laws impose quotas and a myriad of related tyrannies on the private sector, where government has curtailed and even eliminated the right of owners and managers to hire and fire as they see fit. Anti-discrimination laws seek to abolish the freedom of association, which, with property rights, is the very essence of liberty.

Dealing with such real-world problems requires courage, determination, and, above all, a coherent ideological framework. There's no room for diversions when the very future of freedom is at stake. Yet not a single item in Gigot's list deals directly with the central problem in American public life: the size, scope, and intrusiveness of the central government.

In these times of relative peace and prosperity, the American people have never been more ready for a political movement that set as its goal the razing of Washington, D.C., or at least the defanging of its most dangerous elements. When the inevitable recession hits, the political class may look longingly on the days when the public ignored rather than hated its constant attempt to change the subject.

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Llewellyn H. Rockwell, Jr., is president of the Ludwig von Mises Institute.

FURTHER READING: For a New Liberty by Murray N. Rothbard (New York: Fox and Wilkes, 1985); The Triumph of Politics: Why the Reagan Revolution Failed by David Stockman (New York: Harper and Row, 1986); For Good and Evil: The Impact of Taxes on the Course of Civilization by Charles Adams (New York: Madison Books, 1993).

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