REMAKING A MESS

By BILL BRADLEY

I believe the best tax rate is the one that's the lowest possible for the greatest number of Americans. The way to get rates down without increasing the deficit is by eliminating loopholes that benefit a few and leave the rest of us paying higher taxes than we otherwise would have to pay.

A decade ago, Republicans and Democrats were able to set aside traditional politics and pass a tax-reform bill based on the basic principles of fairness, simplicity and efficiency. It appealed to Republicans because it lowered rates, and to Democrats because it eliminated loopholes. Tax reform, in defiance of the odds, upheld the public interest against the special interests.

The 1986 reform cut tax rates dramatically, thereby allowing individuals to keep more of each additional dollar they earned. Individuals got a $30 billion tax cut. It also eliminated $200 billion in loopholes annually, raised corporate taxes $30 billion by toughening the minimum tax, took 6 million low-income people off the tax rolls by increasing the earned-income tax credit, and required the wealthy to pay a bigger share of the total tax revenues. The lobbyists lost; the people won.

How could you cut tax rates and still increase the share of taxes paid by upper-income Americans relative to middle-class Americans? Because in the old system, while the top tax rate was 50%, many of the wealthy paid closer to an effective tax rate of 20% because of all the loopholes.

Just a few months after the reform's passage, however, the industry of lobbyists was back urging that their clients' special provisions be added back to the law. To pay for all the reinstated goodies to oil and gas, mining, real estate and countless other interests, tax rates went up. Just as other countries were imitating our reform because they knew that capital and talent would otherwise migrate to nations with lower tax rates, we got back into the habit of listening to the narrow interests and passing the bill along to the average taxpayer.

The current Congress continues to erode the 1986 reform by moving toward a system with special exclusions for favored groups. This philosophy fails to meet the goals of tax reform in at least three ways:

First, it will increase inequality. More people with similar incomes will pay different taxes due to the increase in special-interest tax breaks. This will elicit suspicion among neighbors when the ones with the best accountants or tax lawyers pay the smaller tax.

Second, the system will be more complex. More people will need to hire tax preparers just to cope with the mind-numbing complexity.

Finally, the system will be less efficient and could damage our nation's long-term economic growth. America can't compete internationally unless our capital is allocated efficiently. The free market is the best vehicle for this allocation. But the proposed changes will empower Washington to tell people what kind of investments to make. Our tax system should facilitate change and reward innovation, not enshrine the status quo, subsidize the politically powerful and shortchange America's potential for growth.

Former Senator Bradley was a leader in passing the 1986 Tax Reform Act.