In response to:

The Bad New Tax Law from the February 12, 1987 issue


To the Editors:

When President Reagan signed the Tax Reform Act of 1986 in a “splashy ceremony” on the South Lawn of the White House (The New York Times, October 23, 1986, p. D1), he hailed the new Act as “the best antipoverty bill, the best pro-family measure and the best job creation program ever to come out of the Congress of the United States.” None of these claims was even remotely warranted, as Henning Gutmann’s admirable and aptly titled article, “The Bad New Tax Law” [NYR, February 12], amply proves. Even so, the President was fully justified in boasting about the Act, since it fulfilled one of his long-held objectives—previously thought to be an impossible dream—the destruction of progression as a normal feature of the federal income tax schedule.

President Reagan denounced progression as far back as 1961, when he told the Press Club of Orange County, California, that the progressive income tax conflicts with the biblical tithe—one-tenth, to be paid allegedly by rich and poor alike—and that it came “direct from Karl Marx.” I can’t disprove Mr. Reagan’s biblical exegesis, but the attribution of progression to Karl Marx is a typical Reaganite fantasy. When Marx was pursuing his subversive research in the British Museum, no one in its Reading Room could have escaped the idea of progression: Adam Smith commented favorably on it in his Wealth of Nations; the government of William Pitt the Younger levied progressive taxes before Marx was born; and Dr. William Paley, Britain’s leading nineteenth-century theologian (author of A View of the Evidence of Christianity) wrote that taxes “ought to rise upon the different classes of the community in a much higher ratio than the simple proportion of their incomes.” In any event, whatever route the idea traveled in getting to the United States, it was embraced by generations of American legislators who admired Adam Smith and reviled Karl Marx.

For half a century (1932–1982), the federal income tax’s top rate on individual income never dropped below 63 percent, and it has been 50 percent since 1982; but the 1986 Act lowers the ceiling to 28 percent, commencing in 1988. Thus, defying this long tradition of bipartisan support for high rates on the upper income tax brackets, the Tax Reform Act of 1986 was a triumph of Reaganomics. Indeed, the President’s victory surpassed even his hopes, since in 1985 he was prepared to accept a top rate of 35 percent. There remains, to be sure, a residue of progression in the 1986 Act, attributable to the fact that a married couple’s income below $29,750 will be subject to a 15 percent rate; but if the President views this remnant as so enfeebled that his war against progression is over, he is right. How he must have savored the presence at the White House ceremony of the Democrats—not as loyal opposition, but as a pathetic me-too band hoping for a smidgen of the glory.

For more than a decade or so before this debacle, it was fashionable to assert that tax shelters and other tax allowances had rendered the nominally progressive rates irrelevant, because “no one” paid them. Like much hardboiled realism, this contention was a myth. For example, of the $293 billion of revenue generated in 1981 by the personal income tax, about 13 percent came from income taxed at 50 percent or more, and in 1982, about 15 percent of the total came from income taxed either 49 percent or 50 percent, the two highest rates for that year. Of course, a host of taxpayers escaped from these high brackets by making use of tax allowances and shelters; but many of their returns are still being audited, and the Treasury has won an avalanche of litigated cases attacking abusive tax shelters on various legal grounds. In any event, the reported figures do not support the claim that progression was already a dead letter, still less that it was wrong in principle.

It must be admitted, however, that the progression-is-dead myth was first propagated by advocates of progression, who earnestly lambasted the income tax with gaudy slogans (e.g., “the income tax is a welfare program for the rich”), hoping that their exaggerated claims would stimulate Congress to purify the tax base so that progression could work more effectively. But their well-intentioned propaganda was more successful in creating discontent on Main Street than reform sentiment on Pennsylvania Avenue; and they reckoned without President Reagan, who really knows how to use populist slogans. Having repeatedly proclaimed that progression was dead, these theorists could not persuade the gravediggers that the alleged corpse still showed some signs of life. Indeed, they were too demoralized to make the effort; and they have been trying since the 1986 Act was signed into law to find redeeming features in its entrails. As Mr. Gutmann’s article shows, the friends of progression will find little there to applaud, even if they are incorrigible optimists.


Whether one laments or welcomes the decline and fall of progression depends on one’s value system; but a second major feature of the new law should be deplored by everyone. I refer to the fact that the Act (which, according to the President will “free us from the grip of special interests”) is studded with so-called transitional provisions that exempt a host of taxpayers from one or another of the new rules. Some of the chosen taxpayers are designated by name, but the identities of many others are concealed behind ostensibly neutral descriptions that make a mockery of the concept of fairness by specifying characteristics picked solely for their exclusionary effect.

One of these provisions, for example, covers “a 562-foot passenger cruise ship…the approximate cost of refurbishment of which is approximately $47 million”; another goes to a corporation “the parent of which was incorporated in California on April 15, 1925” and that “on May 22, 1986, merged into a Delaware corporation incorporated on March 12, 1986”; still another, to “a laundry detergent manufacturing facility, the approximate cost of which is $13,200,000, with respect to which a project agreement was fully executed on March 17, 1986.”

The camouflage employed by the 1986 Act to suppress the names of these, and hundreds of other, favored taxpayers is matched by the euphemism employed to refer to the statutory provisions themselves—“targeted transitional provisions,” a label reminiscent of “revenue enhancement” for a Reagan-era tax increase and “police action” for the Korean War.

Any major revision of the tax law is bound to undermine some settled expectations, and no doubt some beneficiaries of these “targeted transitional exemptions” can make a plausible case for protection against the new rules. The Act, however, makes no attempt to separate the sheep from the goats. Quite the contrary: the dates, dollar amounts, geographical locations, and industrial products specified by the statutory provisions were deliberately selected to prevent similarly situated taxpayers from being treated alike. No matter how many taxpayers may have had equally valid claims for relief, the chosen ones evidently shared a single common characteristic, viz., sponsorship by a legislator who was in a position to get a favor from the chairman of the House Committee on Ways and Means or of the Senate Finance Committee. At any rate, if any other criterion separates the lucky beneficiaries from their similarly situated but excluded neighbors and business rivals, it has not yet come to light. When sending his tax reform program to Congress in 1985, the President observed that Americans “can’t understand the logic or equity of people in seemingly similar situations paying dramatically different amounts of tax.” He was right then, and he can say it again with even greater validity today.

Special transitional exemptions were not unknown before 1986, and these allowances were occasionally concealed behind an ostensibly general description; but the scale of these precedents bears about the same relationship to the exemptions of the 1986 Act that a child’s lemonade stand bears to a regional shopping mall.

Moreover, the resulting debasement of the legislative process promises to become a hereditary disease. A concurrent resolution, introduced to correct “technical” errors in the newly minted Revenue Act of 1986, adds another batch of transitional exemptions, including one targeted for “2 catamarans built by a shipbuilder incorporated in the State of Washington in 1964, the contracts for which were signed on April 22, 1986 and November 12, 1985.” The resolution failed of passage during the closing hours of the Ninety-Ninth Congress, but it presumably remains on the legislative agenda; and it will almost certainly inspire a host of other “targeted” relief provisions. Mr. Gutmann ended his article with the observation: “The new tax law does not bode well for either the health of the country or its people.” Nor does it bode well for the health of the legislative process.

Boris I. Bittker

Yale University

Sterling Professor of Law, Emeritus

New Haven, Connecticut

To the Editors:

Henning Gutmann completely misrepresents the effect of the 1986 tax reform bill on the progressivity of the tax system. The facts are shown in the following table, which compares the burden of the individual and corporation income taxes before and after the tax reform.


The combined federal and corporate income tax burdens are reduced for the bottom 90 percent of the population, and increased for the top 10 percent. This is a progressive tax change by any standard.

Mr. Gutmann’s recital of how the rich can avoid some of the new restrictions on tax shelters suggests that tax shelters have remained wide open. The fact is that it will be extremely difficult to get around these restrictions and, in any case, taxpayers cannot do any better than they do under the old law and, in most instances, they will do much worse.

Furthermore, Mr. Gutmann somehow omits any reference to the 40 percent increase in the tax on long-term capital gains, which are heavily concentrated among the wealthy, and the 20 percent increase in the tax on corporations, which are owned largely by wealthy stockholders.


Perhaps we should have gotten more progressivity out of the tax reform, but it is absurd to argue that the tax bill “contains hidden dangers to the idea of equal opportunity for Americans.” On the contrary, the bill will greatly improve the equity of the tax system and increase economic efficiency at the same time.

Joseph A. Pechman

The Brookings Institution

Washington, D.C.

Henning Gutmann replies:

Joseph Pechman completely misreads my analysis of the tax reform bill. I do not claim that the new law is, in strict dollar terms, either more or less progressive than the current, only mildly progressive system; this question, it seems to me, remains ambiguous, not only because the law seems to grant some tax relief to all income classes, but also because it is difficult to predict taxpayers’ reactions to the bill, or changes in the economy, and probably impossible to quantify either. I do point out that the bill has some very disturbing aspects: in the name of eliminating tax shelters, many wealthy taxpayers get unconscionably large tax reductions, while others less able to afford it must pay more; the much publicized relief thrown to the poor is pitiable by comparison; and in the rush to produce a revenue-neutral law, Congress passed thoughtless and destructive provisions that limit access to important social goods such as education, health care, and capital for new businesses.

But since Mr. Pechman produces figures that purport to show that the bill is progressive, he should reveal more of the assumptions that he made for what must have been very complex calculations. I question the validity of the one he does spell out—that the corporate income tax is a tax on capital. From this I assume Pechman assigns most or all of the expected $120 billion increase in corporate taxes to the top 5 percent, or perhaps decile, of the population, since this wealthiest portion of society holds most of the stock in the country. But reducing dividends or share prices is just one of many ways corporations could pass down their increased tax burden over the next five years. In fact, I would argue that in this era of the all-important quarterly dividend and earnings report, corporations are more likely to pass on increased taxes in higher prices for their products or smaller wage increases (or fewer jobs) for employees—thus transforming the corporate tax into a tax on the incomes of all levels of the population. Mr. Pechman’s assumption that only the holders of capital will pay the corporate income tax seriously distorts his figures.

Pechman’s figures also conflict with projections for 1988 from the Congress’s Joint Committee on Taxation. Their report shows 2.5 million taxpayers, or about 2 percent of the total, earning over $100,000 a year. Of this number, the committee estimates that about 1.5 million will get tax cuts as a result of the new law, while the other million will face increases. The 393,000 taxpayers earning over $200,000 who get cuts save an astounding average of $50,000 each. Calculating it all out, the wealthiest 2 percent of the nation’s taxpayers emerge nearly $3.5 billion a year richer—before even taking into account the adjustments many will make in their investment portfolios to avoid a sharply higher tax. Mr. Pechman’s table suggests the opposite, without explanation.

On the other end of the income scale, Mr. Pechman’s chart would be more honest if it took into account the fact that Social Security taxes, which are levied only on earned income, and then only below a certain level, will rise or at best remain unchanged. Adding this factor, the Joint Committee estimates only a 16.2 percent reduction in taxes in 1988 for those earning under $10,000 a year—the bottom third of taxpayers. Mr. Pechman’s figures showing much steeper reductions don’t accurately reflect the changing tax burden on this segment of society.

On the issue of tax shelters, I did not, as Mr. Pechman puts it, “suggest that tax shelters have remained wide open.” Instead I pointed out that well-to-do taxpayers will have the means to “avoid sharp tax increases,” partially through maneuvering with new or transitional tax shelter rules but also by switching into remaining shelters (such as tax-exempt bonds) or exploiting available deductions (such as interest expense on second mortgages or investment income). It is the middle class, including professionals without access to much capital, who will, as Mr. Pechman writes, in most instances…do much worse.” Many of them can’t afford the losses.

As for the long-term capital gains tax, which rises from 20 percent to 28 percent under the new law, I omitted it because none of the lawyers or accountants I spoke to had any clear idea of its significance, for either progressivity or the economy. There is some concern that the end of preferential treatment for such gains might increase stock market volatility, or damage the ability of new ventures to raise capital by reducing incentives for holding riskier, long-term investments, but the evidence for any significant effect remains scanty.

Precisely in focusing on such more technical issues, analysts like Mr. Pechman, and many commentators in the press as well, have failed to address the socially regressive essence of the bill. Too little has been heard about those hurt by the “reform”: students and the universities trying to provide them a quality education; those with high medical bills, especially the elderly; manufacturing industries; and entrepreneurs trying to start a business, to name just a few. And all for no better reason than to raise revenues to meet some abstract and probably illusory notion of revenue neutrality designed to make palatable the lowest top income tax rates in the US since the 1920s.

Maybe Mr. Pechman, for all his concern with progressivity, has been working too long “inside the Beltway,” as the saying goes. After six years of the current administration many in Washington seem to have developed blind spots on issues of social equity, perhaps because they feel compelled, in the dire atmosphere of that city, to accept the stunted social vision of Reaganism as reality.

This Issue

July 16, 1987