A Tax System As Good As Its People

As Jimmy Carter receives worldwide salute for his life of humanity and activism, it is time to revisit his description of the tax system.

Americans can take pride in the basic principles of the federal tax system. Higher incomes are taxed at a higher level. Good things — home ownership, charities, state and local government — are subsidized. Outsized inheritances are curbed. Citizens report their own tax liability, and the vast majority do it honestly.

In its application, however, the tax system is, in candidate Carter’s 1976 phrase, a disgrace to the human race. Tilted to industries and constituents whose lobbyists are nestled in the inner circle of each party, its administration and enforcement starved of resources for over a decade, a federal tax code that should engender pride instead breeds cynicism. The public is not getting a tax system which, in another Carter phrase, is as good as its people.

Taxes aren’t supposed to be fun, but they’re critical to the common mission of organized society. Reflexive denigration of government, its processes and financing, is bad for democracy, breeding indifference to the principles of selfgovernment and the lessons of history. With authoritarianism spreading worldwide in ways and locations unimaginable 30 years ago, citizens, and especially lawyers, must brace against slouching into alienation.

Cynicism is poison, which is why it is nurtured by opponents of effective governance. If people can be convinced t hat elections don’t matter, they’ll be less inclined to vote. If people think the Internal Revenue Service is incompetent because its response time is lugubrious, they will become indifferent to the defunding of the revenue department. If they think the tax laws are unfair, noncompliance will increase, as Michael Hoeflich, future dean of Syracuse and Kansas Law Schools, showed 40 years ago.

Some are delighted with those results. As Professor Jim Maule, who taught many Delaware lawyers in his decades at Villanova Law School, pungently observed in 2016, “Why does Congress cut the IRS budget when it ought to be increasing it? The answer is simple. The people who control the Congress want to kill the IRS, eliminate federal tax revenues, eliminate federal spending, and eliminate the federal government.”

The result has stifled the federal government’s accounts receivable department. By 2021, the IRS had one staff person for every 16,000 incoming calls. At the beginning of this month, over two million individual income tax returns remained unprocessed. A decade-long Congressional war on the IRS reduced its budget by 20 percent entering 2021. Chiselers and cheats have friends in elected office. New committee chairs want to undercut the landmark 140-nation global tax deal to impose a 15 percent minimum tax on multinational corporations.

While the chronic under-funding of the IRS was reversed in 2022 legislation, the bigger fight has not been joined. The public yearns for a fair tax system, but neither party has taken the lead since the 1980s. Few elected officials discuss taxation, apart from rote denunciations of the source of their power. Bringing the federal system closer to its founding principles is a second-tier priority.

A recent proposal may be bold enough to spur serious discussion to change this inertia. The Fair Tax Act of 2023, recently introduced in the U.S. House of

Repres entatives, would repeal the income tax, estate tax, and payroll taxes, replacing them with a national sales tax of 30 percent, with no exemptions for housing, health care, or groceries. The IRS would be abolished, with all tax collection delegated to state governments.

If enacted, this scheme would shift the tax burden dramatically onto lower incomes, institutionalize dynastic wealth, and effectively dismantle collection efforts. You may love or despise this proposal, but it should not be dismissed. The most chimerical ideas, if powered by enough zeal, can become law.

More importantly, those who oppose the idea shouldn’t just play defense. They should use this idea to keep tax policy a subject of vigorous sustained discussion.

The public continues to believe in progressive taxation and wants loopholes closed, but rarely focuses on t he subject. What has been missing? A second-term President willing to fight. While every President over the last 70 years has signed a signature tax package, the most effective advocates for reform over the past century were two Republicans during or after their second terms.

President Theodore Roosevelt, whose Progressive vision helped define the first 80 years of the twentieth century, made the progressive income tax, then recently ruled unconstitutional by an activist Supreme Court, a cornerstone of his 1910 call for a New Americanism: “I believe in a graduated income tax on big fortunes, and … a graduated inheritance tax on big fortunes.”

In an era when the 1912 Presidential election featured three self-described Progressives and one Socialist, TR’s push helped the Sixteenth Amendment, which the Senate approved, 96-0, to ratification by 1913. An inheritance tax followed, as the rural states told lawmakers that the Great War should not be financed by tariffs that affected farmers and tradesmen most.

President Reagan, whose conservative vision set the contours of the century’s final 20 years, used his 1984 reelection to launch a campaign for tax reform. A pragmatic governor who initiated a major expansion of income taxes in California, he remembered the 91 percent nominal rate faced by his fellow entertainers, and wanted to cut marginal rates to 33 percent or less, yet do so in a revenueneutral way.

Over 18 months of battle and compromise, bipartisan leadership succeeded in closing loopholes, eliminating dubious preferences, eviscerating the tax-shelter industry, imposing tougher rules on investment deductions, and strengthening the estate tax. The Tax Reform Act of 1986 raised the standard deduction

40 to help low-income filers, eliminated the IRA deduction for higher incomes and raised the capital gains rate. The Gipper’s successor signed several more modest reforms, but the energy ended after the 1990 tax bill coincided with the rise of vituperative talk radio.

Succeeding presidents have worked big tax bills in their first year, but mostly diddled with rates. The GOP bills have focused almost exclusively on cuts to upper-income rates and weakening the estate tax, with incidental features that hurt state and local tax governments. Presidents Clinton and Obama were primarily focused on the search for universal health care coverage and economic stimulus. Tax reform was held for the second act, unattainable when each lost control of Congress.

It shows the power of a reelection. Candidate Carter noted that 622 taxpayers with incomes exceeding $100,000 in 1973 paid no income tax and promised to restrict tax shelters for oil, gas, and real estate, address overseas income sourcing abuses, strengthen estate and gift tax, and curb expense account deductions. His cabinet delivered a less ambitious bill that was pared further by a Democratic Congress. By 1978, Carter, in disgust, signed a bill with the sweeteners he offered to business, but almost no reforms. Dessert without vegetables.

Carter brought appropriate passion, but his successors learned that the first year is too soon to tackle seriously the substance of taxation. His six successors signed tax bills in their first year, but other than moving marginal rates, they did little to the tax code itself, except enlarge its complexity, sometimes unraveling the reforms of 1986.

Even with a recalcitrant Congress, bereft of the GOP centrists who made the 1986 Act possible, President Biden scored a major advance in the 2022 tax bill, with its 10-year, $80 billion commitment to boost IRS service and staffing. Calls will be answered, correspondence acted on, rulings issued, software updated, and specialized teams assigned to examine corporate, global, and pass-through entities. Every additional dollar spent in enforcement yields $10 in revenue.

The next step must await a second term. If he becomes the first secondterm Democratic President with a Congressional majority in 70 years, President Biden will have the freedom and opportunity for a legacy that has eluded his predecessors.

To stymie the lobbyists who were outflanked in the 1986 reform, and the donor class that can infect both parties, an iron fist will be needed. The first Senator to have endorsed candidate Carter in 1976 could realize Jimmy’s dream of tax reform.

Chuck Durante, the President of the Delaware State Bar Association, is a partner at Connolly Gallagher LLP, fellow of the American College of Trust and Estate Counsel, chair of the Board of Editors of Delaware Lawyer magazine, president of the Delaware Sports Museum and Hall of Fame, trustee of the Delaware Historical Society and president of the Delaware Sportswriters and Broadcasters Association. He can be reached at cdurante@ connollygallagher.com.

| BY JASON C. POWELL, ESQUIRE