Behind The Flat-tax Debate

This year's tax battle in Congress could be a dress rehearsal for 1988.

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The heat is rising in the monumental congressional debate over a "modified flat tax." And no wonder -- for taxpayers, both individual and corporate, reforms enacted by the 99th Congress may drastically change aftertax income as well as long-term investment decisions. But there is another reason for the soaring passion over tax reform in Washington this winter. At stake in the tax debate is more than just deficits and depreciation allowances. At stake is the new leadership of the Democratic and Republican parties as well.

In each party, the most prominent congressional leader of the tax reform movement is positioning himself for a run at the White House in 1988: Bill Bradley, Democratic senator from New Jersey, and Jack Kemp, Republican representative from New York. Each has used the tax issue to seed a populist-style candidacy and to distance himself from the entrenched leadership of his party. Kemp is building an identity separate from the Eastern, so-called moderate Republican wing associated with Vice-President George Bush. Bradley is separating himself from the Mondale candidacy and the archaic Democratic leadership symbolized by Speaker of the House Thomas P. "Tip" O'Nill.

A former professional basketball star, Bradley has distanced himself in part by writing The Fair Tax, which his forces distributed at last year's Democratic convention. His supporters tried to include the principles of his modified flat-tax legislation, known as Bradley-Gephardt, in the Democratic platform. Although it is characterized as neither an overall tax cut not a tax increase, the Bradley bill would repeal nearly every tax credit and deduction on the books and slash the top marginal rate for personal and corporate income taxes to 30%. Walter Mondale ran against the Reagan deficit with an "honest" proposal for tax increases; his humiliation in November, though, has made Bradley's position look more attractive to some Democrats.

Kemp, already the hero of the New Right and champion of the supply-side revolution, didn't need a book to build his credibility as a national candidate in 1988. Instead, he preached the gospel of tax-reform populism around the country last fall, and helped such embattled Republican candidates as Minnesota Senator Rudy Boschwitz win reelection. Not only did that tour help build a national constituency for Kemp's tax bill, called Kemp-Kasten, but it also earned the former pro-football quarterback a pile of political IOUs than he can cash in during this year's tax fight and in his run for the Presidency in 1988.

The Kemp-Kasten bill is similar to Bradley-Gephardt, except that it would cut the top rate to 25%, allow indexing of capital gains for inflation, and retain current accelerated depreciation schedules. This last provision is dear to the powerful industrial lobbies whose member companies reap billions in tax savings by generously depreciating plants and equipment.

The theory behind both Bradley-Gephardt and Kemp-Kasten is that a vastly simplified tax code will restore taxpayers' faith in the essential fairness of the system, thereby encouraging compliance, while radically lower marginal rates will spur investment and help the country grow out of its crippling budget deficits. Bradley and Kemp each talk glowingly about the other's proposal, a major political irony of the tax reform debate, since these men see the world so differently on nearly every other public-policy issue.

The key question now is whether the reformers can translate their populist support into a victory in Congress. And that depends on whether they can out-maneuver three of the most powerful legislators on Capitol Hill: Bob Dole, the new Senate Majority Leader; Dan Rostenkowski, chairman of the House Ways and Means Committee and Bob Packwood; the newly appointed chairman of the Senate Finance Committee.

In style and substance, Rostenkowski and Dole are nearly opposites from Kemp and Bradley, and both represent the oldstyle leadership that the reformers oppose. Backroom negotiators with their eyes trained on political reality, Rostenkowski and Dole are known to be suspicious of, if not downright hostile to, the modified flat tax reform proposals.

Rostenkowski, who was Chicago Mayor Richard Daley's emissary in Washington, suffered an embarrassing defeat over taxes in 1981 and will be "gun shy," as one Democratic tax counsel on the Hill puts it, about sponsoring any tax bill supported by the Reagan Administration. Although the Treasury Department proposed a modified flat tax plan last November, President Reagan won't make the extent of his support known until early this year. It is unclear if he will pause long enough from his budget-cutting efforts to lobby hard for the flat tax.

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