Plugging Loopholes: "More Virtue Than Revenue"

Why are Democratic presidential candidates rushing to call for tax reform? According to Democrat Arthur Okun, who was chairman of the Council of Economic Advisers under President Johnson, they are responding to the voters' rising resentment against the present inequality of income distribution. This preoccupation with "fair shares," Okun says, is as much the result of the recent recession as an honest concern about fairness. But he fears the divisive effect of too much emphasis on tax reform and income redistribution during the election. He explained his concern at a recent meeting of TIME's Board of Economists:

THE Government's job is to get people to pull together and to allocate the burdens so that everyone pulls his own weight. What we are hearing at the moment is a lot more concern about a conflicting consideration--that everybody gets fair shares.

I cannot remember anything comparable. Probably you have to go back to 1932 to find as divisive an atmosphere. A lot of centrifugal forces are at work in our society. The ethnic ones, women's rights, youth rights, the Viet Nam War--all the concerns about polarization. Within the economic field, perhaps, the slowing of growth in the past couple of years has been particularly important. When we have an expanding economy, it really alleviates social frictions. People get something out of the economy, and they are not envious of everybody else. Now, because they have not been doing so well in recent years, they are sure somebody else has been getting away with murder. They have a feeling that "I got the short end of the stick. Somebody must have got the long end." The fact is that a slack economy has two short ends of the stick.

There is a cost in politicizing wage-price decisions as we have done. Instead of getting mad at their landlord when their rent goes up, people now get mad at the President. Somehow the Government has put itself in a position of saying, "We are going to protect you." There is a feeling that Uncle Sam is standing there making sure the pie is going to be sliced properly.

In the tax area, what has happened in the past year is a prescription for waking up the American public. You could not have done a better job if you tried to put tax reform on Page One every day. You had a tax program last August that was really loaded toward business. The numbers make it clear that it was the biggest business tax cut in American history, with very little for the consumer. Then you had a trial balloon on a value-added tax, which would have been a federal sales tax on the consumer. That trial balloon went up like a lead balloon. The income tax withholding goof has further compounded the feeling of confusion, because people were told they were getting a tax cut; then they found that they had smaller take-home pay.

The person who did most to turn fair shares into a big issue is Richard Nixon and not George McGovern. What concerns me is that I think the Democrats are exploiting this more than is socially appropriate. When candidates throw around big tax packages, they are really talking about the redistribution of income rather than tax reform. But there would be a lot more payoff for everybody in pulling together to get a solid, noninflationary expansion of the economy.

It is also important to recognize that the present income tax structure is progressive, that it does have some favorable redistributive effects. I think that some of our tax preferences for the rich are an unmitigated outrage. But the payoff for eliminating them is more virtue than revenue. Of course, virtue is important. The real reason for wanting to get rid of these horrendous outrages is not to save money for the guy in the $15,000 income bracket, but rather to come to him and say, "You ought to pay your share. Everybody else is paying his share." It is really justification for getting him to pay more.

I think the real problem is this: if a pitch is made in a political campaign to sock it to the economic royalists, that helps undermine the cooperative basis of society. In this sense the redistribution pitch is counterproductive. In terms of our whole social atmosphere, the last thing this country needs is a class war being waged from the campaign podiums this fall. But it looks very likely that this is going to happen.

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