Building character through the tax code

January 21, 1996|By George F. Will

WASHINGTON -- Quadrennially, the lament arises: How did we wind up with this boring presidential campaign? This year such keening is nonsense. The marketplace of ideas is teeming -- at least in the party that believes in markets and ideas -- and is producing the most substantive presidential debate in memory.

Steve Forbes, spending substantially less than is spent to introduce a new snack food, has accelerated the debate about taxes, flat and otherwise. Most Americans might soon realize that most Americans already are principally taxed by a flat tax: A majority pay more in Social Security taxes than in federal income taxes.

This year's campaign has featured a quantity of detailed economic argument rare in American politics. And the campaign was enriched last Wednesday when Phil Gramm at last showed that he knew how to bring the debate up from economics. He unveiled proposals designed to make Mr. Forbes' flat-tax proposal seem thin gruel. Senator Gramm's aim is to enkindle more rapid growth, and to make growth serve the country's concern about character.

His centerpiece is a 16 percent flat tax. With a standard family deduction of $22,000 and a $5,000 exemption for each dependent, a family of four with today's average income (projected to be $49,200 in 1998) would have 65 percent of its income shielded from taxation, a condition not enjoyed since the 1950s. Senator Gramm would end the deductibility of state and local taxes, the better to fuel tax revolts in high-tax jurisdictions.

Charitable giving

Unlike Mr. Forbes, Senator Gramm would preserve the deduction for charitable giving because such giving should be encouraged as the welfare state shrinks. Unlike Mr. Forbes, Senator Gramm would preserve the mortgage-interest deduction because it encourages home ownership, which encourages conservative attributes (the thrift necessary for a substantial investment, respect for property rights, a sense of a permanent stake in the community) that conduce to social stability.

Unlike Mr. Forbes, Senator Gramm would tax all income, including investment income, for two reasons. One is that perceptions matter, and no argument about economic efficiency can hope to banish the perception that taxing income from wages but not from investments is inequitable. His other reason reflects the former economics professor's analytic bent. Suppose, he says, you have two children and give one $100,000 to invest and give the other a $100,000 education. Taxing only the income produced by the investment in education would be a disincentive for investment in human capital.

Mr. Gramm's arguments for taxing all income, and for retaining the mortgage-interest and charitable-giving deductions, may be, in part, rationalizations for taking the path of least political resistance. But at least they are arguments connecting economic measures with moral concerns.

His plan to achieve 4 percent annual growth (the rate has averaged 2.6 percent since 1966) includes, among much else, expansion of free trade; requiring a 60 percent supermajority to raise taxes; balancing the budget in four years and in the next four limiting the growth of government to the inflation rate; establishing a commission, akin to the base-closing commission, that would produce a comprehensive proposal (leading to an expedited up-or-down vote) for pruning regulations. But, again, as important as his proposals is the moral cast he gives them.

Senator Gramm believes economic growth has done more than all the political writings from Locke and Jefferson through Milton Friedman to equip ordinary people for freedom. This is because in a society where brisk growth is the norm, ''fairness'' is understood not in terms of what government gives but in terms of opportunities government does not impede. Such a society is spared the embittering politics of redistribution.

The senator has been faulted by some conservatives for talking too much about economics and too little about ''values.'' (Almost everyone talks too much about ''values'' rather than virtues; Hitler had values, not virtues.) However, Mr. Gramm's economic package is an example of what in another era was usefully called ''political economy.'' It demonstrates that his conservative critics misunderstand him because they misunderstand political economy, which is the devising of economic measures to promote certain character traits and other social objectives.

So far, Mr. Forbes has helped Bob Dole by further fractioning the most conservative portion of the Republican nominating electorate, preventing that portion from coalescing around a single candidate possessing more ideological clarity than Mr. Dole can provide. However, the dialectic of political competition can produce unpredictable outcomes.

Mr. Forbes has done Senator Gramm the favor of forcing him to explain his economic program with reference to the sociology of virtue. It remains unclear that anyone can derail Mr. Dole, but it is now more likely that if anyone does, it will be Senator Gramm.

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George F. Will is a syndicated columnist.

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