Boxed Excerpts from the Q&A:
Will Rates Go Back Up?
Q.: Given our gigantic budget deficits, do you expect that the tax rates you worked so hard to lower will have to go back up in the near future?
Bradley: No. I don’t think so. I think we made a promise to the American people—you give up loopholes, you get lower rates. To those who argue that we should keep the rates where they are, the top rates, you only have to point out that they would be raising taxes on maybe 8-10 percent of the population and therefore would be getting very little revenue. So I would argue that shouldn’t do that, and in fact if there is a revenue need in the coming year for the purpose of reducing the budget deficit, I would like to see further base broadening, further loophole closing. Believe it or not, two weeks after we finished the tax reform act, I got the Joint Tax Committee into my office, and I said, “Now fellows, while our memory is fresh, what where those things that managed to elude us this year?” We have our list, and we’ll see which one manages to push to the surface if there is a revenue need.
Phantom Capital Gains
Q.: Regarding capital gains, if the stock I own goes up 10 percent while inflation goes up 20 percent, why does the tax law call it a gain when really it was a loss?
Bradley: On that question, I come with a little pedigree in that in 1981 I proposed cutting the capital gains rate to 15 percent. I got about 16 votes on the Senate floor for that effort. We began the tax reform debate and the effort to lower the marginal tax rates, and there were basically two points of view expressed by people who came before the Finance Committee in over 30 days of hearings. One point of view was that if the rates go low enough, the differential is less important and could be forgone. Other people said no matter how low the rates go, even 10 percent, a differential is still important. What we have done as a part of lowering the marginal rates as low as we have it essentially to return the tax on capital assets to where it was in 1981—28 percent. And there is embodied in the bill the assumption that if the top rate were to go above 28 percent, the capital gains rate would stay at 28 percent. It’s a choice: You get some things, you lose some things. While your hypothetical example might indeed show that you have a capital loss, your tax on wages, interest, and dividends has dropped from 50% to 28 percent. There is no distinction between long- and short-term gains. You will have lower interest rates. So on balance, I thought it was a choice worth making under those circumstances.
The 5 Percent Boost
Q.: What was the rationale for the 5 percent boost in the rate for incomes ranging from roughly $72,000 to $200,000?
Bradley: The answer to that question is very simple. We wanted a bill. We had worked for hours and hours in the Conference Committee, and the effort had fallen apart a number of times. We were now on Saturday afternoon of the August recess. Everyone knew that if this were not finished before the Congress broke for the August recess, there was no way that it could move quickly enough or that it could defend against delay when we returned in September, given an adjournment of October 1 for the election. We thought we had solved a crisis that occurred on Thursday. Then another one occurred on Friday. We thought we had solved that, and then on Saturday afternoon the revenue numbers came back and they showed that the tax cut for people earning under $50,000 was unacceptable to the House. Therefore we had to take some quick steps: How could we reshape this? This blip up or “boost,” as you referred to it, was the solution that, when fed into the computer, gave us the proper distribution. That was the way the deal was consummated. It was the last act of the tax reform bill or—in the language of my former profession—the last shot. It went in and the game was over.
Other Kinds of Taxes
Q.: What do you see as the possibility of enacting luxury taxes on cigarettes, alcohol, gasoline, and the like?
Bradley: There is a possibility of other kinds of taxes. I think you could see an increase in the gasoline tax. My first choice would be loophole closings. I think you could easily see an increase in the tax on cigarettes, given the correlation between smoking and increased healthcare costs. You could see not only an increase in the price of cigarettes but also a move, which I might actually be in the forefront of, to deny deductibility for advertising tobacco. In general, excise taxes—apart from gasoline, which gives you $1 billion for every one-cent increase—don’t raise a whole lot of money. But those will be things that the Congress will look at. There will be a long menu of those and people will make a judgment as to whether there is a public policy reason that they should be enacted.
This was originally published in the March 11, 1987 issue of PAW.