New York Daily News

Trump’s selective idea of tax reform

- BY JOE THORNDIKE Thorndike is a contributi­ng editor for Tax Notes and the author of “Their Fair Share: Taxing the Rich in the Age of FDR.”

Last week, in promoting his yet-to-be-seen tax cut and tax reform plan, President Trump waxed nostalgic for a simpler time, at least when it comes to taxes. “In 1935, the basic 1040 form that most people file had two simple pages of instructio­ns,” he observed. “Today, that basic form has 100 pages of instructio­ns, and it’s pretty complex stuff.”

It was almost charming — and accurate, too. The 1935 instructio­ns were, indeed, just two pages long. More impressive, the form itself was also two pages long, including six schedules on the back. Today, the equivalent forms would add at least another 10 pages to the total.

So, yes, a look back to 1935 can remind us that tax forms might be simpler. But it can remind us of something else, too: tax rates could be higher. A lot higher.

In 1935, the top marginal tax rate on individual incomes was 63%. That’s a far cry from today’s top rate of 39.6% (which Trump and other reformers hope to reduce). Apparently, high rates and simple forms can go together.

The income tax of 1935 also featured 30 brackets, as opposed to the seven we have today. That might serve as a reminder that cutting the number of brackets, as Trump has proposed, is unlikely to make tax forms any simpler.

Moreover, both rates and brackets were still climbing in those halcyon days of the mid-1930s. In the Wealth Tax Act of 1935, Congress pushed the top rate to 79%. Lawmakers also added another three brackets, including one so lofty that it applied to just a single taxpayer: John D. Rockefelle­r Jr.

It’s remarkable, and some might say depressing, that in an era of drastic wealth and income consolidat­ion at the top, the notion of upping rates and creating new brackets isn’t even part of the conversati­on.

Trump might view 1935 as a touchstone for tax simplicity, and maybe it is. But the 1930s have more important lessons for today’s policymake­rs. Specifical­ly, the era can tell us something important about the meaning of “tax reform” — that amorphous collection of ideals and aspiration­s that shape the legislativ­e agenda (or should).

Nowadays, tax reform is usually defined as a bargain: Lawmakers eliminate many of the loopholes and special preference­s that riddle the tax code. That can hurt, especially if you’re one of the lucky ones who gets to use them. In exchange, however, reformers lower rates across the board. That helps, especially if you weren’t using the loopholes in the first place.

This bargain has been the animating force behind every major tax reform of the past half century, including the landmark Tax Reform Act of 1986.

In 1935, “tax reform” meant something different. Reformers of the New Deal era didn’t want to trade loopholes for lower rates. They wanted to slash loopholes while raising rates on the nation’s most fortunate few.

Throughout the 1930s, President Franklin Roosevelt urged lawmakers to push rates higher, especially at the top of the income scale. “Our revenue laws have operated in many ways to the unfair advantage of the few,” he declared in 1935, “and they have done little to prevent an unjust concentrat­ion of wealth and economic power.” More important, Roosevelt also fought hard to close loopholes. He was passionate about curbing tax avoidance, convinced that it was morally dubious even when it was technicall­y legal.

“The decency of American morals is involved,” Roosevelt told Congress in 1937. “The example of successful tax dodging by a minority of very rich individual­s breeds efforts by other people to dodge other laws as well as tax laws.”

Last week, Trump echoed some of FDR’s indignatio­n. “We need a tax code that is simple, fair and easy to understand,” he declared. “That means getting rid of the loopholes and complexity that primarily benefit the wealthiest Americans and special interests.”

Whether his proposals will align with this rhetoric remains to be seen.

Americans tend to think of themselves as a nation of tax resisters, starting with the Boston Tea Party of 1773 and ending with the Tea Party of 2009 and beyond.

And there’s some truth to that view of American history.

But curbing tax avoidance — rather than lowering rates — is the indispensa­ble foundation of American tax reform.

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