The Congress: An Idea on the March

There they came, streaming into Washington filled with plans and programs and hopes and fears and endless ambitions. They were the members of the 88th Congress, preparing to convene this week.

When all are gathered, they will number 535. Asked to name the most important, any New Frontiersman would unhesitatingly cite a name that most Americans know only vaguely: Wilbur Daigh Mills,53, a quiet, cautious Congressman from a backwoods town in Arkansas.

Mills is chairman of the House Ways and Means Committee. And as such, he may largely determine the fate of President Kennedy’s most important bill of 1963: the tax-revision program that the Administration is presently preparing to send to Congress.

That program already bears the impress of Mills’s influence: Kennedy has drastically revised his proposals to accommodate objections that Mills raised. During the recent shaping of the bill, Administration officials frequently consulted with Mills by telephone. At times it seemed as if the two most important seats of power in the U.S. were the temporary White House in a Palm Beach mansion and Congressman Mills’s office in the basement of the post office in Searcy, Ark., just a hoot and a holler from his home town of Kensett.

Search for Culprits. Victor Hugo supposedly said: “Greater than the tread of mighty armies is an idea whose hour has come.” The tax bill goes to Congress with that kind of impetus behind it—the power of an idea on the move. During 1961 there emerged in the U.S. a history-making consensus that the time has come to do something about taxes. There are broad, often passionate, differences about what should be done, and how and when. But on the central point that the U.S. tax system is excessively burdensome and unnecessarily complicated, agreement cuts across old dividing lines, embraces Democrats and Republicans, liberals and conservatives, businessmen and scholars, the A.F.L.-C.I.O. and the National Association of Manufacturers.

Discontent with taxes is nothing new in history. Over the centuries, it has been an explosive force. Both the American and French revolutions were brought on in part by taxpayer disaffection. But today’s tax-revision tide is essentially different from the elemental discontent shared by all burdened taxpayers throughout history. What is astir in the U.S. is a sophisticated discontent—the nation has scrutinized itself and found a deep but correctable flaw.

The scrutiny grew out of concern about the sluggishness of the U.S. economy. The economy’s recovery from the 1957-58 recession was distinctly lacking in zing. Unemployment remained worrisomely high, and in Election Year 1960 signs of a new recession were gathering. “Growth” became a central issue in the campaign. Again in 1961-62, the recovery was faint and hesitant.

Seeking the causes, more and more economists began pointing at the U.S.’s tax structure. Congressman Mills had been doing that for years. “We must re-examine our tax structure and the concepts on which it is based,” he said in a speech in 1958. To speed up growth, he went on, the nation would have to encourage investment, and to do that it would have to “review the rates of progression in our income tax brackets.”

Refreshing Novelty. If a liberal economist had happened to pay any attention to that speech in 1958, he might well have dismissed Mills’s words on taxes as pro-business blathering. To many liberal economists of just a few years ago, economic sluggishness was a result of insufficient demand; the remedies were increased Government spending, deeper deficits, and possibly a bottom-bracket tax cut.

But the years since have seen a narrowing in differences of opinion about the nature of the U.S. economy. The old chicken-egg argument about the relative priority of demand and investment is still around. But liberals have shown a growing tendency to recognize the vital economic importance of investment and of the factors that investment depends upon—profits, savings, individual incentive. Along with this shift has come an awareness that burdensome taxes act as a brake upon economic growth. Businessmen have long maintained that the upper-bracket tax rates are economically pernicious, but it is a refreshing novelty when the A.F.L.-C.I.O. officially suggests, as it did a fortnight ago, that the top tax rate be slashed from the present 91% to 65%. And it is a sign that an idea is on the march when a Democratic President of the U.S., a political heir of Franklin Roosevelt and Harry Truman, declares that “our tax system exerts too heavy a drag on growth . . . siphons out of the private economy too large a share of personal and business purchasing power . . . reduces the financial incentives for personal effort, investment and risk taking.”

Sunnier Future. Despite the emergent consensus, prolonged hearings, intense lobbying and impassioned arguments lie ahead for the Administration’s tax program. Though they advocate tax reduction in principle, conservatives in both branches of Congress are wary of cutting taxes at a time when the Federal Government is already deep in the red. A deficit of about $8 billion is estimated for the current fiscal year. Another massive deficit lies ahead in fiscal 1964, even without a tax cut. Virginia’s Senator Harry F. Byrd, chairman of the Senate Finance Committee, recently said that “sharp reductions in federal expenditures should precede any major reduction in tax rates.” Colorado’s Republican Senator-elect Peter H. Dominick declared last week that he “can’t see any basis for reducing revenues without reducing spending at the same time.”

To the argument that the tax cuts should not be piled atop a big budget deficit, Kennedy counters with sophisticated rhetoric. The basic reason for the deficit, he says, is not that the federal budget is too fat, but that taxes are too high. Such taxes, the argument runs, drag down the economy, reduce corporate and personal income—and thereby shrink federal revenues. Tax reduction will get the economy moving faster, increase profits, incomes and tax revenues. Accordingly, argues the President, the increased margin of deficit resulting from tax reduction in 1963 would be a “temporary deficit of transition,” a sort of investment in a sunnier future of faster growth, smaller deficits, and eventually a balanced budget.

House of Horrors. That far, Ways and Means Chairman Mills goes along. But he and Kennedy have come into conflict —not about tax cuts as such, but on the issue of general tax reform. Mills calls the present U.S. income tax structure a “house of horrors.” He wants to see it drastically revised, with lower, more equitable rates and fewer exceptions. The Administration, too, favors tax reform. Treasury Secretary Douglas Dillon, the only Republican in Kennedy’s Cabinet, is a sturdy champion of reform along the basic lines that Mills advocates. President Kennedy in a TV speech last year promised “long-needed tax reform that logic and equity demand.” But tax reform is a brambly issue for a politician to grab hold of. Any tampering with tax privileges is bound to stir up angry opposition.

Since the President is in a hurry for tax reduction to perk up the economy, he would prefer to put his tax proposals in two separate packages—cuts now, reform later. Many businessmen agree with that approach. Last November the President’s Advisory Committee on Labor-Management Policy declared that the tax-reform issue “should not be permitted to postpone action on the urgently needed reduction in tax rates.” A few weeks later, the influential Committee for Economic Development argued that it would be “unwise” to let “controversial problems of the tax structure” delay tax cuts.

But Wilbur Mills strongly disagrees. He feels that without the appeal of tax cuts to carry it, reform would not get very far along its rocky road. Mills therefore insists on tying tax cuts and reform together. On that point he has some sturdy backing in Congress. Says Kentucky’s Senator Thruston B. Morton, former Republican National Chairman: “I will oppose any across-the-board tax cut without tax reform. If we cut taxes with out making reforms, we lose much of our trading position.”

The first skirmish between Kennedy and Mills on the reform issue took place last summer when, with the economy showing signs of slump, Kennedy considered calling for a “quickie” tax cut. Mills and Secretary Dillon, allies for tax reform, held firm against a hasty tax bill, and Kennedy discarded the idea. But he still committed himself in public to tax reduction “to take effect as of the start of next year.” To get early tax reduction through Congress, Kennedy planned on a two-package approach—cuts in one package, reform in the other. Again Mills balked, and again Kennedy revised his plans. He gave up the idea of cuts retroactive to Jan. 1, accepted mid-1963 as the earliest possible date for tax reduction to take effect. More important, he dropped the two-package plan. The Administration bill will call for tax revision in stages stretching over two years or more. But it will be a single package, and will include substantial measures of tax reform.

The Administration has kept the dollar details of its tax program under strict secrecy so far. But it will be a hefty package, calling for reductions totaling between $8 billion and $10 billion, with at least three points trimmed off the corporation tax rate (now 52%) and across-the-board cuts in the personal tax rates. The revenue losses will be partly offset by about $3 billion in revenue-increasing reforms, including a tightening up of capital-gains provisions and a substantial nick in the oil-depletion allowance, that favorite target of tax reformers.*

Tilting the House. In Late January a messenger will carry the tax bill from the White House to the Capitol. From then on, the man in charge will be Congressman Mills.

Any chairman of the House Ways and Means Committee is a man of power and prestige on Capitol Hill. Ways and Means has jurisdiction over all matters relating to taxation, the national debt, tariffs, international trade and the social security system. The Senate, of course, also has a say in tax legislation. But since the Constitution requires that all revenue bills “shall originate in the House of Representatives,” Ways and Means is more powerful than Harry Byrd’s Senate Finance Committee.

Mills can exert even more influence than normally belongs to a Ways and Means chairman because both the House and the committee are pretty evenly divided between liberals and conservatives.

Mills does not wear either label. “The only politics I ever knew,” he once said, “is to try to do the right thing. I don’t know where that puts me.” He usually votes for New Frontier bills on the floor of the House. But last year he refused to support the Administration’s medicare bill, and he is considerably less casual about budget deficits than the Administration is. As a power in the middle, Mills can, within his realm of jurisdiction, tilt the House one way or the other. As Mills goes, so is his committee likely to go, and as Ways and Means goes, so, as a rule, goes the House.

Outside the Whirl. Much of Mills’s special authority derives from the sheer weight of his expertise. He is beyond dispute Congress’ leading authority on taxation. His grasp of its intricacies often astonishes expert witnesses who appear before his committee.

Mills works at his job with almost heroic dedication. When he goes home in the evening he carries a load of reading matter on taxes or other Ways and Means business—he seldom reads anything that is not related in some way to the work of his committee. He has almost no diversions, has never taken a vacation trip, never traveled outside the U.S.; the only congressional junket he ever took was to nearby Baltimore. He and his wife Polly (they have two grown daughters) live in the same unfashionable apartment building that they moved into when they first went to Washington in 1939. Their Arkansas residence is a little one-bathroom house that might be the home of a factory hand. They have excluded themselves almost completely from the Washington social whirl, almost never accept an invitation. When they do go out to dinner, it is usually in company with friends or constituents from Arkansas.

Between sessions of Congress, Mills goes home to Arkansas, making speeches, meeting with an endless flow of constituents in his office in Searcy, traveling back-country roads to chat with voters in his basso drawl. Mills has a safe seat, has not had any opposition for the Democratic nomination in his district since 1944—but he behaves as if a formidable challenger were eternally at his heels.

This practice of running hard even though there is no race may be a sign of what many of his fellow Congressmen consider to be Mills’s besetting flaw: an apparent insecurity that sometimes makes him overcautious. The flaw is all the more puzzling in that, far more than most men, Mills has escaped defeats and detours in life. He is that fortunate rarity, a man who has fulfilled his boyhood dreams.

Feathers & Squawk. In Kensett, Ark., where Mills grew up, his father was one of the most prosperous men in town, owner of a busy country store that sold everything from horehound drops to horse collars. (Mills’s mother, 77, still helps run the store.) Later on, Ardra Mills acquired a cotton gin and an interest in the local bank. Wilbur worked in the store during his boyhood, but early in life he was struck with awed admiration of William A. Oldfield, the bouncy, genial Congressman from the district. In his travels around his constituency, Oldfield frequently visited Kensett and stopped at the Mills store. “I was talking about running for Congress by the time I was ten,” Mills recently recalled. Oldfield was a member of Ways and Means—so young Mills decided that he, too, would sit on that committee.

In 1938, after Hendrix College, three years at Harvard Law School and four years as a youthful county judge, Mills fulfilled the first half of his dream by getting elected to Congress. He was 29. Normally it takes considerable seniority to win a place on the prestigious Ways and Means Committee. But Mills reached the goal in a mere four years. Speaker Sam Rayburn, impressed with Mills’s brains and diligence, gave him a push. And the committee’s chairman, North Carolina’s Robert (“Muley”) Doughton, author of the dictum that the objective of tax policy is to “get the most feathers with the fewest squawks from the goose,” soon found studious Congressman Mills a valuable man to have around.

In early 1958, through the inexorable workings of seniority, Mills became committee chairman—and soon suffered a stunning setback: the House rejected the very first major bill that he brought to the floor as chairman (it was a measure to extend the unemployment benefits of jobless people who had used up their quotas ). That blow left a mark upon Mills. He has never lost another major bill on the floor, but in guarding against defeat he has sometimes delayed too long or wavered too much while trying to make a committee bill fail-proof. During the 1959 session, his excessive wariness damaged his prestige, all but torpedoed his hopes of some day becoming Speaker of the House. He procrastinated and wobbled so much on legislative matters before Ways and Means that House wags dubbed it the No-Ways and By-No-Means Committee.

On the Threshold. But last year Mills recouped his own nerve and his committee’s prestige. The three main bills of the session all fell within the jurisdiction of Ways and Means: trade, medicare and the tax revision bill that granted business firms a special credit on purchases of capital equipment. Kennedy considered Mills the key to the 1962 session, and so he proved to be. He refused to back medicare, and it died. But he steered the history-making free-trade bill through the House with a masterful sureness, defended the tax bill on the floor in a virtuoso performance.

With his power and influence restored, and with a relatively weak man in the Speaker’s chair. Mills now has his greatest chance before him. For years he has cherished the grand ambition of drastically reforming the nation’s tax structure—and the beginning of that task is at hand.

Interdependent Evils. As an abstraction, separated from prickly practicalities, the ideal of tax reform commands almost unanimous approval, like free public education or the golden rule. Everybody who has studied the existing income tax structure, through whatever political lenses, agrees that it is a mess. It has grown up piecemeal over the years without any guiding philosophy, becoming ever more misshapen and complex, until today it sprawls over 468 pages in the Internal Revenue Code. It combines harshly progressive rates with an enormous patchwork of special-case provisions intended to mitigate the rates. “The first title of the tax code,” says Mills, “states that all income shall be taxed; the rest of the code is exceptions.” As a result of all the exceptions, only 43% of the total personal income in the U.S. is subjected to the federal income tax.

High rates and teeming exceptions are interdependent evils. What tax reformers want to do is attack both evils at once, cutting the rates drastically and simultaneously “broadening the base” by shrinking or abolishing many of the exceptions. On past performance, the outlook for such reform is dim: efforts at revising the income tax code have generally moved in the opposite direction. In 1954, Ways and Means concocted a tax-revision bill that New York Republican Dan Reed, then chairman of the committee, proudly called “the first overall revision of our tax laws which has ever been undertaken.”

The committee held hearings for many weeks, poked into every cranny of the tax code, painstakingly drafted a bill of 929 pages. But instead of lowering rates and reducing exceptions, the Reed bill left the rates unchanged and added on a big batch of new exceptions. The effect was to make the tax code enormously more complex and increase what one critic of the bill called the “disgusting intimacy between rulers and ruled.”

Ghosts of the Depression. Various schemes of tax reform differ greatly in detail, but most proponents of reform agree that the present structure carries the progressive principle too far. While Congress was shaping the constitutional amendment authorizing an income tax, opponents warned that once the floodgate was opened the top rate might some day reach 50% or even higher. Idaho’s William E. Borah, a great Senate champion of the amendment, was outraged at the suggestion, complained that it insulted his “sense of fairness, of justice.” After the 16th Amendment went into effect in 1913, the top rate was set at 7%. By 1932 it had reached 25%. Then in 1932, beset by the fears and rancors of the Great Depression, the Congress upped the maximum to 63% in one wild thrust.

The ghosts of the Depression have long since vanished from most segments of U.S. life—but in the internal revenue code, the soak-the-rich tone lingers on. In a departure from the old ideology of his party. President Kennedy has recognized that it is time to de-ghost the tax laws too.

The way of the world is such that the rich—those with very large assets—do not actually pay the confiscatory top rates. The rich can arrange matters so that the money rolls in to them in forms that are partly or entirely sheltered from income tax, such as capital gains, royalties from oil properties, interest from tax-exempt municipal bonds. In 1961 a total of 306 U.S. taxpayers filed returns showing an adjusted gross income of $1,000,000 or more. Their adjusted gross income added up to $611,273,000, their total income tax to $280,525,000, or an average of about 45%—a lot less than might be expected from the rate schedules. And that 45% average actually overstates the tax bite because the adjusted gross income figures included only 50% of the taxpayers’ long-term capital gains, and none of their income from tax exempt bonds.

The high progressive rates, then, do not really soak the rich. The most soaked victims of the present tax structure are taxpayers in the upper-middle income brackets, business executives and professional men who receive all or nearly all of their income from salaries (or from fees or royalties not sheltered from taxation). Such people typically have only meager net assets despite their hefty pretax incomes. Far from accumulating capital, they often have to borrow to put their children through college. They attain their levels of prosperity only after many years of gradually working their way up, bucking a headwind of ever higher tax rates. And as they approach their earnings peaks they find themselves paying tax rates that, measured by percentage of gross income, are on the same order as those actually paid by millionaires. The grace and security that come from possession of substantial assets remain out of reach.

A Gem of Justice. The combination of high progressive rates and numerous avenues for escaping them imposes grievous economic costs upon the nation. It leads to misallocation of resources, because economic decisions are made with an eye on the tax angle. Among the highly prosperous, a great waste of energy goes into minimizing tax liability instead of into maximizing return.

There is, then, a compelling case for real reform of the tax structure. The tax reformer’s dream, voiced by Chairman Mills in private but never advocated in public, is to sweep away the whole vast web of deductions, discriminations and special-case provisions, and levy tax upon all income (except such Government transfer payments as social security benefits and unemployment compensation). With nearly 100% of total personal income subject to taxation, instead of the present 43%, the average income tax rate would be only about 10%. Even at the top, rates could be gentle compared to today’s levels.

A less heady version would preserve the present personal exemption for the taxpayer and his dependents on the theory that bare subsistence income should go untaxed. Retention of the $600-apiece exemption would exclude roughly 25% of total personal income from the tax base. Even so, the average rate would come to only about 13%.

With or without the personal exemption, a no-deduction, no-discrimination, low-rate, mild-progression tax structure could be only a gem of simplicity and justice compared to the present structure. Such a sweeping reform would bring a great release of energies. All of the effort and imagination now devoted to tax avoidance could be devoted instead to more economically constructive purposes. The misallocated resources now deflected by tax considerations could flow into more productive channels. The advantages now accruing to the ingenious tax avoider and the outright cheat would largely disappear. The corrosive fog of sordidness and pettiness that emanates from the present tax structure would be blown away by a bracing breeze of equity. The U.S. would be a more dynamic—and a more moral —nation.

A Society of Law. Thoroughgoing tax reform requires two interlocking transformations in the minds of men. The great mass of citizens with low and moderate incomes, and the politicians and labor leaders who speak for them, must be willing to get rid of punitive rates. As sources of revenue, they are virtually hollow. In the present structure, all of the rates above 50% produce $900 million a year in revenue, less than 2% of the Treasury’s total personal-income-tax take. The rates above 65% account for only about $250 million a year. The confiscatory rates are relics of past confusions and rancors, preserved on the books not for any real utility but for symbolic and ideological reasons. Even though largely avoided in practice, punitive tax rates mock the U.S.’s image of itself as an open, free-enterprise society in which ability and effort are justly rewarded.

On the other hand, citizens with large incomes must be willing to recognize that the revenue code’s avenues and alleys of tax avoidance are inequitable and contrary to the spirit of U.S. democracy. In abolishing them, the nation would affirm that it is indeed a society of law, in which equity is paramount over privilege and the tax system distributes the tax burden justly among all citizens.

*The oil-depletion allowance permits the owner of an oil-producing property to deduct 27½% of the gross income from the property in computing the tax liability, with the restriction that the allowance cannot in any year exceed 50% of the taxable income from the property. Yearly cost to the Treasury: about $1 billion. Similar allowances apply to natural-gas wells and, at less generous rates, to most kinds of mineral deposits, from antimony to zircon. What is wrong with the arrangement, as tax reformers see it, is that the owner can keep on taking the deduction indefinitely, even after he has fully recovered his capital outlays, while in most other types of business, an asset can be depreciated (written off against taxable income) only to the extent of its cost.