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Amity Shlaes Makes the Case for Tax Reform

12:00 AM, Apr 5, 1999 • By JONATHAN R. COHEN
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Just in time for filing your taxes -- due, in case you've forgotten, on April 15 -- Amity Shlaes has produced The Greedy Hand. An analysis of our failed tax system, together with suggestions about how it might be reformed, the book has already leapt to the top of the bestseller list on -- proving that there's nothing like the task of preparing tax returns to convince people that something, somewhere, has gone wrong.

The "greedy hand" to which Shlaes refers is, of course, the government's. The phrase was coined by Tom Paine in his 1791 The Rights of Man to describe a state "thrusting itself into every corner and crevice of industry." Shlaes explains how the greedy hand has exploited in the United States the good will of the citizenry to create over the last hundred years our present tax code -- bent on confusing, frustrating, and intimidating us.

A member of the editorial board of the Wall Street Journal and the author of a book about postwar Germany, Shlaes is well positioned to examine the onerous and counterproductive taxes levied on Americans in every walk of life.

Each of her chapters shows how some aspect of our current tax policy destroys jobs, punishes marriage, and interferes with education, savings, retirement, and even dying. And in her brisk conclusion, she offers an eightpoint manifesto for comprehensive reform.

But perhaps the most important contribution in The Greedy Hand is the revelation of how the bloated tax-collecting apparatus is kept hidden from public view. The evil genius of the tax code lies in the withholding tax, the method of taking an ever-expanding chunk of money from our paychecks before we even can see it, let alone decide how it should be spent.

This wouldn't be necessarily a bad thing, Shlaes argues, if the money were put to good use -- like fighting World War II, the reason for launching the withholding tax in the first place. But taxes are used for social engineering as well. "Our tax code," she warns, "doesn't stop at merely taking its share. It also wants to tell people how to live."

Sometimes the result is intended, as in the 1998 tax legislation that sought to punish smokers and reward married couples. And sometimes the result is unintended, as in the tax rebate of the 1975 earned-income credit that ended up acting as a disincentive for low-income workers to strive for greater career success. But in every case, it is an intrusion of the greedy hand's taxing power into ever and ever larger segments of American life.

Shlaes traces the history of the withholding tax to a man named Beardsley Ruml, a pipe-smoking member of the Federal Reserve Board in 1942, who -- back when he had been treasurer of Macy's department store -- had noticed that shoppers preferred paying their bills in small portions. So, too, he argued, would they prefer paying taxes on the installment plan.

As those installments grow ever larger, the greedy hand sometimes overreaches, prompting taxpayers to pay attention to what's being taken from them. Sometimes they even rebel, as Californians did in 1978 when they unleashed Proposition 13 on unwary bureaucrats and politicians.

Shlaes approves of this tendency, of course, and would like to see more of it. But as she points out, tax reforms in America -- whether derived from a grass-roots revolt or from such major federal tax cuts as those during the Reagan administration -- are invariably undermined by new generations of politicians.

In fact, the government's addiction to taxes has proved unshakable by either Democrats or Republicans. It is on the latter that Shlaes pours special scorn, arguing that the Republicans "led the way in replacing the welfare state with the tax code as government's principal social engineering tool." The tax-slashing party of President Reagan, once it obtained control of Congress in 1994, found itself promoting merely "tiny, symbolic projects" (such as the family child credit proposed in the Contract With America) instead of wholesale tax reform.

Shlaes is obviously right that Republicans have helped maintain the burdensome and inequitable tax code. But we need to remember that for every fiscal sin of the Republicans, there are a thousand sins of the Democrats.

The Democratic party, especially its congressional wing, still keeps unswerving faith in the virtues of the Nanny State and in the efficacy of the tax system as a device for making us behave better.

It is in her analysis of the sins of the Nanny State that Shlaes really shines, especially when she turns her attention to such schemes as the attempt to equalize school funding.