Remarks to the Tax Reform Action Coalition

May 14, 1986

I hope I haven't kept you waiting, but somebody had to run the store. [Laughter] Well, it's a pleasure to be with you again. During the last election, I promised to support an overhaul of the tax system from top to bottom. And every time I talked about it there were cheers from the audience and a gigantic ho-hum from the pundits. And, as usual, the people have been way out ahead of Washington insiders on this issue. The special interests in the Nation's Capital seem to have taken the taxpayers for granted once too often.

It reminds me a little bit of a story, and I hope I haven't told you this story before. [Laughter] But if I have, you've got to remember that life not only begins at 40 but so does the tendency to start telling stories over and over again. [Laughter] It's about a businessman who -- just down at the entrance of his building there was an elderly lady selling pretzels. And every day he'd go by and he'd put a quarter down, never take a pretzel, and go on in. He was being very charitable. And this went on for some time. And he came along one day, put down his quarter, started -- and she took him by the arm. And he looked at her, and he said, ``Well, you probably want to know why for this full year I've been leaving 25 cents on the plate and not taking a pretzel.'' And she said, ``No, I just wanted to tell you that pretzels are 35 cents now.'' [Laughter]

But it was less than a month ago that we were told that tax reform was dead. And the one thing about Washington, there are plenty of people around to tell you why something can't be done. And if I was cynical enough to believe that real change is impossible, I wouldn't have run for this job. Democracy's a cumbersome process. Like Winston Churchill said, ``Democracy is the worst form of government except all those other forms that have been tried from time to time.'' I think the bold and innovative tax program that was passed through the Senate Finance Committee by Bob Packwood and his bipartisan coalition is a major victory for the democratic process. It's the kind of straightforward, hard-hitting proposal that's enough to restore one's faith -- a faith some of us never lost -- that this truly is a system of the people, by the people, and for the people. It's a good proposal, and pardon me for resurrecting an old phrase, but we should go for it.

It was about a year ago when I called on Congress for a second American revolution. I spoke about the need to transform an unfair and overly complex system, a source of resentment and confusion, into a fair and simple tax code. One that would serve the general interest instead of the special interests, and one that would encourage business to grow and produce. I said then, and I still say, business leaders -- small and large -- should be permitted to quit spending their time concentrating on the tax angles and get back to thinking about supply and demand.

Our original proposal, to say the least, got a little bogged down as it went through Congress. We fought hard -- and that means all of us on the White House team -- Jim Baker's team over at Treasury, everyone else in the administration -- but the Washington establishment was fighting just as hard, trying to sink tax reform. Interest groups drilled one little hole after another in the hull of the tax reform boat, and when they got done, they proclaimed it wouldn't float. Well, that's not what I call good government. And what has happened in these last few weeks is evidence that there are still a lot of people in this town who are committed to good government and to following the will of the people. The proposal that passed the Senate Finance Committee meets the criteria I set down for tax reform. Starting right now, getting it passed and signing it into law is a top priority. It simplifies the mind-boggling tax rate structure, making it more understandable and fair. And it reduces the personal income tax rates to their lowest levels in over half a century.

And talking to some people about tax reform, I made a point the other day, just shortly after April 15th, that mine was all made out for me, and they sent it to me and even with it all filled out I couldn't understand it. There will be only two rates under the new plan: 15 and 27 percent. The overwhelming majority of people -- over 80 percent -- will pay a tax rate of 15 percent or less and most will enjoy a reduction in their tax obligation.

The effort is designed to be revenue-neutral, so if a large number of people and businesses are paying less, some people and businesses will be paying more. But those whose taxload will increase are those who have made extensive use of tax shelters and other schemes and have not really been paying proportionately a fair share of the tax burden. However, lowering the rates does not translate as tax shift. Lowering the rates and broadening the base will actually add to government revenue. As far back as the 14th century, a Moslem philosopher named ibn-Khaldun observed, ``. . . At the beginning of a dynasty taxation yields a large revenue from small assessments. At the end of the dynasty taxation yields a small revenue from large assessments.''

By lowering the rates, we'll encourage resources to flow from tax shelters to productive economy-building investment. By lowering the rates, we'll encourage the entrepreneurial spirit of the work ethic by letting people keep more of what they earn. This is the way to build a stronger and more powerful economy -- one that produces more for everybody, including a broader tax base for the Government. You know, I've often wondered how much the Government really got from some of those tremendously high marginal rates. Because when I was back in Hollywood, where the pay scale is a little above the average, I know I would reach a point and then someone would send a script -- and gee, it would look like a good part and something I'd like to do. But I'd already reached the 90-percent bracket. [Laughter] And there wasn't any way I was going to spend a couple of months working for 10 cents on the dollar. [Laughter] So, they didn't get much for their -- in that particular rate.

My Council of Economic Advisers tells me that the Senate Finance bill, with its added incentives and efficiencies, could increase our country's growth rate nearly 10 percent over the next decade. That could mean as many as 4 million additional new jobs over that period. That could mean as much as $600 to $900 of more real income per household each year. Business men and women don't have to be told what more money in the pockets of consumers will do. Lower rates aren't the only pluses, however, to the Finance Committee proposal. The personal and dependents exemption will be raised $2,000 for all middle- and low-income Americans. It'll remove 6 million working poor from the income tax rolls altogether.

And finally, in the area of fairness, it provides for a minimum tax of 20 percent on certain items of tax preference. And I have an uneasy feeling that maybe the gentlemen sitting behind me have already told you all these things. But too often in the past, tax provisions aimed at encouraging business expansion were used as escape vehicles to get away from paying any taxes at all. Those of you who've been working long hours, in part, to make up for the taxes your competitors aren't paying, will be pleased to know: The day of the free ride is over. Overall, this bill is a giant step forward. And I hope I can count on each of you to do your utmost to see to it that no holes are drilled through the bottom of this tax reform boat before we get a chance to launch her.

Nancy has devoted herself in these last few years to the battle against drug abuse. And I'm very proud of everything she's doing in this truly noble endeavor. And she's been promoting one method of fighting drug abuse that may have some application to the battle for tax reform. It's now the title of an organization of school kids all over the country. And so, I hope you'll take this message to Members of Congress concerning this tax proposal. Tell them when the special interests come around they should ``Just say no.'' [Laughter]

Now, I want to thank you -- all of you -- for what you've done and what I know you're going to do on this important issue. Just before the last income tax day you sent over a T-shirt to me inscribed with ``Let's make today the last April 15th without tax reform.'' Well, I loved it on a T-shirt, and I love it in reality, and together, I think we can do just that. So, thank you all again. God bless all of you.

Note: The President spoke at 11:32 a.m. in Room 450 of the Old Executive Office Building.