Tax Reform: Get Ready For A Classic Clinton Turnabout

If there was one thing Bill Clinton was sure of, it was this: He held the high ground in the tax-reform debate. By casting Republicans as defenders of the rich--and trumpeting his tax breaks for the middle class--the President thought he could keep all those crazy flat-taxers and income-tax bashers in their cages.

But congressional hearings into Internal Revenue Service abuses made electrifying political theater, catching Clinton off guard and forcing him to accept Republican proposals to reform the IRS. And if that wasn't enough, tax issues helped the GOP sweep key elections on Nov. 4.

That's why Administration complacency has been replaced by near panic. Despite Treasury Secretary Robert E. Rubin's reluctance, Clinton may do an about-face. Rather than opposing change, he is now looking to promote his own version of reform, perhaps as soon as in his State of the Union Address in January.

"WE'VE GOT TO RESPOND." Just by getting in the game, Clinton vastly increases the odds of a tax restructuring before he leaves the Oval Office in 2001. Without the President's backing, tax reform would be a hot issue in 1998 and 2000 campaigns--but it would go nowhere. "Fundamental reform has to be bipartisan," says Barry K. Rogstad, president of the American Business Conference, a group of midsize companies. "You need a chief executive to take this to the American people."

What's behind Clinton's abrupt change? Al Gore, for starters. The Vice-President's potential rivals for the 2000 Presidential nomination, eager to counter the GOP clamor for a new tax code, already are pushing their own plans. And congressional Democrats, worried about their '98 races, are eager to stake out a position.

"After the IRS debate, there was a fierce determination not to get stuck with the short end of the stick," says a senior White House official. "We've got to respond to the tax debate." So a team of Clinton advisers--led by Deputy Treasury Secretary Lawrence H. Summers and National Economic Council Director Gene Sperling--is working up options. "We're marching through every reform idea," says Sperling.

While New Democrats and Republicans agree on many economic issues, Clinton's version of reform could be very different from the GOP alternatives. He's likely to focus on making the tax code simpler while preserving progressivity.

That puts the President at odds with two leading GOP proposals--a 17% flat tax championed by House Majority Leader Dick Armey (R-Tex.) and a national sales tax embraced by House Ways & Means Committee Chairman Bill Archer (R-Tex.). Republicans say their plans would simplify taxes and spur economic growth, but Clintonites insist both plans favor the rich.

Clinton could lift key elements from plans offered by Senate Budget Committee Chairman Pete V. Domenici (R-N.M.) and House Minority Leader Richard A. Gephardt (D-Mo.), considered Gore's chief rival in 2000. Domenici backs a consumption tax, and Gephardt's proposal would set a 10% rate for families earning $60,000 or less.

Afraid that he'll find himself alone among candidates defending the status quo, Gore has been a major catalyst for the White House's new-found interest in tax reform. By the time the Veep hits the primary trail, he needs to have a plan of his own. "It's close to an imperative," says one Gore insider.

SHIFTING SANDS. But first the Vice-President and other tax-reform advocates will have to win over in-house skeptics. Some White House politicos still hope a bitterly divided GOP will fail to reach consensus on a reform proposal, allowing Clinton to duck his own tough choices. "Maybe we'll all agree to just debate this in the abstract until 2000," says one strategist.

Clinton no longer wants to take that chance, however. And with marching orders coming directly from the Oval Office, even the Treasury Secretary is going along. "He is not wildly for reform," says a White House aide. "But he has agreed to see what they can come up with." For now, Rubin says, "Whether the President will have anything to say in the State of the Union is very much unresolved." But down the road, he could live with a plan like the Tax Reform Act of 1986, which cut rates and dumped loopholes but preserved the income-tax framework.

For now, the best bet is that the President will reprise the strategy that worked so well for him in the balanced-budget debate. Once he senses public support for reform, Clinton will try to get ahead of the GOP with a middle-of-the-road plan of his own while painting the Republican alternatives as "radical." To set the stage for such a step, he could use his State of the Union address to issue a call for a tax code based on the principles of progressivity and simplicity--with details to come later. By just embracing the concept, Clinton will go a long way toward turning tax reform talk into reality.

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