Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of the forthcoming book “The Benefit and the Burden.”
This Saturday is the 25th anniversary of the Tax Reform Act of 1986, signed into law by Ronald Reagan on Oct. 22, 1986. He called it a “revolution” and “the most sweeping overhaul of our tax code in our nation’s history.”
Perspectives from expert contributors.
Perspectives from expert contributors.
But with the passage of time, it appears far less consequential than it did at the time. Although some aspects of the law remain part of our tax system, others were jettisoned with unseemly haste. The experience raises serious questions about the long-term effects of tax reform that those favoring an overhaul today would do well to learn from.
At least on the Republican side of the political spectrum, there is a widespread belief that tax reform is the key to growth. The Republican leadership also contends that the only reform that really matters is cutting the top tax rate for individuals and corporations. It is practically impossible to find a Republican willing to put a specific tax preference — exclusion, deduction, credit or loophole — on the table for elimination.
Of course, many Republicans will proclaim a willingness to wipe the slate clean and abolish all tax preferences. But they always seem to find a couple of exceptions. Herman Cain, for example, whose 9-9-9 plan I discussed last week, would continue to allow a deduction for charitable contributions. In the Cain plan there is no personal exemption, no child credit, no earned income tax credit or any other provision aiding families or the poor — but museums of modern art, Ivy League universities and public television stations would still be able to receive contributions that were tax deductible.
Historically, wipe-the-slate-clean plans have always foundered when squeaky wheels insisted on one little exception. Mortgage interest is a common one. Homeowners are a major Republican constituency, and even if they might be willing to give up the mortgage interest deduction in return for lower rates, few want to see the value of their principal asset fall further in value.
This would almost certainly happen if the mortgage interest deduction were abolished, because its value is capitalized into home prices — people are willing to pay higher prices and can afford larger mortgage payments due to interest deductibility. If the deduction were withdrawn, many homeowners would find renting to be more attractive.
But once one makes an exception for mortgage interest or charitable contributions in a radical tax reform plan, how does a politician say no to those who fear they will lose medical insurance if its tax exclusion is abolished, or those who live in high-tax states like New York where the deduction for state and local taxes is critical?
Once politicians make any exceptions to wiping the slate clean, they are on a slippery slope, because those benefiting from the next most popular deduction will be standing in line demanding an exception, too.
For these reasons, all tax reform plans premised on completely throwing out the tax code and starting from scratch are hopelessly utopian, with not the remotest possibility that any of them will ever be enacted. And support for them is not costless. Because so much political energy is channeled into the Fair Tax, the flat tax, the 9-9-9 plan and other proposals, very little is left over for changes that fall short of tearing the tax code out by its roots but are still needed.
The 1986 law was never about starting from scratch. It was about making progress, improving the tax code and accomplishing something at the end of the day that was worth doing. Yet despite the relative modesty of the goal, it was still extraordinarily difficult to accomplish and could easily have fallen apart on many occasions during the process. It succeeded, in large part, because of factors no longer present in our political system.
First, there was a tradition of tax reform, as was accomplished in the tax reform acts of 1969 and 1976, which concentrated on eliminating tax loopholes that only benefited special interests. This was considered a good idea per se, even if tax rates were not cut in the process. Today, such reforms would be viewed as tax increases and impermissible under the “tax pledge” that Republicans are dogmatically committed to.
Second, Republican tax reformers of the 1980s, such as Representative Jack Kemp of New York and Senator Bob Kasten of Wisconsin, were willing to put specific tax preferences on the table for elimination and take the heat for doing so.
Reagan built on their efforts and put forward a very detailed plan for tax reform in May 1985, based on several years of work by the Treasury Department, that identified a long list of tax provisions needing pruning from the tax code, along with supporting analysis and documentation.
Today, Republicans like Mr. Cain put most of their efforts into devising catchy slogans and almost none into providing details of their tax proposals.
Third, bipartisanship wasn’t a dirty word in the 1980s. The 1986 law would have been impossible if the Republican chairman of the Senate Finance Committee, Bob Packwood of Oregon, and the Democratic chairman of the House Ways and Means Committee, Dan Rostenkowski of Illinois, weren’t committed to the effort and willing to work closely, compromising, making deals and splitting differences in a way that Congressional Republicans and Democrats are incapable of doing today.
In the end, the key compromise that made the 1986 law work was Reagan’s willingness to raise the capital gains tax to 28 percent from 20 percent in return for dropping the top income tax rate to 28 percent from 50 percent.
Today, Republicans like Mr. Cain make abolition of the capital gains tax a key element of their tax reform efforts. It’s hard to imagine that they would ever support a deal like the one Reagan took such pride in.
Even so, critical elements of the 1986 law fell apart almost immediately. The top rate was raised to 31 percent in 1990, while the capital gains rate stayed at 28 percent. Thus both liberals and conservatives lost out, and the dream of treating all income the same and taxing it at a low flat rate went up in smoke. According to the Tax Policy Center, the aggregate size of tax expenditures began rising almost as soon as the ink was dry on the 1986 law.
Nevertheless, the fact that the weeds will grow back is no reason to never prune a garden. One has to take a stab at it once in a while or eventually be surrounded by a jungle of ugly plants. That there is no once-and-for-all solution to it, or to the problems of the tax code, is a poor reason not to at least try to clean up from time to time.
Based on the experience of the 1986 law, the essential prerequisite for doing another tax reform like it is for President Obama to put a detailed plan on the table, as Reagan did, backed by extensive research and analysis from the Treasury Department. Reagan kicked off his effort in the 1984 State of the Union address. Obama’s 2012 address would be an appropriate occasion for him to do the same.
