Tax reform is essential, inevitable, and impossible
Tax reform is even more necessary now than it was in 1986. Everyone agrees that the tax system is complex, unfair, and inefficient.
Twenty-five years ago tomorrow, Ronald Reagan signed the Tax Reform Act of 1986. It was a beautiful fall day and the signing was on the back lawn of the White House. I was there along with many of the other Treasury staff who worked on the historic legislation, as well as a bus load of tourists from Iowa who were hoping for a White House tour, but had to settle for parts as extras in the stagecraft of official Washington. Because I am really tall (6’6”), one tourist asked me to take a picture of the scene, which she couldn’t see through the crowd. I hope it came out.Skip to next paragraph
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I loved tax reform. It lured me away from the sleepy New England college where I was a professor and changed my life. Whether you judge TRA86 a success or a failure, it was a major change to the tax code. It cut top individual income tax rates from 50 to 28% and corporate rates from 46 to 34%. It eliminated a host of loopholes, deductions, and preferences—mostly on the corporate side. It removed poor people from the income tax rolls. It taxed capital gains the same as ordinary income, eliminating the single biggest driver of individual income tax shelters and making it possible to slash top tax rates while maintaining the progressivity of the income tax.
And it was fun. Treasury and Hill staff who worked on tax reform worked incredibly long hours crafting and recrafting provisions as the bill evolved through its many permutations. It was thrilling. Even though almost nobody actually thought it would become law, imagining a complete rewrite of the tax code is about as much fun as a tax geek can have. We were rewriting the Internal Revenue Code of 1954. Exciting!
But there was little reason for optimism until late in the process. The first version that passed the House wasn’t much of a reform. Compared with the pristine blueprint that Treasury produced for the President in 1984, the House bill had restored most of the loopholes and didn’t cut rates much. The Congressional leadership didn’t look promising. Ways and Means Chairman Dan Rostenkowski was an old school Chicago pol. (Later, he’d go to jail for embezzling postage stamps.) Senate Finance Chairman Bob Packwood used to have weekly meetings with his big donors where they’d tell him about their desires—none of which involved paring loopholes and deductions. (Packwood eventually retired in disgrace after several female staffers recounted his improper advances.) But at some point, these sleazy pols decided that reform was good politics. Ronald Reagan’s style of benign neglect turned out to be perfect for tax reform. He’d be AWOL for months, and then show up at a key point to make a great speech or do some arm-twisting. A junior senator from New Jersey, known more for his jump shot than his legislative prowess, turned out to be a master tactician and strategist. Bill Bradley, who later proved to be a lousy politician on the national stage when he ran for president, had unsurpassed skills in the back rooms and ante chambers of Congress.
Somehow, after multiple near-death experiences, the Tax Reform Act passed with overwhelming bipartisan majorities in both Houses of Congress and was signed by the president on that beautiful fall day. I stayed in Washington, made some amazing friends, got to work on Health Reform I at CBO in 1994, returned to the Treasury to head up the office where I’d been a staffer during tax reform, started the Tax Policy Center, and eventually returned to academia to hold a chair in memory of one of my legislative heroes, Pat Moynihan (who was a senior Democrat on Senate Finance during tax reform). I’m pretty sure none of that would have happened without tax reform as I’d never have come to Washington in the first place. So I have just warm feelings about the Tax Reform Act of 1986.
And it’s easy to get excited about the possibility of a Tax Reform Act of 2014. Tax reform is even more necessary now than it was in 1986. Everyone agrees that the tax system is complex, unfair, and inefficient. And it doesn’t come close to raising enough revenue to pay for the government, whose needs will only grow as the baby boomers retire and health care costs continue to rise. There are lots of tax reform plans out there, including the ones produced by theBipartisan Policy Center (my favorite since I helped write it), the Bowles-Simpson panel, and an excellent report commissioned by President Bush. There’s even an action-forcing event in 2012 when the Bush tax cuts are scheduled to expire. Rather than extending what everyone agrees is a deeply dysfunctional tax code, why not remake it to meet the needs of 21st century America?
Cue the patriotic music.