Tax Analysts Blog

Finance Committee Review of 1986 Act Smacks of Desperation

Posted on Feb 9, 2015

The Senate Finance Committee will try to use history as a guide to break the logjam on tax reform. The Republican-led body will hold a February 10 hearing featuring former Finance Chair Bob Packwood and former Sen. Bill Bradley, who will talk about the process that led to the historic legislation that redefined the tax code and has left its imprint on the minds of would-be tax reformers for almost three decades now. However, looking back at 1986 appears more desperate than inspired because most of the factors that existed then are almost totally absent now.

The importance of presidential leadership has been discussed repeatedly in tax policy columns and forums. President Reagan was a huge reason that tax reform stayed on Congress's radar throughout the early 1980s. He was committed to it and was willing to build his second term around it. He also had enormous political capital that he was willing to spend after his landslide reelection in 1984.

President Obama, of course, is not committed to tax reform. He has no political capital (not even with his party, it seems, as evidenced by his retreat from his proposal to tax section 529 college savings plans). He won reelection in 2012, but he definitely has not built his second term around tax issues (it's not clear what he is trying to accomplish during his last four years in the White House, beyond keeping his foreign policy from disintegrating and ensuring that his party has steadily diminishing numbers on Capitol Hill).

The taxwriting committees had powerful leaders during the buildup to the 1986 act. The role of Dan Rostenkoswki cannot be overstated. He ensured Democrats would work with the Republican-controlled Senate, and he kept things proceeding on a largely bipartisan basis. Bob Dole and Packwood were Rostenkowski's counterparts in the Senate, and while Packwood only took over the committee in 1985 (when Dole became majority leader), he had a strong working relationship with the House and could pick up the work where Dole left off.

Today, Paul Ryan and Orrin Hatch have just taken up the gavels of Ways and Means and Finance, respectively. Both are congressional veterans, but neither has much of a tax background. Ryan has talked a lot about working with the president to achieve common ground, but he's already basically written off doing much on the individual side. Hatch has pledged to come out with a plan this year, but he isn't coordinating with Republicans in the House, much less Obama and the administration.

The Treasury Department is much different, too. Obama's Treasury talks about frameworks and broad principles and has repeatedly balked at providing a detailed plan (arguing recently that detailed plans only get picked apart). Reagan's Treasury was the opposite, putting out comprehensive proposals multiple times, including the epic Treasury II plan that was the foundation for most of the work lawmakers ultimately produced.

So the process elements simply aren't there to study. Packwood and Bradley can romantically discuss the 1986 act and chastise lawmakers and the White House for not replicating its success, but they can't give much practical advice to Hatch and his colleagues on Finance. Times have changed. The president is different. Congress is different. Treasury is different. But perhaps most importantly, the consensus behind tax reform isn't the same. In 1986 virtually everyone was on board with a plan that lowered rates and broadened the base. In 2015 that broad, macro-level agreement is completely absent. The two parties want something totally different out of a code overhaul.

If Hatch wants to learn something about building a process to pass legislation in this era of divided government, he should broaden his horizons and look at how President Clinton and the GOP-led Congresses of the 1990s were so successful. That's probably a better model for how to jump-start tax reform today than the unique, and impossible to replicate, processes from the mid-1980s.

Read Comments (6)

edmund dantesFeb 9, 2015

"The two parties want something totally different out of a code overhaul. "

That is the key point. The Republicans want more economic growth for all, the
Democrats want more income redistribution for their base. Those objectives are
mutually exclusive. What's more, the environmentalists have *less* economic
growth as their objective ("sustainability!").

The seeds of the 1986 tax reform were planted with the Kemp-Roth tax reform
proposal, which Reagan endorsed during his first campaign. That led to the
Economic Recovery Tax Act of 1981, which, remarkably, did in fact lead to
economic recovery. ERTA was the proof of concept--that tax reform could
powerfully boost economic growth--that made the 1986 overhaul possible. As well
as the key political actors you've mentioned in your excellent analysis.

If we truly want robust economic growth again, we should simply re-enact the
1986 tax code, that is, repeal every single change that has since been made to
it.

Republicans should lower their sights, not expect to get tax reform done under
this President, but lay out a vision to be enacted with the next one.

robert goulderFeb 9, 2015

Re-enact the Tax Reform Act of 1986. Not a bad idea, frankly. Sign me up.
However, I can't imagine today's political players would ever agree to such
legislation.

Would today's GOP-controlled Congress agree to tax capital gains at 28%? I
think not. Taxing capital gains at the same rate as ordinary income was
apparently okay for President Reagan (he signed the legislation, after all) but
today it's blasphemy to all Republicans, and maybe even a few centrist
Democrats.

And would President Obama agree to tax ordinary income with a bifurcated rate
structure of 15% and 28%? Don't think so. He'd almost certainly view that top
marginal rate as going soft on those lucky one-percenters.

This is a purely hypothetical, to be sure, but I'm very curious as to how
reenactment of TRA 1986 would be scored. Total guesswork, but I'm thinking it
would come out revenue positive.

More food for thought: How has federal spending changed since 1986?

travis rechFeb 9, 2015

@ED "The Republicans want more economic growth for all, the
Democrats want more income redistribution for their base."

Your reply would have been vastly more useful if you left the partisan hackery
out of it.

edmund dantesFeb 9, 2015

I, for one, would gladly trade taxing capital gains at the same rate as
ordinary income if it meant the top federal income tax rate was 28%. The
special lower rate for capital gains is needed when you have top rates above
40% to satisfy political desires. The whole "carried interest" controversy
evaporates.

Of course, I agree that Obama would never sign such legislation. Whether it
would be scored revenue positive I couldn't say, but on the record it would
enhance economic growth.

christopher berginFeb 9, 2015

Jeremy, great post. edmund dantes brings some great perspective; I would add
that even with President Reagan's leadership and the lessons of ERTA, TRA '86
almost never happened, proving tax reform is hard. To Michael Karlin: Your tax policy points should
put you on the Senate Finance Committee, in my opinion, your placement on the political spectrum
notwithstanding.

Michael KarlinFeb 9, 2015

I vote for:

* Eliminating the difference between capital gains and ordinary income, annual
mark to market taxation of stock market gains and losses.

* Full territorial taxation, residence-only taxation (no taxation based only on
citizenship)

* Elimination of accelerated depreciation, elimination of section 199, phased
elimination of the mortgage interest deduction by capping the rate at which it
can be deducted and gradually lowering the $1 million, and eliminating the
charitable contributions deduction.

* Eliminating any difference between how we pay for health care (directly or
via insurance), preferably by simply not allowing any deductions at all for
either.

* Carryover basis for all assets on death (with adequate transitional
provisions for people who don't have records of their tax basis and exemptions
for personal use assets other than collectables) and repeal of the estate, gift
and GST taxes.

* Disqualify section 501(c)(4) organizations that spend more than 10% of
contributions received on politics or lobbying.

* Making the gas tax a percentage rather than a flat or indexed rate, at the
state level, reduced income taxes and increased property taxes.

* There should be room for VAT in there, as well.

* Increased funding for the IRS

I wonder where this all puts me, in terms of position on the political
spectrum?

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