Tax Analysts Blog

It's Time to Stop Talking About Tax Reform

Posted on Jun 11, 2013

Enough already: it's time to stop talking about tax reform. Not about necessary and useful changes to the tax code – by all means, let’s talk about them. But let’s do away with anodyne invocations of “tax reform” as a useful shorthand for this debate. The phrase probably meant something once, but it doesn't anymore. And its feel-good connotations obscure the real hurdles to improving the tax system.

Sometimes, a little bit of ambiguity can help grease the legislative skids. When it works, aspirational rhetoric can blur points of contention and get people moving forward. After which, with any luck, momentum will carry them over the finish line.

Arguably, that’s what happened in 1986, when a bipartisan drive for “tax reform” made it possible to enact a lot of difficult but useful changes to the tax laws. But in 2013, "tax reform" has become an obstacle to legislative achievement, masking fundamental disagreements that must be resolved before anything useful actually gets written into law.

In a recent blog post, Stan Collender argues that "tax reform" -- in the general sense of useful revisions to the tax law -- is years away. That's a safe bet, I think. There are many reasons why the current drive won’t succeed. But the main one is foundational: there is no broad consensus on the meaning of reform.

Among tax experts there still is; most are chanting the mantra of 1986: “broaden the base, lower the rates.” This tried and true definition undergirds the yeoman work being done by the professional staffers of the House Ways and Means and Senate Finance committees, the Joint Committee on Taxation, the Treasury Department, and much of the broader tax policy community.

My colleague Bruce Bartlett has recently made the same observation:

    Almost everyone agrees that the ultimate goal of tax reform should be to lower statutory tax rates and that it should be revenue-neutral, that is, neither raising nor lowering net federal revenues over some reasonable time period. This will require the elimination of many tax expenditures benefiting both individuals and businesses.

There is much truth to this. But ultimately, this is a definition of tax reform that resonates principally with wonks, not the general public or even the larger political community. To be sure, partisan wrangling still goes on among tax experts, but it unfolds within certain boundaries -- the boundaries defined by traditional tax reform.

Meanwhile, a much larger and more important battle is raging in Washington over the meaning of tax reform. For most Democrats, reform means raising new money from the tax system, preferably from the rich. For most Republicans, reform means tax reduction of one sort or another. This debate over tax reform, meanwhile, is just part an even bigger, almost epic battle over the size and shape of government. The stakes of that battle are so high as to render tax reform little more than an afterthought.

Optimists will say that I am being unreasonable -- and ahistorical, too. They will point out that the meaning of "tax reform" was also contested in the 1980s; Republicans considered rate reduction the essence of reform, while Democrats focused on base broadening. Indeed, the basic bargain of traditional tax reform was politically appealing precisely because it was ambiguous; it made ample ideological room for all parties to the debate.

Fair enough. But the definitional differences of 1986 were questions of emphasis and degree; while important, they seem almost quaint in the context of our current politics. In the 1980s, the parties were arguing over relatively small changes to the size and role of government in society. Today, they are having a much more serious, vastly more fundamental debate over the kind of government we want to have. The stakes are much higher.

Until that debate gets settled, tax reform will remain a chimera. And no amount of happy talk (or detailed position papers) will make it any more real. This is one of those times when wishing will not make it so.

Read Comments (2)

edmund dantesJun 12, 2013

The bipartisan 1986 Tax Reform should be seen as the final conclusion of a
process that began with Reagan's election in 1980. ERTA was the down payment,
that got the wheels in motion.

Imagine someone saying, in 1980, that the then 70% top marginal income tax rate
could be brought down to 28% without material loss of revenue over a period of
six years. How could that be? Not just from base broadening, though that was
important, as was eliminating tax benefits for investment that made no economic
sense. No, the larger consequence would be a very long economic boom and bull
market that would trump all the static analysis and tax projections. Crazy, no
one would believe. But that is exactly what happened. The thing is, you have
to really want the economic growth, not just pay it lip service as today's
politicians do.

When you have crippled your economy with a 70% top rate, you can get a
tremendous economic response from lowering rates. Now the rates, though
destructively high, don't give us nearly the same room for negotiating.

For my money it would be a tremendous step forward if we simply re-enacted the
1986 Tax Reform Act, eliminating all the destructive code tinkering that's been
done in the intervening years.

clint stretchJun 18, 2013

Reenacting the 1986 Act would not work. That Act did not generate enough
revenue to support the federal government. On-budget (non-trust fund) spending
for 1982-1985 averaged 18.5 percent of GDP, it dropped to 17.9 percent for
1991-1993. In contrast, on-budget revenues dropped from 13.5 percent of GDP to
12.7 percent even with the 1990 tax increases.

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