Tax Analysts Blog

Tax Cuts Can Still Be Tax Reform

Posted on Dec 22, 2016

If you listen to the lobbyists, tax reform is always just around the corner. For years, Beltway mavens have been especially vocal about the urgency – and even the inevitability  – of corporate reform. With some $2.6 trillion in corporate earnings “trapped,”  “stranded,”  “stashed,”  or simply held overseas, the status quo has long seemed untenable.

And yet, it has proven strangely tenable from one year to the next. Inertia and gridlock have been powerful obstacles, slowing the drive to bring that money home. Even the pairing of repatriation with infrastructure construction– a masterpiece of bipartisan logrolling that seems irresistible in theory – has turned out to be notably resistible in practice.

And then Trump happened. Or more precisely, Trump plus the Republican success in holding the Senate. And now, for the first time in a long time, single-party dominance seems poised to deliver some version of the long-predicted, always “inevitable” tax reform.

At this point, the real question is what the ascendant Republicans mean by “tax reform.” Critics have suggested that they’re really just seeking a giant tax cut, which by most definitions is not true reform.

I disagree. While I may not like it, I think the definition of tax reform – if the phrase is going to mean anything – has to make room for sweeping tax cuts that change the landscape of American politics in a fundamental way. And by that measure, I think the Republicans are talking about a very real kind of tax reform.

Technocratic Reform

Traditionally,  tax reform has been a bipartisan, expert-driven affair. This tradition, which I call technocratic tax reform, features a bargain of sorts: Taxpayers get lower rates in exchange for sacrificing some of their cherished tax preferences.

This approach to tax reform has at least one major accomplishment to its credit -- the Tax Reform Act of 1986. And while that landmark legislation is now 30 years old, its fundamental bargain still commands respect from many prominent politicians, including House Ways and Means Chair Kevin Brady.

In a recent interview, Brady lauded his predecessor, Dave Camp, for making tax reform “inevitable” (there’s that word again). How so? “In the sense that he showed you could broaden the base and lower the rates and simplify the code and be competitive around the world and make it more understandable,” Brady told CNBC.

That’s almost charming in its optimism and generosity. And the sentiment has been echoed (at least implicitly) by other GOP leaders when emphasizing the need to limit federal borrowing. “My preference on tax reform is that it be revenue neutral,” declared Senate Majority Leader Mitch McConnell earlier this month.

Still, it’s hard to square that sort of fiscal traditionalism with Trump’s sweeping plans for tax reform, not to mention the House blueprint that Brady has been championing for the last six months. (The revenue loss from the former is uniformly estimated to be something between very large and huge; Brady’s plan looks cheap by comparison but still loses money according to most estimates.)

The real question here is both rhetorical and political: Do any of these GOP plans constitute real tax reform? If we use the technocratic definition (with its emphasis on trading a broader tax base for lower rates), then the answer is probably no.

What if we take a grander view, rooting our definition in historical experience? That approach would define reform in terms of structural change (think 1913 and the creation of a brand-new income tax). In that case, the House blueprint might qualify, since it would replace the current corporate income tax with a novel destination-based cash flow tax. That’s some real change.

But for the sake of argument, I want to suggest that even if next year’s tax legislation abandons the cash flow tax, it may still qualify as tax reform.

If you believe creeping statism is the biggest problem facing America, then revenue-losing tax cuts are a legitimate instrument of both fiscal and political reform. In fact, the more revenue they lose, the more they look like reform.

I suspect that many Republicans view Ronald Reagan’s 1981 tax cut in that light. And as a matter of history, they’re right. Reagan’s first-year tax cuts permanently altered the trajectory of federal fiscal policy, not to mention American politics and governance writ large.

And tax reform has never been the same, either. Rates came down swiftly and dramatically in 1981, and in the decades since, no one has seriously suggested that they return to anything like their pre-Reagan heights. Reagan’s cuts weren’t just a change in degree, they were a change in kind; income taxes today look very different than they did before Reagan changed the conversation.

In other words, Reagan’s claim to tax reform glory hinges not simply on the technocratic achievements of 1986 but also on the supply-side victories of 1981.

Now, lurking inside this definition of tax reform is the discredited notion of starving the beast. As any number of critics have pointed out, the beast of big government has never actually been starved – not even by Republicans who claim to hate it. Indeed, by most measures, the beast has continued to eat quite well.

But absent the Reagan reforms, I think the beast would be bigger. Reagan’s tax cuts didn’t starve big government of the money it needed to survive, but they almost certainly constrained its growth. Even Reagan’s later tax hikes didn’t completely undo the strictures imposed in 1981.

To be clear, Reagan’s tax-cut version of tax reform is not my sort of tax reform. I’m inclined to the old-school tradition, trading rates for base broadening. And if I were looking for something more dramatic and structurally innovative, I’d consider the introduction of a broad-based consumption tax, perhaps using it to replace revenue from the struggling corporate tax.

I support that sort of tax reform because I don’t support the GOP fixation on shrinking government. Indeed, my inclination would be to expand the state, at least in the service of broadly shared economic security.

But that’s just my opinion. And while I cherish it, I don’t think it entitles me to commandeer the moral and rhetorical high ground of “tax reform.” If that contested phrase means anything, it means something simple: a change to the tax system that makes a difference and lasts a long time.

And by that measure, we may be in for some genuine tax reform next year.


Read Comments (4)

Mike55Dec 21, 2016

Interesting article. For what it's worth, I've always taken the semantics of "tax reform" for granted. Some condensed phrase was needed to define substantial alterations to the tax code that have nothing to do with the politics of increasing/decreasing federal revenue generally. For whatever reason, "tax reform" was chosen... I don't think a moral or rhetorical high ground is intended.

Whatever you'd like to call it, HOW we collect revenue, the AMOUNT of revenue we collect, WHO we collect revenue from, and WHAT we do with the revenue collected are four distinct questions. As you know better than anyone, it has historically proven impossible to reach any sort of workable consensus when trying to address all four issues in one fell swoop. Conversely, we have at times been able to compromise on one issue at a time.

This explains why "tax reform" advocates are so rabid about revenue neutrality. They all have their own strong opinions on revenue of course. But since they know if the HOW is considered in tandem with pretty much anything else, including how MUCH, they are preordained to accomplish nothing at all. Single party control does not change this. So sure, perhaps lowering rates by a significant enough margin would, in and of itself, qualify as "tax reform." But if that's the case then someone needs to find a new two-word phrase that people can use when they want to discuss the HOW.

Edmund DantesDec 22, 2016

Very good piece. As I was reading, I was thinking, "No, as much as I agree on the importance and value of the 1986 tax reform, ERTA was far more consequential." No sooner had I composed that thought than you made the point for me.

Before ERTA, it was routine to assume that the government might take more than half of a transaction between citizens--whether it was compensation income, a gift, or an inheritance. No one thinks that any more. Excepting perhaps Bernie Sanders and his supporters.

Taking the government's profit out of inflation was also a huge change with ERTA, through inflation indexing.

I agree with you, tax reform is coming. I said the same in my comments to Mr. Bergin, back when he was still blogging. I miss his posts.

One big part of this reform should be major personnel changes at the IRS, to sweep out the corruption that would otherwise undermine Republican-initiated tax reform.

Mike55Dec 22, 2016

"I agree with you, tax reform is coming."

I agree too, but just to play Devil's Advocate (since three tax wonks agreeing with one another is no fun at all), I'll lay out the other side. Here goes: while everyone has the best of intentions, Republicans just don't have enough time to get tax reform done.

Modern political reality dictates that if tax reform is going to happen, it must happen before September of 2017.* Trouble is, tax reform turns out to take a long time to get done. By way of example, TRA of 1986 took over 2 years from the date drafting began in earnest to date of passage. Trump doesn't have over 2 years.

More importantly, Trump isn't going to get to spend much time worrying about taxes between now and September. The largest challenge facing our country is healthcare, not taxes (it deeply pains me to admit this). Putting the fancy rhetoric and blame laying aside, both parties are saying the same thing about healthcare: it's a ticking time bomb. Spending 18% of our GDP on healthcare with no end to the upward cost spiral in sight is not sustainable. This will be the first problem Republicans tackle, which is going to consume a big chunk of the time between now and September. Doesn't leave a whole lot of room for tax reform...

*I believe there have been articles in Tax Notes that spell these points out in greater detail, so I'll avoid the exercise of summarizing them poorly here.

Edmund DantesDec 22, 2016

Mike55, although I agree that tax reform has taken a long time in the past in the usual case, this is not the usual case. Reagan got ERTA pushed through by August of his first year, and that was with Democrat Rostenkowski in charge of the Ways and Means Committee! The paradigm shift that is Trump may well replicate the urgency and surprise legislative efficiency that we saw in 1981. Especially given that we have the bones of the plan already outlined, and the Republicans have both houses of Congress.

I'm not downplaying the importance of health care reform. But I believe that Trump will be a multi-tasker, he will attack many objectives simultaneously. He will delegate at least as much as Reagan did, which was a lot. I suspect that Trump will bring as much originality to governance as he did to campaigning.

Submit comment

Tax Analysts reserves the right to approve or reject any comments received here. Only comments of a substantive nature will be posted online.


This question is for testing whether or not you are a human visitor and to prevent automated spam submissions.

By submitting this form, you accept our privacy policy.


All views expressed on these blogs are those of their individual authors and do not necessarily represent the views of Tax Analysts. Further, Tax Analysts makes no representation concerning the views expressed and does not guarantee the source, originality, accuracy, completeness or reliability of any statement, fact, information, data, finding, interpretation, or opinion presented. Tax Analysts particularly makes no representation concerning anything found on external links connected to this site.