Tax Analysts Blog

Tax Reform 1986 Is No Model for 2013

Posted on Nov 7, 2012

Everybody knows tax reform was an extremely difficult political exercise. But as hard as it was in 1986, tax reform would be much more difficult now.

First, the tax system had more potential for reform back in 1986. We had the investment tax credit and unseemly individual tax shelters. The repeal of the ITC and implementation of passive loss rules raised large amounts of revenue. This allowed politically popular middle-income deductions and benefits to remain unscathed. There are no similar sources of revenue from base broadening that are readily apparent now.

Another indication of the reduced potential for reform is that although rates are now much lower, the amount of revenue raised is about the same as in 1986.

Second, TRA 1986 redistributed the tax burden from individuals to corporations, including significant increases in taxes on foreign-source income. Pressure to address issues of international competitiveness will make this type of politically popular shift in the tax burden practically impossible.

Third, TRA 1986 was revenue neutral, while tax reform in the 113th Congress could require more revenue.

Fourth, the partisan divide was not as large then as it is now. Democrats and Republicans worked together on reform in 1982 and 1984. House Democrats and the Reagan White House had a working relationship. Nothing like that exists today.

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