Tax Analysts Blog

When It Comes to Tax Reform, History Tells Us What Might Happen – And Why It Probably Won’t

Posted on Feb 10, 2015

The Senate Finance Committee got a visit from the Ghosts of Politics Past today. Former Sens. Bob Packwood and Bill Bradley answered the call of a desperate committee and tried to conjure up some useful thoughts on “Getting to Yes on Tax Reform.”

The past is almost never a good model for the future, because the future rarely looks anything like the past. Sure, we can find familiar patterns and striking similarities. But the islands of continuity are surrounded by a sea of change.

That’s not to say that history can’t be useful to policymakers. Indeed, it can be crucial, providing the kind of perspective that makes progress possible. Carefully used, history can expand our notion of what’s possible.

But it also limits our sense of what’s likely.

What history can’t do is provide easy recipes for legislative success. In the case of 1986, the reasons not to look backward for specific guidance are legion. Today’s tax system might well be broken, but it’s broken in different ways than the tax system of 1986. In particular, the corporate tax today is a different beast – especially in comparative terms – than the corporate tax of 1986.

Even more important, the political context has changed entirely. In fact, the most important change between today and 1986 is the 1986 law itself. Over the past three decades, President Reagan’s landmark reform has been remade dramatically, and its gradual unraveling has diminished the prospects for a redo.

For many of today’s political leaders, the history of the 1986 reform is a story of betrayal. Republicans entered the 1986 debate hoping for lower rates, and they accepted base broadening as the price. Democrats wanted a broader base and were willing to accept lower rates to get it.

That bargain worked, but it’s unlikely to work again. Democrats look back at 1986 and see the subsequent rise of corporate and individual tax avoidance—some of it of the self-help variety, but much of it enabled by helpful legislation. Republicans look at today’s higher rate structure and see a similar betrayal of the 1986 bargain. Having been fooled once, neither side is willing to get fooled again.

In fact, both sides have an unrealistic view of tax reform: Bargains are never permanent, at least in a democracy. Tax reform isn’t something that gets done and stays done. It’s something that gets done and then done again. And again. And again.

And that’s the real lesson of history: Reform is hard. Packwood and Bradley can put a hopeful spin on that difficulty, reminding today’s lawmakers that it’s possible to snatch victory from the jaws of defeat (a process that occurred multiple times in 1986, as my colleague Chris Bergin observed yesterday in a comment on Jeremy Scott’s post).

But victory is the exception, not the rule. Properly told, the history of the 1986 tax law is a cautionary tale, not a hopeful one. And combined with countless other examples of failed tax reform, the case for caution gets even stronger.

Still, the optimists will have their say. Two of the most determined are Jim Pinkerton and Elaine Kamarck, co-chairs of the pro-reform business group the RATE Coalition. They tell an inspiring story of the past that seems to have a clear lesson for the present:

    Back in 1986, nobody thought that a House dominated by Democrats and a Senate that was controlled by Republicans could come together with the Reagan White House to produce a historic tax reform bill. But they did, because all of the lead actors understood that tax reform was essential for economic growth.

There’s some truth to this rosy view of the past – and a hefty dose of romanticism. Personally, I’m inclined to think that passage had less to do with good intentions and more to do with good luck.

The 1986 reform happened not because it was wise and prudent and necessary, but because it worked politically. And even then, only barely.

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