Does the Tax Reform Act of 1986 Offer Lessons for Future Reform?

By :: October 20th, 2011

As the economic coordinator of the Treasury study that led to Tax Reform Act of 1986, I've always found it fascinating to read and listen to stories about the law.   Many seek the linear trend from cause to effect to secondary cause to enactment, as if there was  some logical series of events that made the dominoes fall.  History books, of course, are often written as a series of  “A led to B” scenarios.     

Thus we are tempted to say, ““Let’s repeat A, then we’ll  get another great B,” to which three responses are almost inevitable:

    “A isn’t repeatable.”  [The historians]
    “B wasn’t all that great.” [The contrarians]
    “B isn’t the right target today.”  [The realists]

Let’s start out by stating the obvious.  Heraclitus was right, you can’t walk in the same stream twice.  But saying  that A isn’t repeatable or B didn’t change the world misses the point.   

If there is any lesson from TRA86, it is that  real reform requires channeling forces and information in the right  direction. 

Put more broadly, it isn’t helpful to  try to recreate  historical circumstances to get the same outcome.   It is far more useful to understand how to  convert luck into serendipity to increase the odds that good things will happen.

In a recent testimony and a Tax Notes article, I outlined ten steps that increased the chances of reform in 1986 and for the most part are repeatable today.  These include;  seize today’s, not yesterday’s opportunities; rely on principles like equal justice under the law to determine what should be done; make reform comprehensive, in part, because the political cost is likely to be the same in any case; shift the burden of proof to those opposing the better system; form liberal-conservative coalitions in areas where both sides can gain something;  plan strategies in advance for  how to best present the proposals and their effects  to the public; empower nonpartisan staffs like Treasury’s Office of Tax Policy and the Joint Committee on Taxation (who really assembled the ’86  reform); establish leadership on a variety of fronts;  insure accountability so that very specific political leaders bear a significant cost if reform fails; and empower someone to run with the ball and strategize on how to make reform happen.

In 1984 through 1986, much of the political leadership came late to  the game.  And some of the lessons of 1986  were learned, not planned. For example, one key to passage was that at each step in the process, first Treasury Secretary Don Regan, then House Ways & Means Committee Chair Dan Rostenkowski, and finally Senate Finance Committee Chair Bob Packwood feared they would be blamed if the bill failed. As a result, each worked extremely hard to  make sure that tax reform did not die on their watch.

Actual reform is seldom random.  It often requires real hard work, perhaps not too different from what a household must do when it changes its way of living or how a business  moves forward with a new product that displaces an old one.  The failure to reform so many of our government programs and institutions, therefore, rests not solely with the power of the status quo, special interests influence, or weak political leaders.  It also involves a real failure to plan  how to increase the odds that real reform will take place.

6Comments

  1. AMTbuff  ::  4:43 am on October 21st, 2011:

    The lasting lesson of the 1986 Tax Reform is that when you trade elimination of tax shelters for lower rates, the former is permanent and the latter is temporary. Congress simply cannot resist the impulse to complicate the tax code. Reducing tax code complexity therefore increases uncertainty about future tax rules, and that is inimical to economical growth.

  2. Michael Bindner  ::  8:39 am on October 21st, 2011:

    Obama appointed two commissions to study tax reform. Because both were bipartisan, neither came up with a plan. Treasury appears to be unwilling to put anything forward either. Like health care, Obama wants this plan to come out of Congress. According to observes, the Joint Select Committee is holding their cards close to the vest. They are likely consulting up the food chain, but are keeping their discussions out of the public eye. This time, the incentive for tax reform is the possiblity that Obama may simply revert to Clinton era tax policy. As long as he has the unilateral ability to do that and the willingness, he holds all the cards, forcing the GOP to deal. The JSC will come up with something comprehensive, since the whole point of their deficit reduction execise is to offset making some portions of the Bush Tax Cuts permanent or replacing them with other cuts. Finding the spending cuts is not the issue – deciding on the offseting tax provisions is. If Obama gets his way on allocating the minimum $2 Trillion by keeping the child tax credit at $1,000 and the 10%, 25% and 28% rates in place, he can veto any other extenders – which is why the GOP won’t agree to limited objectives.

  3. Vivian Darkbloom  ::  8:54 am on October 21st, 2011:

    I agree that Congress can’t help tinkering with the Code and that this makes the Code more complex, but I can’t agree that since the 1986 Act was passed this increased complexity has been the result of higher tax rates, as such.

    After the 1986 TRA was implemented the top marginal rate for individuals on ordinary income was 28 percent. This jumped up to 31 percent after only two years then up to 39.6 percent in 1993 (Bush I) then back down to 38.6 percent in 2001 and 2002. Since then the top rate has been 35 percent. When the higher rates were implemented after the 1986 Act, the rates generally kicked in at pretty high levels. Thus, the “middle class” was generally spared from these higher rates at the top end. Rates for lower income earners have actually gone down (not even counting EITC, etc). So, since the top marginal rate has gone up a bit, very few taxpayers were not spared and this is not, in my view, the cause of the added complexity of the Code.

    Corporate tax rates have been steady at 35 percent for quite a long time.

    Estate and gift tax rates have gone down since 1986, as have exemptions.

    After the 1986 Act, the rate on capital gains and dividends was the same as ordinary rates (28 percent). Those CG rates have gyrated a bit, but the trend has been down—not up. After a few years at 20 percent we are now at 15 percent. Rates on dividends (15 percent) are clearly lower now than after the 1986 TRA.

    Also “Reducing tax code complexity therefore increases uncertainty about future tax rules, and that is inimical to economical growth.” There are good reasons to be cynical about tax reform, but on its face this argument suggests that reducing tax code complexity is a bad thing. Clearly, you didn’t mean that?

    Yes, it’s true that Congress has the tendency to put back a lot of ornaments on the tree, but my take is that they tend to put different ones on than the ones that were taken off. For example, the passive activity loss rules have survived, personal interest is no longer deductible, etc.

    I would not be so pessimistic. Everyone needs to do a bit of Spring cleaning now and then. Sure, the attic will slowly fill up again with junk, but that doesn’t mean that the periodic cleaning should be eliminated altogether.

  4. AMTbuff  ::  3:10 pm on October 26th, 2011:

    >Yes, it’s true that Congress has the tendency to put back a lot of ornaments on the tree, but my take is that they tend to put different ones on than the ones that were taken off. For example, the passive activity loss rules have survived, personal interest is no longer deductible, etc.

    That was my point. A constantly varying set of wasteful tax breaks does even more economic damage than a fixed set of wasteful tax breaks. Ask any investor what he wants from the tax code and the answer will always be: predictability.

  5. getnewlinks.com  ::  8:50 pm on October 1st, 2014:

    First of all I would like to say awesome blog!

    I had a quick question that I’d like to ask if you do not mind.

    I was curious to know how you center yourtself and clear your mind before writing.
    I have had a tough time clearing my thoughts in getting my ideas out there.
    I tuly do enjoy writing butt it just seems like the first 10 to 15
    minutes are generally wasted just trying to figure oout how tto begin. Any recommendations or hints?
    Thank you!

  6. Foundation for Defense of Democracies  ::  1:32 am on December 12th, 2014:

    Foundation for Defense of Democracies

    TaxVox