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.