Five Lessons from the 1986 Tax Reform Act
October 22 is the 25th anniversary of the landmark Tax Reform Act of 1986. For those of us who still remember that remarkable event, it is a time to reminisce. But with tax reform back on the policy agenda, it may also be useful to consider some important lessons of TRA 86. Here are five:
Presidential leadership. Tax reform will make nearly everyone mad. Big-bucks subsidies will be slashed or killed. Political demagoguery will run wild. The Reagan Administration saw that reform would only work if it began with a very specific plan that the White House owned. And President Reagan eventually became its best salesman. My Tax Policy Center colleague Gene Steuerle—who helped write TRA 86—always says the secret to success in Washington is writing the first draft. Put it this way: President Obama’s health reform strategy, which left the dirty work to Congress, is not the way to go.
It takes a village. Tax reform is doomed without bipartisan consensus. Pols of both parties must come to believe these difficult changes are in their political best interest. I can’t imagine three politicians less alike than Reagan, House Ways & Means Committee Chairman Dan Rostenkowski (D-IL), and Senate Finance Committee Chairman Bob Packwood (R-OR). Yet all three instinctively understood the benefits of tax reform (to, among other things, their own reputations) and were willing to put aside their vast differences to cut a deal. Again, the partisan health reform battle is exactly what not to do.
Follow the money. The very first point of agreement has to be over how much money a new tax system is expected to collect. Is it supposed to be a tax cut or a tax increase, or is its goal to restructure the system while collecting the same amount of revenue as the code it is replacing? The ’86 reformers settled that early by agreeing their bill would be revenue neutral. And, as the super committee is learning, until you agree on the seminal issue of revenues, you are wasting your time.
It won’t be perfect. Pundits are always looking for the ideal tax code—one that is optimally efficient, fair, and simple. Herman Cain and I, who both believe that a consumption tax will be part of America’s future, both have in our minds an ideal tax (though not the same ideal tax). And that’s the point. When Congress finishes grinding sausage, the new tax code will be messy. But if the experience of 1986 is any indication, a good rewrite will be significantly less ugly than what it replaces. And that is both the best we can hope for and a good thing.
It won’t last. A major tax reform in 1964 lowered the top individual rate from 91 percent to 70 percent, created a new standard deduction, and cut corporate rates. By 1968, Congress was adding back individual and corporate surcharges. In 1969, Congress cut rates again and repealed the investment tax credit. In 1971, it restored the investment credit. Congress reworked big chunks of the ’86 act in 1990 by, among other things, raising rates. It is remarkable that the Bush-era tax cuts have survived as long as they have, but I wouldn’t count on the next big tax rewrite lasting another decade.
The world has changed an awful lot in 25 years and it would be foolish to expect TRA 2013 to roll out the way the 1986 Act did. But those hard-learned lessons of 25 years ago are still worth remembering.