Analysis: Tax reform impossible? Reagan did it 25 years ago

WASHINGTON Fri Oct 21, 2011 11:39am EDT

Bogi Johannes, who is dressed as the Statue of Liberty, tries to attract business for Liberty Tax preparers in Falls Church, Virginia April 8, 2010.   REUTERS/Kevin Lamarque

Bogi Johannes, who is dressed as the Statue of Liberty, tries to attract business for Liberty Tax preparers in Falls Church, Virginia April 8, 2010.

Credit: Reuters/Kevin Lamarque

WASHINGTON (Reuters) - Tax reform can happen in the United States. President Ronald Reagan and a divided Congress defiantly proved it 25 years ago this Saturday.

On both sides of the acrimonious tax debate, no event is held in such awe today as the historical moment when Reagan signed tax reform into law on October 22, 1986.

"All of the betting was that (reform) was impossible," said Michael Graetz, a tax professor at Columbia Law School.

But it got done. Even now, tax lobbyists still shake their heads in disbelief at the 1986 reform. The fact that no comparable achievement has followed, a quarter-century and four presidents later, makes the feat all the more remarkable.

And it begs the obvious question.

With the U.S. fiscal situation so much more dire, why is it not happening now? Even with wide agreement in both parties that the tax code is a loophole-ridden jumble of inefficiency and unfairness, even tentative reform has been unattainable.

The answers are four-fold, said academics and some of the tax experts who helped craft the reform of 25 years ago:

First, glaring loopholes are fewer today; second, the deficit's size blocks agreement on revenue neutrality; third, Reagan raised corporate taxes, but this is harder now; and fourth, a lower capital gains rate is more deeply entrenched.

Not many issues are hotter on the campaign trail than taxes. Republican presidential candidate Herman Cain has his "9-9-9" plan; rival Rick Perry wants a "flat tax;" Ron Paul wants to abolish the income and estate taxes entirely.

President Barack Obama wants tax reform as well. He regularly calls for closing corporate loopholes and making the wealthy pay their fair share of taxes.

From the Occupy Wall Street protests to the Tea Party, taxes fuel voter anger across the political spectrum.

ANGER NOT ENOUGH

"Nobody in the world likes the tax code as it is currently constructed," said Paul Weinstein, who was a senior adviser to Obama's 2010 deficit reduction commission.

"There's no doubt there is a strong desire to see tax reform," said Weinstein, currently director of the public management program at Johns Hopkins University.

In 1986, a similar wave of anger overwhelmed the defenders of a tax code that was riddled with egregious shelters so common that they were advertised in newspapers.

"Nobody could defend the amount of capital that was being thrown at wasteful tax shelters," Graetz said.

Today's tax expenditures -- from tax-advantaged retirement savings to deductible mortgage interest -- are more costly and more politically popular than the shelters of the 1980s.

These are tax breaks "we all love," said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a group that advocates for deficit reduction.

"They aren't the same kind of bad guys" that lawmakers rallied against in 1986, she said.

Early in the 1986 negotiations, lawmakers decided to maintain revenue neutrality, or not raise new revenues. It was "the watchword and guiding star" for tax reform, Graetz said.

Lawmakers today, facing a massive budget deficit, are not as united on the revenue neutrality. "The fiscal pressures are far greater today than they were" in 1986, MacGuineas said.

DEEP DIVIDE

Obama has called for ending tax cuts for the wealthy that were approved under President George W. Bush, but Republicans have a near-unanimous coalition against any tax increases.

With so much of the federal budget devoted to mandatory spending, such as the Medicare and Medicaid healthcare programs, the budget process is more constrained. To do future tax reform, "we will need more revenues," MacGuineas said.

A key to 1986 was that cuts in individual tax rates were balanced by increases in corporate taxes. But corporations are more powerful today and face more global competitive pressures, giving them more leverage to block tax increases.

The 1986 reform "did increases taxes on corporations to fund tax cuts on individuals," Graetz said. "I don't know anybody who thinks that's economically sound today."

Eugene Steuerle, a senior fellow at the Urban Institute, a think tank, and an economist in the Treasury Department during the reform process, said reformers today should look at closing corporate loopholes as a way to broaden the tax base. "There's actually a lot of room to maneuver there," he said.

Raising the capital gains rate would also generate revenues today. But Weinstein said, "Any kind of increase in capital gains (taxes) is going to be controversial."

(Reporting by Patrick Temple-West; Editing by Carol Bishopric)

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Comments (6)
powerwhip wrote:
Nothing will happen under a do nothing republican controlled house. Throw the bums out.

Oct 21, 2011 8:25am EDT  --  Report as abuse
need 61 republicans in senate to fix the problems… democrats will turn usa into greece…

Oct 21, 2011 11:49am EDT  --  Report as abuse
MarketForce wrote:
Yes, Reagan did it 25 years ago…. and this economy is the result. We get to clean up a lot of Reagan’s old steamers. He armed Al Qaeda, gave long-range missiles to Iran, cut taxes on the rich while increasing federal spending, de-regulated the banks.

Yeah, the guy was a real hero. If you happen to like money more than America. That was his deal.

Oct 21, 2011 12:05pm EDT  --  Report as abuse
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