Tax reform looked like it was in peril. Influential business groups, including real estate agents and homebuilders, opposed it. Lobbyists were working feverishly against it. Opinion polls showed the public was as unenthusiastic as many members of Congress.
That was 1986, the last time Congress drastically overhauled the tax code. But the same dynamics are at work today. And as Republicans labor to push a tax bill through Congress, they speak nostalgically of the events of 31 years ago.
House Ways and Means chairman Kevin Brady, in his opening comments at the markup of the Tax Cuts and Jobs Act on November 6, said the 1986 law “was the most sweeping overhaul in American history” and that today’s legislators face a similar challenge: “coming together to fix a tax code that has become just as broken, complex, and unfair as the one President Reagan and Congress overhauled in 1986.”
In Republican mythology, Reagan turned around an anemic economy and overcame Democratic resistance in Congress by taking his case for tax cuts to the American people. The Reagan cuts, the story goes, more than paid for themselves, since the strong economic growth that resulted led to increased government tax collections throughout the 1980s. That’s essentially true, but it is much more descriptive of Reagan’s 1981 tax cuts than the ’86 reform.
Like the current plan, the 1986 reform traces its roots to a presidential campaign. In his 1984 State of the Union address, Reagan said he was directing his Treasury Department to devise a plan to “simplify the entire tax code so that all taxpayers, big and small, are treated more fairly.” While Treasury worked away on the details, Reagan campaigned on the prospect of lower, fairer taxes, casting them as an essential part of freedom and American prosperity.
Three weeks after blowing out Walter Mondale, Reagan received Treasury’s recommendations and passed them along for Congress to implement. The outlines are strikingly similar to those of the current plan: eliminate deductions (even popular ones), increase the individual standard deductions, slash corporate rates, and decrease the number of brackets. At the time, there were 16 brackets, and decreasing them to just 2 or 3 seemed so novel that some publications referred to it as a “modified flat tax.” One key difference: From the beginning, the 1986 plan was designed to be revenue-neutral; today’s plan envisions a net cost of $1.5 trillion over 10 years.
Democrats controlled the House, while Republicans held the Senate. It is hard to imagine in this politically polarized time, but Democrats in the mid-1980s were open to a Republican tax plan. It is true few were enthusiastic about the bill, but nobody wanted to be blamed for its demise—least of all by a president who had just carried 49 states and had approval ratings above 60 percent.
The tax-reform effort benefited from leaders who advocated it forcefully. Reagan delivered a prime-time speech on tax reform in May 1985, followed immediately not by the customary rebuttal, but by a televised statement of support from Rep. Dan Rostenkowski (D-Ill.), chairman of the House Ways and Means Committee.
The reform push would last nearly two years, with the bill almost failing a number of times. In the House, it nearly died in committee, but Rostenkowski started making deals and secured the votes. In the full House, a preliminary vote on tax reform failed when Republicans defected over not being able to vote on a proposal to change the taxation of federal pension benefits. Reagan interceded, and it passed on a second vote.
In the Senate, where Bob Packwood of Oregon headed the Finance Committee, prospects initially looked bleak, too, after Republicans proposed keeping many business tax breaks. But Packwood altered their approach—legend has it after two pitchers of beer with an aide at the Kelly’s Irish Times, a popular Capitol Hill watering hole. His proposal of lowering rates on business made eliminating tax breaks more palatable, and the bill prevailed.
Summarizing the tax bill’s odyssey through Congress, the New York Times said, “tax legislation came close to death more times than an alley cat.”
The bill that won approval called for just two tax brackets, with the top rate falling to 28 percent from 50 percent. In today’s parlance, that would be translated as a massive tax cut for the rich. Corporations, too, enjoyed rate cuts, from 46 percent down to 34 percent. In a move that helped poor and middle-income taxpayers, the bill raised the standard deduction and personal exemptions. To compensate for the lost revenue, the measure raised taxes on capital gains, closed deductions and loopholes, dramatically scaled back credits for business investment, and expanded the alternative minimum tax.
The Reagan administration estimated that 60 percent of taxpayers would receive a tax cut, while 20 percent would see an increase. In contrast, the current plan making its way through the House would cut taxes for 76 percent of taxpayers and raise taxes on just 7 percent, according to an analysis from the liberal Tax Policy Center.
The 1986 tax reform plan—the one that slashed tax rates of millionaires and billionaires and of big corporations—passed by big bipartisan margins. “You couldn’t tell what party anybody was in the discussion,” remembers Jeffery Trinca, legislative counsel to the National Association of Enrolled Agents and the tax aide to Sen. David Pryor (D-Ark.) back in 1986. “If you had timber in your district, you fought for timber. If you had poultry, you fought for poultry.”
The New York Times editorialized in favor of tax reform, praising the curtailment of using the tax code to create winners and losers: “Along with the direct benefits of cutting marginal tax rates, reform offers an opportunity to return to more open government decisions, openly arrived at.”
The bill attracted the votes of more than two-thirds of Democrats in each chamber—including a “yea” from a young New York representative named Chuck Schumer. Today, Senate minority leader Schumer is a leading critic of tax reform, saying it is “little more than an across-the-board tax cut for America’s millionaires and billionaires.”
Reagan signed the bill into law in October 1986, calling it a triumph for risk-taking and innovation: “This tax bill is less a reform than a revolution. . . . The bill I’m signing today is not only an historic overhaul of our tax code and a sweeping victory for fairness, it’s also the best antipoverty bill, the best pro-family measure, and the best job-creation program ever to come out of the Congress.”
But tax reform wasn’t a winner for congressional Republicans. Just two weeks later, they lost five seats in the House and eight in the Senate, handing control of the upper chamber to the Democrats.
The stakes may be even higher this time around. If Republicans fail to pass a plan, they face the real prospect of going before voters in 2018 with no major legislative accomplishments.
The idea behind tax reform remains to simplify the code—clearing away the underbrush of provisions that reward certain expenditures with favorable tax treatment while, at the same time, lowering tax rates, so that most people pay close to or less than what they did before. This would make the tax code cleaner, more efficient, and less prone to abuse. But it can be a tough political slog, as many deductions sound helpful and compassionate, such as paying less in taxes if you have high medical expenses or student loans, suffer catastrophic losses from fire or natural disaster, or move somewhere for a new job. Tax reform can begin to push the government out of the incentives business.
Incentives will not disappear completely. In a nod to low- and middle-income taxpayers, the Republican plan increases the child tax credit and adds a new credit to help care for elderly parents. In a reversal from the 1986 law, which expanded the alternative minimum tax, the current version repeals it.
One criticism of the 1986 bill was that it did little to boost economic growth, because the tax changes related to the treatment of business investments were too punitive. An analysis by the Tax Foundation found that the 1986 reforms actually shrank the U.S. economy by 0.2 percent. The current bill heads in the opposite direction, speeding write-offs of capital expenditures. The White House Council on Economic Advisers forecasts that the business changes would add more than 4 percent to long-term growth. The more growth the greater the odds that wages will rise.
In developing the current tax package, Republicans clearly studied and learned from the 1986 reform. But to get it through Congress, they’ll need to do more than just refer to Ronald Reagan. They will need the same creative and persistent leadership Congress showed three decades ago.
Tony Mecia is a senior writer at THE WEEKLY STANDARD.
