A Lesson From 1986

Yes. we all know that the Tax Reform Act of 1986 is the most recent example of comprehensive tax reform. And yes, it compressed 14 tax brackets into two (15%, 28%) with a third that has been called the phantom bracket (33%). It also eliminated most tax deductions and entirely erased loopholes and shelters.

But little has been said about the process. It took TWO YEARS  for lawmakers to wheel and deal, talk and balk until they finally had a compromise.

What Happened During Those Two Years?

We could say that it all started with a 1984 Reagan Administration proposal called Treasury I. President Reagan reputedly cared about reforming the system because he had not liked his 90% marginal tax rate. He appears to have made sure that other people cared too.

A 2 1/2 (or so) minute excerpt from the President’s 1985 talk to the nation:

At the time, we had a Republican Senate, a Democratic House and the Republican President. The problem was how to arrive at a compromise among so disparate a group. Some complained about tax dodgers. Others were angry about high rates. People were concerned that the poor paid too much and the system was convoluted.

Through a public charm offensive from a politically savvy President and considerable private maneuvering, enough Democrats and Republicans agreed to negotiate. The Democratic chair of the House Ways and Means Committee asked the people what they wanted. He scheduled a summer of public hearings during which more than 450 people testified. Three Democrats and three Republicans (plus one extra lawmaker) had a series of secret meetings. You get the idea. Socially and professionally, over beer and in committee, they identified their tradeoffs.

At the end, they were able to meld the tax reformers worried about unfairness with the supply siders who wanted low rates. During those 24 months, they gave and they got.

Our Bottom Line: The Characteristics of Good Tax Legislation

We have three basic criteria for judging tax legislation:

• Is it fair?
• Is it simple?
• Does it collect sufficient revenue?

When President Ronald Reagan said that the Tax Reform Act of 1986 was “clear, simple and fair for all,” he almost said it all. He just could have added that the TRA was also a legislative lesson.

My sources and more: To hear 40 years of tax legislation in 60 minutes or so, do listen to this Econtalk 2012 archive podcast. Then, this recent NY Times  column from former NJ Senator Bill Bradley and this 1986 NY Times article were good for more detail. But if you want the whole story, Showdown at Gucci Gulch is excellent.

After publication, this post was edited to eliminate a typo.