Tax Reform "Revolution" in 1986 But More Needed Today

Yesterday, October 22, was the 30th anniversary of the Tax Reform Act of 1986 (see 10/18/16 post). My class enjoyed a "Happy anniversary TRA86" cake! 

TRA86 represented a lot of changes that mostly broadened the base and lowered rates. When President Reagan signed the bill, he had lengthy remarks including this statement:

"this tax bill is less a freedom—or a reform, I should say, than a revolution. Millions of working poor will be dropped from the tax rolls altogether, and families will get a long-overdue break with lower rates and an almost doubled personal exemption. We're going to make it economical to raise children again. Flatter rates will mean more reward for that extra effort, and vanishing loopholes and a minimum tax will mean that everybody and every corporation pay their fair share. And that's why I'm certain that 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 profamily measure, and the best job-creation program ever to come out of the Congress of the United States."

A lot has changed since 1986. Tax rates increased and the base was narrowed by adding over 100 new deductions, exclusions, credits and special lower rates (such as dropping the top capital gain rate from 28% to 0%, 15% or 20%). The income gap has widened, businesses face a more competitive global environment, intangibles are more significant business assets, carbon footprints are more important, and the nature of the workforce and business transactions have changed. Tax reform today needs to recognize these trends.

Also, the growth of special tax rules (ones that are not crucial to the design of an income tax) has budgetary, economic and social effects. Spending in the tax law has grown to equal discretionary spending. But the spending in the tax law is mostly hidden. Recent talks of tax reform though have begun to focus on it. That is important because any effort to broaden our current income tax base to allow for rate reductions will need to get public buy in that that is spending.

For example, the House Republican tax reform blueprint released in June 2016 said this about the spending in the tax system:

"Many of these tax preferences, sometimes referred to as "tax expenditures," are special-interest giveaways that are masked as tax breaks instead of direct grants. For fiscal year 2016, such "spending" through the tax code amounts to more than $1.4 trillion or almost three-fourths of the amount of revenue raised by the entire federal income tax. When Washington picks winners and losers with the tax code, the American people ultimately pay higher tax rates and keep less of their hard-earned money." (p. 9).

But even that problem was noted back in 1984 in efforts that eventually led to TRA86. Senator Bradley and Congressman Gephardt had proposed the "Fair Tax" which was a simpler income tax with fewer special rules and lower rates. In Senator Bradley's book, The Fair Tax, he suggests (page 66) a "unified budget" that "clearly lays out what government spends not only through the authorization and appropriations process, but also through the tax code and off budget. Once all those numbers are laid out, the people could better determine what activities government should increase and reduce."

Under a unified budget, for example, the cost of the American Opportunity and Lifetime Learning Tax Credits (about $20 billion per year) would show up in the same budget as spending on Pell Grants (about $30 billion). A unified budget would help improve budget literacy (awareness) for everyone. It's interesting that it was discussed back in 1984.

So, renewed tax reform efforts today mostly aim to get back to TRA86 days with a broader tax base and lower rates. To get there though, there seem to be a lot more tax provisions that would need to be cut or reduced to get there. We'll see.

What do you think?