MY VIEW: Perspectives on the Tax Reform Act of 1986
The Tax Reform Act of 1986 turned 25 on Saturday, prompting a number of commentators to write their perspective on the reform. We will highlight three specifically, focusing on the lessons from the 1986 Act, the possible economic effects, and why we should/how we can produce a similar reform effort today.
The first is from CRFB board member Gene Steuerle, talking about the lessons to be learned from the 1986 reform. Being in the Treasury at the time of the reform, he is in a unique position to speak to this. In the piece, he outlines ten guidelines for reform that can be learned from the 1986 reform. First and foremost, policymakers need to think about what they value in a tax code and balance those concerns accordingly. These could be efficiency, progressivity, horizontal equity, or simplicity, to name some. Second, he stresses the importance of coordination in getting legislation passed: those who take the lead on reform need to have a strategy for getting a plan through Congress, and they need good information to back up that plan. Finally, a tax reform effort takes leadership from lawmakers, both to get the ball rolling and to provide the political will to get it through Congress.
Martin Feldstein analyzes the economic effects of the 1986 reform in an op-ed in the Wall Street Journal. In studying the incomes of people between 1985 and 1988, Feldstein finds a significant rise in the income of people in the former 50 percent bracket (the top rate pre-1986), which he attributes to the marginal rate cuts. He finds a less but still present positive response for taxpayers in lower brackets. Feldstein estimates that a 10 percent across-the-board cut in marginal tax rates by itself would only lose about 60 percent of the revenue a static estimate says it would. He concludes that a deficit-neutral tax reform that cut tax rates by 10 percent and included base broadening along the lines of the Feldstein-MacGuineas-Feenberg proposal could raise $500 billion over ten years using dynamic estimates.
CRFB's Paul Weinstein and Ed Lorenzen bring the talk of tax reform into the current context, calling for the Super Committee to use its unusual power to reform a code that has grown significantly in complexity over the past 25 years. Although many have said that tax reform is too heavy a task to be accomplished in the Committee's short time left, Weinstein and Lorenzen note that some plans for tax reform already exist (Fiscal Commission, Domenici-Rivlin) that would actually go further than the 1986 effort and also raise revenue. Even if the Super Committee does not have the will to undertake this comprehensive a reform in one month, they can still put in place a process for tax reform that sets the parameters and targets but leaves the details up to Congressional committees. This is the approach the Gang of Six took and would be easier for the Super Committee to do, considering their time constraint.
The need for reform of the tax code is apparent, but it does not necessarily need to exactly follow the 1986 reform. For example, unlike the 1986 reforms that were deficit-neutral, we need tax reform that will raise revenue, probably by more comprehensively scaling back tax expenditures. However, we can use the political lessons from the Tax Reform Act of 1986 to make the tax reform we want today more likely.