Will We Get Another 1986 Soon?

The tax framework used by Simpson-Bowles and Domenici-Rivlin is so popular because it has worked in the past. With a broader base, we can lower marginal rates while still getting some of the revenue we need to begin tackling our budget deficit.

In 1986, both parties had differing economic philosophies to guide them as they thought about tax reform and though their theories went by different names, they were similar in their real-world application: lower rates, broader base.

Same as today. Both parties generally accept the idea that lower rates and a broader base are a good idea. Why? Because of international competition. At a time when concerns about slow growth and job-loss are running high, the realities of offshoring and outsourcing are a serious concern and the tax numbers show policymakers are right to be concerned.

In 1986, the average of the corporate income tax rate for the Organization of Economic Cooperation and Development (OECD) countries was 50 percent. Today, it’s 25 percent for those countries--it has fallen in half. Meanwhile, the U.S. rate, which fell from 46 percent to 34 percent as a result of tax reform in 1986, is now stuck at 35 percent. In other words, U.S. companies pay a tax rate at least 10 points higher than their international competitors. Further, since 2000, the number of the world’s 500 largest corporations in the United States has fallen from 179 to 133, a decline of 26 percent.

In 1986, proposals for a lower tax rate and a broader base had become part of the intellectual landscape. The successful 1986 Tax Reform Act owed much to earlier plans that had advanced many of the same ideas.

Same as today. Over the last several years, a number of economic plans have included the idea of a lower corporate tax rate and a broader base. These plans include the “Gang of Six,” the Rivlin-Domenici plan, and the Bowles-Simpson plan.

The 1986 reform was passed by a divided government and thus required political compromise, which is never easy. But the principles of what should make up effective tax reform are so clear that both parties can use this example to reassure the country that politics will not get in the way of making the tax code simpler and more effective.

In 1986, amidst concerns about “gridlock,” both parties wanted to show that they could govern effectively. So Republicans and Democrats came together to show two parties could govern together. How? The only way possible, by actually getting tax reform done.

Same as today. Effective governance means the same today, getting things done. At a time when Americans are skeptical of Washington, it behooves leaders across the government to show, once again, that they can solve problems and achieve these important goals.

Tax reform is a great example of a way that policymakers can "go smart." It represents an opportunity not just to reduce the deficit but also make the tax code more conducive to growth.