|Tax Reform Act of 1986
What lessons did we learn?
October 14, 2010
On September 23, 2010, the Senate Finance Committee held a hearing entitled "Tax Reform: Lessons from the Tax Reform Act of 1986." Testimony was provided by four individuals who worked in Congress or Treasury in the 1980's. This hearing continued a string of occasional tax committee hearings on some aspect of tax reform dating back to 2007. Prior hearings focused on such topics as the following:
Senate Finance Committee:
House Ways and Means Committee:
This article summarizes key points raised in the recent hearing on lessons learned from the Tax Reform Act of 1986 (TRA'86), offers observations on the relevance for any upcoming tax reform and provides an opportunity for readers to share their thoughts on what lessons they think were learned.
Tax Reform Act of 1986
Many likely view the TRA'86 as landmark legislation especially since so many changes were made that the Internal Revenue Code had to be renamed to IRC of 1986 (rather than of 1954). Concerns over high tax rates and rampant tax shelter activity, united President Reagan, a majority of legislators and many in the public to enable extensive tax changes.
Significant work was done leading up to enactment of TRA'86 in October 1986. Treasury researched various tax policy issues including equity, economic distortion and complexity. In addition, alternative tax systems, including a value-added tax (VAT), were studied. Numerous hearings were held on general and specific aspects of tax reform. (For further information, see Strategy for Major Tax Reform.)
Statements and testimony were offered by Senators Max Baucus (D-MT.) and Chuck Grassley (R-IA) as well as four witnesses. A few Senate Finance Committee members were present and asked questions. The invited witnesses:
"In my opinion, our challenge will do no less than pull the current Income Tax Code out by its roots and throw it away so that it can never grow back."
Themes and Topics
Participants noted several "lessons" as well as reasons why reform is needed today. Key points are summarized below:
Gephardt described the efforts of himself and then Senator Bill Bradley (D-NJ) in 1982 to simplify the Code and restore fairness. He observed that when Congressman Jack Kemp and Senator William Roth (R-DE) also recommended reforms, the four engaged in bipartisan discussions with a common goal. However, he notes, "it wasn’t until President Reagan embraced the idea of tax reform that real action started." Archer further emphasized this stating: "Without doubt, President Reagan's personal commitment to lowering individual tax rates was a key factor that helped keep tax reform on track."
Gephardt also stressed the need to inform the public via an open and transparent process.
"there is a key premise to tax reform that needs to be fleshed out. The premise I refer to is whether we assume current law levels of tax relief remain in effect or whether we assume that the bipartisan tax relief plans of 2001 and 2003 have expired. If we use the latter assumption, i.e., that the post-2010 record level tax increase goes into effect, then tax reform really becomes a historic tax increase."He further noted his support for "lowering the overall level of taxation."
A key driver of efforts leading to TRA'86 was concerns over equity fueled by widespread use of tax shelters by middle- to high-income individuals. In addition, tax rates were high — 46 percent for corporations and 50 percent for individuals. Today, problems are different and arguably less focused. Chapotan observed: "A disadvantage today may be that there are not the broad, high-profile tax culprits like the tax shelter industry in the 1980s."
There are far more special provisions in the law today than in the 1980s. But is there sufficient public perception of unfairness when special provisions exist for just about every taxpayer? Will complexity be enough to drive tax reform or will taxpayers prefer their tax breaks over simplification and the uncertainty of what tax reform will really mean for them?
Congressional tax committees have been talking about the need for tax reform for the past few years. Yet, the law grows more complex with each new tax act. Politicians' campaign promises tend to include additional tax breaks making it harder to convince the public that the complexity they bring should be eliminated. And the growing national debt likely makes it harder to sell the public on any promise of a repeat of the TRA'86 in which repeal of tax breaks is accompanied by lower tax rates.
Per Senator Baucus: "Now is exactly the time to talk about tax reform. I am committed to tackling it. That’s what our constituents sent us here to do." Let's see if the 112th Congress can go beyond talk and indeed improve the federal tax system to enable it to meet principles of good tax policy and support 21st century ways of living and doing business.
Reader Thoughts and Observations
What lessons do you think were learned from TRA'86? How might such lessons be relevant to tax reform efforts today? You can share your ideas with others by posting a comment at the 21st Century Taxation blog (hosted by the author) here.
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Annette Nellen, CPA, Esq., is a tax professor and director of the MST Program at San José State University. Nellen is an active member of the tax sections of the ABA and AICPA. She serves on the AICPA’s Individual Income Taxation Technical Resource Panel. She has several reports on tax reform and a blog.