Tax Reform

For all his divine talents, Jesus demonstrated room for improvement in the apothegm department. Illustrating the extent to which some members of the upper tax bracket might be classified as celestially-challenged, the Savior twice quipped how it’s “easier for a camel to go through the eye of a needle.”

Clearly Jesus hadn’t heard of tax reform — nor foreseen C-SPAN’s modern rejoinder to Mark 10:25, which frequently displays reform bills trying to pass through a Committee on Ways and Means session with a futility that might make the camel’s mouth drop (and remind the needle that things could be worse).

No matter: These days, tax reform is more popular than ever. And hey, why not? The concept weds both left and right ideologies with a broadened tax base and lowered rates, respectively. For Americans not familiar with tax code history (read: everyone), a quick recap: Tax reform’s 15 minutes came with the Tax Reform Act of 1986, when Ronald Reagan’s Senate Republicans and Tip O’Neill’s Democrats condensed 15 income tax brackets down to four, top individual rates moved from 50 percent to 28 percent and the lowest moved from 11 percent to 15 percent. Corporate tax rates fell to 34 percent, and everyone — a lot of angry people — surrendered deductions and loopholes.

Exactly why the policy became a success is written in the results: During the two years after reform, the economy saw the addition of over six million new jobs, contributing to an annualized gross domestic product averaging at nearly 4 percent. Economists often parse just how much of that growth is owed to reform, but few question the fundamental triumph of TRA as one of the greatest pieces of general interest legislation in American history.

Here ends the abridged version of tax reform — the only version today’s legislators have been studying, apparently. While the innovative policy of tax reform wields powerful allure for lawmakers, it comes prepackaged with deeply complex policy conundrums, weeks of sleepless committee gridlock and five metric tons of political explosives. But these lessons of history are cheerfully overlooked, both in the political intelligentsia propagating reform and the Joint Select Committee on Deficit Reduction, where the idea lived a tenuous half-life. That ignorance spells bad news for reform.

Though Senators Ron Wyden (D-OR) and Judd Gregg (R-NH) have been pushing a tax reform bill for years, their effort manifestly shows reform’s inherent challenges. Meanwhile, reform gets only lip service from posturing Supercommittee members.

“Comprehensive tax reform would spur economic growth and job creation,” reads a deficit platform from GOP Ways and Means Chairman David Camp, devoting one sentence of platitude to a movement that devoted five years of effort. Supercommittee Co-Chair Jeb Hensarling quickly purred in agreement: “I hope we are able to bring about pro-growth tax reform to bring about more revenues.” (Note to Representative Hensarling: If your primary plan is to hope, you may want to upgrade to prayer.)

Despite these carefully crafted stances, most legislators have probably not read the eminent and comprehensive “Showdown at Gucci Gulch” by Jeffrey Birnbaum, the gripping account of TRA’s nearly inconceivable passage in 1986. Instead, the extent of lawmaker knowledge on the topic remains in talking-point territory, and reform is now rapidly descending from that rare pedestal of a serious policy option toward the densely crowded pit of banality where most Washington ideas with a flicker of intellect go to die (here lies cap-and-trade, the Development, Relief and Education for Alien Minors Act and immigration reform).

Yet hope springs eternal. The political impetus for tax reform is far stronger than in 1986 given our massive deficit that, if allowed to fester, could wreak havoc on the budget in coming years. But even a diluted version of reform will require lawmakers to embrace the lessons of legislating the original TRA. Again, I thank Birnbaum.

 

1. Transparency sucks. Get ready to don your diapers.

Sunshine laws are great when Congress is doing something evil (which is often). But when the general interest is at stake, transparency is a death knell for reform. And like everything about tax reform, the ends justify the means. The most crucial tool that allowed reform to withstand the influence of a lobbyist armada in 1986 was procedural strategies that concealed legislators’ traceability to important votes. That meant shutting out the public (including both media and lobbyists) on important debates, a maneuver that would likely produce outrage today. Still, keeping the public as much in the dark as possible is a goal worth pursuing.

Chairmen Dan Rostenkowski (Ways and Means) and Bob Packwood (Senate Finance Committee) conducted their committee business in private. Since persuading lawmakers to close corporate loopholes meant keeping corporations out of the loop, most votes were conducted anonymously.

Senator Packwood proved especially cunning, frequently adjourning committee sessions in public only to reconvene them in secret. In this setting Senators could “vote their conscience” in committee, then emerge to face crowds of bewildered lobbyists and simply blame Chairman Packwood for the eliminations. More creative in his methods was Rostenkowski, who, during the last crucial markup sessions, handed out adult diapers to committee members to avoid facing a barrage of lobbyists on their way to the bathroom. (Some things haven’t changed: A recent Bloomberg report described corporate lobbyists hiding in bathroom stalls to prey on bewildered Supercommittee members.)

 

2. There will be blood. Reformers must be committed from the outset.

In a game of axing tax incentives, there can be no sacred cows. In order to fiscally pave the way for a simplified overhaul of individual rates, tax reform in 1986 closed hundreds of loopholes and deductions — so-called “tax expenditures” that made the tax code resemble a “giant Swiss cheese.” By 1986, the cheese block was so riddled with holes that it verged on collapse.

It’s this especially challenging part of tax reform — eliminating special loopholes and goodies in the tax code — that underscores the intense need for anonymity in Rule #1. Most difficult will be eliminating “feel-good” deductions, just like TRA restricted deductions to individual retirement accounts, capital gains and employee pensions. Many loopholes were given innocent-sounding names so they could gain passage in the first place.

That’s not to say bargaining isn’t allowed. Paradoxically, what held the Packwood coalition together long enough to gain Senate passage was the undying hope of its committee members that their districts’ loopholes might be spared. And the endless distribution of transition rules — clauses that delayed the onset of loophole closures — became acceptable bargaining chips, doled out like de facto loopholes without sacrificing the integrity of reform.

Finally, loyalties to Grover Norquist or Andy Stern must be checked at the door. During Rostenkowski’s moment of truth, his committee realized it had to eliminate a fringe benefit deductible for unions. That vote failed — TRA was DOA — but Republicans shocked it back to life by allowing Democrats to avoid going on record against union interests (see Rule #1). Similarly, the current GOP anti-tax wing may worship Reagan. But ironically, given the opportunity to travel back to 1986, Tea Partiers would have crushed Reagan’s singular greatest policy achievement. Tax policy is dense and confusing — just about anything can be construed to resemble a tax “increase.” For reform to succeed, the spirit of Republican support must come with the big picture — a simpler tax code and lower marginal rates, which the GOP recognized in 1986.

 

3. Electioneers need not apply. Tax reform is a political deadweight.

Public service is a thankless job. Tax reform demonstrates that rule in the extreme — namely, that such an arduous job for the general good will be rewarded so sparsely. At least that’s what happened in 1986.

Again, the paradox is striking. Time and again, the public was inert and apathetic on tax reform, despite a bill that improved the lives of nearly every American. Reagan’s sporadic attempts to sell the public consistently fell flat; for Congress, this spelled a threatening lack of political cover. In this vacuum of public apathy, interests groups were able to mobilize and nearly succeeded in upending TRA.

The application of this rule to today’s political reality is simple: Moderate legislators from marginal districts shouldn’t misinterpret tax reform as a political boon. What’s more, they should stay out of reform negotiations as much as possible. Even if the Supercommittee could achieve the impossible feat of total legislator anonymity, no moderate in America would be caught dead voting for — let alone authoring — elimination of dozens of rewarding loopholes, loopholes expressly written to gain votes in the first place. Over and over, TRA was nearly killed by the intransigence of legislators clinging to their district’s pet deduction in 1986. Legislators with the least to lose — those from the safest of districts — are probably best suited to put deductions on the chopping block.

The resulting contradiction is that more extreme liberals and conservatives will be forced to work together (if I had an answer for this conundrum, I’d be shilling out 50 grand to my own lobbyists, not Brown).

 

4. Make it neutral. As much as possible, reform should avoid lowering the deficit.

Despite the contradiction, tax reform — take a deep breath — should at all costs avoid improving the deficit scenario. On its face, it may appear absurd that the one reform capable of bridging liberal and conservative interests wouldn’t tackle the deficit dilemma that precipitated the idea of tax reform in the first place. But that was also true in the 1980s, when Reagan ran up the greatest peacetime deficits in history. The singular factor upon which TRA passage hinged was its undying commitment to staying “revenue neutral.”

That meant every penny in revenue raisers — deduction eliminations and corporate tax increases — was paired with the lowering of personal income tax rates. In a way, it was the perfect compromise: Democrats never gained any favored net revenues, and Republicans never won any real tax cuts. What motivated the cooperation was the belief that a fairer, simpler code would improve the economy (and result in new revenues in the long run, a fundamentally conservative idea). This was policy entrepreneurialism in its truest form.

If moderates stay out of the equation in passing tax reform in 2011 and on, the remaining two extremes must be co-opted. For it to pass the far right, tax reform can’t raise taxes a penny. To pass the far left, it must annihilate every last corporate loophole. And to fend off legions of corporate lobbyists, the perception that taxes aren’t increasing will prove crucial to reform’s positive perception and increase the chances of passage.

Again — surprise! — this will be immensely difficult. The story of TRA’s journey to passage is riddled with late-night write-up sessions, endless back-and-forth between committees and Treasury officials and last-minute crises that revealed reform was “over” or “under” by a few billion dollars — all to ensure that the bill remained “revenue neutral.” For all the effort, the decision to make TRA a neutral tax bill paid off. Averaged over the four years after 1986, federal coffers increased 0.01 percent from TRA, about as close to zero as possible.

 

5. Make it last. But don’t hold your breath.

There’s a lot worth copying in the Tax Reform Act. But one area of failure in 1986 was continuity. Almost from the moment reform was signed, Congress began feasting on the fresh cheese block and carving out rewards for constituents, businesses and supporters. By 1990, Bush tax policies essentially hammered the final nail in the TRA coffin. In the 25 years since TRA, Congress has added tens of thousands of deductions and loopholes into the tax code — many think today’s code is worse than the one first reformed in 1986.

Republicans love to skewer Obama’s economics, claiming the remedy to his policies is to reinvigorate “certainty” into the economy. These critics are close, but still wrong; their logic would dictate that there’s no distinction between a “certainly” bad policy and a “certainly” good one. What the economy needs is stability — and long-term stability at that. This strikes at the heart of the nature of tax policy, which often consists of one- or two-year changes. Any given policy is perennially on the verge of expiration.

 

In a climate as divisive as Washington’s today, successful tax reform certainly remains hard to imagine. Still, if there’s any singular lesson of TRA, it’s that such massive reforms are chaotic, asymmetrical, anarchic and (think adult diapers) pretty much deranged — characteristics, as it turns out, that could make for a warm reception on Planet Washington.

Plus, other tax schemes come to mind that make tax reform look like easy money by comparison. Politicians wrangling over tax reform can hold on to this nugget: “‘Tis easier for tax reform to pass through the aye of a committee than a Republican to enter the Kingdom of Flat Tax.” Call it divine inspiration.

 

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