Reagan Offers Lesson for Obama on Fixing Tax Code: Albert Hunt

One consensus within the polarized American body politic is that the tax code is inefficient, inequitable, complicated and counterproductive.

“Those who don’t have a savvy accountant or who refuse to participate in tax games often end up paying more,” says Senator Max Baucus, a Montana Democrat. “Honest taxpayers end up feeling like chumps.” Representative Dave Camp, a Michigan Republican, puts it more directly: “The tax code is 10 times longer than the Bible, without the good news.”

These are the chairmen of the congressional tax-writing panels, Senate Finance and House Ways and Means. President Barack Obama has evinced interest in embracing tax reform.

That suggests changes in the individual and corporate tax codes are high on Washington’s agenda this year. Wrong; tax reform is a decided long shot.

The notion of a sweeping tax overhaul invariably is more appealing than actually doing it. Lower rates and a simpler code are widely supported; curbing tax breaks like the home-mortgage deductions or corporate subsidies for overseas investments -- two possible ways to pay for lower rates -- are anathema to the influential interests benefitting from such advantages. The parts usually trump the whole.

Only two weeks before his Jan. 25 State of the Union address, Obama still is ambivalent about how aggressively to tackle the tax system. Top administration economic officials see the merits of such an undertaking and concede that while serious long-term deficit reduction requires higher taxes, that might not be achievable until people see a simpler and fairer code.

Deficit Reduction

Yet administration officials also believe the prospects for success are slim. On the individual and the corporate side -- together or separately -- Obama either would like to raise some revenue for deficit reduction or, at a minimum, be revenue neutral.

That’s where the politics get ugly. The business community is divided on revamping corporate taxes; industries or companies that pay higher tax rates like the idea. Those that pay lower or almost no taxes don’t.

On Capitol Hill, when Republicans talk about tax reform, that usually means lower taxes, which, the administration argues, make significant deficit reduction impossible. A top administration official says one of the very few Republicans who seem serious about a credible tax package that would lower rates and eliminate loopholes is Tom Coburn, a conservative Oklahoma senator. That’s not the stuff of a successful coalition.

1969 Break

On occasion there are catalyzing events that force tax changes. In 1969, after the departing Treasury secretary revealed there were 155 wealthy individuals who didn’t pay any taxes, Congress closed some loopholes. In 1975, in the middle of an energy crisis and amid soaring industry profits, there was a crackdown on oil-industry tax breaks.

The most apt analogy is the 1985-86 overhaul that dramatically lowered individual rates while broadening the base by curbing special write-offs.

There are parallels to the present situation: In 1985, there was divided government, though it was the mirror image of today’s, with a Republican president and Senate, and a Democratic-controlled House.

Yet in what was a more conducive climate, it took a politically painful year-and-a-half and three or four genuine near-death experiences before a measure was enacted.

Unlikely Coalition

Then, there was a coalition of liberal tax reformers who hated all the special-interest provisions in the code and supply-side conservatives who wanted lower rates. They joined forces in an unlikely and temporary union.

The agreement was achieved only through a huge increase in corporate taxes, which financed the individual provisions. Today, most of the discussion, even among some Democrats, focuses on the need to reduce or reform corporate taxes, not increase them.

President Ronald Reagan initiated a tax study as the 1984 presidential campaign began out of a fear -- unrealized -- that the Democrats would seize the issue. Thereafter Reagan, who paid a 91 percent top rate when he was a highly paid actor, became a passionate advocate. “He really wanted lower rates and didn’t care how we got there,” recalls former Senator Bob Packwood, an Oregon Republican who chaired the Finance Committee.

Baker and Darman

Spearheading a torturous process for the administration were two of the best policy and political strategists, Treasury Secretary James Baker and Deputy Treasury Secretary Richard Darman. They avoided legislative landmines that would have maimed lesser lights.

Crucial was the backing offered by important congressional Democrats. Senator Bill Bradley of New Jersey was the architect of the tax-overhaul proposal before the Reagan administration touched it. Chicago Democrat Dan Rostenkowski, who chaired the House Ways and Means Committee, threw his support behind the measure in the spring of 1985 and navigated it through a skeptical committee and House.

On the Republican side, the most prominent supply-side politician, the late Congressman Jack Kemp of New York, was an important booster, as was Packwood, who rescued the bill in the Senate. For days, Packwood assembled secret meetings of political heavyweights to plot this course, including prominent Democratic senators such as Bradley, George Mitchell of Maine and New York’s Daniel Patrick Moynihan

In 2011, it is impossible to envision contemporary counterparts in either party, most particularly, among Republicans. Any trade-off made on higher taxes would be assailed by the party’s base.

December Agreement

Some optimists say the December deal between the White House and Senate Republicans is a harbinger of accords that might be reached this year. That deal gave away almost a trillion dollars over a couple years and there was no short-term pain. Any tax measure that isn’t a big revenue loser involves political pain, not a popular commodity in Washington these days.

An early clue of any prospects for success is whether Obama is willing to risk the dicey tradeoffs and make tax overhaul a major chunk of the State of the Union address in two weeks or merely makes a passing mention.

Albert R. Hunt is the executive editor for Washington at Bloomberg News. The opinions expressed are his own.)

To contact the writer of this column: Albert R. Hunt in Washington at ahunt1@bloomberg.net.

To contact the editor responsible for this column: at mberley@bloomberg.net.

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