Lessons of 1986 Show IRS Code Revision Tougher This Time: Taxes

The lessons of the last big revision to the tax code in 1986 show it’s going to be harder to get things done this time.

Like today’s effort to cut rates, eliminate deductions and simplify the code, the deal under Ronald Reagan faltered again and again, Bloomberg BNA reported. Ultimately, lawmakers lowered the top rate to 28 percent from 50 percent, scrapping loopholes and increasing corporate taxes in a revenue-neutral fashion.

The goal today is much the same: to rewrite the tax code to cut back on breaks and simplify the code.

Lawmakers, lobbyists and tax professionals who worked on the 1986 rules say the past offers insight into the odds for another compromise. Looking back, they see several differences that lawmakers are having trouble resolving before any legislation can succeed, including items as central as whether the nation’s tax bill should go up at all.

“The zero-sum game that may be part of this year’s process will make it harder than 1986,” said David Kautter, managing director of the Kogod Tax Center at American University.

Like today, politicians in the early 1980s were focused on reducing the deficit and trying to stimulate economic growth. Then there was more appetite on Capitol Hill for legislation that could increase taxes, Tom Neubig, the national director for quantitative economics and statistics at EY and former chief economist at Treasury’s Office of Tax Analysis in 1986.

The years running up to 1986 saw legislation that both cut government benefits and raised taxes, culminating in a 1986 bill that was kept revenue neutral through an increase in corporate taxes of about $120 billion, something unlikely to be repeated.

Greenspan Commission

“I liken the beginning of the tax reform effort in the 1980s to the beginning of the tax reform effort in 1982, when Senate Republicans were focused on reducing the deficit even during the greatest recession at that point,” said Neubig.

A year later, the Greenspan Commission recommended -- and Congress enacted -- a significant group of changes to Social Security that both cut benefits and increased taxes. The Republican-led Senate passed another deficit-reduction bill closing tax loopholes and implementing other changes to the tax code in the Summer of 1984, Neubig said.

“It’s one of those things that is really important in understanding the political dynamics of a revenue-neutral tax reform, by definition there are going to be winners and there are going to be losers,” said Neubig.

In another difference, Reagan and Congress already had signaled that there were going to be significant tax increases and that some people were going to pay more.

Today’s Fight

Compare that with today’s Congress, where Majority Leader Harry Reid, a Nevada Democrat, said Aug. 1 that he was supportive of tax-code changes if it raised “significant revenue” -- something Senate Minority Leader Mitch McConnell characterized as a “real stumbling block.”

There was a sense buy-in from the administration, something that hasn’t yet shown itself in this time, Kautter said.

“I don’t know that President Obama has that same belief, that he’s got the same sort of commitment to tax reform that Reagan had,” Kautter said.

Indeed, Washington has a long way to go before Congress and the White House can move forward together on a tax overhaul.

In late July, President Obama laid out his tax proposal, one that included a one-time increase of revenue for highways and other infrastructure projects and a simplification of the tax code. Left out was mention of individual taxes.

The proposition was rebuffed by Republicans, with Senator Orrin Hatch, the Utah Republican who is the ranking member of the Finance Committee, suggesting the president’s proposal was an attempt to undermine any deal. Obama said July 31 that he wouldn’t negotiate over raising the debt ceiling as part of an effort to move tax reform forward.

Treasury Sidelined

Also on the sidelines is the Treasury Department, which took a leading role the 1986 deal, releasing a pair of meticulously crafted proposals, Treasury I and Treasury II. The papers gave Reagan and Congress a framework on which to build a compromise, said Donald Reynolds Jr., shareholder at the D.C. offices of law firm Buchanan, Ingersoll & Rooney.

“Back in those days, the Treasury staff and the Joint Committee staff seemed to be the dominant technical staff,” said Reynolds.

Driving the effort today are Senate Finance Committee Chairman Max Baucus, a Montana Democrat, and House Ways and Means Chairman Dave Camp, a Michigan Republican.

For many practitioners working in Washington, the 1986 deal was a key moment in their careers, one which shaped their outlook on the legislative process and set the course for tax policy for years to come. But what many tax practitioners took from the deal -- and what many young practitioners may take from today’s deal -- was that the major overhaul closed a generational gap among colleagues.

“It’s a great leveler, 30 years of experience doesn’t mean much if they just threw the law out,” said Reynolds. “It kind of leveled the playing field between youngsters and greybeards.”

To contact the editor responsible for this story: Cesca Antonelli at fantonelli@bloomberg.net

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