The Tax Reform Act of 1986: did Congress love it or leave it?

INTRODUCTION

Taxes are never popular, and they are so complicated that people have a hard time communicating to politicians the actual source of their displeasure. Most people believe that taxes are too high, others believe there are too few (or too many) deductions or exclusions.

Depending on whom you ask, the system is either too favorable (or not favorable enough) to the rich or too complicated. Some people are simply frustrated with government in general and vent their feelings on the tax system and the Internal Revenue Service. So, politicians put forth a variety of proposals in response to the public's dissatisfaction. In 1980, for example, President Reagan's election campaign emphasized tax cuts; many believed that this issue played a decisive role in his victory. Yet, after tax cuts were implemented in 1981, people were still dissatisfied. Politicians believed that the public wanted a fairer system, and a five-year debate and significant political struggle ensued, leading to the Tax Reform Act of 1986. Discontent with the system seems to be on the rise again, perhaps spurring another cycle of tax reduction and reform. The recent Congressional reform proposals can be seen as a response to this discontent. Although many agree that the present system is burdensome to both taxpayers and the economy, little consensus exists as to which proposal promises the best solution.

Just about ten years ago, on June 24, 1986, the U.S. Senate passed its version of the Tax Reform Act of 1986 by a vote of 97 to 3. If for only a brief period, this high degree of consensus on what the tax system should look like was astounding. What led to the development of this consensus? How durable was the consensus? Are there parallels between recent tax legislation and the events leading up to the 1986 Act that shed any light on the likelihood of another round of fundamental reform? These are the questions this paper attempts to analyze.

In the next section of the paper, I review the legislation that led up to the 1986 Act and emphasize that lower tax rates and broadening the base were changes with which Congress had considerable experience by the time the Act was developed. I hen discuss what I believe were the two primary features of the Act that allowed the formation of the pro-reform consensus in 1986: substantial rate reduction and improvement in horizontal equity. With respect to economic growth issues, Congress was able to ignore many entreaties to save specific tax provisions that provided a boost to particular sectors of the economy in the belief that lower rates would themselves protect the economy from significant disruption. The next section of the paper briefly contrasts the principles of the current round of reform proposals to those of the 1986 Act. Although they apparently share objectives of low rates and a broad base, the approach toward equity issues is very different. Legislation since 1986 is then described in order to identify whether principles guiding tax legislation have changed in a way that points toward the emergence of a consensus around one or more of the current proposals. My conclusion is that we are at least several years away from an evolution toward a view that these proposals embody feasible Congressional tax policy decisions.