History and Hope Mix for Bipartisan Tax Reform

Comprehensive tax reform, current edition, resembles the successful 1986 effort in many ways. Today, as then, driving tax reform is the clear and correct perception that the tax code poses an unnecessarily severe drag on economic growth. In one key respect, however, the current effort thus far differs significantly from the past: The Tax Reform Act of 1986 (TRA86) was a deeply bipartisan effort, whereas tax reform today has been an almost entirely Republican show. This partisan split is understandable in some respects, but the split need not and should not persist if tax reform is to be truly successful.

The obvious need to provide America’s families with a stronger economy offering higher wages and more opportunities should be reason enough for many Democrats to want to support tax reform under reasonable conditions. History affirms grounds for optimism.

Bipartisan then, bipartisan now?

President John F. Kennedy understood the dampening effects of high tax rates. Though he was assassinated before seeing his policy enacted, President Johnson pushed the program through Congress and thus the 1964 “Kennedy tax cuts” became law. The 1964 bill centered on significant tax rate reductions to achieve a substantially stronger economy. It passed the U.S. House of Representatives with 326 Democrat and 108 Republican votes, and then easily cleared the Senate with 53 Democrat and 21 Republican votes.

Some years later, Congressman William Steiger (R-WI) offered an amendment to the 1978 Revenue Act effectively reducing the capital gains tax rate to 28 percent to re-invigorate a languishing economy. Democratic support for the Steiger amendment proved “wild,” despite President Carter’s firm opposition. Democrats were willing to buck their President in part because another Democrat, Texas Senator Lloyd Bentsen, Chairman of the Joint Economic Committee and later Treasury Secretary under President Bill Clinton had made a strong case for reducing capital gains tax.

The Steiger amendment was but a foretaste of the changes soon to follow. The woeful mishandling of the U.S. economy during the Carter Administration in part led to the election of Ronald Reagan and a very deep recession as the Federal Reserve out of necessity embarked on a painful policy of disinflation. Enacted in 1981, the Reagan tax program, following the path-breaking work of Senator Bill Roth (R-DE) and Congressman Jack Kemp (R-NY), was intended to pull the economy out of recession and boost it for the long run. It was tremendously successful on both counts.

Congressman Dan Rostenkowski (D-IL), a classic Chicago liberal and the powerful Chairman of the Ways and Means Committee shepherded what eventually became the Economic Recovery Tax Act of 1981 through the House of Representatives. On the final vote in the House, of those voting over half the Democratic conference voted for the bill, and over over three-fourths of Senate Democrats supported the bill.

Subsequent legislation to reset income tax levels likewise enjoyed bipartisan support as the stage was set for TRA86, perhaps the most intensely bipartisan tax legislation in the modern era. On the Republican side, Senator Bob Kasten (R-WI) and Rep. Jack Kemp (R-NY) led the charge, and were joined by New Jersey Democratic Senator Bill Bradley and Congressman and later Democratic House Majority Leader Dick Gephardt of Missouri.

Bradley and Gephardt deserve much of the credit for TRA86’s passage as they had barnstormed the country tirelessly with speeches, interviews, and media appearances pressing the case for lowering tax rates and broadening the tax base. On the final votes for the 1986 reforms, nearly half the House Democrats and half the Senate Democrats voted for the measure.

Beyond 1986

Following TRA86, the two political parties largely went their own ways on tax policy, but with exceptions. For example, Senators Sam Nunn (D-GA) and Pete Domenici (R-NM) introduced the USA tax reform plan, a highly detailed, comprehensive, and revolutionary approach that offered a means of eliminating tax on saving and investment while integrating the payroll tax into the income tax.

Despite the effort and its highly respected sponsors, the USA Tax never gained much traction. The USA Tax presented a fully fleshed out tax program, which meant the proposal was fairly difficult to explain. This shortcoming was quickly highlighted as the Hall-Rabushka Flat Tax came on the scene offering as a major selling point its vast simplification and ease of explanation. The Flat Tax, however, remained largely a Republican and ultimately incomplete answer to tax reform.

Bipartisan tax reform again gained traction briefly after the 2004 election with the release of the superb report of the presidential commission led by former Senators John Breaux (D-LA) and Connie Mack (R-FL), but this effort, too, led to naught for lack of national consensus.

Tax reform in 2017

By all appearances, tax reform in 2017 is entirely a Republican affair, and not just because Republicans control the White House, the House of Representatives, and the Senate. Republicans are also in the lead because of the remarkable consensus regarding tax reform’s main goals – economic growth and middle class tax relief – and its key elements, such as much lower tax rates for business, expensing or its rough equivalent for businesses’ capital purchases, a competitive international tax system, simplification, and certainty.

In contrast, while individual Democrats have ideas to contribute toward a more pro-growth tax policy, collectively the Democrats have offered little more than warmed over redistributionism. It is not surprising, therefore, Republicans have, to date, made limited efforts to reach out for Democratic input. A second explanation for the limited outreach is that Republicans themselves, while united on many broad principles, are still sorting out in detail what they favor themselves.

The next step in the tax reform process will be passage of a budget resolution to include “reconciliation” instructions for tax reform. The essential consequence of reconciliation is that tax reform can then pass in the U.S. Senate with only 51 votes. The natural inference is that tax reform will therefore be a partisan exercise, but this need not be true. Reconciliation creates a path forward, but not the only path. The possibility remains the bill could receive significant Democratic support. Very encouraging were reports of a recent meeting on tax reform between President Trump and Democratic Senators Manchin of West Virginia, Heitkamp of North Dakota, and Donnelly of Indiana.

Permanence matters

Bipartisan support for tax reform matters because of tax reform’s overriding objective – stronger economic growth – and a basic requirement of meeting that objective fully – permanence. Temporary tax programs, even if otherwise well-designed, have little chance of improving the economy’s performance even in the short-run. For tax reform to be truly effective individuals and businesses must have some substantial confidence the provisions will remain in effect for many years, otherwise the investments and actions intended to flow from tax reform will simply not occur.

Bipartisan support for tax reform is fundamental to achieving a stronger sense of permanence in tax reform’s changes. By the very nature of politics, if comprehensive tax reform passes solely or almost exclusively with Republican votes, then Democrats’ natural response will be to pick at the difficult decisions made to achieve tax reform. Operating from the opposition, Democrats will naturally make opposition to the Republican tax reform a central feature of their political program.

On the other hand, if following the guide of modern history at least a significant minority of the minority support and vote for tax reform, then the law is more likely to remain intact for years to come regardless of shifting political fortunes. Bipartisan support raises the prospects for permanence which raises the effectiveness of tax reform’s ability to strengthen the economy for the benefit of America’s families and businesses.

About the authors

J.D. Foster

Dr. J.D. Foster is the former senior vice president, Economic Policy Division, and former chief economist at the U.S. Chamber of Commerce. He explores and explains developments in the U.S. and global economies.