The Senate Finance Committee held hearings Thursday on tax reform and the lessons learned from the Tax Reform Act of 1986 in the wake of a recently published report from a presidentially appointed panel.
In 1986, Congress pruned the Tax Code, pretty severely, said Senate Finance Committee Chairman Max Baucus, D-Mont., in a statement. But its grown back, bigger and stronger. Once again, it needs to be pruned.
Baucus noted that the Tax Code is now about 70,000 pages long, and since the 1986 tax reform Congress has made more than 15,000 changes to the Tax Code.Each change created additional complexity, and each change created the potential for exploitation. said Baucus. Once again today, just as in the 1980s, many can largely avoid paying taxes, if they know how to manipulate the Tax Code. A long list of deductions, credits, and exclusions are available to help avoid taxation. Those who dont have a savvy accountant or who refuse to participate in tax games often end up paying more. Many honest taxpayers end up feeling like chumps.
The Presidents Economic Recovery Advisory Board, chaired by former Federal Reserve chairman Paul Volcker, released a report last month outlining ways to simplify the Tax Code (see Obama Board Outlines Changes in Tax Structure and Presidents Tax Reform Panel Report Has Déjà Vu Moments). The hearing on the 1986 bill is the first in a series of hearings planned in the Senate Finance Committee on tax reform.
Just about everybody agrees that our Tax Code is too complex, said ranking Republican member Charles Grassley, R-Iowa. The tax form instruction book is probably the most unwelcome piece of mail many taxpayers get. The complexity means taxpayers cant be confident that theyve received all the breaks coming to them, or that they havent paid more than they owe.
William R. Archer Jr., a senior policy advisor with PricewaterhouseCoopers, talked about the history behind the 1986 Tax Reform Act.
There were many factors that led to tax reform in 1985 and 1986, but I am convinced that President Ronald Reagan played the single most critical role in passage of the 1986 Act, he said. I am not the first person to note that major tax reform requires presidential leadership. That was true in 1986 and it is true today. President Reagan was passionate about individual tax rates. He often recounted that during World War II his income from acting was taxed as high as 91 percent, leaving him with only 9 cents of each additional dollar of work. He understood from this experience that high tax rates discourage people from working harder and undercut economic opportunity.
Archer noted that Reagan succeeded early in his first term, in 1981, at reducing the top individual tax rate from 70 to 50 percent. Reagan continued to press for lower rates during his campaign for reelection in 1984 and made tax reform a centerpiece of his State of the Union Address and second-term agenda. House Ways and Means Chairman Dan Rostenkowski and Senate Finance Committee Chairman Bob Packwood helped pushed through the tax reforms of 1986 with the help of Rep. Dick Gephardt (who also testified Thursday) and Sen. Bill Bradley. Rostenkowski initiated a tax dialogue with the American people with his Write Rosty public outreach campaign, Archer recalled.
John E. Chapoton, a strategic advisor with Brown Advisory in Washington, D.C., who served as assistant secretary of the Treasury for tax policy during Reagans first term, testified about his office developed many of the proposals that later resulted in the Tax Reform Act of 1986.
In policy shops there was continuing unhappiness with the increased tax burden on the poor and families caused primarily by erosion of the personal exemption through inflation over the years with inadequate relief in the tax reduction bills that appeared periodically, he said. The administration was keenly aware of this dissatisfaction but many of the Presidents advisors argued that taxes had dominated the agenda during the Presidents first three years and it would be a mistake to put tax reform on the table and let that dominate the final year of the first term. This was an election year of course, and there was keen awareness that tax reform proposals were already on the tableRepublican proposals such as Kemp-Kasten and Roth-Moore, and more importantly the Democrat proposal by Senator Bill Bradley and Representative Dick Gephardt. While these proposals varied significantly they contained similar themesthe principal one being base-broadening primarily through reduction of tax expenditures, accompanied by significant reduction in tax rates. Generally speaking they also dealt with fairness issues that had been long neglected, principally the increased share of tax imposed on families and the poor over the years. The Bradley-Gephardt bill was the focal point. It was a very comprehensive proposal. The sponsors each served on the tax writing committees of their respective houses of Congress and thus had access to the talents and resources of the staff of the Joint Committee on Taxation.
Randall D. Weiss, managing director of economic research at the Conference Board in New York City, testified about some of the lessons learned from the Tax Reform Act of 1986. Many members of Congress, their staffs, and executive branch personnel worked very hard to make it happen, said Weiss. They knew that the income tax generated the major share of Federal tax revenue and that the income tax carried the burden of raising this substantial revenue in a way that the public would believe was fair. This is still true today. It is important for Congress to periodically review the income tax in order to raise the necessary revenue as fairly and efficiently as possible. The advantage of a comprehensive tax reform initiative is that many tax provisions can be changed at the same time, thus allowing a package to be shaped that accomplishes these objectives. This is much more difficult to do in piecemeal tax bills that deal with only a few provisions at a time.
He noted that the 1986 bill passed in the Senate Finance Committee and the full Senate with overwhelming bipartisan support, 20-0 in the committee, and 97-3 in the Senate.
I believe that two features of the Act were critical (1) substantial rate reduction and (2) significant improvement in the publics perception of the fairness of the tax, said Weiss. Also important were two other aspects of the shaping of the Act revenue neutrality and de-emphasis on adjusting the taxs distribution by income class. I believe that all of these considerations would be important for, and allow the success of, a tax reform effort in the current environment.
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