Twenty Years Later: The Tax Reform Act of 1986

October 23, 2006

Yesterday marked the 20th anniversary of the nation's most recent federal tax overhaul—the Tax Reform Act of 1986. Although much of what that reform accomplished has been unwound over the years by lawmakers eager to reward constituents with tax preferences, it stands as a rare example of bipartisan support for fundamentally sound tax policy.

In yesterday's Washington Post, Jeffrey H. Birnbaum, co-author of Showdown at Gucci Gulch, had a nice commemoration of TRA'86:

Twenty years ago today, President Ronald Reagan signed into law the broadest revision of the federal income tax in history. The Tax Reform Act of 1986 -- the biggest and most controversial legislative story of its time -- had lawmakers, lobbyists and journalists in Washington in an uproar for two years. Despite nearly dying several times, the measure eventually passed, producing a simpler code with fewer tax breaks and significantly lower rates. The changes affected every family and business in the nation.

In the years since, however, rates have gradually risen and Congress has passed nearly 15,000 changes to the tax law. Many of the loopholes that disappeared two decades ago are back. Now, as then, politicians (including President Bush) are branding the income tax unfair and calling for reform. And now, as then, few expect it to happen.

But what lessons from the tax revisions of 1986 might apply to a similar effort today?...

Read Birnbaum's full list of lessons here. For our own commemoration, economist Gerald Prante pulled together the following commentary on TRA '86, exploring lessons from the reform effort:

Tax Reform: What Has Changed Since 1986? There is an old saying that those who forget history are doomed to repeat it. The issue of tax reform is no exception.

The Tax Reform Act of 1986, which was signed into law twenty years ago this month, was considered at the time one of the most significant pieces of legislation ever passed. The fact that Congress went against the wishes of powerful lobbyists in overwhelmingly passing such legislation was seen as a triumph of the American people.

But despite the temporary success of tax reform in 1986 and the apparent conquest of the public interest over the special interests, two failures were evident. First, while the legislation did close special tax shelters for select individuals—events that often became nightly news stories—the reform did little to close the many significant exemptions that inhibit overall economic growth. Also, much of what passed in 1986 to limit special tax loopholes has already crept back into the system courtesy of politicians quick to give in to whatever lobby fills their pockets.

How long did it take before talks of rolling back the reforms began to emerge? Consider the Wall Street Journal on the day following Mr. Reagan’s signature:

Yesterday, shortly after 11 a.m., Ronald Reagan signed HR 3838, the landmark tax-reform bill of 1986. The battle to get tax reform is over; the battle to keep it is just beginning.

Mr. Reagan recognized this in his statement at the signing ceremony, pledging to stop rate increase, and laying out a remarkably thoughtful explanation of the principles behind the movement to cut tax rates. Enjoy it while you can. Congress will be back on Jan. 6, and the movement to take away tax reform will start. (WSJ: Oct. 23, 1986)... (Full piece here.)

In attempt to revive 1986-style bi-partisan support tax reform, Sen. Ron Wyden and Sen. Bill Bradley recently held a press event, commemorating the 20th anniversary of TRA'86 and calling for a bi-partisan coalition to repeat the 1986 feat:

1986 Tax Reform Act by Calling for President Bush to Join in Cleaning Up the Tax Code Washington, D.C.—Twenty years after the last major tax reform act was signed into law, former U.S. Senator Bill Bradley (D-NJ) and Senator Ron Wyden (D-OR) have scheduled a news conference this Monday, October 23, to urge President Bush to join Congress in once again enacting real tax reform for the American people.

Bradley and Wyden’s call for a tax debate comes two weeks before the decisive mid-term elections.

Bradley, the original Senate sponsor of the 1986 Tax Reform Act, remains one of the nation’s leading advocates for a fairer and simpler tax code. Wyden is the author of the Fair Flat Tax Act of 2005, a tax reform package which calls for a simplified tax code to benefit middle-income Americans. (Full story here.)

We've done a lot on fundamental tax reform over the years. For a sampling, see our "Tax Reform" section here.

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