Back to the future: Reagan, Trump and bipartisan tax reform
This piece originally appeared on The Hill.
With the startling, positive outreach to the congressional Democratic leadership to forge an agreement on short-term funding of the government to avert a shutdown, increasing the debt ceiling and funding Hurricane Harvey relief, followed by further efforts to enlist Democrats on immigration reform and tax reform, the door is now more open than seemed possible for President Trump to create a bipartisan coalition for tax reform and tax cuts, just as Republican icon Ronald Reagan did in 1986. While Trump in 1991 told Congress the 1986 tax act was an “absolute catastrophe” because it closed real estate loopholes important to his business, as president he has warmly endorsed it.
The 1986 Tax Reform Act, signed by President Reagan almost exactly 31 years ago, was the first across-the-board tax reduction for everyone since the Kennedy tax cuts, and there have been none since. President Carter tried and failed to pass a comprehensive tax reform bill in 1978-’79, even with a heavily Democratic Congress.
The essence of the Reagan plan, embraced by the Democratic leadership that controlled the Congress, was to create a fairer, simpler tax system, with lower rates and fewer tax breaks for the wealthy and corporations, that did not inflate the budget deficit. By appealing to Democrats with the liberal idea of closing tax loopholes, shelters and deductions for the wealthy, with the conservative Republican philosophy of lowering tax rates, he forged a bipartisan coalition.
The act lowered personal and corporate tax rates, while remaining revenue neutral by broadening the tax base through eliminating tens of billions of dollars in tax loopholes for the wealthy and corporations. It also lowered the capital gains rate from 20 percent to 28 percent, agreeing with Democrats that capital gains generally benefiting the wealthy should be taxed at the same rate as ordinary income from workers — the heart of Reagan’s and now Trump’s blue-collar support. Reagan said in championing the bill that he wanted to “close the unproductive loopholes that allow some of the truly wealthy to avoid paying their fair share.”
It exempted millions of low-income families from a federal income tax by expanding the standard deduction, personal exemption and earned income tax credit; it drastically reduced the number of tax brackets, with the top rate for individuals cut from 50 percent to 28 percent; and it slashed corporate tax rates from 48 percent to 34 percent, paid for by eliminating or reducing corporate tax breaks.
Since the 1986 act, presidents and successive Congresses have eroded some, but not all, of its benefits. Scores of special, targeted tax breaks and shelters have been passed. The top tax rate for individuals has now increased to 39.6 percent, and the number of brackets has jumped to six.
For sure, President Trump is in the Oval Office in a different era: the middle of American politics has eroded; both parties are more partisan, less willing to compromise, and more subject to pressures from their left and right flanks. Yet even liberal champion Sen. Ted Kennedy (D-Mass.) voted for the 1986 Act.
Trump’s approval ratings are under 40 percent — far below Reagan’s. It will be harder to close loopholes to offset the revenue loss from tax cuts, and congressional Republican leaders seem less interested in doing so, relying upon “dynamic scoring” — that somehow tax cuts will produce so much more economic growth, tax revenues will magically close the deficit, something which has never been shown to happen.
The Republican leadership is so anxious to pass a tax bill by the end of the year, it will leave little room for the kinds of reforms Reagan and the congressional Democrats achieved to earn the tax cuts. If there is a 2017 tax bill, it is likely to be almost all tax cuts, with no tax reforms to broaden the base.
Still, there are important lessons to be learned from Ronald Reagan’s approach.
He announced his intention for comprehensive tax reform in his 1984 State of the Union message, almost a year before he submitted his proposals, so it was well thought through, and went through a lengthy odyssey in Congress, with full hearings, markups and deliberation. While Treasury Secretary Steve Mnuchin and National Economic Council Director Gary Cohn have been assiduously working on a tax bill for several months, speed seems to be a key goal for both the administration and the Republican leadership, to have one major victory before the end of the first session. This will almost certainly lead to cuts without Reagan-type tax reforms.
Ronald Reagan also courted Democrats, including Speaker Tip O’Neill (Mass.), Ways and Means Committee Chairman Dan Rostenkowski (Ill.), and Rep. Richard Gephardt (Mo.) and Sen. Bill Bradley (N.J.), who already had a similar bill in the hopper, working with the politically gifted Treasury Secretary James Baker. Trump got off on the wrong foot by threatening Missouri Democratic Sen. Claire McCaskill to support the principals of the tax proposal he presented in her home state. But he has recently rectified this with a sincere outreach to a number of key Democratic leaders, as Ronald Reagan did.
There are substantial hurdles to forge a bipartisan consensus: Democrats are insisting that most of the individual tax cuts be focused on the middle class, and that deep tax reductions be paid for by loophole closings; Republicans are intent on deep corporate and upper income individual tax cuts, with little reforms to pay for them. The nonpartisan Tax Policy Center indicates the Trump plan could add over $3 trillion to the deficit in the first 10 years alone, and that 40 percent of the cuts would go to the top 1 percent of earners.
But still, as in 1986, there is broad, bipartisan recognition that:
- our tax system is too complex and unfair;
- that reducing high marginal tax rates can encourage taxpayers to lessen reliance on tax shelters;
- that our corporate tax system in the globalized world economy leaves U.S. corporations at a competitive disadvantage, with the highest marginal tax rates among OECD countries — although far lower actual rates, with all the special tax breaks — encouraging them to invest in low tax states abroad;
- that U.S. corporations should be encouraged to bring back the more than $2.5 trillion they have parked abroad and make job-creating investments rather than use them for stock dividends and share buybacks;
- that individual tax brackets should be narrowed; and
- that the tax code favors debt over equity, by allowing deductions for interest but double-taxing corporate equity income.
The most important lesson from 1986 is that Ronald Reagan showed consistent leadership at key points when the bill seemed doomed, going to Capitol Hill, writing letters to wary Republican members, and using his bully pulpit to stay on message about its importance to audiences around the country. This will be a major test for President Trump, to see if he has absorbed Reagan’s lessons. By indicating to Democrats that he does not want to focus his tax cuts on the wealthy, he is sending a powerful signal. The tax debate is also a test for the Democratic leadership to rise to the occasion, as they did in reaching agreement with Ronald Reagan three decades ago.
Ambassador Stuart E. Eizenstat
Partner, Covington & Burling LLP
Eizenstat is the former U.S. ambassador to the European Union, undersecretary of commerce and international trade, undersecretary of state for economic, business and agricultural affairs and deputy secretary of Treasury in the Clinton administration (1993-2001). He was also the chief White House domestic policy adviser to former President Jimmy Carter (1977-1981).