clock menu more-arrow no yes

An expert on the 1986 tax reform explains why this time it’s going to be harder

Congress is getting ready to attempt the near impossible: rewrite the tax code for the first time in 31 years. And if there’s one thing to learn from the past effort, it’s that reform will require strong cooperation from both sides of the aisle.

The passage of the Tax Reform Act in 1986 was heralded as a triumphant bipartisan effort, one led by President Ronald Reagan. Back then, lawmakers were trying to simplify the tax code and make it more fair, and they focused on lowering the top individual tax rate and eliminating some tax shelters and special deductions.

It took two years of painstaking rewrites — and lots of complaints from special interest groups — to get it through Congress and onto the president’s desk. One of the hallmarks of the law was taxing capital gains income at the same rate as ordinary income. Another goal was to shift the tax burden from individuals to corporations — something that ultimately didn’t happen.

Jeffrey Birnbaum, a former tax reporter for the Wall Street Journal and the Washington Post, covered the entire process back in the mid-1980s. The book he wrote about it with fellow reporter Alan Murray, Showdown at Gucci Gulch, became a cult classic among tax policy wonks in Washington. I spoke with Birnbaum, who now runs his own public relations firm, about what the 1986 tax overhaul can teach us about the chances of reforming the system once again. (Birnbaum’s firm represents the Coalition for Fair Effective Tax Rates.)

This interview has been lightly edited for clarity.

Alexia Fernández Campbell

The 1986 tax reform acts has been described as a great political success. Can you tell me why that is?

Jeffrey Birnbaum

If you were an advocate for the legislation, it was a remarkable success. It won despite enormous odds. It had repeated near-death experiences before finally it was passed and signed into law. As a testament to how difficult it was, there have been other attempts over the last 30 years to do something similar and none of them have succeeded.

Alexia Fernández Campbell

Why do you think that is?

Jeffrey Birnbaum

Well, because it's inherently complicated and painful to some, and for those reasons it would take a very long time to complete.

Alexia Fernández Campbell

How do you think the effort to overhaul the tax code will be different this time around?

Jeffrey Birnbaum

There are many things different about this moment in time. I don't think I want to make a prediction that it will succeed or not. Now, compared to the relatively recent past, the president and the leaders of Congress have all said they are in favor of moving forward with tax reform in concept. Until recently the president was not an advocate for reform, and without the president's support, anything as large and difficult as overhauling the income tax was very difficult, if not impossible, to do.

Alexia Fernández Campbell

Are there any other differences between now and then?

Jeffrey Birnbaum

Well, the tax code now gets more complicated all the time, which is one of the things the public dislikes about the tax code. And so there is a growing dissatisfaction, according to the polls, with the federal tax system. And that is an important element about whether tax reform succeeds.

Alexia Fernández Campbell

Why does the tax code get more complicated all the time?

Jeffrey Birnbaum

Sen. Bob Packwood, who in ’86 was the chairman of the [Senate] Finance Committee, likened the income tax to a shrub that you can prune back but then it comes back stronger, and so I think [that] is a fair description of how narrow preferences are constantly being added by interest groups and their supporters in Congress to the tax code.

Alexia Fernández Campbell

What hasn't changed since then? Are the special interests the same?

Jeffrey Birnbaum

Interest groups now have [more] access to levers of influence and publicity than they did 30 years ago. The internet, if it existed, was not available to the public. Now issue campaigns are everyday occurrences on a range of issues, so the opponents of tax reform now have a lot more access to the means to complain publicly. I'm sure that will make passing a major tax bill that includes raising taxes on some people much more difficult.

Alexia Fernández Campbell

At the time, President Reagan had strong bipartisan support in Congress to work on tax reform. What do you think President Trump can learn about the way it was handled back then to make sure it is successful?

Jeffrey Birnbaum

I mean, it's a mathematical necessity, I think, to have Democratic and Republican supporters for something that doesn't break down just on partisan lines. There are regional differences, there are economic interests that compete, it's a much more complicated issue to get a majority in the House and the Senate, let alone the tax writing committees. So there has to be much more cooperation than we've seen demonstrated so far in Congress.

Alexia Fernández Campbell

You mentioned in an op-ed in the Washington Post that tax reform won't happen by the fall. Why do you think it won't happen by then?

Jeffrey Birnbaum

I think it's too tight a timeline. I'm not saying that it will or won't be successful. I'm just saying it will take longer than the predictions we've seen.

Alexia Fernández Campbell

But as we've seen, there is a lot of pressure from the new administration to make things happen fast. Don't you think they will try to fast-track this?

Jeffrey Birnbaum

Simply putting something out doesn't mean it works. That is the point I am trying to make. It is very difficult to find the right combination of tax changes that can produce a consensus on Capitol Hill, and we have no idea what is possible until we see what the Trump administration recommends, and they have no proposal yet. The only proposal that is fully formed that I am aware of is the one House Republicans have, called the blueprint. We could start making some guesses about prospects once the Trump administration endorses that, but they've made pretty clear that they're putting together their own plan.

Until we see that, it's impossible to judge how long things will take or whether they will move forward or how. We also know that the Senate Finance Committee leader is not especially enthusiastic about the House Republican blueprint; that means they would have to come up with something different. So all those factors mean to me there is not the prospect, given the limited number of legislative days between now and the fall, for a major piece of legislation to make it all [the way] through the process.

Alexia Fernández Campbell

The 1986 law was supposed to shift the tax burden from individuals to corporations, but that hasn't really happened. Many corporations have been keeping their overseas profits in tax havens. Do you think the law has failed in some ways?

Jeffrey Birnbaum

No. I don't agree with that. Just because some shelters were shut down in ’86 doesn't mean that others weren't devised and popped up, but in this case there are all sorts of things. There have been many, many changes, but one is that most business income now is taxed on the individual rate, not the corporate rate, and the vast majority of businesses are not corporations. That may be a result of the ’86 law, and maybe that has let to more sheltering of income. I just don't know.

Alexia Fernández Campbell

What are some of the limitations of the 1986 law that didn't pan out the way they were intended?

Jeffrey Birnbaum

There are many, many, I'm sure. But one of the big ones is that passive loss rules were changed to shut down limited partner tax shelters, many of which affected real estate. They did so because they were short of revenue at the end, and they changed those rules retroactively, which sent the commercial real estate industry into a tailspin.

Alexia Fernández Campbell

There has been a lot of talk about making the tax code more simple and fair. Do you think it's even possible to be fair to everyone?

Jeffrey Birnbaum

No, you cannot have both a simple and a fair tax code. It can either be simple or it can be fair, but not both. By fair, I mean some industries think they should be taken care of with special provisions. But if it's simple, you get rid of all those special provisions, so there has to be a balance between simple and fairness.

Alexia Fernández Campbell

Do you miss covering tax policy, or are you glad not to be involved this time around?

Jeffrey Birnbaum

Am I glad I don't have to talk about tax reform on a day-to-day basis? Yeah. It's very, very hard work, and as a reporter, it will be a very exciting, interesting, all-consuming thing if it's anything like it was 30 years ago.