In the Nation's Interest
Trump Should Win One for the Gipper on Tax Reform
by Joe Minarik April 27, 2017
Tax reform is stalled. President Trump wants to shake it loose with the same plan that got it stuck in the first place. Economists fear that it will blow up an already frightening national debt. Republicans on Capitol Hill have their own plans, but cannot agree among themselves.
What’s wrong with tax reform? Why can’t it move, even in a Washington under control of a single political party?
Both the president’s and the Congress’s plans were built of imaginary parts, creating outlandish expectations. Just one of the biggest examples: The House relies on a “border adjustment” feature to raise $1.2 trillion (over ten years) and to turn the nation’s trade deficit around. (Hint: If it does fix the trade deficit, the $1.2 trillion disappears.) The border adjustment would hit America’s retailers and consumers with higher prices (unless the world’s fickle currency markets suddenly march in lockstep to offset its direct effects, in which case it would not fix the trade deficit). And it would totally jumble corporate America’s business models, raising taxes on many firms and rendering some non-viable.
Meanwhile, the president is starting with a principle—but no specific decisions to justify it—of a corporate tax rate so inconceivably low that it is guaranteed to cost our already debt-laden government trillions.
It reminds a few of today’s gray-haired tax analysts of 1981. Washington enacted a massive tax cut. In the first few weeks thereafter, its triumphant advocates talked about a “second bill” to go even further. Supply-sidism was about to overflow the Treasury with cash. Washington would spend that bounty on an even bigger tax cut: a “flat tax” of no more than 15 percent for the nation’s highest earners.
But reality intervened. Revenues plummeted, and the deficit soared to unthinkable heights. The “border adjustment” of its day, “safe-harbor leasing,” zeroed out the taxes of some of the most profitable corporations. Instead of indulging in a “flat tax,” Washington scrambled to claw back much of the 1981 tax cuts.
What followed was a five-year-long “miracle” (as some stated in print). A Democrat put forward a real tax reform, truly maintaining constant revenues, and reducing tax rates substantially. Not 15 percent, which was always unrealistic – but 30 percent for the highest earners. And a big cut in the corporate tax rate, too. All fully paid for with elimination of tax preferences for both businesses and households.
The Republican president didn’t want to face the Democratic plan in the 1984 presidential campaign. So he promised a Treasury Department alternative – just as soon as the election was over. And his Treasury complied – playing by the same honest rules. So over the next two years, the late Ronald Reagan (who might not qualify today, but back then was considered by many to be a Republican) worked with the late Speaker Tip O’Neill, the late Ways & Means Chairman Dan Rostenkowski, and late Representative Jack Kemp to get a bill through the House. Then the very much alive Democratic Sen. Bill Bradley, who started it all back in 1981, and the equally surviving Republican Finance Chairman Bob Packwood, streamlined that bill and launched it safely to its destination.
Life lesson: The flash and dash of 1981 failed. All of the miracle components – the flat tax, the safe-harbor leasing, and the supply side – broke down. But the straightforward, transparent 1986 model worked.
Conclusion – for those who care to learn from history: We have seen all of today’s tax reform drama before. We are watching a remake, with border adjustment playing the part of safe-harbor leasing, and 15 percent coming back with plenty of makeup to reprise its ebullient performance as 15 percent. But we already know how the story ends. So why not cut to the chase?
Why not start with the Tax Reform Act of 1986? It was a bipartisan bill, blessed by both sides. Sure, it would have to be spruced up for today’s cinema. All of the numbers – the personal exemptions, the earned-income credit, the tax bracket boundaries – would have to be updated. Its corporate tax rate – which in its day was virtually the lowest in the world – would have to be reconsidered. (If you want a head start on the updates, look at the 2012 Pete Domenici and Alice Rivlin Debt Reduction Task Force plan.)
We will not get tax reform moving today by trying to re-invent the wheel. Instead, let’s use Ronald Reagan’s plan, and win this one – again – for the Gipper. It worked before.