When Congress made taxes fairer

With President Donald Trump now talking about overhauling the tax code, it’s worth reflecting on the last time Congress revamped the system: the Tax Reform Act of 1986.

That bill’s success relied on a clear set of principles, a committed president, an effective Treasury secretary, bipartisan support and congressional committee chairmen willing to put their reputations on the line. Few of those pieces seem in place today, and the Trump administration hasn’t even begun to face the trade-offs necessary to cut rates without increasing the deficit or widening the gap between rich and poor. But perhaps the lessons of the past show a way forward.

After World War II, federal tax rates rose steadily, loopholes proliferated and the tax code grew more complex. By the 1980s, its unfairness was indisputable. Middle-class taxpayers shouldered the burden for the wealthy, who often paid little tax. Republicans liked lower rates, and Democrats wanted loopholes closed, but no one had put the two together. So how did we make that combination?

It took years of work. In 1983, Rep. Dick Gephardt, D-Mo., and I introduced a tax reform bill that cut rates and closed loopholes, one I outlined in a 1984 book, “The Fair Tax.” I tried to sell the idea to Walter Mondale, the Democratic presidential nominee, but he rejected it. President Ronald Reagan, however, worried that Mondale might embrace reform and seize the initiative on cutting tax rates, so he asked the Treasury Department to study the issue and report back after the election.

The department’s first study called for rate cuts and closing loopholes. The latter was predictably savaged by special interests. A subsequent, watered-down but still useful report offered a framework based on four principles: equity, so that equal incomes paid equal taxes; efficiency, to let the market allocate resources more freely; simplicity, to reduce loopholes; and fairness, to ensure that those who have more income pay more tax.

In 1985, Reagan met in the West Wing with a bipartisan group of senators – not unusual in those days. I jokingly told the president that he and I backed reform for different reasons: As an actor, he’d paid a marginal rate of 90 percent; as a professional basketball player, I’d been a depreciable asset. We all agreed that the system was broken.

The task of getting the president’s bill passed fell to Rep. Dan Rostenkowski, D-Ill., chairman of the House Ways and Means Committee, and Sen. Bob Packwood, R-Ore., chairman of the Senate Finance Committee. It was tough sledding in the House, where all revenue bills start. After failing to eliminate a tax break for banks, the bill stalled. But Rostenkowski persevered, and thanks to his clout and dealmaking, a bill limped to the Senate. It was far from what Reagan wanted, but he’d urged House Republicans to support it to “keep the process alive.”

Packwood held 33 days of hearings before rewriting the bill in committee. Things took a familiar route: Lobbyists swarmed the halls outside the hearing room, which the press called “Gucci Gulch.” Because the committee didn’t follow the Treasury Department’s four principles, there was no rationale to resist the lobbyists. So the business deduction for excise taxes, benefits for the timber industry, the capital gains exclusion and other loopholes went untouched, making it impossible to lower rates without increasing the deficit. An unnamed White House source called reform “moribund,” and Packwood abandoned the fight.

Then, over a beer with his chief of staff at the Irish Times pub, Packwood decided to give the bill-writing one more chance. But this time he decided to embrace Treasury’s principles and to do the work in private.

Packwood convened three Republican and three Democratic Finance Committee members in his office. He knew we had to act fast before the special interests got organized. We met every morning from 8 to 11 during one week and for 10 hours on Saturday. When we disagreed on what to do about a loophole or rate reduction, we’d vote. Sometimes the winning side had three Democrats and one Republican, sometimes three Republicans and one Democrat. Whatever the outcome, we supported the majority.

With seven respected committee members backing the bill, Packwood cajoled, threatened and persuaded others on the committee to embrace it, outmaneuvering senators who wanted higher rates and real estate lobbyists eager to protect tax shelters. There were a few perilous moments. We came up short on revenue at one point, increasing the deficit in a supposedly revenue-neutral bill. Initially we missed our agreed income-distribution goals. But in the end, the bill passed committee 20-0; and then, after a big battle on IRAs, it passed the Senate 97-3. That kind of vote really used to happen.

As a conference committee then negotiated differences between the House and Senate bills, Rostenkowski hovered large. Like Packwood, he wanted to show he was a chairman who could complete what Washington insiders said was impossible. He called in chits, delivering reluctant Democrats.

The final bill chopped the top rate to 28 percent from 50 percent, closed nearly $100 billion a year in loopholes, taxed labor and capital at the same rate, and gave low-income Americans one of the biggest tax cuts of their lives. Most people got to save more of every dollar they earned, corporations were treated more equally, and the wealthy ended up paying a higher share of total income tax revenue because they’d benefited disproportionately from the loopholes we’d eliminated.

Treasury Secretary Jim Baker’s role was critical, particularly on corporate tax changes. High-paying companies benefited from a rate cut to 34 percent, but those who lost loopholes and paid higher taxes – real estate, oil and gas, and some manufacturing industries – would appeal. Baker had to back up the “no” that they’d heard from Packwood and Rostenkowski. He knew that the president’s goal was lower rates and that giving up loopholes was the way to get them. A man of substance and political smarts, he knew, as they said in his home state of Texas, when to hold and when to fold.

Throughout, the press played a positive role. Its scrutiny was a bulwark against special interests. More important were the tireless staff members who knew the arcane details of tax policy and were savvy enough to understand the explosive political terrain.

In the end, the Tax Reform Act upheld the general interest over the special interests, showing that clear principles, legislative skill and persistence could change a fundamentally unfair system.

After it was over, the team gathered at the White House on a bright October afternoon as Reagan signed the bill. But Packwood and I were stuck by chance in Oregon campaigning – he for reelection and I for the Democratic candidate for governor – and fog made us miss our flight back to Washington. Yet, at Packwood’s suggestion, we did our own news conference. Bipartisanship then was something to be proud of.

Over the years, bill after bill has chipped away at the changes we made, and people today once again see unfairness everywhere in the code. Tax liability appears to be totally random. Loopholes cost more than $1 trillion, and equal incomes don’t pay equal taxes. The question is the same as in 1986: Can our leaders put principle and country over politics and party, and work together for the common good?

Given the extreme polarization within and between the parties, the odds are against success. Legislating is a very human experience in which trust and mutual respect play critical roles. But 1986 proved that when both are present, big things can get done.

Odds are against success this time around

Bill Bradley, a former Democratic senator from New Jersey, is a managing director at Allen & Co. and host of ‘American Voices’ on SiriusXM Radio.