BEYOND THE NUMBERS
Why 1986-Style Tax Reform Is Obsolete
The 1986 Tax Reform Act, which tax experts often laud, cut tax rates and broadened the tax base and, all else being equal, the “lower the rates and broaden the base” formula is economically sound. But all else is not equal today; the nation faces enormous long-term budget deficits that will require wrenching policy choices, and all parts of the budget — very much including revenues — must be on the table. Given our daunting long-term deficits, the single most important goal of tax reform should be to raise substantial revenue, in a progressive manner, as part of a balanced deficit reduction policy.
In 1986, tax reform was “revenue neutral” — it was designed to neither increase nor reduce revenues compared to the pre-reform tax code. That was fine in 1986 but, today, revenue neutrality would be harmful. Politically, policymakers have two major opportunities to secure a substantial revenue contribution to deficit reduction (which they should pair with spending cuts). First, the current tax-rate structure expires at the end of 2012 and the higher, Clinton-era tax rates are scheduled to return on January 1. Preventing the Bush tax rates from expiring will require action by policymakers, and this presents an opportunity they shouldn’t squander to construct a tax structure that generates significantly more revenue than a continuation of current policies. Second, policymakers can curb tax expenditures, which Harvard economist and former Reagan economic advisor Martin Feldstein has called “the best way to reduce government spending.”For more, see our papers on how tax reform could become a trap that leads to higher deficits and the tension between reducing tax rates and reducing deficits.