Ag Policy Blog

Tax Reform in 2017 Compared to How it Got Done in 1986

Chris Clayton
By  Chris Clayton , DTN Ag Policy Editor
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Tax reform isn't something easily done.

Long ago, a good four days it seems, the controversy of the moment within the Trump administration was discussion of a border tax.

The border tax debate stemmed from the White House executive order to build a wall along the southern border with Mexico. The wall and border adjustment tax seemed quite controversial before the executive orders on Friday that dominated news with a different set of complicated battles over politics and national values.

Getting back to the border adjustment tax, it is an issue that has floated to the surface in both Congress and the White House as a possible panacea to both deal with trade deficits and tax policy.

The border adjustment tax is one of those ideas that comes from shifting or reducing corporate income taxes. Congress wants to reduce that tax load on corporations, which account for about 12% of all federal taxes collected. In 2015, corporations accounted for just under $390 billion of more than $3.3 trillion in taxes collected, according to the IRS.

With no details in hand, House Speaker Paul Ryan, R-Wis., indicated last week that House Republicans not only want to deal with Obamacare, but also approve a new tax overhaul by the August recess. Ryan said his tax package would be "revenue neutral," meaning collections would neither increase nor decrease. The obligations of who exactly pays taxes would then shift from one group to another. After all, if you are going to reduce the tax load on corporate income taxes, then Ryan sees that revenue being made up somewhere.

As Politico quoted Ryan, tax reform simply means, "lower rates, broader base, upset lobbyists."

What's clear is that Congress sees a major opportunity for tax reform, going beyond changes in tax rates that were changed under the Bush administration.

Last summer Ryan's plan was to cut taxes for small business -- sole proprietorships, LLCs, S Corps and companies. There would be a 25% maximum rate for companies. Further, businesses would have "full and immediate write-offs for business investment."

Under Ryan's blueprint, taxpayers would get a 50% deduction on dividends, capital gains and interest from investments. Ryan's plan, however, doesn't detail how much the average person's income is from such investments compared to wages or ordinary income.

In a nod to farmers and small businesses, Ryan's plan would also eliminate the estate tax, a tax that generates about $20 billion a year in federal revenue.

However, for Ryan's goals to cut various business taxes, there are few other details on how the plan will become revenue neutral. The only major revenue generator being floated seriously is the border adjustment tax at 20% on trade deficits. Through the first 11 months of 2016, the trade deficit was pegged at $595 billion. If we tack on another average month, then the 2016 trade deficit was around $650 billion. If this border adjustment tax holds, then that would generate roughly $130 billion or so federal tax revenue. Then it becomes unclear how that revenue on imports would fluctuate over time.

Given that overall federal tax collections are just over $3.3 trillion each year, Ryan's overall plan would affect just about 4% of tax revenue, depending on rounding errors. It is unclear how much tax savings Ryan's other proposals would generate for businesses.

Ryan's proposals regarding individual taxes are not fully flushed out. Individual tax account for roughly $1.8 trillion in federal revenue.

So there doesn't seem to be a firm understanding of the final end product or the total value of taxes that will be impacted. Still, Ryan is ready to go full bore without a detailed proposal from the newly-minted Trump administration and it's unknown what Senate tax leaders would like to see done. It's simply a rush to move a plan without a real strategy on how to get it done or sell it to the skeptical.

There are various plans and ideas floating around Congress and the Trump administration to overhaul the Tax Code. This is what led to the pitch by Trump officials that Mexico would pay for the southern wall through a 20% border tax on the deficit in trade volume between the U.S. and Mexico. The White House then clarified that such a tax would be applied on imports from all countries in which the U.S. has a trade deficit. A border adjustment tax would then translate into a tax on importers, which then essentially translates into a consumption tax. It is then believed the other countries facing a new tax would be gracious and not apply a similar tax, or tariff, on U.S. goods.

Ryan's ambition isn't surprising, but he doesn't seem willing to take a page from history to accomplish his goals. There is a reason tax reform hasn't happened in three decades. A great deal of the problem stems from the increasingly fractured Congress and agendas that limits the ability to rally lawmakers and a president.

How hard is it to do tax reform? Well, it has been 31 years since a president and Congress were able to work in conjunction, across the aisles and across the congressional chambers to pass a major tax overhaul. The plan actually took three years to go from conception to law.

How did that happen?

The White House and Congress got together for a tax-reform overhaul was in 1985-86, after then-President Ronald Reagan's 1984 re-election.

In part, the Tax Reform Act of 1986 stemmed from reaction to tax cuts in 1981. Tax cuts in 1981 greatly benefited businesses and caused tax receipts to decline. There was also a growing complaint that taxes were unfair to individual taxpayers.

In his State of the Union speech in 1984, Reagan called for a detailed report from the Treasury Department on the U.S. tax system. That report was delivered just around the end of '84.

There were several major tax plans floating around from both Republicans and Democrats in Congress.

It should be noted regarding Reagan at the time that his approval ratings in 1985 were above 70% for much of the year. Reagan was basically at the peak of his popularity.

The Treasury report was well received, but one of its key features was an increase in corporate income taxes as a way to lower individual income-tax rates. President Reagan was concerned about the increase in corporate taxes, but his advisors indicated the only corporations likely impacted would be those that have gotten out of paying any income taxes. So Reagan agreed to go along with the plan.

Congress at the time sought a simpler, fairer system. Strong public belief at the time that some wealthy people and corporations were getting unfair breaks and the expense of middle class. Also sought to simplify taxes.

The 1985-86 Congress was split with Democrats controlling the House and Republicans controlling the Senate. Democrats held the House 253-182 while Republicans controlled the Senate 53-47.

Looking at tax reform, the House Ways & Means Committee held 30 days of hearings in February and March 1985 on the Tax Code. It was not an easy process to get the House to move ahead. In partisan fashion, Democrats didn't want to pass a bill that would essentially give credit to Reagan. Republican committee members felt slighted and did not want to work with Democrats.

In May 1985, President Reagan's administration submitted its tax proposal to Congress.

House Ways & Means leaders spent the summer crafting their plans. The Ways & Means Committee then spent 26 committee working days from October to December 1985 to mark up their bill that moved to the House floor in mid-December that year. The House passes its version of the bill 258-168. There were 188 Democrats and 70 Republicans that backed the bill.

Reagan and his team had to step in and encourage Republicans to vote for the bill. Reagan's team did so even though his own White House staff had indicated he would veto the Democratic version. Reagan, however, wanted the bill passed so it could move to the Senate where he could get a bill more to his liking.

On the Senate side, the Senate Finance Committee held 36 days of hearings from fall of '85 to spring of '86. In May of '86, the Senate Finance Committee marked up its bill.

The Senate then debated its bill on the floor nearly the entire month of June. Get this: the Senate version of the tax reform bill passed 97-3.

Conference negotiations between the House and Senate leaders went on throughout the summer. The conference report went to the House on Sept. 25, 1986 (That was six weeks before the mid-term congressional elections.) It passed 292-136 -- a strong bi-partisan vote.

A day later, the Senate passed the conference bill, 74-23.

President Reagan signed the tax reform bill into law on October 22.

The 1986 law, a compromise under any definition, actually raised capital gains rates from 20% to 28% while reducing the maximum ordinary income tax rates from 50% to 28%.

More details on tax reform in 1985-86 comes from this 1987 report.…

There are reasons no Congress and president have been able to pull off a comprehensive tax reform bill since the 1980s. Those old-timers knew how to plan and they also understood how to compromise.

Follow me on Twitter @ChrisClaytonDTN


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