Historic Tax Code Changes Eroded in Years Since 1986

Budget deficits have been its greatest enemy. To stanch red ink, a succession of presidents has led the way for increases in federal revenues. In 1990, under President George H.W. Bush, and again in 1993, under President Bill Clinton, taxes were raised and the code was again complicated with tax preferences given to favored interests.

Clinton in particular encouraged a resurgence of social engineering through the tax code, which was exactly what Reagan's tax reform had hoped to end. During the Clinton administration, dozens of savings and education incentives were inserted into the law. In addition, tax rates have inched upward over the years, which in turn put pressure on Congress to draft even more tax breaks to protect vulnerable or politically potent groups.

By the end of the Clinton years, Congress had shoehorned many new breaks back into the system and rates for individuals hovered near 40 percent. The effective tax rate for some Americans was even higher than that, because of the phase-out of certain tax benefits.

In the past three years, President Bush has returned to at least part of the Reagan legacy -- the Republican-led portion -- by starting again to cut tax rates. Like Reagan, Bush is a firm advocate of rate cuts as a way to stimulate economic growth. He lobbied Congress hard to make the change.

Today, mostly because of Bush's prodding, tax rates are lower than during the Clinton administration, but not as low as during the Reagan administration. The top nominal income tax rate for individuals is 35 percent and the number of brackets is six. Corporate tax rates are now higher than at the end of the 1980s.

Some of Reagan's reforms remain pretty much intact. For example, millions of Americans with low and moderate incomes still do not have to pay income taxes. And not all of the loopholes that were closed in 1986 have been reopened on either the individual or corporate sides of the ledger.

But the overall direction of the debate and of pending legislation is going against the spirit of the 1986 act. Almost no decision-makers talk about eliminating tax breaks anymore, except for the most egregious, tax-sheltering kind. Instead, lawmakers and the president routinely recommend new tax benefits for one sector or another. And with federal budget deficits soaring, Democrats have long pressed for an increase in taxes for upper income people. In fact, the Democrats' presumptive presidential nominee, Sen. John F. Kerry, is running on that proposal.

Lawmakers are considering various pieces of legislation that would insert tax breaks into the code. One bill high on the agenda of the Republican-controlled Congress would establish a new manufacturers' tax credit to replace a foreign-tax subsidy declared illegal by the European Union. That credit is reminiscent of the investment tax credit that the 1986 law eliminated. Lawmakers are also eager to skin back the minimum tax, which is gradually pulling into its net a growing number of upper middle-income families as well as millionaires.

After years of being dormant, tax-sheltering has also come back into vogue, though largely among corporations. "There has been retreat from the Reagan tax reforms," concludes C. Eugene Steuerle, a scholar at the Urban Institute and a former Reagan treasury official. "The world has moved on."