House Speaker Paul D. Ryan (R-Wis.) recently took to Twitter to make the case for tax reform. Posting a meme that featured an image of the 1980s group the Bangles next to one of singer Taylor Swift, Ryan noted, “America’s music tastes have changed since 1986, but our tax code hasn’t. It’s time.”
But reforming the tax code isn’t as easy as swapping Bangles albums for Taylor Swift tracks. Although conventional wisdom assumes that tax reform should be easy for the GOP — after all, it has been the party’s raison d’etre for decades, and Republicans are desperate for a win after stumbling badly over health-care reform — history tells us that real tax reform is difficult and rare. Despite the enthusiasm of many Republicans for the idea, few of the forces that made tax reform possible in the past are evident today.
One major missing piece: grass-roots activism for reform. The 16th Amendment, which gave Congress the power to “lay and collect taxes on incomes,” was the result of a grass-roots campaign to challenge the political and economic power of the Gilded Age elite. These original populists demanded a progressive income tax to replace a revenue system reliant on tariffs and consumption taxes. Only after more than 20 years of agitation by ordinary men and women did the states ratify the 16th Amendment, in 1913.
Likewise, it was a grass-roots revolt that helped to put reform back on the agenda in the late 1960s. For much of the post-World War II period, taxes had not been a particularly important political issue. Indeed, when the Kennedy administration wanted to cut taxes in 1963, it had to lobby the public for support. All this changed by the end of the decade.
In January 1969, just days before Richard M. Nixon took the presidential oath of office, officials in Lyndon B. Johnson’s Treasury Department released a report listing about 200 wealthy people who had “used loopholes in the tax code to reduce, or even eliminate, their federal taxes.” Already angered by the 10 percent Vietnam War income tax surcharge passed the summer before, taxpayers demanded that Congress and the White House reduce taxes on ordinary Americans and repeal the tax privileges of the rich. In response, Congress passed, and Nixon signed, a broad tax reform package that eliminated or curtailed more than 75 tax breaks employed by the wealthy or corporations, and passed significant tax savings on to the lower-income brackets.
Another missing piece? Bipartisanship. This grass-roots tax revolt intersected with amenable political calculations by both major parties. By the end of the 1960s, with the “New Deal coalition” looking increasingly shaky, both Democrats and Republicans turned to tax politics to appeal to what Nixon called the “Forgotten Americans” in the white working and middle classes.
Democratic liberals initially looked well positioned to use the issue of tax fairness to bring white working- and middle-class voters back into the Democratic fold. Nixon signed off on tax reform only after his advisers convinced him that a veto would alienate “such potent groups as the aged as well as a fair portion of the great ‘Silent Majority.’ ”
But if Democrats won the battle over tax reform in 1969, they lost the war over taxes by the middle of the next decade. Economic insecurity increased, and the GOP abandoned its commitment to balanced budgets. Pinning its hopes on the magic of supply-side economics, the GOP became the tax-cut party.
The GOP’s switch to the politics of tax cuts was perfectly timed. The early 1970s saw a flowering of grass-roots tax resistance movements on the left and the right. Union leaders, civil rights activists and welfare rights organizers initially attacked a tax code “rigged” in favor of corporate “pickpockets” and wealthy “tax millionaires.”
By the mid-1970s, however, in the face of slowing economic growth and a rising cost of living, earlier demands for tax justice gave way to strident calls for plain old tax cuts of any sort.
The tax politics of the 1970s laid the groundwork for the Tax Reform Act of 1986. Heralded at the time as a “Second American Revolution,” the law has since become the model for tax reform, but it also reveals the flaw at the heart of the GOP’s tax-cut logic. The idea for the bill began in Ronald Reagan’s White House as a way to protect the rate cuts made by the 1981 Economic Recovery and Tax Act and reaffirm the president’s commitment to “radically change the structure” of the U.S. tax system.
Promises that those rate cuts would spur economic growth and swell the federal coffers had not materialized. Instead, the cuts, in combination with massive defense spending, had produced unprecedented budget deficits and spiraling debt. Indeed, although Reagan reveled in his reputation as “tax-cutter in chief,” he actually signed income tax increases in 1982 and 1984 — even if he wouldn’t admit it.
The 1986 Tax Reform balanced revenue-raising reforms with revenue-losing rate reductions. The White House hoped this would satisfy those demanding further rate increases to address the deficit crisis. They were right.
Democrats accepted the deal, getting “base-broadening” reforms that closed loopholes, a capital-gains tax increase and increases to both the standard deduction and the personal exemption. In return, the GOP slashed the top marginal rate from 50 percent to 28 percent, and reduced the corporate tax rate from 48 percent to 34 percent. The final bill passed the Democratic-controlled House by a vote of 292 to 136 and the Republican-controlled Senate by a similarly lopsided margin of 74 to 23.
The GOP has pitched its tax reform plan as the direct descendant of the 1986 bill. But none of the factors that made that bill possible — a popular second-term president, divided government, bipartisan cooperation and a genuine concern about deficits — exists today. Nor is there the kind of grass-roots organizing around tax politics that helped produce the 16th Amendment or the 1969 tax bill. In fact, last month, only 2 percent of Americans listed “taxes” as the most important issue facing the country.
Democrats should be wary of signing on to any tax reform bill, even one that promises progressive reforms in return for reductions in the corporate and individual tax rates. Lower tax rates, not the proliferation of loopholes, explain why the rich are less taxed today than in the past.
What’s more, closed loopholes tend to open up after the spotlight dims and special interests have a chance to weigh in. Almost as soon as Reagan signed the 1986 law, lobbyists began a campaign to roll back the changes in a new “technical corrections” bill. Once lowered, however, rates are more difficult to increase.
Moreover, any reform that busts the budget and leads to increased deficits will compound Democrats’ political problems. The often-unnoticed corollary of the GOP’s transformation into the tax-cut party has been the Democrats’ transformation into budget scolds. Should the GOP tax plan lead to increased debt and deficits — which history suggests it will — Democrats will be forced once again into a defense of budget discipline, and given the unhappy and unpopular task of championing unpleasant spending cuts and tax increases.
In 1976, Wall Street Journal columnist Jude Wanniski encouraged Republicans to become the “Santa Claus” of tax reduction. “Hypnotized by the prospect of an imbalanced budget,” Wanniski wrote, Republicans had been forced into the “role of Scrooge.”
Wanniski was right, at least on the politics. The GOP’s transformation into the tax-cut party changed the rules of the game, and put Democrats on the defensive. To win back the party’s reputational advantage on the economy, the Democrats would be wise to stop playing the GOP’s game.