President Reagan signed the Tax Reform Act of 1986 28 years ago today. In hindsight, the tax law that resulted seems like a beacon of simplicity, with its 28% top rates and its lack of a capital gain differential.
Looking hard at the 1986 Act, we can see some warning signs. It enacted a temporary research credit, setting the stage for the semi-annual parade of expiring provisions. It included the current alternative minimum tax, which adds huge complexity to individual compliance. It had some benefits that phased out based on income, such as passive losses for active renters and for some IRA contributors. But at the time those could be seen as flaws to be fixed. Instead, they were weeds that would be cultivated.
I count 47 “major” post-tax reform tax laws in the Tax Policy Center list. Every one of them has done its part to undo tax reform. Most of them are represented on my souvenir bookshelf, which has tax law summaries going back to 1984. The left half of the top shelf takes us from 1984 through the 1986 reforms. The rest of it is tax reform’s undoing.
While each law did its little damage to the tax law, I look at President Bush’s signing of the 1990 Omnibus Budget Reconciliation Act as the moment when things really began to unravel. OBRA increased in the top rate to 31%, uncoupled the capital gain rate from the ordinary income rate, and enacted the foul phaseouts of itemized deductions and the standard deduction that dishonestly increased the top effective rate over the top stated rate.
Three Presidents and dozens of bills later, we have individual rates over 40%, considering phaseouts and the Obamacare surtaxes. We have dozens of regularly expiring provisions that require lobbyists to pay homage to the taxwriters every year or two. We have unprecedented complexity that forces even smart taxpayers with simple financial lives to pay to get their returns done. And we have land mines all over the tax law, including foreign reporting provisions that can impose $10,000 penalties on taxpayers who have paid all of their taxes.
It’s all a depressing story. Still, 1986 did happen. Top rates came down from 50% to 28%. The base was broadened and rates reduced. It happened once, so maybe it can happen again.
The internet ate my first shot at this post, so just a very quick roundup today.
Tony Nitti, IRS Sheds Light On The Use Of The Recurring Item Exception
Mitch Maahs, IRS Revises Offshore Voluntary Compliance Programs (Davis Brown Tax Law Blog)
Kay Bell, NY tax scammers copying fake IRS tax call template
Peter Reilly, IRS Collection Action Can Be Delayed For A Long Time
TaxProf, The IRS Scandal, Day 531
David Brunori, Tax Ballot Predictions (Tax Analysts Blog)
Tracy Gordon, Bertha and the French Professor: Lessons for Public Private Partnerships (TaxVox)
Richard Borean, Tax Foundation Awards for Outstanding Achievement in State Tax Reform in 2014 (Tax Policy Blog). No Iowans — no surprise.
