Paul L. Caron

Thursday, May 3, 2012

Fiscal Times: Reagan's Tax Reform Roadmap Won't Work Now

The Fiscal Times, Why Reagan's Tax Reform Roadmap Won't Work Now:

As politicians and business leaders sound the battle cry to make over the loophole-ridden U.S. tax code, they often point wistfully to the Reagan as the perfect road map. The Tax Reform Act of 1986 achieved many of the goals now being espoused by Republicans and Democrats: It greatly simplified the income tax code, broadened the tax base and eliminated many tax shelters and preferences.

The measure was made “revenue neutral” by decreasing individual tax rates and eliminating $30 billion a year in loopholes while increasing corporate taxes. Many of the brackets were consolidated, and the top tax rate was lowered from 50% to 28%. ...

Regardless of the timing, all sides agree a major rewriting of the tax code will call for painful tradeoffs, and likely will require heavy lifting well beyond what the Reagan White House and a politically divided Congress did 26 years ago. ... Today, Democrats and Republicans are sorely divided over whether a tax overhaul should raise revenue at all to help pay down the nation’s $1.3 trillion deficit. They also are embroiled in a vitriolic debate over the merits of raising taxes on the rich. ...

"The 1986 Act is often described as the gold standard in tax reform, but the world is a fundamentally different place than in 1986,”said Ed Kleinbard, a tax law professor at USC and former chief of staff at the non-partisan Joint Committee on Taxation.” We need more revenues than the 2012 tax rules would generate if extended.” ... Tax experts, including Kleinbard, say the 1986 tactic of shifting tax burdens from individuals to corporations is simply not feasible today.  That’s because in 1986 the threat of U.S. businesses moving intellectual property abroad to avoid U.S. taxes was virtually nonexistent due to stricter barriers to international investment and the fact that U.S. corporate tax rates were consistent with other developed nations.  Today, capital is much more mobile, and other developed nations like Canada, the United Kingdom and Japan have lowered their statutory corporate tax rates with the expectation that doing so would attract foreign companies to shift their profits to their jurisdiction.

The top federal corporate tax rate in the U.S. is 35%, compared to an average rate of 25.4% in 2012 for the 34 developed countries included in the Organization for Economic Cooperation and Development. “So any tax change that would make it more costly or any less advantageous for U.S. businesses to operate domestically—that becomes a real question of competition,” said Joseph Minarik, a former economist for the House Budget Committee and Office of Management and Budget. 

As for the surge in U.S. companies shifting income to lower tax jurisdictions overseas: “This issue was simply nowhere near as important in 1986 before all of these elaborate tax avoidance structures developed,” said H. David Rosenbloom, director of the International Tax Program at New York University School of Law.

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The question should not be is a tax formula based upon Reagan's 1986 tax reform right for today. Given unimaginable problems created by government and banks, the question should be what would Reagan, with his insights into government and human nature and his core values, do today if he were President. Well, it wouldn't be what we've seen from "today's experts."

FDR's "tax reform roadmap" was a disaster even when FDR was President and wouldn't work today, either. That's where "scholarly" papers should focus, because our President is trying to copy FDR, except going even further to the left.

As a taxpayer interested in tax reform discussions, I say to government don't come to me wanting more money until you do something about that spending problem of yours.

Posted by: Woody | May 3, 2012 6:47:12 AM

Oh, in the question above, I left out Reagan's leadership, a quality clearly lacking by our current President. It's too bad that tax papers don't reflect that factor within the framework of passing tax reform.

Posted by: Woody | May 3, 2012 6:54:31 AM