As Washington grapples with the budget, it might be worth asking a simple question: What would Ronald Reagan do?
He was the last president to preside over a significant tax reform, one
that did exactly what both candidates in this year’s presidential
election said they want to do: lower tax rates and close loopholes.
And a critical part of that reform was to end the historical system of
taxing capital gains at lower rates than ordinary income.In the name of fairness, the Tax Reform Act of 1986 raised the maximum
tax rate on long-term capital gains to 28% from 20% at the
same time it reduced the maximum rate on ordinary income to 28%
Doing that again in a tax reform act of 2013 would do more than raise
revenue and increase fairness. It would bring an abrupt end to the
“carried interest” tax dodge, in which managers in the private equity business are able to define their compensation as capital gains and
thus pay far lower income tax rates than do ordinary people with far
Ideally, there will be two tax reform efforts in the next 18 months.
The first, going on now, is a simple patch-up, aimed at dealing with the
pending increases in taxes brought on largely by the expiration of the
Bush “temporary” tax cuts. If the lame duck Congress and President Obama can avert disaster, raising some revenue while not devastating the economy, they will have succeeded.
But the next move should be aimed at comprehensive tax reform. The Obama
administration should look to President Reagan’s second term for
inspiration. The Reagan method included a comprehensive,
well-thought-out proposal that dealt with the myriad details that can
rise up to frustrate any efforts at change, put together painstakingly
by the Treasury Department.