Tax reform lessons from 1986

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In 1986, President Reagan worked with Congressional Democrats and Republicans to pass tax reform that resulted in a revitalized economy and laid the groundwork for one of the longest and widespread economic booms in U.S. history. The idea was simple, and yet profound: lower the corporate tax rate and broaden the base. Yes, some special interests were hurt, but the public interest was served, leaders of both parties put the interests of the country first. And the results spoke for themselves. The stock market went up, and unemployment fell quickly over the subsequent two years.

Today, the United States has the highest corporate tax rate in the world and in a time of sputtering economic growth, the U.S. economy needs a genuine and long-lasting boost. We need to make America the best county in the world in which to do business. That’s the true path to economic growth and job creation.  

And just like in 1986, when diverse groups came together in support of pro-growth reform, we again have an opportunity for economic growth, through corporate tax reform.

Even though power in Washington was divided then as it is now, 1986 was a marquee year for tax reform. Back then, Republicans controlled the White House and the Senate, and Democrats controlled the House. Neither party was in a position to dictate the terms, and any legislation passed was, by definition, a compromise. The result was the Tax Reform Act of 1986, signed into law by President Reagan on October 22, 1986.

Today, power is again divided, and if they want to get something done, the two parties must work together.

In 1986, both parties had differing economic philosophies to guide them as they thought about tax reform and though their theories went by different names, they were similar in their real-world application: lower rates, broader base.

Same as today. Both parties generally accept the idea that lower rates and a broader base are a good idea. Why? Because of international competition. At a time when concerns about slow growth and job-loss are running high, the realities of offshoring and outsourcing are a serious concern and the tax numbers show policymakers are right to be concerned. In 1986, the average of the corporate income tax rate for the Organization of Economic Cooperation and Development (OECD) countries was 50 percent. Today, it’s 25 percent for those countries--it has fallen in half. Meanwhile, the U.S. rate, which fell from 46 percent to 34 percent as a result of tax reform in 1986, is now stuck at 35 percent. In other words, U.S. companies pay a tax rate at least 10 points higher than their international competitors. Further, since 2000, the number of the world’s 500 largest corporations in the United States has fallen from 179 to 133, a decline of 26 percent.

In 1986, proposals for a lower tax rate and a broader base had become part of the intellectual landscape. The successful 1986 Tax Reform Act owed much to earlier plans that had advanced many of the same ideas.

Same as today. Over the last several years, a number of economic plans have included the idea of a lower corporate tax rate and a broader base. These plans include the “Gang of Six,” the Rivlin-Domenici plan, and the Bowles-Simpson plan.

In 1986, amidst concerns about “gridlock,” both parties wanted to show that they could govern effectively. So Republicans and Democrats came together to show two parties could govern together. How? The only way possible, by actually getting tax reform done.

Same as today. Effective governance means the same today, getting things done. At a time when Americans are skeptical of Washington, it behooves leaders across the government to show, once again, that they can solve problems and achieve these important goals.

When it comes to corporate taxes, it is time to party like 1986. Momentum for meaningful corporate tax reform continues to build and despite the partisan divide, the political climate is right to enact meaningful reform to grow the economy and once again make America the most business-friendly country in the world.
 
Kamarck, advisor to President Bill Clinton and Vice President Al Gore, and Pinkerton, a White House domestic policy adviser to Presidents Ronald Reagan and George H.W. Bush, are co-chairs of The RATE Coalition, a bipartisan group advocating for corporate tax simplification and rate reduction.