Tax Reform's Moment?
Where else is the growth going to come from?
STEPHEN MOORE'Let's go with the radical approach." That's what then-Senate Finance Committee Chairman Bob Packwood exclaimed to his top tax aide during a legendary two-pitchers-of-beer lunch at Washington's Irish Times in the spring of 1986. They were trying to figure out how to save Ronald Reagan's dream of a sweeping tax overhaul that appeared dead in the Senate. That lunch changed history.
By going "radical," Mr. Packwood meant a wholesale restructuring of the tax system. His plan was to slash the 50% top tax rate to 28%—which was far lower than even the 35% rate Reagan had proposed—terminate all but the most sacred deductions, and go to war with the high-powered corporate lobbyists on K Street. And miracle of miracles, "radical" carried the day in one of the most improbable legislative victories in a generation. A majority of Republicans and Democrats in both houses voted for imposing the lowest tax rates since the 1920s. This was Congress at its very best.
Is it time for another 1986 moment? When I asked that question to the people who could make it happen, they were hardly encouraging. "No way. It won't happen," says Wisconsin Republican and House Budget Committee Chairman Paul Ryan. "There's not enough time and the debt rules would make us raise taxes," he points out. Other naysayers complained that the war between the two parties has made the atmosphere in Washington too poisonous.
But don't be so sure. What everyone inside and outside the Beltway wants to know, given the recent economic funk, is: Where will the growth come from? Certainly not from another round of failed Keynesian spending blowouts. The White House's lame call for an infrastructure bank this week is merely a stimulus redux, and Republicans have seen enough "shovel ready projects" to last two lifetimes. Nor will Republicans, in an era of $1.5 trillion deficits, get very far pitching pro-growth tax rate cuts, a la Reagan 1981, without major offsetting loophole closings. This omelet is going to require cracking some eggs.
Rep. Dan Rostenkowski (left) with Sen. Bob Packwood, June 1, 1986.
There are other reasons to think the stars might finally be aligning for another 1986 triumph. Last year the White House tax-reform commission headed by former Fed Chairman Paul Volcker denounced the corporate income tax structure and warned that the "growing gap between the U.S. corporate tax rate [39%, a combination of state average and federal rates] and the corporate tax rates of most other countries [25%] generates incentives for U.S. corporations to shift their income and operations to foreign locations." Treasury Secretary Tim Geithner was even more succinct when he said earlier this year: "Everybody who looks at the current system says we can do better than this." Amen.
Meanwhile, everyone seemed to miss the political breakthrough by the much-maligned bipartisan Gang of Six, which proposed to end tax loopholes and lower the top income tax rate to between 23% and 29%. For the first time since 1986 we have Democrats—even liberals like Dick Durbin of Illinois—endorsing lower tax rates and finally acknowledging that soaking the rich with confiscatory taxes is an economic loser. "We understand getting these rates down is an important economic goal," says Democrat Mark Warner of Virginia, another one of the six.
Mr. Warner is right on the economics. In the early 1990s, Dale Jorgenson, then-chair of Harvard's economics department, calculated $1 trillion of economy-wide efficiency gains from the 1986 tax reforms—and that was when a trillion was still a lot of money.
There's an old saying that when dollar bills are lying on the sidewalk, someone picks them up. The big question is whether Barack Obama has the good sense to do that on tax reform. It may save his presidency.
Junking the tax code is one of his last chances to pour growth hormones into a sickly economy and get jobs back before November 2012. For their part, Republicans could use a tax restructuring to tap the Laffer Curve growth effects of lower rates. There's no reason for the GOP to defend special-interest favors in the tax code doled out to the housing industry, nonprofits, the municipal bond sellers, and the green-energy lobby. The value of trading in all those undeserved favors for a 25% tax rate would be enormously positive, and by growing the economy, would lower the deficit.
I asked Jeffrey Birnbaum, the co-author of the indispensable book on the 1986 Tax Reform Act, "Showdown at Gucci Gulch," how good policy managed to triumph over the legions of special interests. "Tax reform was like a Phoenix," he explained. "Every time it seemed dead, someone pulled it out of the ashes." Could it happen again? "Well back then," he replied, "people in both parties understood the income tax was broken and unfair." How is that different from today?
Mr. Moore is a member of the Journal's editorial board.
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