Legacy lost: Ronald Reagan's tax simplification

To put it simply, our tax system is unfair, inequitable, counterproductive, and all but incomprehensible. I've mentioned before, and this is absolutely a fact, that even Albert Einstein had to write to the IRS for help with his Form 1040.
       — Ronald Reagan

Only with the passage of time do we begin to fully appreciate the full vision of President Ronald Reagan and the achievements that resulted from that vision. The most commonly cited  achievements of the Reagan dministration are ending the Cold War, rescuing the American economy from the doldrums of high inflation and high employment, and restoring America's image both at home and abroad.  Another remarkable, but rarely mentioned, contribution is the Tax Reform Act of 1986.  The tax reform legislation which became law contained many key concepts from Reagan's vision, even after going through the process of legislative compromise with an opposition majority in the House necessary to secure its passage.  Presidential leadership can overcome the seemingly insurmountable obstacles which are encountered when undertaking any major reform efforts.

The 1986 Act did what most observers thought was impossible: reduce the complexity of the federal tax code. Originally, discussions for reform of the tax code focused on a flat tax system. This system has one tax rate, irrespective of income, and only limited deductions.  However, going directly to a single—rate tax structure was not politically feasible, so a compromise emerged from Congress. 

Prior to this reform there were eleven income tax brackets with marginal rates ranging from 11% to 50%.  In addition, the code was filled with a myriad of deductions and shelters which motivated business and individuals to enter into arrangements not on their economic merits, but rather for the tax consequences. With the passage of the Act, the number of brackets was reduced to three with marginal rates of 15%, 28%, and 33%.  In addition, many deductions were eliminated, which reduced many of the economic distortions caused by the previous tax complexity.  The end result was a flatter and simpler tax structure. 

With the Act's passage, the United States had the lowest marginal tax rates of any major economy.  This reform extended the economic expansion brought on by the Reagan tax cuts of 1981 and was one of the foundations that fueled the 1990s boom. 

What is perhaps the most remarkable about this legislation is that it required Reagan and his supporters in Congress to confront nearly every powerful interest group, all of which thrived on their own special provisions in the tax code.  Not only did President Reagan have to overcome K Street objections and pressures, he had to forge an alliance with the Democratically—controlled House of Representatives —— and its Ways and Means Committee from which all tax bills must originate.  

While many played a role in passing this reform, it was the direct result of Reagan's vision and leadership.  Even before entering politics, Reagan spoke of the need to simplify the tax code and also campaigned on it in all of his Presidential bids.  Once the major initiatives of his first term, economic revitalization and confronting the Soviet Union were underway, he turned his attention to tax reform.  He campaigned on it in his 1984 reelection campaign and made it a high priority after handily winning reelection. 

In keeping with his leadership style, President Reagan left the details of implementing the vision to key aides, but provided leadership when necessary to break impasses which appeared to have stopped the reform initiative.  At times, the pundits thought that tax reform was dead. Yet through his personal efforts Reagan was able to keep it alive and get most of what he wanted.  When required, he would he would intervene and broker a deal behind closed doors.  However, he was most effective when he communicated his vision for a fairer and simpler tax code directly to the American people. President Reagan summarized the power of capturing the support of the American people at the bill's signing ceremony on October 22, 1986:

The journey's been long, and many said we'd never make it to the end. But as usual the pessimists left one thing out of their calculations: the American people. They haven't made this the freest country and the mightiest economic force on this planet by shrinking from challenges. They never gave up. And after almost three years of commitment and hard work, one headline in the Washington Post told the whole story: ``The Impossible Became the Inevitable,'' and the dream of America's fair—share tax plan became a reality.

Unfortunately, over time some of the gains from the Act were lost as more brackets were added during subsequent administrations and more complexity crept back into the code as focus shifted to other issues.  The marginal tax rates for the higher brackets have also increased.   Ironically, Russia, a country re—created due to the collapse of Reagan's Cold War nemesis, the Soviet Union, now has a flat tax system.

Today, tax simplification is back on the agenda.  President George W. Bush created a special bipartisan Commission which is charged with studying the alternatives and making recommendations by the end of the year.  As President Bush's tax and other initiatives such as Social Security move forward we should recall 'how the impossible became the inevitable' for Reagan's tax reform initiatives and draw the appropriate lessons for today.

First, Reagan used the bully pulpit of the Presidency to articulate a vision and offer reform proposals.  Second, he left it to the experts in his administration and to his allies in Congress to hammer out the details.  Third, when an impasse occurred he went behind closed doors to "reason together" (in Lyndon Johnson's immortal phrase), or, when necessary, went over the heads of Congress and gathered the support of the people.  Fourth, when a compromise was necessary Reagan was willing to horse trade, but not on items he considered vital to achieving his vision.  Reagan often stated that if he achieved most of what he wanted that was a victory and you could always come back for the rest later. 

Finally and most importantly, major reforms are achieved only when leaders boldly attack complex problems.  This often requires them to suffer a short term loss of political popularity.  In the end, history looks favorably on leaders who solve the difficult problems rather than those who pass them along. 

James A. Leggette is an economist and talk radio host. Michael W. Funk is an executive in the telecommunications industry. They are collaborating on a book on Ronald Reagan's economic legacy. Comments may directed to jim—wmox@netdoor.com

To put it simply, our tax system is unfair, inequitable, counterproductive, and all but incomprehensible. I've mentioned before, and this is absolutely a fact, that even Albert Einstein had to write to the IRS for help with his Form 1040.
       — Ronald Reagan

Only with the passage of time do we begin to fully appreciate the full vision of President Ronald Reagan and the achievements that resulted from that vision. The most commonly cited  achievements of the Reagan dministration are ending the Cold War, rescuing the American economy from the doldrums of high inflation and high employment, and restoring America's image both at home and abroad.  Another remarkable, but rarely mentioned, contribution is the Tax Reform Act of 1986.  The tax reform legislation which became law contained many key concepts from Reagan's vision, even after going through the process of legislative compromise with an opposition majority in the House necessary to secure its passage.  Presidential leadership can overcome the seemingly insurmountable obstacles which are encountered when undertaking any major reform efforts.

The 1986 Act did what most observers thought was impossible: reduce the complexity of the federal tax code. Originally, discussions for reform of the tax code focused on a flat tax system. This system has one tax rate, irrespective of income, and only limited deductions.  However, going directly to a single—rate tax structure was not politically feasible, so a compromise emerged from Congress. 

Prior to this reform there were eleven income tax brackets with marginal rates ranging from 11% to 50%.  In addition, the code was filled with a myriad of deductions and shelters which motivated business and individuals to enter into arrangements not on their economic merits, but rather for the tax consequences. With the passage of the Act, the number of brackets was reduced to three with marginal rates of 15%, 28%, and 33%.  In addition, many deductions were eliminated, which reduced many of the economic distortions caused by the previous tax complexity.  The end result was a flatter and simpler tax structure. 

With the Act's passage, the United States had the lowest marginal tax rates of any major economy.  This reform extended the economic expansion brought on by the Reagan tax cuts of 1981 and was one of the foundations that fueled the 1990s boom. 

What is perhaps the most remarkable about this legislation is that it required Reagan and his supporters in Congress to confront nearly every powerful interest group, all of which thrived on their own special provisions in the tax code.  Not only did President Reagan have to overcome K Street objections and pressures, he had to forge an alliance with the Democratically—controlled House of Representatives —— and its Ways and Means Committee from which all tax bills must originate.  

While many played a role in passing this reform, it was the direct result of Reagan's vision and leadership.  Even before entering politics, Reagan spoke of the need to simplify the tax code and also campaigned on it in all of his Presidential bids.  Once the major initiatives of his first term, economic revitalization and confronting the Soviet Union were underway, he turned his attention to tax reform.  He campaigned on it in his 1984 reelection campaign and made it a high priority after handily winning reelection. 

In keeping with his leadership style, President Reagan left the details of implementing the vision to key aides, but provided leadership when necessary to break impasses which appeared to have stopped the reform initiative.  At times, the pundits thought that tax reform was dead. Yet through his personal efforts Reagan was able to keep it alive and get most of what he wanted.  When required, he would he would intervene and broker a deal behind closed doors.  However, he was most effective when he communicated his vision for a fairer and simpler tax code directly to the American people. President Reagan summarized the power of capturing the support of the American people at the bill's signing ceremony on October 22, 1986:

The journey's been long, and many said we'd never make it to the end. But as usual the pessimists left one thing out of their calculations: the American people. They haven't made this the freest country and the mightiest economic force on this planet by shrinking from challenges. They never gave up. And after almost three years of commitment and hard work, one headline in the Washington Post told the whole story: ``The Impossible Became the Inevitable,'' and the dream of America's fair—share tax plan became a reality.

Unfortunately, over time some of the gains from the Act were lost as more brackets were added during subsequent administrations and more complexity crept back into the code as focus shifted to other issues.  The marginal tax rates for the higher brackets have also increased.   Ironically, Russia, a country re—created due to the collapse of Reagan's Cold War nemesis, the Soviet Union, now has a flat tax system.

Today, tax simplification is back on the agenda.  President George W. Bush created a special bipartisan Commission which is charged with studying the alternatives and making recommendations by the end of the year.  As President Bush's tax and other initiatives such as Social Security move forward we should recall 'how the impossible became the inevitable' for Reagan's tax reform initiatives and draw the appropriate lessons for today.

First, Reagan used the bully pulpit of the Presidency to articulate a vision and offer reform proposals.  Second, he left it to the experts in his administration and to his allies in Congress to hammer out the details.  Third, when an impasse occurred he went behind closed doors to "reason together" (in Lyndon Johnson's immortal phrase), or, when necessary, went over the heads of Congress and gathered the support of the people.  Fourth, when a compromise was necessary Reagan was willing to horse trade, but not on items he considered vital to achieving his vision.  Reagan often stated that if he achieved most of what he wanted that was a victory and you could always come back for the rest later. 

Finally and most importantly, major reforms are achieved only when leaders boldly attack complex problems.  This often requires them to suffer a short term loss of political popularity.  In the end, history looks favorably on leaders who solve the difficult problems rather than those who pass them along. 

James A. Leggette is an economist and talk radio host. Michael W. Funk is an executive in the telecommunications industry. They are collaborating on a book on Ronald Reagan's economic legacy. Comments may directed to jim—wmox@netdoor.com