30 Years after the Tax Reform Act: Still Aiming for a Better Tax System; the Transformative 1986 Legislation Was Necessary in Its Time, but Tax Reform Is Badly Needed Again to Simplify a Tax Code That Has Grown Too Complex and to Make the United States More Competitive Internationally

[ILLUSTRATION OMITTED] The last major reform of the federal income tax laws occurred 30 years ago with the Tax Reform Act (TRA) of 1986, P.L. 99-514, signed into law on Oct. 22,1986. The changes were so significant that Title 26 of the U.S. Code was renamed the Internal Revenue Code of 1986 (replacing the 1954 Code). The TRA was the product of a three-year collaborative effort by a Democratic House, a Republican Senate, and President Ronald Reagan, showing that bipartisan, major tax reform is possible. Soon after the TRA was enacted, changes were made, including ones that unraveled some of the simplification achieved through its base broadening and lowered tax rates. Since the mid-1990s, each decade has seen discussions of major tax reform. Yet, even though the tax code continues growing more complex and is becoming outdated due to changes in ways of living and doing business, no major change on the scale of the TRA has occurred. With so many suggestions for reform and criticisms of the current system, we believe this is likely to change in the next few years, though. In the meantime, the 30th anniversary of the TRA offers an opportunity to reflect on how the act came about, what remains today, and the lessons learned that might help with future reforms. REASONS FOR THE TRA There were two key reasons for enacting the TRA: 1. Sufficient bipartisan and public support for a reformed income tax that was simpler and more supportive of economic growth. 2. Desire for a system where all taxpayers pay their fair share. A starting point occurred in 1982 when Sen. Bill Bradley, D-N.J., proposed to reduce rates and remove many individual and corporate tax preferences. He spoke widely of this idea, published a book--The Fair Tax--and introduced the Fair Tax Act with Rep. Richard Gephardt, D-Mo. (see Bradley and Gephardt, Fixing the Income Tax With the Fair Tax, 3-1 Yale Law & Policy Review 41 (1984), and S. 2817 and H.R. 6944, Fair Tax Act of 1982 (97th Cong.)). The Fair Tax Act included significant base broadeners, such as repeal of the direct charitable contribution deduction, state tax deduction, and casualty and theft losses; limiting the deduction for interest expense to the amount of income; and inclusion in income of one-third of the cost of employer-provided health insurance. These legislators described their proposal as fairer, simpler, less economically distorting, and more conducive to employment and productive investment (Fixing the Income Tax With the Fair Tax, supra, page 41, available at tinyurl.com/zoymadr). Even though two Democrats were prominent in the debate, the ideas caught greater attention from Republicans than from Democrats, eventually leading Reagan to call for tax reform and a study by Treasury (Bill Bradley Led the Break on the Tax Reform Bill, The Philadelphia Inquirer (June 15, 1986), available at tinyurl.com/jxbf7jc). In his 1984 State of the address, Reagan said: Let us go forward with an historic reform for fairness, simplicity, and incentives for growth. I am asking Secretary [of the Treasury] Don Regan for a plan for action to simplify the entire tax code, so all taxpayers, big and small, are treated more fairly. And I believe such a plan could result in that underground economy being brought into the sunlight of honest tax compliance. And it could make the tax base broader, so personal tax rates could come down, not go up. I've asked that specific recommendations, consistent with those objectives, be presented to me by December 1984 (Address Before a Joint Session of Congress on the State of the Union (Jan. 25, 1984), available at tinyurl.com/jogmxx2). The second reason for supporting the TRA was widespread concern that large corporations and high-income individuals were not paying their fair share. The transmittal letter for Treasury's three-volume tax reform report released in November 1984 noted that public perception of the unfairness of the tax system undermines taxpayer morale (Treasury Dep't, Tax Reform for Fairness, Simplicity, and Economic Growth, Vol. …