Listen to Art Laffer discuss the 1986 Tax Reform and the prospects for reform now:
Former Senator Bill Bradley has an important and timely piece in the Sunday New York Times. As someone who was part of the 1986 Tax Reform Act, he has some good knowledge to share.
With seven respected committee members backing the bill, Bob Packwood cajoled, threatened and persuaded others on the committee to embrace it, outmaneuvering senators who wanted higher rates and real estate lobbyists eager to protect tax shelters. There were a few perilous moments. We came up short on revenue at one point, increasing the deficit in a supposedly revenue-neutral bill. Initially we missed our agreed income-distribution goals. But in the end, the bill passed committee 20 to 0; and then, after a big battle on I.R.A.s, it passed the Senate 97 to 3. That kind of vote really used to happen.
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The final bill chopped the top rate to 28 percent from 50 percent, closed nearly $100 billion a year in loopholes, taxed labor and capital at the same rate, and gave low-income Americans one of the biggest tax cuts of their lives. Most people got to save more of every dollar they earned, corporations were treated more equally, and the wealthy ended up paying a higher share of total income tax revenue because they’d benefited disproportionately from the loopholes we’d eliminated.
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Over the years, bill after bill has chipped away at the changes we made, and people today once again see unfairness everywhere in the code. Tax liability appears to be totally random. Loopholes cost over $1 trillion, and equal incomes don’t pay equal taxes. The question is the same as in 1986: Can our leaders put principle and country over politics and party, and work together for the common good?
Given the extreme polarization within and between the parties, the odds are against success. Legislating is a very human experience in which trust and mutual respect play critical roles. But 1986 proved that when both are present, big things can get done.
A. Barton Hinkle of the Richmond Times-Dispatch has some interesting things to say about tax cuts, he takes a swipe at the Laffer curve along the way, that mistake aside, he does make some valid points.
Most discussions of tax policy overlook a crucial initial condition: the ownership of the money before the government confiscates it. That is a moral consideration, or at least it ought to be. Pundits go on at great length debating whether the government can afford to let people keep a bit more of their own money. Very few ever ask whether the taxpayer can afford the high cost of government.
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Any discussion of tax policy ought to start with the recognition that taxation entails taking the earnings of some people for the benefit of others. We need some level of taxation; government can’t function without it. But the level should be kept as low as possible.
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This is, indeed, a question about greed. But not in the way it is normally framed. As George Mason University economics professor Donald Boudreaux once said, it’s an odd value set that considers “I want what’s mine” to be selfish and greedy but “I want what’s yours” to be selfless and noble.
Over the next two decades federal spending is set to soar from 20 percent of GDP to 28 percent, and much of that spending growth is on automatic pilot. Nobody ever asks how that spending is going to “pay for itself.” Given that taxes already cost Americans more than food, clothing, and shelter combined, maybe they should.
Larry Kudlow was a guest of John Catsimatidis on The Cat’s Rountable, here is the podcast.
But Laffer refuses to ascribe his theory to one party, recounting a conversation with his neighbor Al Gore a few weeks ago in which the former Democratic presidential nominee told him the best bill he voted for in economics was the 1986 tax cuts.
Laffer underscored other notable Democrats, including Joe Biden, Harry Reid and Barbara Boxer, who also added their names to the 97-3 roll call, claiming they did it because it was “the right thing to do.”
Laffer joined The Heritage Foundation’s tax expert Steve Moore Monday to resell the pertinence of his Reagan-era tax cuts during a Heritage panel discussing the need for tax reform.
“We are at a stage in our history where we need a low-rate, broad-based, flat tax,” Laffer said, repeating the mantra throughout his talk.
He began with a cost-benefit analysis, pointing to John F. Kennedy’s tax cuts in the 1960s, where the highest marginal income taxes were dropped from 91 to 70 percent and the lowest from 20 to 14 percent.
Under these cuts, those in the highest tax bracket could now keep 30 cents of every dollar they made versus the 9 cents they were able to keep prior to the tax cuts. Similarly, those in the lowest tax bracket could now keep 86 cents of every dollar versus the previous 80 cents.
This cut, Laffer continued, reaped the greatest cost-benefit ratio for those in the highest tax bracket, giving them a steeper incentive to work because they were able to keep more of what they worked for.
“The reason you cut tax rates on highest group is not because you love rich people … it’s because you get more bang for the buck,” he said.
☕ Jim Brown Jr. takes a look at the 1986 tax reform efforts in this column for Arkansas Business.
As a president who embraced supply-side economics, Reagan wanted lower marginal tax rates. He had pushed through previous tax reform efforts that had lowered rates, but as 1986 began, the top rate was still 50 percent. However, because of a variety of loopholes, many wealthy individuals and corporations paid little or no taxes. This tax avoidance infuriated some, who wanted to eliminate these tax breaks in the name of “tax fairness.”
President Reagan’s advisers put these two ideas together and came up with a plan that would eliminate many loopholes and use the resulting new revenue to lower tax rates. It would also remove many lower-income Americans from the tax rolls.
As the plan worked its way through Congress, both Democrats and Republicans changed it to preserve some loopholes. However, the final bill that emerged was a remarkable piece of legislation that, on the whole, embodied tax policy that promoted the common good instead of special interests.
In the years since the 1986 tax reform, many of its major provisions have been weakened or undone. Lobbyists have been busy in the past 28 years inserting more loopholes, deductions and credits to benefit their clients. Tax rates have also risen. Our code is far less pro-growth than it was in 1986. Few, if any, would claim that it treats all taxpayers fairly.