Reagan was wise enough to make his tax reform revenue neutral and distributionally neutral.
Photograph by David Hume Kennerly — Getty Images

Donald Trump can learn from Ronald Reagan on Tax Reform

By Alan Murray
December 21, 2016

Good morning.

The Dow stands on the brink of 20,000, driven in part by optimism of a major tax reform bill getting through Congress next year. While the odds of that are the best they’ve been in many years, it’s still far from a sure thing.

I cut my teeth as a Washington reporter covering the Tax Reform Act of 1986, which is now being held up as the model for the GOP tax bill of 2017. It was guided from the beginning by two fundamental principles – it was to be revenue neutral, meaning it would raise as much revenue as the existing tax system; and it was to be distributionally neutral, meaning it would not shift the burden of taxation among income groups.

Trump’s campaign plan meets neither of those goals – its tax cuts would increase the budget deficit and they would cut taxes more deeply for high-income Americans. But campaign plans are always more symbolism than reality. Given the nation’s growing federal debt burden (about to be exacerbated by rising interest rates) and the yawning class divide revealed by this year’s election, Republicans would be wise to adopt both of Ronald Reagan’s 1986 guidelines as starting points.

But that’s where the going gets tough. Cutting taxes is easy – politicians from both parties are happy to do it. Paying for tax cuts is hard. In a revenue neutral bill, there will both winners and losers. And it’s the nature of politics that losers make more noise than the winners. That’s already started, with retailers howling about a proposed border adjustment that penalizes imports, and realtors and bankers gearing up to fight any reductions in the mortgage interest deduction. It’s going to be a very good year for Washington lobbyists.

Jeff Birnbaum and I wrote the story of the 1986 bill in Showdown at Gucci Gulch; Lawmakers, Lobbyists and the Unlikely Triumph of Tax Reform. (Still in print, here.) The word “unlikely” was carefully chosen, for the reason mentioned above. Tax reform overcame the odds in 2016 in part because of an unusual set of personalities and circumstances, and in part because of a very dedicated group of largely non-partisan tax experts in government who trusted each other and were determined to do something in the public interest. Today, such non-partisan players are increasingly in short supply, and trust is hard to come by.

That’s not to say broad-based tax reform can’t happen in 2017. It’s just to say the odds are a still good bit longer than the market’s euphoria seems to suggest.

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