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February 2, 2017
Tax History: Can Trump Be the New Reagan for Tax Reform?
Joseph J. Thorndike

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We hear it so often that it's become a truism: Tax reform is hard. In fact, the observation is so banal that it wouldn't bear repeating were it not for the misplaced optimism that surrounds tax reform during these early, post-gridlock days of the Trump administration.

But tax reform is still hard, as all the sniping about the House "Better Way" blueprint makes clear. As my colleague Mindy Herzfeld noted last week, moving a bill from inception to legislation will take a rare alignment of the stars this year -- just like it did in 1986. And so far, at least one star is missing from the constellation: vigorous presidential leadership.

Now to be fair, these are early days, and the Trump administration has a lot on its plate. But Republicans made many promises about tax reform during the campaign, including a pledge to enact it quickly. More recently, GOP leaders have warned of a slower pace; originally slated for introduction during President Trump's first 100 days, tax reform seems more likely to find a spot in the first 200. Maybe.

Even that more realistic goal will require heavy engagement from Trump, which we have not seen yet. Trump has paid lip service to tax reform, both during the campaign and since his inauguration. But he has been consistently -- and possibly deliberately -- vague about his specific priorities.

All of that has left reporters reading the tea leaves, parsing every presidential statement to see how it fits with known facts about GOP reform, including the House blueprint. That's made for a fair amount of wish reporting, with analysts trying to draw connections where none is readily apparent.

Case in point: the tortured analysis of Trump's support for a border tax and its possible relationship with the border-adjustable tax floated by the House. In mid-January, Trump voiced strong -- and fairly definitive -- reservations about the House plan. But that didn't stop reporters from jumping on his more recent border tax comments, and those of his press secretary, Sean Spicer, as a sign of compromise.

More likely, it was a sign of indecision -- or indifference. If there's one obvious characteristic of the Trump position on tax reform, it's lack of serious engagement on the details.

And yet serious engagement is vital if the blueprint, or any other reform agenda, is to become a legislative reality. That's the lesson of 1986.

Reagan on Reduction

Ronald Reagan came to the White House with a clear position on tax reform, defined chiefly as tax reduction. Indeed, his unhappiness with federal tax policy played a crucial role in his famous conversion from Democrat to Republican. Trump has made a similar partisan switch, but there's scant evidence that taxes had much to do with it.

In their coauthored history of Reagan-era tax policy, W. Elliot Brownlee and C. Eugene Steuerle describe "the Speech" that Reagan gave hundreds of times during his rise to power. As a new star of the Republican right, Reagan honed a message of complaint and conviction. "We stand between the taxpayer and the taxspender," he said. Only sweeping tax cuts could protect America from the statist menace of the New Deal order.

As he campaigned for the White House in 1980, Reagan put taxes at the center of his appeal. In many respects, his plans for tax revision were a model of traditional, elite-driven GOP tax reform. In particular, they made plenty of room for lower taxes on capital income.

But Reagan's commitment to tax reform also featured a vital "populist dimension," according to Brownlee and Steuerle. His promise to cut rates dramatically and quickly would provide a windfall to the wealthy, but it also offered real and tangible benefits for middle-income and working-class Americans. Indeed, Reagan was more committed to these rate reductions than to any other element of his campaign tax plan, chiefly because he believed they would help a broad swath of the taxpaying public.

Once in office, Reagan remained a tribune of populist tax reform. When advisers urged him to accept a variety of pro-business reforms, he agreed -- but only on the condition that his sweeping rate cuts would remain central to the plan. By reducing rates but leaving graduated brackets in place, Reagan was signaling his intention to help middle-income Americans while still expecting greater sacrifice from the nation's most fortunate. "Reagan had turned out to be the most extreme populist in the room," Brownlee and Steuerle write.

Reagan's commitment to tax relief for those in the middle brackets of the income spectrum was central to his electoral appeal, in both 1980 and 1984, and it shaped his earliest -- and arguably most important -- tax reform, the Economic Recovery Tax Act of 1981. Absent the president's commitment to progressive reform, that law would probably have delivered an even larger share of its total benefits to businesses and wealthy individuals.

Reagan on Reform

Reagan was not a fan of base-broadening tax reform, at least initially. Like many conservatives, he viewed tax preferences as legitimate -- and any effort to eliminate them as a money grab by lawmakers. Brownlee and Steuerle relate a classic observation penned by Reagan himself: "The truth is that most of what our politicians call loopholes are the legit. [sic] deductions the working people depend on to keep their inc. [sic] tax from being more intolerable than it is." In Reagan's view, without tax preferences, the statist beast would grow even stronger.

But Reagan warmed to base-broadening over time, especially when deficit worries pushed him to acknowledge the need for additional revenue. By the mid-1980s, he was more or less a convert, having been convinced by fairness and efficiency arguments that tax preferences had to be scaled back.

Reagan was intermittently engaged in shaping the details of his administration's plan for tax reform. But even more importantly, he empowered subordinates to get serious -- and specific -- about the administration's agenda. Reagan's support for Treasury tax experts helped make them pivotal players in the legislative process that eventually produced the Tax Reform Act of 1986.

Moreover, Reagan expended personal political capital to make tax reform a reality. At various points, he encouraged, prodded, and warned reluctant lawmakers, helping them navigate the circuitous route to reform. His backroom pressure was critical at key points.

One of Reagan's most important contributions to tax reform, however, was public. In a televised address on May 28, 1985, he laid out the case for sweeping reform. His comments were both general and specific, resonant with broad ideals and rooted in particular provisions of the incipient legislation.

Reagan's soaring rhetoric was impressive. "This, then, is our plan," he declared. "America's tax plan, a revolutionary first for fairness in our future, a long overdue commitment to help working Americans and their families, and a challenge to our entire nation to excel -- a challenge to give the U.S.A. the lowest overall marginal rates of taxation of any major industrial democracy, and yes, a challenge to lift us into a future of unlimited promise, an endless horizon lit by the star of freedom, guiding America to supremacy in jobs, productivity, growth, and human progress."

But Reagan offered more than rhetoric. He also engaged tax reform in terms of its specifics. He described new bracket and rate reforms, underscoring how they would benefit all American families, not just those at the top of the economic pyramid. He called for increases in the personal exemption, as well as new advantages for retirement saving. He emphasized the stake that every American had in making the tax system simpler, more efficient, and more just.

Most importantly, however, Reagan made the case for the essence of tax reform -- base-broadening coupled with rate reduction. That kind of tax reform is challenging to sell, especially in political terms, because it creates clear winners and losers. But Reagan embraced that fact. "There is one group of losers in our tax plan," he said. "Those individuals and corporations who are not paying their fair share or, for that matter, any share. These abuses cannot be tolerated."

In both his public and private statements, Reagan was the very model of an engaged chief executive, pursuing one of his most important priorities in the face of stiff political resistance.

And it worked, of course: Reagan gave tax reform the momentum it needed to vanquish Washington's policy inertia. "Over the months that it took for the tax bill to crawl through the legislative process, the president's radio messages and speeches continued to drum up public support for tax fairness," Brownlee and Steuerle write. "Whoever wished to attack [the department's reform proposal] had to invoke principles more compelling than those of the president." And no one could.

Reagan's role in shaping the 1986 tax reform was crucial. Will Trump play a similar role in 2017? It's too early to tell. But while much has changed over the past 41 years, one thing hasn't: the significance of presidential leadership.