* October 1986 reform defied political skeptics
* Reagan, divided Congress overcame major obstacles
* Circumstances, key players are different, experts say
By Patrick Temple-West and Kevin Drawbaugh
WASHINGTON (Reuters) - Tax reform can happen in the
United States. President Ronald Reagan and a divided Congress
defiantly proved it 25 years ago this Saturday.
On both sides of the acrimonious tax debate, no event is
held in such awe today as the historical moment when Reagan
signed tax reform into law on October 22, 1986.
"All of the betting was that (reform) was impossible," said
Michael Graetz, a tax professor at Columbia Law School.
But it got done. Even now, tax lobbyists still shake their
heads in disbelief at the 1986 reform. The fact that no
comparable achievement has followed, a quarter-century and four
presidents later, makes the feat all the more remarkable.
And it begs the obvious question.
With the U.S. fiscal situation so much more dire, why is it
not happening now? Even with wide agreement in both parties
that the tax code is a loophole-ridden jumble of inefficiency
and unfairness, even tentative reform has been unattainable.
The answers are four-fold, said academics and some of the
tax experts who helped craft the reform of 25 years ago:
First, glaring loopholes are fewer today; second, the
deficit's size blocks agreement on revenue neutrality; third,
Reagan raised corporate taxes, but this is harder now; and
fourth, a lower capital gains rate is more deeply entrenched.
Not many issues are hotter on the campaign trail than
taxes. Republican presidential candidate Herman Cain has his
"9-9-9" plan; rival Rick Perry wants a "flat tax;" Ron Paul
wants to abolish the income and estate taxes entirely.
President Barack Obama wants tax reform as well. He
regularly calls for closing corporate loopholes and making the
wealthy pay their fair share of taxes.
From the Occupy Wall Street protests to the Tea Party,
taxes fuel voter anger across the political spectrum.
ANGER NOT ENOUGH
"Nobody in the world likes the tax code as it is currently
constructed," said Paul Weinstein, who was a senior adviser to
Obama's 2010 deficit reduction commission.
"There's no doubt there is a strong desire to see tax
reform," said Weinstein, currently director of the public
management program at Johns Hopkins University.
In 1986, a similar wave of anger overwhelmed the defenders
of a tax code that was riddled with egregious shelters so
common that they were advertised in newspapers.
"Nobody could defend the amount of capital that was being
thrown at wasteful tax shelters," Graetz said.
Today's tax expenditures -- from tax-advantaged retirement
savings to deductible mortgage interest -- are more costly and
more politically popular than the shelters of the 1980s.
These are tax breaks "we all love," said Maya MacGuineas,
president of the Committee for a Responsible Federal Budget, a
group that advocates for deficit reduction.
"They aren't the same kind of bad guys" that lawmakers
rallied against in 1986, she said.
Early in the 1986 negotiations, lawmakers decided to
maintain revenue neutrality, or not raise new revenues. It was
"the watchword and guiding star" for tax reform, Graetz said.
Lawmakers today, facing a massive budget deficit, are not
as united on the revenue neutrality. "The fiscal pressures are
far greater today than they were" in 1986, MacGuineas said.
Obama has called for ending tax cuts for the wealthy that
were approved under President George W. Bush, but Republicans
have a near-unanimous coalition against any tax increases.
With so much of the federal budget devoted to mandatory
spending, such as the Medicare and Medicaid healthcare
programs, the budget process is more constrained. To do future
tax reform, "we will need more revenues," MacGuineas said.
A key to 1986 was that cuts in individual tax rates were
balanced by increases in corporate taxes. But corporations are
more powerful today and face more global competitive pressures,
giving them more leverage to block tax increases.
The 1986 reform "did increases taxes on corporations to
fund tax cuts on individuals," Graetz said. "I don't know
anybody who thinks that's economically sound today."
Eugene Steuerle, a senior fellow at the Urban Institute, a
think tank, and an economist in the Treasury Department during
the reform process, said reformers today should look at closing
corporate loopholes as a way to broaden the tax base. "There's
actually a lot of room to maneuver there," he said.
Raising the capital gains rate would also generate revenues
today. But Weinstein said, "Any kind of increase in capital
gains (taxes) is going to be controversial."
(Reporting by Patrick Temple-West (202) 354-5841
firstname.lastname@example.org; Editing by Carol
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