Republicans have been harping on the meme that the tax code hasn't been changed since 1986. Of course, that claim is patently false. George H. W. Bush supposedly lost the election in 1992 because he broke his vow of "read my lips, no new taxes". Bill Clinton raised taxes in higher incomes during his first term and George W. Bush passed another enormous tax cut in 2002. There were also tax changes in 2009 under Obama as part of ARRA, the stimulus package. In an ultimate irony, the tax cuts in ARRA for the bottom 40% of taxpayers were significantly larger than the tax breaks in the current bill which will expire in seven years.
But if Republicans want to keep harping on 1986, then let's talk about it. Because the tax reform of 1986 was actually precipitated by Reagan's 1981 tax cut that has some remarkable similarities to today, despite being slightly less extreme. That bill resulted in an across-the-board 25% reduction in rates to be phased in over three years. It included a huge gift to the rich by reducing the top rate by 20%, from 70% to 50%. Those at the bottom only saw the rate decline from 14% to 11%. It include a huge cut in the corporate rate as well, amounting to $150 billion over a five year window. That is the equivalent of $400 billion in today's dollars. It allowed for accelerated depreciation. The capital gains rate dropped from 28% to 20%. In essence, the 1981 tax bill was a gift to corporations and the rich just like the current tax bill, although, unlike the current bill, there was also some decent tax relief for lower and middle income earners.
One of the great propaganda efforts of all time was the creation of the myth of the "Reagan miracle". That myth still haunts us to this day. In actuality, the 1981 tax cut was supposed to be offset by spending reductions, reductions that, of course, never came. In a similar manner, Republicans today are already preparing the groundwork for entitlement reductions in Medicaid, Medicare, and Social Security. Whether that effort has the same fate as it did in the 1980s remains to be seen. But the fact of the matter is that, without those cuts, the national debt rapidly increased and the country entered a double-dip recession. Interest rates skyrocketed from 12% to 20%. And by 1982, Congress had rescinded the tax cuts that were to phased in over the next two years. Reagan, who had entered office decrying the size of the national debt, ended up tripling it from around $900 billion to $2.6 trillion by the time he left office.
The tax reform of 1986 was largely driven by the total failure of the 1981 plan. The bill closed a number of tax loopholes, generating around $60 billion and, because of that broadening of the base, was able to cut tax rates across-the-board even further.The depreciation elements of the 1981 plan were curtailed, a corporate alternative minimum tax (AMT) was introduced, generating around another $25 billion, and the existing AMT was strengthened. That allowed the personal deduction, the standard deduction, and the earned income tax credit to all be increased, essentially allowing more than six million poor Americans to not owe any income taxes at all.
The model for this tax bill is exactly what Art Laffer recommended for Kansas and Governor Sam Brownback enthusiastically adopted. It was a total disaster. Tax receipts cratered, exacerbated by massive tax avoidance using pass-through entities, and state services in transportation and education were forced to shrivel. Some counties reverted back to dirt roads because of the lack of transportation funding. Schools were forced to close months early because the budget had been exhausted.
Unlike Kansas, however, the federal government is not required to have a balanced budget, although Republicans consistently push for that. So interstates won't turn into dirt roads quite yet. Instead, the deficit will skyrocket and interest rates will rise, just as they did in 1981. And God forbid there is an economic slowdown. Recognition of certain massive tax avoidance schemes will create a push to revisit certain sections of the law. In addition, there are already provisions that clearly violate international trade rules and tax treaties that we have with other countries. Those will also have to be addressed.
So, just like in the 1980s, there will be a reckoning for this bill. It may be in two years or it may be in five. But changes, and probably drastic ones, will have to be made. For Democrats, the key is to make sure they are in power when that time comes. If they are, they will have a chance to enact real tax reform that will force corporations and the rich to pay their fair share, eliminate loopholes, and broaden the base just as in 1986.
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