Bitter partisanship. Hopeless gridlock. A tax code littered with loopholes that only special interests could love.
Washington’s latest attempt to overhaul the federal tax code, the first under Donald Trump, is getting underway with all these familiar realities in place. But despair not, former U.S. senator Bill Bradley advises in a prominently featured New York Times commentary, we can overcome all these obstacles.
How can Bradley, a New Jersey Democrat, be so sure? He cites his own personal experience within the convoluted legislative process that produced the Tax Reform Act of 1986.
Lawmakers involved in that process, Bradley informs us, faced a similar set of obstacles. They overcame them all, says Bradley, “showing that clear principles, legislative skill, and persistence could change a fundamentally unfair system.”
We do today certainly in different times, Bradley acknowledges, but “perhaps the lessons of the past show a way forward.” Now as then, he asks us to keep in mind, a little “trust and mutual respect” — a willingness to compromise — can go a long way.
Bradley’s particular take on the 1986 Tax Reform Act actually offers up nothing particularly new. Washington insiders have considered the 1986 tax bill a smashing success for quite some time. They mourn the loss of the bipartisan comity that made the effort possible – and blame our current tax mess on that loss.
Blame belongs elsewhere. Yes, we do need to learn the lessons of 1986, as Bradley suggests. But we first need to recognize what the 1986 Tax Reform Act represented. What Bradley and his wistful insider buddies hail as a success amounted much more to a surrender — to America’s deepest pockets.
In the years right after World War II, these deepest pockets felt under siege. In the new America that emerged out of the New Deal, America’s wealthiest faced tax rates that soared above 90 percent on earned income over $400,000. These rates ate away, year by year, at the top 1 percent’s share of the nation’s income and wealth.
America’s middle class, by contrast, prospered as never before. In the immediate post-war decades, the real incomes of average Americans doubled.
Bradley and his Wall Street wing of the Democratic Party have a different story to tell about the postwar years.
“After World War II, federal tax rates rose steadily, loopholes proliferated, and the tax code grew more complex,” writes Bradley, now a managing director for a New York investment bank, in his New York Times piece. “By the 1980s, its unfairness was indisputable.”
Bradley’s story, in other words, starts with rising tax rates, a frame of reference that neatly jibes with the conservative Republican world view. Outrageously high tax rates, this view holds, will always trigger a mad — but understandable — scramble for loopholes. Lower the high rates, and loopholes will go the way of the dodo.
Progressive Democrats in the years after World War II saw that scramble for loopholes. But they also saw enormous value in high tax rates on high incomes. Their political response: fight to plug the loopholes.
In 1961, the newly elected Kennedy administration started down that loophole-battling road, then backed away, unwilling to expend the political capital necessary to prevail. President Kennedy instead ending up pushing for across-the-board tax cuts. He asked Congress to cut the tax rate on top-bracket income from 91 to 65 percent. Congress did eventually opt to drop the tax rate, to 70 percent, in 1964.
The rate remained at that top level until 1981, when the newly elected President Ronald Reagan signed legislation, backed by a sizeable cohort of Democrats, that slashed the top rate down from 70 to 50 percent. That reduction set the stage for what Bradley sees as the heroic grand compromise of 1986: Democrats agreed to lower top rates even further and Republicans agreed to plug loopholes.
By signing this 1986 compromise into law, Bradley believes, Ronald Reagan was acting reasonably and presidential. But Reagan had no real reason not to sign the legislation. The 1986 Tax Reform Act gave Reagan the significantly lower tax rates — 28 percent on income in the top tax bracket — he had been fighting for ever since he first confronted tax rates over 90 percent as a Hollywood movie star.
And what did Reagan and his fellow deep pockets have to give up in return for this substantially lower top rate? An assortment of loopholes they mattered much less with a top tax rate that had shrunk so low.
The most significant loophole plug in the 1986 Tax Reform Act, adds veteran Phoenix tax attorney Bob Lord, happened to involve the passive activity loss rules. This plug drove a stake in the heart of the tax shelter industry.
“But the truth is,” notes Lord, “that the IRS was clobbering tax shelter investors in court anyhow.”
The “compromising” the Reaganites did in 1986, Bill Bradley believes, shows that a bipartisan spirit can work political miracles. In fact, the 1986 miracle worked overwhelmingly one way. The Reaganites didn’t compromise away any of their core commitments. The Democrats did.
In the Tax Reform Act of 1986, Democrats like Bradley essentially rubber-stamped the Reagan Revolution against a more equitable distribution of America’s income and wealth. They abandoned what little remained of the New Deal’s opposition to grand concentrations of income and wealth.
With their “bipartisan” support for the 1986 Tax Reform Act, Bradley and his lawmaker soulmates only hastened that concentration, as data compiled by Thomas Piketty and other economists for the World Wealth and Income Database make plain.
In 1980, the year of Ronald Reagan’s election, America’s top one percent accounted for 9.4 percent of the nation’s income. America’s poorest 50 percent that year took home almost twice that, 17.8 percent.
By 1985, the top 1 percent had closed that gap. Their share of national income after four years of the Reagan Revolution, had jumped by nearly a third. Americans in the bottom half of income-earners, meanwhile, saw their share dip by a third.
By 1989, the year Reagan left office, America’s top one percent was taking home nearly as much income as the bottom 50 percent. Since then, the one-percent share has increased still higher, to over 20 percent. We’ve gone from an America where the bottom 50 percent earned double the income of the top 1 percent to an America where the top one percent makes double what the bottom 50 percent earns.
The really scary part? That one-percent share could go even higher if we embrace the lessons of 1986 that Bill Bradley so wants us to cheer.