Pro-Growth Tax Reform: The 1986 Experience
In remarks today on averting the president’s “fiscal cliff,” Speaker John Boehner cited the bipartisan Tax Reform Act of 1986 as a model for how Republicans and Democrats can work together to pave the way for long-term economic growth, help bring jobs home, and rein in our national debt:
"There is an alternative to going over the fiscal cliff, in whole or in part. It involves making real changes to the financial structure of entitlement programs, and reforming our tax code to curb special-interest loopholes and deductions. By working together and creating a fairer, simpler, cleaner tax code, we can give our country a stronger, healthier economy. A stronger economy means more revenue, which is what the president seeks. … There’s a model for tax reform that supports economic growth. It happened in 1986, with a Democratic House run by Tip O’Neill, and a Republican president named Ronald Reagan.” – Speaker John Boehner, November 7, 2012
Boehner says there were skeptics who doubted the benefits of tax reform in 1986. But “those skeptics were wrong.”
A Fairer, Simpler Tax Code Means a Stronger Economy…
According to the Wall Street Journal, the bipartisan 1986 tax reforms “wiped out hundreds of billions of dollars in tax breaks and used the money to lower tax rates.”
This “resulted in a revitalized economy and laid the groundwork for one of the longest and widespread economic booms in U.S. history,” according to a bipartisan group that advocates for a simpler tax code.
Stanford economist and former Treasury Secretary George P. Shultz calls the tax reform of 1986 “sort of the unsung hero of the very good economic times we had for a long time.”
Scott Hodge from the Tax Foundation says similar tax reforms today – that is, reforms that eliminate loopholes and lower tax rates for all – “would greatly improve the nation's prospects for long-term GDP growth” and “will lead to higher wages and better living standards for American citizens.”
Heritage Foundation policy analyst Curtis Dubay says “the economy would be stronger,” “more Americans would be employed, and wages would be higher.” That’s because a simpler tax code “encourages growth by removing the barriers” to “working, saving, investing, and taking on risk.”
President Obama’s tax hike on small businesses - on the other hand - would destroy more than 700,000 jobs and lead to lower wages, according to analysis by independent accounting firm Ernst & Young.
The bottom line is that “President Obama’s higher tax rates will harm the economy,” says the Heritage Foundation. Fundamental tax reform that closes loopholes and lowers rates “will help.”
A Stronger Economy Will Lead to More Federal Revenue…
More federal revenue “is what the president seeks,” said Boehner. “Because the American people expect us to find common ground, we are willing to accept some additional revenues, via tax reform.” Not higher tax rates, and not tax hikes on small business job creators, but tax reform that helps grow our economy – which will lead to more revenue.
That’s what happened after the 1986 reforms. In testimony to the House Budget Committee, economist Kevin Hassett said the consensus of economists surveyed on the 1986 reform bill believe it “produced about one percentage point higher growth over a long period.”
According to former Congressional Budget Office (CBO) Director Douglas Holtz-Eakin, tax reform “that generated this impact” today would help lower “the deficit by $310 billion.”
“If history is a guide,” argues economist Diana Furchtgott-Roth, “a more efficient tax system will bring in more revenue to the Treasury, as lower rates foster economic activity.”
Martin Feldstein, chairman of the Council of Economic Advisers under President Reagan, says, “The experience after the 1986 tax reform implies that the combination of base broadening and rate reduction would raise revenue equal to about 4% of existing tax revenue.”
President Obama has blamed his record deficits in part on his weak economy – recognition of the fact that a stronger economy would generate additional revenue without raising tax rates.
A “Balanced” Approach Also Requires Spending Cuts & Entitlement Reforms …
But “reforming our tax code to eliminate special-interest loopholes and deductions” alone won’t get the job done. Boehner said, “In order to garner Republican support for new revenues, the president must be willing to reduce spending and shore up the entitlement programs that are the primary drivers of our debt.”
“Shoring up entitlements and reforming the tax code … will bring jobs home and result in a stronger, healthier economy.” See Boehner’s full remarks here.