In 1986, Congress passed an income tax reform that reduced the top personal income tax rate from 50 percent to 28 percent and created a 15 percent rate for everyone else. It was paid for by closing billions in loopholes, those arcane provisions in the code that reduce taxes for their lucky beneficiaries but leave the rest of us paying more. The '86 reform was revenue neutral, neither raising overall taxes nor increasing the deficit. It was guided by three principles: equity—equal incomes should pay equal taxes; efficiency—the market is a better allocator of resources than members of Congress; and fairness—those Americans who have more should pay more.
In the beginning the pundits said tax reform had as much chance of passing as an elephant has of flying to the moon. The tax code was seen as a playground for Washington's special interests—an unfair burden the rest of America would just have to bear. Yet reform passed. Average taxpayers got to keep more of each additional dollar they earned, all corporations were treated more equally, and the wealthy ended up paying a higher percentage of total income tax revenue.
As President Obama talks of reforming the tax code again, the experience of 1986 taught me that there are six things necessary to achieve the goal, no matter how he chooses to define reform:
1. A President who is fully committed. Ronald Reagan, a Hollywood actor when marginal rates exceeded 90 percent, cared passionately about lowering them. Giving up loopholes to get lower rates was not a hard decision for him.
2. A Treasury Secretary who will get deeply involved and at crucial moments has enough command of the subject to negotiate a resolution. Jim Baker and his admirable assistant, Dick Darman, drove the process for President Reagan. At the end, Baker himself was negotiating specific detailed provisions.
3. A chairman of the House Ways and Means Committee who will use all available chits to bring recalcitrant congressional members to support the cause. The chairman must be self-interested in reform's success. For example, in 1986, Dan Rostenkowski embraced reform because it was big enough for his ambition. He had been lambasted for cutting special-interest deals to pass Reagan's 1981 tax cut. By 1986 he could cut loopholes and gain a good government imprimatur. "Rosty" also wanted to do reform because others said it could not be done. Success would mark him as the most effective chairman of the era.
4. A chairman of the Senate Finance Committee whose interests are also served by overseeing passage. Bob Packwood played that role in 1986. He was a late convert to the cause, but once there, he persuaded, cajoled, threatened, and outsmarted the opponents. In the process, Packwood found his liberal Republican legs and defended the bill in the best progressive tradition of Teddy Roosevelt. His achievement offered a contrast to the previous Democratic chairman, Russell Long, who had fought the very idea of tax reform for decades.
5. Followers who know the subject, enjoy dueling substantively with opponents, and pursue the goal single-mindedly. These members can create the energy for passage. In 1986, I played that role for Packwood and Rostenkowski. For four years I talked about practically nothing but tax reform.
6. Finally, a tireless staff, smart enough to master the arcane details of tax legislation and savvy enough to be able to advise their principals about how to deal with other lawmakers and the media. In 1986, Rostenkowski, Packwood, and Baker had such staff—and so did I.
President Obama has a full plate, and the world's unpredictable economic events dominate Treasury Secretary Timothy Geithner's days. If the President does not have all six of these elements in place, he shouldn't waste his time. Yet if he does want to change the way Washington works—as he promised to do in 2008—there is no better place to start than with the shameful folly we call the 2011 income tax code.