“The plan’s provisions to lower tax rates while creating fairness in the tax code are similar to pro-growth policies supported by President Reagan…this tax plan is Reagan on steroids that was passed in 1986”
What Was the Tax Reform Act of 1986?
The Tax Reform Act of 1986 (“TRA86”) was a law passed by Congress and signed into law by President Reagan. It lowered the top marginal income tax rate from 50 to 28 percent. It lowered the top corporate rate from 46 to 34 percent. It “paid for” these rate reductions by eliminating or restricting hundreds of tax exclusions, adjustments, deductions, and credits.
Most importantly for this analysis, TRA86 was designed to be tax revenue-neutral. Total tax revenues aimed to be the same after as before the reform.
How Did TRA86 lead to the Taxpayer Protection Pledge?
TRA86 gave birth to the Taxpayer Protection Pledge. Supporters wanted assurances that their support for a broader tax base in exchange for lower tax rates would not be betrayed by higher tax rates later (which is, in fact, exactly what happened in 1990 and 1993). The Pledge, which has been signed by 235 Congressmen and 41 Senators, is a promise made from an elected official to his constituents and the American people to:
“ONE, oppose any and all efforts to increase the marginal income tax rates for individuals and/or businesses, and
“TWO, oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing income tax rates.”
Senators Tom Coburn (R-Okla.), Mike Crapo (R-Idaho), and Judd Gregg (R-N.H.) are Pledge signers.
Why is Simpson-Bowles Not Like TRA86 and a Violation of the Pledge?
The Simpson-Bowles bill has two things in common with TRA86: first, it lowers marginal income tax rates. The top individual and corporate rates would fall from 35 to 23 percent under their most aggressive scenario. Virtually all tax deductions and credits would disappear. On its face, this appears to be a reform styled after TRA86.
However, the comparison falls apart in one key aspect—namely, the bill is not tax revenue-neutral, like TRA86 was. In fact, it’s a ten-year tax hike of over $1 trillion. Its stated goal is to raise the federal tax burden from its historical 18 percent of GDP to a record and permanent 21 percent. The money raised from broadening the base is not 100% plowed into lower marginal tax rates, and is therefore a violation of the Pledge. Simpson-Bowles is a massive tax hike masquerading as tax reform.