Reinventing the wheel: what we can learn from the Tax Reform Act of 1986

In 2010, when former Senate Finance Committee Chair Sen. Max Baucus was beginning his push toward tax reform, he held a hearing featuring veterans of the great tax reform of 1986.2 The main conclusion from this hearing was that Congress has changed too much since then to make a repeat of 1986 likely. We are now five years later, Sen. Baucus is the US Ambassador to China, and no tax reform appears likely in the immediate future, thus confirming what the veterans told the Chair in 2010. Nevertheless, I believe that the Tax Reform Act of 1986 (TRA 86) offers some useful lessons for the current tax reform effort, less on process (because of the aforementioned changes in Congress) but more on substance. Specifically, I think TRA 1986 is a useful model because: (a) It suggests that individual rates on ordinary income can be cut if the tax rate on capital gains is increased; (b) It suggests that overall revenue neutrality can be achieved by cutting taxes on individuals and increasing the effective tax rate on corporations (while reducing the nominal corporate rate); (c) It suggests that corporate/shareholder integration is unnecessary. This paper elaborates on these suggestions.