Editor’s Note: Tax reform. It’s item No. 2 on the Republicans’ legislative agenda, but as the health care bill straggles on, who would bet on a tax system overhaul any time soon?
But it doesn’t have to be that way. So says David Smick, a global macroeconomic strategist and the author of “The Great Equalizer: How Main Street Capitalism Can Create an Economy for Everyone.”
Below, Smick explains that though America’s last tax reform, 31 years ago under President Reagan, was a “fluke,” congressional Republicans and the Trump administration could learn something from it.
Smick analyzed the economic anxiety that led to the rise of Bernie Sanders and Donald Trump in “The Great Equalizer.” He predicted the global financial crisis in his 2008 book, “The World Is Curved: Hidden Dangers to the Global Economy.” So we figured he might be worth listening to this time around as well.
— Kristen Doerer, Making Sen$e Editor
Given the task of enacting tax reform, congressional Republicans and the Trump administration would do well to look to history.
The 1986 tax reform (the last reform of the federal tax code to become law) came about as an unexpected surprise. A fluke. In the two years leading up to its enactment, the conventional wisdom was that tax reform was impossible. As an adviser to that effort, between 1984 and 1986, I attended five “funerals” commemorating the death of any effort to change the tax code.
By 1986, the Reagan White House had produced a tax reform package that was literally declared “dead on arrival.” Congressional “supply siders” had their own version that essentially reflected the U.S. Chamber of Commerce’s preferred tax changes containing too many corporate giveaways and the elimination of too few business shelters. It too was going nowhere fast. Congressional Democrats offered the Bradley-Gephardt tax reform bill with not enough Democratic support, and almost no Republican support, for passage at a time when Republicans controlled Washington.
But then something happened — a surprise shock to the political system — that would be an even rarer occurrence in today’s politically risk-averse Washington, D.C. At the time, former Merrill Lynch Chairman Donald Regan was Ronald Reagan’s sometimes politically tone-deaf treasury secretary. Unbeknownst to Regan, in the bowels of the U.S. Treasury Department, a nonpartisan group of tax nerds put together a bold tax reform package that managed the remarkable feat of skewering both party’s special interests. The corporate lobbying community was furious. But then something happened that changed the Washington dynamic. When the controversial plan was leaked to the press, the Democratic leadership on Capitol Hill came out in favor of “Ronald Reagan’s new tax initiative,” which was really a plan largely written by the Treasury’s civil servants who were not affiliated with either party.
The Reagan White House was furious at its own treasury secretary for allowing such a radical tax reform to be announced. Shortly thereafter, chief of staff James Baker and Regan switched jobs. But here’s the irony: Though never enacted, the surprise plan of the Treasury nerds broke the ideological and partisan logjam. Fairly quickly, a bipartisan group of congressional tax writers, including Sen. Bob Packwood, R-Ore., Sen. Bill Bradley, D-N.J., Rep. Jack Kemp, R-N.Y., and Rep. Dan Rostenkowski, D-Ill., and Treasury Secretary Baker relatively quickly hammered together a deal. Packwood, the Senate Finance chairman, was particularly adept at moving to find bipartisan common ground. In one of the great surprises of U.S. legislative history, tax reform became a reality.
Which brings us to the current debate over fiscal policy. If they really want tax reform, the Republican leadership should reach out to Democrats (particularly the 25 Senate Democrats up for reelection next year) with a plan that would be bipartisan in nature. That means there would be no overhauling of the individual tax code, which would only inflame partisan passions. No bipartisan consensus exists on the issue of individual tax cuts. But there does seem to be a joint consensus that today’s corporate tax rate, the highest in the world, has had the effect of encouraging American companies to move plants and jobs overseas. There also seems to be a bipartisan consensus to modernize the country’s infrastructure. There seems to be a consensus that the U.S. economy’s productivity has declined as a result of a slowdown in capital investment and business startups, now at a 15-year low. Most members of Congress can feel it in their bones that America’s innovative risk-takers are holding back.
To start the negotiations, the Republican leadership should throw on the table a bipartisan plan beginning with four elements. First, reduce the corporate tax rate from 35 percent to 20 percent (with “pass-throughs” for the small business sector included) and eliminate many loopholes. Second, allow immediate expensing of capital investment as a means of encouraging higher productivity growth, the key to raising today’s growth rates, now roughly half the historic average rates of economic growth. Third, create a generous repatriation incentive that allows American companies to bring home the $2 trillion to $5 trillion sitting offshore so long as they also agree to purchase a specified amount of low-interest infrastructure bonds. A separate pool of capital based on the issuance of these long-term bonds should be the source of the base of financial support for the fourth item — spending serious money to modernize the country’s major infrastructure.
Republicans should offer Democrats some sweeteners that would be tough to vote against. One might be a new program giving disadvantaged families vouchers to help them relocate to better job opportunities. Another might be a modest incremental increase in the minimum wage, carefully designed to avoid threatening small-business solvency and loss of entry-level jobs.
Both political parties need to fixate on encouraging startups, helping young firms survive and ending the regulatory, anti-trust and patent arbitrage games that large corporations use to gain competitive advantage over the small. They should make the process of going public easier and less expensive. And they should work together to help the workhorses of the grassroots economy, regional and community banks. Why this call for a bipartisan approach to startups? Unlike large corporations, startups take place and produce jobs in America.
Democrats and Republicans alike should remember that policy changes often show their effects after an uncertain lag. For example, President Jimmy Carter’s deregulation efforts in the late 1970s no doubt benefited Ronald Reagan’s economy in the early 1980s. The 1986 tax reform happened on Reagan’s watch, but arguably laid the foundation for the successful Clinton economy. Both parties gained politically, but the long-term winner from the bipartisan approach was the American people.
The key question: Is there a leader in Washington from either party with the nerve to make the first move?