Monday, July 24, 2006

Superman Returned. Can Tax Reform?

Two decades have passed since the Tax Feform Act of 1986, a noble but doomed effort to create a fairer, simpler income tax.

Ideally, TRA 86 would have featured a flat tax, but even tax reform's most idealistic supporter, Bill Bradley, the ex-basketballer turned Senator, knew that idea wouldn't fly.

So TRA 86 had two rates, 15% and 28%. But even though the Act limited or voided a number of tax breaks, it was deemed to raise not quite enough revenue. Then somebody had a really awesome idea:

“Let's phase out the 15% rate for upper-income taxpayers. Make ’em pay a flat 28%. We'll make the phase-out gradual, so they'll never notice.”

And so it was that TRA was doomed to death by ridicule. For the practical effect of the gradual phase out was to cause a taxpayer's marginal tax rate to rise from 15% to 28% to 33% (because of the phaseout) as income increased. Then the top rate dropped back to 28% for top-bracket taxpayers.

TRA 86 wouldn't have lasted long anyway, but the lower marginal rate for the richest Americans sure didn't help.

Some provisions of TRA 86 live on. The Alternative Minimum Tax, for instance. But even the AMT was a lot neater and simpler when it was born.

Now, Jeffrey Birnbaum reports in The Washington Post, Senator Ron Wyden is eager to launch a new round of tax reform, with the backing of Senator Grassley, Chairman of the Senate Finance Committee.

Tax code changes are always good news for tax lawyers, accountants and investment advisers. Will Tax Reform, the Sequel ever see the light of day? We'll have to wait and see.

Click here for an earlier Jeffrey Birnbaum column on the decline and fall of TRA 86.

1 comment:

Jim Gust said...

I think the odds are much against tax reform, especially if Bush is perceived as a weakened lame duck. Unless the Democrats take both houses of Congress--if they could take credit for the next tax reform, I expect they might embrace it.

The whole reason that the Democrats are fighting PETRA is that they won't get credit for what is, at heart, a Democrat reform measure. If they can't have the credit, they certainly won't let the Republicans take it.