Lessons from Tax Reform Act of 1986

The Senate Finance Committee held hearings today to review and reflect on the important lessons our country learned from its experiences with the Tax Reform Act of 1986 (which Dave Williams talked about in class on Tuesday).

There is a good deal worth reading and pondering in the transcripts of those hearings.

Senator Baucus (D-Montana), Chair of the Senate Finance Committee:

"The Tax Code is like shrubbery--the more severely it's pruned, the bigger and stronger it will grow back."

In 1986, Congress pruned the tax code, pretty severely. But it's grown back, bigger and stronger. Once again, it needs to be pruned.

The tax code is now about 70,000 pages long. A recent article in the Economist reported that Americans collectively spend more than seven billion hours filing our returns. That's the equivalent of nearly four million workers toiling full-time, year-round just to handle the paperwork.

The Tax Reform Act of 1986 was a landmark law. It affected every American family and every American business. It significantly reduced taxes for individuals. And it eliminated many benefits for special interests.

The 1986 tax reform leveled the playing field.

No longer could a wealthy individual escape taxes by buying into a tax shelter. No longer could a clever investment strategy get investors out of paying their fair share. No longer could businesses participate in notorious tax shelters.

Similar taxpayers paid similar taxes.

But since the 1986 tax reform, Congress has made more than 15,000 changes to the tax code. Congress made these changes with the best intention. Some to collect revenue, some to stabilize the economy, others to further other social objectives.

But each change created additional complexity. And each change created the potential for exploitation.

More here.

Senator Charles Grassley (R-Iowa) Ranking Member, Senate Finance Committee

Just about everybody agrees that our tax code is too complex. The tax form instruction booklet is probably the most unwelcome piece of mail many taxpayers get. the complexity means that taxpayers can't be confident they've gotten all the tax breaks coming to them, or that they haven't paid more than they owe. As we note the complexity, we should note a point one of the key 1986 Tax Reform Act architects has made many times. Senator Bob Packwood was very fond of saying, "Many taxpayers accept complexity that favors them."

More here.