Revenue neutral in ‘86

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Experts and the public alike agree that the tax code could use a good housecleaning. The most sensible model to follow is the landmark Tax Reform Act of 1986, which respected members of both parties have praised. President Reagan worked with both Republicans and Democrats to produce a sweeping bill that cut personal and corporate tax rates while eliminating scores of loopholes and other tax breaks.

Unfortunately, today some conservative policy-makers on Capitol Hill and in the White House reject the 1986 model. They say they’ll oppose any bill that includes any provision that would raise any tax revenue (such as by closing a loophole) — even if the bill as a whole doesn’t raise taxes. Until they change their minds, any effort to reform taxes is doomed.

Here’s why: In negotiating the 1986 tax reform, Mr. Reagan and Congress agreed that the plan would be “revenue neutral” — in other words, it wouldn’t raise more or less revenue than the existing tax system would have raised.

Therefore, to offset the costs of cutting tax rates dramatically, the 1986 law ended a number of lucrative corporate tax breaks and taxed capital gains at the same rate as ordinary income. Overall, as the president demanded, the bill was revenue neutral.

Now fast-forward two decades. Today, some anti-tax extremists say they will not support the end of any tax write-off, no matter how wasteful or unnecessary, simply because that would generate revenues for the federal government.

So last month, when the House and Senate approved budget plans covering the next five years, some conservatives quickly denounced the plans as the “largest tax increase in history” even though they contained no tax increases at all. In fact, the plans would allow for new tax cuts or for an extension of the tax cuts due to expire in 2010, as long as the costs are offset to avoid increasing the deficit.

Something similar happened last fall, when House Ways and Means Chairman Charles Rangel laid out a major tax-reform proposal that would make the tax code far simpler, and probably more efficient. Under Mr. Rangel’s plan, 90 million Americans would pay less in taxes than under current law, while approximately 4 million very high-income people would pay more. Yet critics demagogued the plan as a huge tax increase, even though it would raise the same amount of revenue as current law.

And when Congress prepared last fall to extend Alternative Minimum Tax relief for another year so the tax wouldn’t hit upper-middle-class households, Senate Minority Leader Mitch McConnell stated that it was “offensive” to Senate Republicans to have to offset the cost of doing so. The White House agreed, demanding that Congress extend AMT relief but not pay for it. Ultimately, Congress gave in and went along, adding $50 billion to the deficit.

As the AMT example shows, cutting taxes but refusing to pay for it is not a recipe for comprehensive tax reform. It’s also not a recipe for responsible fiscal policy.

The nation already faces dangerously large budget deficits over the next several decades because of rising health care costs and the retirement of the baby boomers; more unpaid-for tax cuts would only worsen the problem. In fact, extending the big tax cuts passed in 2001 and 2003 without paying for them would more than double the long-term budget gap. That would force future generations to enact even larger tax increases and cuts in public services like education and health care to get the budget under control.

Instead, we should return to the principles behind the bipartisan 1986 tax reform: Improve the tax code so that it can raise the same amount of revenue in more efficient and more equitable ways.

Aviva Aron-Dine is a policy analyst at the Center on Budget and Policy Priorities.

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