April 21, 2017 / 5:34 PM / 4 months ago

Review: Lessons from ghosts of tax reform past

A stuffed ghost rests on a trader's screen above the floor of the New York Stock Exchange (NYSE) after Snap Inc. listed their IPO in New York, U.S., March 2, 2017.Lucas Jackson

WASHINGTON (Reuters Breakingviews) - U.S. President Donald Trump is embarking on an endeavor that has eluded many of his predecessors: tax reform. The last successful overhaul occurred 31 years ago under Ronald Reagan – a president Trump says he hopes to emulate. The drama was captured in the book “Showdown at Gucci Gulch,” first published in 1987. The lobbying and partisan battles depicted then seem almost quaint now, but the saga still offers useful tips on legislative pitfalls, political maneuvering and the machinations of lobbyists.

Reagan was an odd torchbearer for reform, say authors Jeffrey Birnbaum and Alan Murray, who covered the story for the Wall Street Journal. The president had approved a 1981 package that included what were then the biggest tax breaks for businesses in American history. The Democratic Party, the usual advocate for tax overhauls, controlled only the House of Representatives. But the public was increasingly angry with special treatment for the wealthy and for corporations.

Like the present occupant of the White House, Reagan was not known for his policy prowess and is a minor character in the book. His deputies and congressional leaders are the stars. Capitol Hill was filled with outsized personalities like Chicago native Dan Rostenkowski, chair of the House Ways and Means Committee, who was later sentenced to 17 months in prison for corruption. Treasury Secretary James Baker’s astute political skills also helped sway minds. Rostenkowski relayed one exchange with Baker to the authors: “Jimmy boy, you’re massaging me. I have been handled by better than you, and your hands are cold.”

The book reveals the importance of anonymous staffers in crafting legislation. David Brockway, who held the thankless job of staff director of the Congressional Joint Committee on Taxation, served as both punching bag and savior depending on his estimates. One of his tricks was to lower the income levels at which new tax rates would apply, which increased revenue and covered gaps created by deductions and other loopholes.

Many of the challenges facing legislators in 1986 are even worse today. At that time the budget deficit of more than $200 billion was seen as the biggest headache. Policymakers struggled to come up with a plan that wouldn’t increase the shortfall. This year, the U.S. government deficit is projected to reach $560 billion.

Groundwork for reform was laid by the Treasury in 1984 but seemed politically unfeasible: the plan raised income from corporate taxes by 36 percent. This proved a political godsend. “Without it, tax reform might never have made it through Congress,” the authors write. “Only a conservative Republican administration could get away with proposing such a drastic hike.”

Washington is all about wielding power. Congressional committee chairs and cabinet secretaries at times struggled to maintain their influence in the face of lobbyists and political donations. The 36 members of House Ways and Means raised about $7 million in 1985 - an unseemly amount at the time. “Evenings were filled with so much drinking and eating at fundraiser cocktail parties that several of the biggest lobbyists in town had to put themselves on ‘controlled fasts,’” the authors write.

Baker had one of the toughest tasks: “He had to walk a very narrow and treacherous line: restoring enough tax breaks to keep a coalition of powerful interests from killing the entire effort, while at the same time repealing enough preferences to make meaningful tax reform possible.”

Tax reform could have died many times over had it not been for the deft use of obscure and technical rules to win over skeptical lawmakers. Rostenkowski used a provision to ease the shift between current and future tax laws to dole out favors. He handed out $5 billion, including exceptions to tax-exempt bond limits that helped finance a new stadium for the Miami Dolphins.

Another parallel with present-day Washington is that the House led the overhaul while the Senate stalled in the hope that the issue would go away. Timing was also key. The House and Senate raced to reconcile their two tax bills before the August 1986 recess. Reagan signed the bill just a month before the midterm elections in November – a timetable that would be virtually impossible now.

The final plan closed loopholes worth about $300 billion over five years and raised corporate tax revenue by $120 billion. Democrats and Republicans were both able to claim victories.

Legislating has only become harder in the intervening years, even with Republicans now in charge of both houses of Congress and the White House. The failed effort by Trump and House Speaker Paul Ryan to repeal Obamacare is a poor omen for a tax reform. Ryan said his party faces a learning curve to move from opposition to governing. The twists and turns of 1986 should be part of the lesson.

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