With the imminent release of the next variant of the Trump/GDP tax reform plan, the last rate reduction/base broadening tax reform in 1986 can provide some insights on the hard choices and heavy lifting politically that true reform takes. The above chart shows that significant tax base broadening in both individual and corporate income taxes occurred to finance lower tax rates and low- and middle-income tax relief.
The closest thing to a silver bullet in base broadening was the repeal of the investment tax credit, which accounted for slightly less than one-quarter of the revenue increases. After that, tax reform required detailed, while still significant, tax law changes closing loopholes, removing industrial policy-type subsidies, and limiting special rules that benefited small groups and complicated the tax code. The table below shows the major revenue raisers.
It was not easy taking on all of the interest groups that benefited from these specific tax provisions, but the principle of lower marginal tax rates and their benefits of greater efficiency, growth, and simplicity won the day, with the strong support of the President and Congressional leaders, particularly the tax-writing committee chairmen. Base-broadening also helped improve horizontal equity, treating households in similar situations similarly. Closing loopholes benefiting the well-to-do and small groups improved the perception of a fairer tax system.
The tax and economic issues are different now than in 1986, but lower marginal tax rates, closing loopholes, and removing special provisions benefiting small groups will have similar benefits. Reducing taxes is easy; tax reform is hard choices and taking on many different vested interests in order to achieve a principled outcome. The final outcome was far from perfect, but was a major policy improvement.
I went to the OECD in Paris in 2014 to work on tax reform since I had waited 28 years for the next US federal tax reform. The OECD/G20 Base Erosion and Profit Shifting project was and still is global tax reform in progress. Hopefully, the President and Congress will work toward true US tax reform.