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March 08, 2018 Opinion Point

1986 v. 2017? No Comparison

By Jasper L. Cummings, Jr., Alston & Bird, LLP, Charlotte, NC

A Corner Bar

It was one of those old-style two-story corner bars in Chicago, with the door at the corner. No longer a bar, this was the office of an Illinois state legislator, who provided an office to a famous Illinois politician, Dan Rostenkowski, while he was waiting to go to prison. Well, maybe Dan did not really have or need an office for general use, but he welcomed me at a table next to a window in a back room. I had come to interview Dan about the Tax Reform Act of 1986.

Twenty years later my main memory is that Dan was instantly my friend, or at least he made me feel that way … which is what great politicians can do. He smiled and looked me in the eye. He remained happy and proud about passing the historic tax act. I understood how this rough-hewn Chicago pol had taught himself tax and become chair of the House Ways and Means Committee: he could sell you anything.

Dan told his favorite story about meeting with President Reagan during the legislative process, recounted in the reprint of that interview1 in this publication. And he confirmed some of the stories told in the essential book on the 1986 act: Jeffrey Birnbaum’s 1987 Showdown at Gucci Gulch.

In sum the Tax Reform Act of 1986, which produced the Internal Revenue Code of 1986, was a huge success for the democratic process. It was not the last (mostly) bipartisan tax bill, but it was at the crest of a hill from which a long downhill slide began. At the end of the slide is the 2017 budget reconciliation act, which was so one-sided and political that it could not even hold onto its politicized original title: The Tax Cuts and Jobs Act. How did we get here?

Andrew Mellon

Secretary of the Treasury Andrew W. Mellon was not present at the creation of the 1913 federal income tax, but he was close.2 As soon as the White House had a Republican inhabitant, Mellon became Secretary and took a hands-on approach to the tax laws and administration that would make even the last “real” (meaning tax lawyer) Commissioner of the IRS envious. He devised a plan to scale back the high wartime taxes based on his “scientific” understanding of how taxation should work.

And he had company in applying principles, whether scientific or not. Yale economics professor Dr. T.S. Adams was one of the members of the IRS internal appeals committee that eventually evolved into the Board of Tax Appeals. He and other Treasury officials essentially created the idea of an income tax out of very little raw materials, and its principles quickly became intricate, even complex.

But while Mellon was trying to downsize taxes, an odd group of southern congressmen was fighting back. Due to the seniority system, men like Sen. Furnifold Simmons (D. N.C.), and Representatives Claude Kitchin (D.N.C.) and Muley Doughton (D.N.C.) chaired the tax committees under Democratic presidents and were powerful opponents of Republican presidents. During that era, Congress reenacted the “Revenue Act” for every biennial Congress. That made for a sort of incremental growing of the tax law every two years, allowing an experiment and adjustment process.


But federal taxation ended its “scientific” growth and adjustment (to the extent that had ever existed) in the 1935 tax act. It included what was called a “wealth tax” with higher progressive rates, and turned generations of the wealthy against Democrats; they even refused to say the name of the president, calling him “That Man,” the title of a book by Roosevelt’s Attorney General and Supreme Court appointee, Robert H. Jackson.3 But the feud over the federal income tax was cut short by world events—the Second World War—which had to be funded, and which turned the biennial revenue law into a tax that almost everyone paid, for the first time.

1954 Code

Even before the war ended Republicans called for scaling back the high wartime taxes. Even President Eisenhower resisted, due to the newly invented Cold War. But a scandal in the decentralized administration of the IRS prompted a complete rewrite of what had become the 1939 Code in 1954. You can still read the many volumes of testimony and letters that informed Congress of tax wants and wishes in Seidman’s history of the tax laws.

To hear him tell it, Sheldon Cohen and a handful of other recent law school graduates drafted the entire 1954 Code, immediately after finishing redrafting all of the income tax regulations under the 1939 Code, after which they reissued the regulations under the new code.4 But a read of Seidman’s history of the 1954 Code reveals hundreds of others had a hand in its birth, and substantial thought went into creating an administrable tax regime and the details of its terms.


After 1954, federal taxation could mostly go on automatic pilot up to 1985 because of three things: (1) it had steep progressive rates, (2) the rate brackets were not indexed for inflation, and (3) there was substantial inflation, particularly in the 1960s. The result was what is usually called “bracket creep” for taxpayers, and more tax revenues annually. Therefore, political debates focused more on spending money than raising taxes. So when Reagan was elected, the tax system was not a problem in terms of raising revenue, but it was a problem in terms of raising too much revenue for Republican tastes.

Therefore, Reagan’s first project was a huge tax cut, which was “bipartisan” in the sense that the Democrats saw the train leaving the station and they got on, too. It helped that Reagan got shot shortly before the 1981 act was passed, creating a lot of legislative and public sympathy. But very soon everyone realized that the cuts had overreached, and Reagan signed 5-6 tax increase bills thereafter, depending on who is counting. One was the 1986 Code.

1984 – 1986

The fundamental reason why the 1986 Code differs from the 2017 Act is the lead-up process. There were two full-scale Treasury studies of how to revamp the federal tax laws, beginning in 1984, called Treasury I, followed by Treasury II. The process was so complex that in 1992 Eugene Steuerle wrote a whole book about it called The Tax Decade, and the decade was preceded by an even deeper Treasury think-piece: Blueprints for Basic Tax Reform (Jan. 17, 1977).

Treasury I was not as far out as Blueprints, but it essayed a pure economic approach to issues. It and Blueprints are the progenitors of the 2016 Republican House Blueprint for tax reform. Just as that 2016 Blueprint was supplanted by a more politically friendly (to Republicans) act in 2017, Treasury I was supplanted by Treasury II, written under the direction of James A. Baker, one of the most astute politicians the Treasury has ever seen.

But as Rostenkowski explained, Baker and the Republicans could not do it alone because the Democrats were in their 40-year period of control of the House, although the Republicans controlled the Senate. So Rostenkowski started his own drafting process. The 1986 act deserved the label “reform,” although it contained many preferences that would be called loopholes. It essayed to “broaden the base and lower the rates,” which is commonly viewed as good tax policy.

The best examples of its approach are the passive activity loss rules and the at-risk rules. They are complex mini-regimes that many tax lawyers today may have never mastered; they usually don’t need to be learned because the doctors and dentists are no longer investing in the cattle-feeding tax shelters.

The 1986 reform effort took on a life of its own because no one wanted to be responsible for its failure, sort of like the dancing around government shutdowns today. This is where Finance Committee Chair Bob Packwood came in. I also interviewed him in his basement office after his abrupt “retirement” from Congress. It was a real office, but I recall it as one of those white-painted brick-basement cubicles with half windows looking up at the sidewalk outside.5

Packwood was not nearly as magnetic as Rostenkowski, but he was an experienced politician. The two of them made common cause with the president to get the bill passed. That example has caused many pundits to observe that “the key to passing a big tax bill is getting the President behind it.” But those pundits usually did not consider passing a big tax bill through budget reconciliation with one party rule of Congress.

There were many motives for supporting the Tax Reform Act of 1986: eliminating loopholes; fairness; improving the economy; attacking tax shelters. But the president wanted one thing: reduce those high over-90% rates that he had allegedly paid on his acting income back in the 1940s; it didn’t matter that such rates had ended in 1964. And by getting what he wanted and bringing Democrats on board with rate cutting he sneaked the Trojan Horse into the Democratic tent. Broadening the base and lowering the rates can be viewed as a description of the House Republican’s 2016 Blueprint, which approximated a consumption tax.

Doubled Down

Of course Reagan came by his tax conservatism comfortably in the Republican Party: Mellon thought 25% should be the top income tax rate and Republicans had frequently sought a constitutional amendment with that limit. So rate reduction had been Republican orthodoxy, but after Reagan, Republicans doubled down.

Reagan had taught them two things: (1) deficits did not matter, at least to their electoral success, and (2) why should Republicans cede to Democrats the political benefits of spending increases (think Bush’s prescription drug coverage). The technical term for this political epiphany is the “Two Santa Claus” theory of tax politics.6 Then they put these “principles” into effect with newly enforced vigor under House Speaker Newt Gingrich in the 1990s.

Obama’s Big Mistake

Now comes the Obama administration. It pursued as its number one legislative goal the historic number one wish of Democrats, going back to that original Democrat, Teddy Roosevelt in 1908: national health care. And like the dog chasing the bus, they caught it, and may now wish they had not, at least not in 2010.

That and the 2008 depression produced the expected political backlash. The Republicans retook the House in 2011. Republicans immediately mirrored the Democratic action in 2009: pursue the Republican’s number one wish-list item: a 2011 discussion draft of a major tax cut under the leadership of Ways and Means Committee Chair Dave Camp. The Camp bill became a formal proposal in 2014, and its words form the core of the 2017 Republican tax act. For example, new section 965, the one-time transition tax for the territorial system, is mostly word for word from the Camp bill.


The 2017 bill based on the Camp draft was sort of like Treasury II, in relation to the 2016 House Republican’s Blueprint, which was analogous to Treasury I. The Blueprint was more of a theoretical think piece, whereas the 2017 bill was politically enactable without Democratic help. It would not make Wal-Mart mad about not deducting imports. While it might disgruntle some with its one-time transition tax in section 965, they were “gruntled” by the vision of future never-taxed foreign income.

That astute political mix of business tax sweeteners (combined with a president who would sign the bill) made having a partner like Dan Rostenkowski unnecessary in 2017. It also made unnecessary (at least from the majority’s perspective) months of open hearings like Wilbur Mills and Russell Long used to hold on tax proposals. It was not that Mills and Long were unfriendly to backroom deals, but they operated in the long tradition of tax law writing being the most important exercise of the democratic process, even when it meant paying off political patrons (think of the tariffs).

In 2017 the Tax Policy Committee of the House Ways and Means Committee did not hold any hearings until July 13, when it held a half-day hearing entitled in a way that sounded like they knew what the bill would contain: Hearing on How Tax Reform Will Help America’s Small Businesses Grow and Create New Jobs (note the “Built for Growth” slogan on the webpage). They heard four scheduled speakers, apparently carefully selected: a union representative, small business, larger business and a policy organization.

Then they held a second meeting a week later with a similarly suggestive title: Hearing on How Tax Reform Will Simplify Our Broken Tax Code and Help Individuals and Families. Again, the four speakers appeared to have some balance, although their testimony offered little in detailed tax provision analysis. But they were headed up by former Ways and Means Chair Bill Archer (R. Tx.), a sure friend of the Republican proposals.

The Senate Finance Committee was more active in holding tax hearings. For example, on Sept. 19, 2017, it heard from Scott Hodge, President of The Tax Foundation. Hodge presented The Tax Foundation’s Four Pillars of Tax Reform:

1. Providing full expensing for capital investments;

2. Cutting the corporate tax rate to a globally competitive level, such as 20 percent;

3. Moving to a competitive territorial tax system; and

4. Making all three of these policies permanent.

Well, The Tax Foundation pretty much got what it wanted. Hodge made a feint at stroking Senator Hatch by stating that he generally favored corporate integration, a Hatch project, but he quickly moved on to the corporate tax cuts.

What Happened?

It is hard to avoid the view that the 2017 Republican tax act was never going to be very different from the 2014 Camp draft, which Camp had previewed in 2011. It contained the wish list of corporate multinationals supported by the new President: a 20% (ultimately 21%) tax rate and a “territorial” system replacing worldwide taxation, accompanied by substantially increased expensing and enough individual tax changes to provide something to “sell” to the voting citizenry.

Those of us who are working through the actual language of the 2017 act know without doubt that it lacked the careful drafting that historically had produced major tax bills. We know for a fact that it upends the tax law in ways that the 1986 Code never did. Whatever you thought you knew about international tax planning can be forgotten, and you can start from scratch, like the greenest graduate.

Maybe the same could be said about the 1913 income tax, but it had been rehearsed in the 1894 income tax (killed aborning by the Supreme Court), and the Civil War income tax, which actually operated as an income tax.

So how does the process of enacting the 2017 tax act compare with the process in 1985 and 1986? Not at all.

Related Content:

Cummings & Swirski, Interview with Ward M. Hussey, ABA Tax Sec. Newsl., Summer 2000.

Cummings & Swirski, Interview with John E. (“Buck”) Chapoton, ABA Tax Sec. NewsQuarterly, Spring 2014.

Cummings & Swirski, Interview with Robert S. McIntyre, ABA Tax Sec. NewsQuarterly, Summer 2014.

1 ABA Tax Sec. NewsQuarterly, Winter 2011, at 4.

2 See Cummings, Counterpoint: Let’s Not Rush to Change the System, ABA Tax Sec. NewsQuarterly, Spring 2006, at 11.

3 Cummings & Swirski, Interview with Robert H. Jackson, ABA Tax Sec. NewsQuarterly, Summer 2007, at 7.

4 Cummings & Swirski, Interview with Sheldon Cohen, ABA Tax Sec. Newsquarterly, Fall 2007, at 5.

5 See Cummings & Swirski, Interview Revisited: Senator Bob Packwood, ABA Tax Sec. NewsQuarterly, Winter 2015, at 12.

6 Cummings & Swirski, Interview with Eugene Steuerle, ABA Tax Sec. NewsQuarterly, Winter 2004, at 18.

Jasper L. Cummings, Jr., Alston & Bird, LLP, Charlotte, NC