November 15, 2013

The Spirit of ’86: Real Lessons of the Last Big Corporate Tax Overhaul

By William Rice, Policy Consultant, Americans for Tax Fairness

It may well be that “those who cannot remember the past are condemned to repeat it,” but if you misremember history cleverly enough, you can turn it to your advantage. In fact, that’s what is happening right now among the people who want to keep giant corporations from paying their fair share of taxes.

A review seems in order, since Congress may soon consider a major overhaul of the corporate tax code.

Some corporate lobbyists and advocates are invoking the last major tax code revision, in 1986, to support “revenue neutral” reform. (This means closing some tax loopholes but giving the revenue generated right back to corporations by lowering their tax rates.) Their self-serving interpretation of history distorts why the corporate tax code was revamped 27 years ago: Too many corporations were dodging their taxes. It also distorts the actual results of that reform: Corporations as a group wound up paying a fairer share of taxes.

That’s the real lesson of ’86, and one we’d do well to remember in 2013, when corporate tax dodging is rampant once more.

Ronald Reagan: Corporate Tax Reform Hero?
Tax reform that clamps down on free-loading corporations was championed by no less a tax-cutting hero than Ronald Reagan.

The Reagan Revolution had ridden in on a wave of promised tax cuts, including cuts for corporations. The theory then (as now, in some quarters) was that tax cuts magically pay for themselves, by encouraging businesses to reinvest in the American economy. This leads to increased sales and hiring more workers – all of which increases tax revenues.

It’s a pleasant idea, but the reality is simpler: lower taxes lead to lower not higher revenues.

But in 1981, soon after signing one of history’s biggest tax giveaways to the wealthy, President Reagan received a sobering warning from his budget officials: reverse course, or face huge deficits.

Reagan (showing a greater concern for national finances than many of his followers do today) did an about-face and raised taxes the following year. One of the principal methods was closing corporate tax loopholes, including curbing the use of offshore tax havens (pp. 7-9). An important precedent was set for ’86.

1986’s Answer: Close Loopholes
The eventual success of that larger reform was aided by a second shock to Reagan’s tax worldview. Informed by his Treasury secretary that lots of profitable U.S. corporations (including Reagan’s former employer General Electric) were paying zero federal income taxes, the affable president responded: “I just didn’t realize that things had gotten that far out of line.’’

But they had (and have again now). What to do about it was the biggest debate in Washington over the next several years—a debate largely shaped by a series of careful but pointed reports issued by ATF ally Citizens for Tax Justice. After many legislative twists and turns—and millions of dollars in lobbying—the Tax Reform Act of 1986 was signed into law.

The final product was in fact revenue neutral—but that’s because it cut individual taxes while raising corporate taxes, a net $120 billion over five years. It raised this revenue not by boosting rates—corporate rates actually fell, along with individual ones. Instead, it closed loopholes, like special credits for buying equipment and special breaks on how to value it. Among the other corporate tax giveaways that were taken away in ’86 were lavish meal, travel and entertainment deductions (anyone remember the taxpayer-subsidized three martini lunch?).

The Real Lessons
So the real lessons of the corporate tax reforms passed in ’86 are that it was:

  1. Undertaken not to cut corporate tax rates, but to stop corporations from dodging their fair share of taxes.
  2. Not revenue neutral, but on balance raised the amount of taxes paid by corporations.

In our current era of renewed, widespread corporate tax avoidance, any corporate tax proposals that ignore these lessons are not only violating the spirit but defeating the purpose of the 1986 reforms.