Bill Bradley, former New Jersey senator and Democratic presidential candidate, is the self-described "zealot" of the tax reform effort that led to the Tax Reform Act of 1986. As a member of the Senate Finance Committee, Bradley introduced his own version of tax reform, the Fair Tax Act, with former House Majority Leader Richard A. Gephardt in 1982 and 1985. During that time, Bradley wrote The Fair Tax: At Last, a Proposal That Offers the Fair Tax to Every American!
This year marks the 25th anniversary of the 1986 reform effort. Bradley recently sat down with Tax Analysts' Meg Shreve to discuss the potential for another major overhaul of the tax code.
Tax Analysts: On August 8 President Obama mentioned tax reform again in conjunction with the deficit joint commission. What's your feeling right now? Is the climate there for tax reform? Any similarities to 1986?
Bill Bradley: I think there are four or five things that you need in order to do tax reform. The first thing is you need to define what you mean by tax reform. Do you mean closing loopholes only? Or do you mean closing loopholes to lower rates with all the money going to lower rates? Or do you mean closing loopholes and using only some of the revenue to reduce rates?
If you close loopholes, you're raising taxes on those individuals that use the loopholes.
Other people say no, tax reform should be cutting the individual rates and making up the lost revenue with a gasoline tax or a value added tax. That's a whole other way of looking at it, so you
need to define what you mean by tax reform.
In '86 we were very clear: revenue neutral. It's simply going to be giving lower rates to the vast majority of Americans and paying for them by [closing] the loopholes used by fewer Americans. That's what the objective was and it drove the whole thing. Republicans wanted lower rates; Democrats wanted fewer loopholes. Each party got something out of tax reform.
You need to be clear from the beginning. I wrote a book about it: "This is what tax reform is [and] this is what I mean by it." The Reagan administration did two studies. We meant the same thing so we were in concurrence.
Once you've got definition, I think there are other things you need. You need a president that is full-square behind it. Ronald Reagan wasn't in the room negotiating. He just gave a couple of speeches, but he told his people, "This is what I want you to do." Second, you need a Treasury secretary that can go in and cut the deal. He's got to know taxes well enough that he can go in and ultimately broker an agreement. That's what [former Treasury Secretary James Baker] did at Treasury when he was there. That's what [former Treasury Secretary Donald Regan] did at Treasury when he started the process. Although Baker was hands-on, Regan made it acceptable and led the charge. It was Baker who actually sat in the room and cut the deal. How do I know? He cut it with me.
Third, you need to have a chair of the Ways and Means Committee and a chair of the Finance Committee who believe their political futures are served by doing tax reform. In the case of [former Sen. Bob] Packwood and [former Rep. Dan] Rostenkowski, each of them — for different reasons — knew this is what they wanted to get done. They found a way to get it done — a very pragmatic way.
Last, you need some zealot who does nothing but talk about it and tries to make the case as broadly as possible. That was probably me. [I] didn't do anything except talk about tax reform for four years. It got so bad that I remember being on a TV interview show that was recorded on a Thursday and rebroadcast on Sunday, so I was at home watching it. My daughter — who was about 10 years old at the time — and her little friend were in the room. The TV said, "Eyewitness News with Senator Bill Bradley," and my daughter elbows her friend and says, "C'mon, let's go. All he's going to talk about is
loopholes." That's how bad it got.
You need all those elements if you're going to really make it happen. I suppose if you had enthusiastic Ways and Means and Finance committee chairs then you wouldn't need a zealot as much.
TA: You mentioned having the president behind it. How would you grade what President Obama has done so far on tax reform? What do you think he still needs to do to push the issue?
Bradley: He needs to be very clear about what he means and why it should be done. If the answer is "We need to close loopholes to raise revenue and we don't touch rates" — if that's what you mean, then say it.
TA: Do you think the corporate and individual have to go together?
Bradley: Well, I personally think you have to do individual. You could do individual alone, but if you do individual you should also do corporate, but each should be internally consistent. Doing corporate alone doesn't make sense to me.
TA: So you have to pair them together somehow?
Bradley: Yeah, I think so.
TA: And what about this discussion in the context of the deficit commission? Do you think tax reform has a place there? Or should it be separate from the deficit talk?
Bradley: If it's revenue neutral, then it's irrelevant. The 1986 tax reform is irrelevant to the deficit reduction commission, because it was revenue neutral. But if you want to raise revenue, then you close loopholes, you make deductions against certain rates and not other rates. It seems to me the deficit reduction commission is saying that tax reform means closing loopholes to raise taxes. That's what I understand. I don't know if that's what the president has said specifically.
TA: How important is it to get the American public to buy in? It seems everyone is focused on jobs and the economy right now. Does Obama have to have a kind of "Write Rosty" moment? What does he have to do?
Bradley: Tax reform will never be a mainstream issue. It's too complicated for too many people, but you have to have a public strategy. You have to be able to explain to the public at large what you're doing. What we were trying to do was make equal incomes pay equal taxes. That was one of the principles. Another principle was that those who have more should pay more — retain progressivity. The third was the market is more efficient at allocating resources than the Ways and Means or Finance committees. Those three principles guided the whole thing. So I think that ideally you'd have a set of principles that guide this.
TA: You mentioned having a Treasury secretary that can broker a deal. Would you talk about how important Treasury I and II were to the process?
Bradley: Dick Gephardt and I introduced the first version of the Fair Tax in 1982. I made a big push to get [former Democratic presidential candidate] Walter Mondale to adopt it and take taxes as an issue away from Republicans by arguing for lower rates and fewer loopholes to pay for it. Mondale rejected that idea mainly because he had been on the Finance Committee and thought it had been hopeless. The Republicans heard about that and were afraid that he was going to come out in the campaign for it and take the tax issue from them. So Reagan said, "I've commissioned a study." That first study emerged as Treasury I, which was a pretty good job.
When things got serious, Reagan said he'd like to go ahead, and Don Regan got involved. They did Treasury II, which was new and improved. Just like I introduced a bill in '82, I introduced a new and improved bill in '85.
It was a bipartisan effort. It wasn't just some Democrat writing a book about achieving the impossible, but it seemed to be something that both sides could get something out of. That's really the key. The reason tax reform worked is because each side got something out of it politically. Republicans got lower rates (and Democrats don't mind being associated with lower rates, either). Democrats got loopholes closed, which made equal incomes pay more equal taxes, and retained the progressivity principle. The result of that bill was that the top 5 percent paid a higher percent of the income tax revenue after tax reform than before tax reform even though the rate dropped from 50 to 28 percent. What does that tell you? The rich were using loopholes to avoid paying taxes.
TA: There was some talk that Treasury would release something earlier this summer on corporate tax reform. Nothing seemed to come from that. What does Treasury have to do?
Bradley: I think the administration has to decide what it means by tax reform. That should be an effort of the Treasury Department with the president endorsing it.
TA: Looking at the [committees], there were a lot of hearings this summer. Leading up to TRA 1986, an entire summer was devoted to tax reform hearings. Is it comparable?
Bradley: When we did over 30 hearings in the Finance Committee, we had sets of questions that we could ask those who testified because there was something on the table: Treasury I, Treasury II, the thing I introduced. "Are you in favor of lower rates and paying for them by reducing loopholes? Would you give up this loophole? Would you give up the mortgage interest deduction? Would you give up certain kinds of depreciation?" You ask people questions.
I'll give you a perfect example. At every hearing I'd ask, "How low does the rate have to be for you to give up capital gains as an exclusion?" It boiled down to somebody saying, "If you can get the top rate down around 28" — which is what the capital gains tax was at that time—"and assure us that the capital gains tax will not go up or higher than that, then maybe we could take that." That came out of the hearings. Hearings are valuable if they are substantive searches for answers. They're less valuable if they're simply political shows to back up an already decided point of view of the chairman.
TA: The hearings have been presented as an opportunity to kind of educate members since there are so many new faces on Ways and Means.
Bradley: I think it's very true: "This is the income tax code. These are the rates and these are the exceptions. There are over a trillion dollars of loopholes. If we close them, we could lower the rates this far. If we close some of them, we could lower the rates that far. If we close some of them, we could lower the rates and use some of those revenues for deficit reduction, so you could get some lower rates and some deficit reduction." It's important to explain that to people.
An argument I made constantly [was] that spending money through the appropriations process is no different than spending by reducing somebody's tax rate for doing x, y, or z. If you believe the market is a better allocator of resources than the Ways and Means Committee, then you don't want the special loopholes. You want the market to allocate capital.
Some of the loopholes are extremely sensitive. The big five, as you know, are the biggest revenue raisers. They cost the most: mortgage interest, healthcare, buildup in pensions, property taxes, and charitable contributions. Those are the big five.
TA: There's basically no way to touch those politically, right?
Bradley: I could see ways of touching them. If you don't want to raise the top rate from 35 percent to 39 percent but you want to have upper-income people pay more taxes, or you wanted to reduce the budget deficit, you could say that the mortgage interest deduction is deductible only against the 28 percent rate, not the 35 percent rate. The value of that deduction drops from 35 cents to 28 cents. That means someone in the 35 percent bracket pays more taxes.
TA: Sen. Ron Wyden, D-Ore., first with former Sen. Judd Gregg and now with Sen. Daniel Coats, R-Ind., has put out some tax reform proposals. Have you gotten a chance to look at them at all?
Bradley: I talked to Ron early in the process but I haven't analyzed the bill. I think Ron is a committed tax reformer, and I think that helps. Maybe he's the zealot. I know he's been very serious about tax reform. He reached out to me a couple years ago to get an understanding of what happened in '86 and how did it happen. I think he's very talented.
TA: There's a lot of talk. You have Wyden out there with his bill. You have the chairs talking about tax reform. What has to happen beyond the political rhetoric to get the ball rolling?
Bradley: I think the administration has to propose something. It's conceivable you could have a lawmaker write a book. I doubt that will happen. You need somebody to say, "Here's what I mean by tax reform." Here it is. Lay it out in all its great detail.
The absence of [a] clear definition of what you mean is a guarantee of conflict down the road that would be unnecessary otherwise. Conflict is going to occur anyway. It would be less destructive if we knew what we were in conflict about as opposed to talking about apples and oranges.
TA: This has come up before in the hearings: How do you counteract the lobbying that's going to come in?
Bradley: One of the things we did was split the corporate community. There are a lot of corporations and a lot of individuals that will benefit from lower rates that are fed up with paying higher rates of tax because other people get special deals and pay lower rates of tax. We built a corporate committee in favor of tax reform and a labor committee in favor of tax reform. That helped a lot, because we had other corporations paying lobbyists to thwart tax reform.
You've got to know what your specific proposal is in order to determine who is going to pay more taxes and who is going to pay less tax. If you're not specific, then everybody will be against it. All the 34,000 lobbyists will be against it because they will be paid to stop the unknown. And you remember what the title is of the book written about TRA 1986: Showdown at Gucci Gulch.
TA: Is there anything about TRA 1986 — the whole effort — that you would have done differently? And if so, are there lessons there for lawmakers this time around?
Bradley: As I think about it in retrospect . . . revisiting what happened in '86, I'd say, "Hmmm, this wasn't a bad legislative effort." I still think that. You can quibble about transition rules. You can quibble about small things, but the big subject, the big issues related to the principles that were originally established — equal incomes did pay more equal taxes. The wealthy did pay more. Those who made more should pay more. The market did allocate resources more effectively.
Overall, I feel that the effort has survived the test of time. Notwithstanding the fact that one year later all the loophole guys were back in my office saying, "Gee, we want to put this back in." I remember the capital gains guys came in. They had 28 percent and said, "Well, we want 20 percent or 15 or 10" or whatever. I would say to them, "Look, fellas, I appreciate that, and I appreciate the value of lower capital gains for certain venture capital operations, but if you get that in I can tell you one thing: The rate's going up." Their response was that they didn't care. In other words, they liked the old system.
That's precisely what happened. [Former President George H.W. Bush] came in [with] his fixation with capital gains. [Former Democratic Senate Majority Leader] George Mitchell was against it. It didn't succeed.
[President Clinton] came in, and he just filled the code with things he could spend taxpayer money on without having appropriations. It would be interesting to know how many loopholes were introduced under his tenure and for which narrow constituency.
TA: What are the lessons from TRA 1986?
Bradley: They're the ones that I had said. You've got to have principles. You've got have a specific proposal. You got to have the ability to deal without losing your principles or your objectives.
TA: Are the stars aligned for tax reform?
Bradley: Well, not for corporate reform. And I don't think that the stars are aligned for a repeat of 1986, when you had revenue-neutral reform. What I see as the reason people are interested in this is they think this is a way to get increased revenue without touching rates. Is there a constituency for that?
I do think the most important thing is the marginal rate. There are plenty of loopholes that create great inefficiency in the economy, but there are certain realities. If you try to make the corporate deduction deductible against the 28 percent rate, you'll have every charity in America coming in and arguing that there will be no more charitable giving — but all the studies show that the tax rate doesn't determine the charitable giving, by and large. It's people's charitable impulse.
I think today tax reform means closing loopholes to raise revenue—maybe closing enough loopholes to drop the rate a point to 34 [percent] marginal rate or something like that. You couldn't drop the medium rate because you'd have to raise so much money.
TA: The first step just begins with a definition?
Bradley: This is not the kind of thing that you can settle in a room late on a Friday night without having put it out there and giving everybody their shot. If you hold hearings, what group is going to come in and say, "I'll give up my loopholes"? They're not going to do that, so you do a specific proposal. You put it out there and let people hammer it. Then you compromise, but without compromising your original principles.
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