Tax Reform Watch: From 1986 to 2017 — Where Are We Now? – August 18, 2017 by Tracy Monroe

August 16 marked the 31st anniversary of the day when 10 members of Congress — five tax writers from the House and five from the Senate —  reached an agreement on the most sweeping overhaul of the U.S. tax code in American history.
 
House Ways and Means Committee Chairman, Kevin Brady, celebrated the anniversary this past Wednesday by giving a speech at President Reagan’s ranch to build support for tax reform. There are many parallels between the types of tax reform sought now and then, with one major difference — 31 years ago there were specifics on a tax reform plan, while today we are still awaiting details.
 
And the goals that the 1986 Tax Reform Act (TRA) achieved are surprisingly similar to the goals that exist for today’s call for reform. Congressman Brady stated:
 
“The Reagan tax reform was all about helping the American people — workers, middle-class families and Main Street job creators.” He further stated: “And most of all, it focused on American competitiveness and economic growth — delivering one of the most modern and pro-growth tax systems the world had ever seen. A tax system that provided our businesses and our workers with the greatest opportunity to compete and win.”
 
The core principals and aspirations from 1986 still exist today: simplification for individuals while allowing American businesses to compete globally. In fact, today’s rhetoric of wanting to reduce tax rates and the number of tax brackets is repeating many of the same outcomes we saw in the 1986 TRA: 

  • The top tax rate for individuals was reduced from 50% to 38.5%, and further reduced to 33% in 1988.

  • The number of individual tax brackets was reduced from 15 to three.

  • The standard deduction, personal exemption and earned income credit were expanded, and the higher standard deduction simplified the preparation of tax returns for many individuals. 

  • The corporate tax rate was reduced from 46% to 34%. 

One striking difference, though, is that on August 16, 1986, there was a plan that was agreed to by both the House and the Senate. The law was signed by President Reagan on October 22, 1986, and tax reductions went into effect January 1, 1987.
 
Yesterday’s speech by Congressman Brady was long on outlining the compelling reasons why now is the time for tax reform but short on the plan to accomplish it. So, aside from the general comments made by the Director Gary Cohn and Treasury Secretary Steve Mnuchin in April, we are left waiting for more.  Brady addressed the issue stating “Just like in 1986, this is not going to be easy. Legislatively, tax reform is the challenge of a generation for America. There’s already a hashtag for it on Twitter — #TRIH: tax reform is hard.”
 
With each day that passes without a specific plan for reform in place, it becomes less likely a retroactive effective date of January 1, 2017, will be possible. In fact, with each day that passes it seems less likely that one large tax reform bill will pass and more likely that reform is achieved through several smaller bills, first to reduce individual tax rates and then to address corporate tax reform. However, if any retroactive individual income tax rate reductions are put in place by year-end, many individuals stand to enjoy a larger-than-normal refund since the individual tax withholding tables have not changed.
 
For now, this is where we stand and where we will stay — at least until after the Congressional summer recess. Our Cohen & Company team will be back offering updates and insightful thought pieces on tax reform once Congress returns in early fall. We thank you for continuing to follow us and hope to have good news to report as the seasons begin to change!
  
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