The success of the Tax Reform Act of 1986 is still being debated. Free-lance writer Meredith F. Chen asked various authorities for their opinions on the new tax system, and excerpts of their comments follow.
Paul Gann, president of the People’s Advocate, Sacramento:
“I don’t think that the Tax Reform Act has been that valuable to the taxpaying public. I have certified public accountants that work for my organization, and they are still puzzled about tax reform and they wonder what is it really going to turn out to be.
“We should have the courage to increase taxes for the things that are necessary because I resent the fact that we are borrowing money for generations that haven’t even been born yet.
“The cost of government should go down. We have too much government. We have government running out of our ears, and our eyes and our nose, and every day they increase our costs. Either let’s pay our way or let’s cut budgets.
“We need an honest reform, not a gobbledygook like we have had up to this point. What we have to do is reduce the size of the cost of government or we are going to have to increase taxes--one of the two.”
Sen. Phil Gramm (R-Tex.):
“I don’t think that we are truly going to get a measure of the full impact of the reform package for some time to come. But overall, I believe that it is an improvement in the tax system, even though during the transition it has been very unfair to some individuals and to some industries. It represented a change in the rules of the game on a retroactive basis, and that’s always difficult.
“I think that, to some extent, our problems were the sort of problems that a family would have moving into a new house. The house may be bigger and better, but you’ve got to get over the pain of moving. I don’t doubt that the new tax system is superior to the old one in both efficiency and equity.
“Finally, let me say that it has an additional superiority and that is, by eliminating the soft political underbelly of the tax code, those elements that were the most vulnerable politically and by taking those revenues and reducing rates, it now means that those who want to reduce taxes have to raise rates rather than eliminate inequities. It makes it harder for those who want to raise taxes to achieve that goal. That is a plus for the taxpayer.
“I think that the change made in 1986 was so substantial that other than simply correcting obvious and unintended inequities, that we ought to leave the tax code alone. I don’t think that taxes are going to go up.”
Rep. Henry Waxman (D-Los Angeles):
“I think that the 1986 Tax Reform Act has been beneficial. Many of the loopholes that we’ve seen in the tax law have been eliminated. I think that we’ll have a better idea of the effects of the new law in the next couple of years after it is completely phased in.
“I think that more reform is needed. Corporations and wealthy taxpayers still do not pay their fair share of the taxes because this new law is not progressive. The philosophy behind the tax reform act was that people with similar incomes should pay similar amount of taxes. Now we are getting a proposal from President Bush to reduce capital gains taxes by 15%, which I think is an attack against the very premise of the bill.
“I think eventually we are going to have to raise more taxes. Whether it will be through income taxes is an open question.”
Michael A. Uretz, chief operating officer for Los Angeles-based World Gym Licensing Ltd., which has 107 gyms in the United States and 15 in Western Europe and Japan:
“In my opinion, the new law has actually helped our business. We’ve experienced growth in the last two years that is all out of proportion to the growth we experienced before 1986. I don’t attribute that only to the tax reform act, obviously, but my sense is that people know now with more certainty that a lot of what they make, they are going to keep. I think that has helped in persuading many people to embark on a franchise because it seems like people have more income with which to invest.
“It is my feeling that there is more money out there, and one of the reasons is that the Tax Reform Act lowered taxes for many, many people. I think it is one element in many elements that has benefited our business, aside from the fact that the economy has been very good and fitness seems to be something everyone is interested in.
“In my personal life there are certain negatives in that I’m still not on real sure ground as to some of the deductions. The rules have all changed, and they’ve impacted me in a negative way in certain respects, but I’m getting used to it.
“My sense is that the new tax law will gradually be amended, and that taxes are going to go up.”
Jim Michaels, editor of Forbes magazine:
“One of the beneficial side effects is that it has killed the tax shelter business, which is a misuse of scarce capital. I think it has helped as far as the average American is concerned. It has put something extra in their take-home pay, which helps counter the continued toll that inflation takes on the household budget. To that extent it has also somewhat moderated the pressure for inflationary wage increases. That is very healthy.
“What’s harder to measure, but it’s certainly there, is that it has been a boost to incentive in that higher-paid people, creative people, can keep a larger part of what they earn.
“I think that there is another step in tax reform which should address some aspects of our tax laws which penalize savings. As you know, the savings rate in this country is not as high as it ought to be. There are certain things in the tax law such as the double taxation of corporate dividends and the fact that we no longer have a capital gains tax differential that penalize savings and investment. I think that they should be addressed. We have certainly come a long way with the present tax reform.
“Congress is going to have to face this problem of how do we encourage savings and investment. The earlier phase of the tax reform was to get a fairer system and one that put less of a bite on the individual taxpayer. It may be a couple of years, but eventually they will have to face the problem of double taxation of dividends and a lower rate for capital gains, and any other things they can think of to encourage savings. But that is for the future.
“I don’t think income taxes are going to go up, unless it is part of some trade-off in any future overhaul that may give a better break to capital gains. There might have to be some trade-offs in some higher marginal tax rates. But barring that, no I don’t think tax rates are going to go up.”
Sonny Bono, mayor of Palm Springs:
“Tax reform limits us as a city four or five different ways and it is definitely not working at the city level. We don’t think it is beneficial at all because many ways that we could make more money have been taken away from us and more or less routed to the federal government. We have limitations that we didn’t have before on refinancing and severe investment limitations that we didn’t have before. There probably are a lot of areas where we could make a lot more money, but the new reform is so restrictive, we can’t do that any more. It has more or less put a limit on our entrepreneurial possibilities of making money.
“One of the requirements is that we have to supply a new auditing of the city government. That auditing costs $10,000 a year. That is typical of the way the government approaches things; you do it, you pay for it and we’ll take a look at it and see if we want to fine you for it.
“It has created a definitely more restrictive climate for a city. It’s costly for a city.
“I think tax reform should be overhauled, but I don’t know if it is going to be. The problem is that the federal government has a tremendous debt problem, and when they get so much heat on for having a debt, they start getting very creative about how to tax people or how to figure out an angle where you take it out of one pocket and put it in another pocket. I don’ think we’ll see an increase in taxes, but we will see an increase in charges.”
Sen. Lloyd Bentsen (D-Tex.):
“I certainly do think that it is working, and it helped clear out a lot of tax shelters that resulted in some substantial abuses. It helped restore some credibility to the tax system. We had a situation where a fellow could be making a million dollars and paying no taxes. You had somebody else making $30,000 and paying taxes, and he just knew something wasn’t right about the system, and he was right. He began to lose confidence in it. You’d see someone working for a company that was making $600 million and paying no taxes, and that just wasn’t right. I very much agree that reforming the system restored some credibility and fairness.
“Some of the things that are problems still in the complexity of the 1986 Tax Act is a cause for concern because the simplification that was an objective was not accomplished. That is particularly true where you have to itemize. For those that don’t itemize, it was a help. You have a lot of people who were taken off the tax rolls, and you have tax relief for low-income and middle-income workers, too, by increasing personal exemption and the standard deduction.
“I think that you’ll have to have additional simplification, but that is always difficult to accomplish. One thing I disagreed with on the tax reform act was the retroactivity on real estate. I thought that should have been prospective.
“I don’t think that income tax rates are going to go up in the near term.”
Milton Friedman, winner of the 1976 Nobel Prize for economics:
“First of all, I think that the tax reform was a good reform on the whole. Second, it is too early, too soon to make any kind of serious judgment to answer your question. The tax reform of 1986 didn’t really go into effect until 1988, and of course we don’t have the statistics for 1988 yet. It is almost impossible to (assess it) except on the basis of the same considerations that were looked at at the time the act was passed.
“All those who were in favor of the Tax Reform Act of 1986 will say that it is fine, and those who were opposed will say no. Nobody really has any more information. It’s going to be a couple of years, you can’t tell anything about it right now.
“There are things about it that I didn’t like and there are things about it that other people didn’t like and they are still there. The two most important from my point of view are, first of all, the treatment of capital gains. What I favor is indexing the base for inflation, then it’s OK to keep it as regular income.
“I think the proposal to lower the rate is better than doing nothing, but not as good an indexing the base. The other major defect is the heavier taxation of corporations, which has had the effect of strengthening the incentives of corporations to borrow rather than have equity. That incentive was there before, but it’s strengthened. It ought to be eliminated by eliminating the double taxation of dividends.
“In the next couple of years tax rates are not going to go up. I think it is political suicide to raise taxes.”
Sylvia Porter, columnist and financial writer:
“It is a little early to judge the 1986 Tax Reform Act. It’s been just working for awhile. I think it is a fair bill. I don’t think it is by any means what we expected, but that is the way these enormous tax bills begin. The bill is what I consider the best the legislators could get at the time and probably the best they could get now. This took months of consultation from the best experts we had.
“I think that more reform is needed, but you have to be careful as to what comes under the definition of reform.
“I think tax rates will go up. What was President Bush really saying when he said no more new taxes? We’ll probably increase sin taxes. That would be an excellent way to raise an awful lot of money. I would say that that’s where your increases will come, and if I were going to vote on it, that is where I would concentrate, and I expect we’ll get it.”
Arthur Laffer, founder of supply-side economics:
“I think the bill is a very good one. I don’t know whether it is fair or not. I orient myself towards efficiency, towards production output, employment and eliminating poverty. In that sense, I think the bill moves in a very correct direction of dropping marginal rates and broadening the tax base.
“The whole theory of taxation is to have the lowest possible tax rate on the broadest possible tax base. You give people the the least incentive to evade, avoid or otherwise not report taxable income, and the least places to which they can escape.
“That is exactly the reason why I like dropping those rates from 50% to 28%, dropping the corporate rate to 34% and broadening that base as much as you can.
“It is absolutely not simple, but as far as leading to the continuation of the recovery, lowering unemployment and keeping production output and prosperity going, this one is really good.
“I think more reform is needed, but the question is: What happens when you tamper with it? It shouldn’t be tampered with if the bill gets torn apart, but there are corrections that could be made to make it better and simplify it. I don’t think that tax rates are seriously going to go up. The whole politics has changed, and it is very much in the people’s favor for quite awhile.”
Shirley McVay Wiseman, president of the National Assn. of Home Builders:
“We generally supported tax reform. It simplified the system and was generally good for the overall economy. Certainly in our industry, the preservation of the mortgage interest deduction was of primary importance and that was something we supported then and still support.
“The one thing that concerns us is housing affordability. The Tax Reform Act directly affected housing affordability by stripping away all the tax incentives for multifamily housing units and depreciation allowances. For instance, in 1985 we built 670,000 multifamily units. In 1988, we only built 407,000 units. That is a 40% decline. With that kind of decline you are going to see a significant increase in rental housing, and rates will continue to climb on rental housing. Therefore, those who continue to pay higher rents have nothing left to save for down payments (to purchase) housing.
“It covers the whole spectrum. Rental housing is affected. For-sale housing is affected because rental affordability is dramatically impacted.
“In terms of reform, we would like to see some type of legislation that wouldn’t significantly impact on the deficit, created to give some limited incentives to rental housing because we have a lack of affordable housing across the country. Without some type of incentives, we are afraid that affordable, rental housing will dry up.”
Roger Staubach, former quarterback for the Dallas Cowboys, now president of a commercial real estate firm based in Dallas:
“The short-term effects have hurt the real estate industry a great deal, but long term I think it is beneficial. There was a need for reform. The 1981 tax laws, especially in the Southwest, fueled some projects that were more tax-driven than based on the law of supply and demand.
“There wasn’t a real supply and demand criteria for some of the apartments that were built. People felt that they could build projects and structure them such that the tax benefits would cover any shortfall. I think the tax laws were a big factor that were driving deals for tax reasons rather than economics.
“The 1986 Tax Reform Act went back and actually changed the rules of the game. In the short run it has hurt, but in the long term, conceptually, I think the tax laws dealing in real estate will be beneficial.
“Everybody screams that the corporations should pay more taxes. But what are the corporations? The corporations are people. People work in corporations, and corporations need to make a profit. Hopefully, if you can benefit the corporations in a fair way, you don’t need to keep taxing the corporations and making them out to be the bad guys. They pay the salaries of the people who are the workers. There has to be a balance somewhere.
“I feel like the tax law at least set a motion that we are going to try to be more broad based and fair and nonpartisan. There were some excellent ideas, and there were some big mistakes that hopefully they’ll rectify.”