Book: Showdown at Gucci Gulch
Author: Jeffrey Birnbaum and Alan Murray
Key takeaways: This book is about the 1986 tax reform, which as the subtitle of the book states, was an “unlikely triumph”.
History of Income Taxes: At the close of the 19th century, government raised most of is revenue from tariffs and excise taxes (placing a heavy burden on low-income Americans). William Jennings Bryan fought for an income tax in 1895, but was thwarted by the Supreme Court which called it an unconstitutional levy. Only in 1913, when the 16th Amendment was ratified, income tax became law. Tax rates were boosted to help finance WW-I and then again for WW-II, and after the wars, instead of lowering the tax rates, Congress chose to give tax-breaks, which over time proliferated and became a major source of frustration among Americans, especially after the high inflation of the 70s.
Tax Reform is Hard: The 1986 tax bill endured a roller-coaster existence for almost two years, before it was passed by a Democratic House led by charismatic Ways and Means chair and House speaker, a Republican Senate led by a business-friendly but socially-liberal senator, and signed by a Republican President who had just won a 49-state landslide and had job approval in the 60s (before Iran-Contra scandal). Theta reform effort was helped in a significant part by CoS-turned-Treasury Secy. James Baker’s political skills, and Bill Bradley (D-N.J.)’s work on the topic before it was picked up by the White House. It was understood that tax reform is too big, too complex and too controversial to be pushed through the Congress by one party alone, but this could also be a result of power being split in D.C., with the House under Dem control.
To appreciate the effort it goes into bringing a bill like this to the floor and getting it passed, look at this abbreviated sanitized chronology –
- Aug 5th 1982 : Senators Bill Bradley (D-N.J.) and Richard Gephardt (D-M.S.) introduced Fair Tax Act
- Jan 25th 1984: President Reagan called for a Treasury study of tax reform in his SOTU address, to be presented to him by Dec ’84 (after election).
- Apr 26th : Republican version introduced
- Nov 27th : Treasury Secy. Don Regan introduced his plan
- May 28th 1985 : President Reagan and House Chairman Don Rostenkowski (D-Chicago) appeared on national TV to endorse tax reform
- Oct 1st : House Ways and Means began drafting serious drafting sessions (revenue measures must originate in the House)
- Dec 17th : House passes the Tax Reform Act by voice vote
- March 19th 1986 : Senate Finance Committee began drafting a tax-reform bill (the committee is the sister of House Ways and Means)
- April 24th : Bob Backwood (R-O.R.) unveils a new low-tax-rate plan
- May 7th : The Finance Committee approves the tax plan by a unanimous 20-0 vote
- June 4th : Senate began debating tax reform
- June 24th : Senate passes a tax reform bill 97 – 3
- July 17th : House-Senate conference begins
- Sept 27th : Senate sends the conference-report bill to the President
- Oct 22nd : President signs the Tax Reform Act of 1986
An Unexpected Catalyst: Bob McIntyre’s study in 1984 shone a light on non-payment of taxes by corporations, and was a key catalyst for starting the reform process. Corporate contribution to government revenue had plummeted from 25% in the ’50s to just over 6% in 1983. McIntyre study found that 128 out of 250 large and profitable companies paid no federal income tax in at least one year between 1981 – 83, and 17 of these companies paid no federal income tax in any of the 3 years. This report turned out to be more influential than the might of the very many lobbyists.
Treasury Plan: This was the wild west era of drafting because people thought everything was on table–including items such as home-mortgage deduction, and increase in corporate tax rates. Interesting part when the draft was first presented to the President he didn’t quite grasp the significance and his most serious objection was the proposal to end deduction for country-club dues (admittedly, most of the stuff is boring, and this is where having someone with a political nose in the Treasury was very important, and why move of James Baker to Treasury–from CoS, was critical to the eventual passage).
“Write Rosty” to Passage in the House: House Ways and Means chairman Don Rostenkowski had decided that he’d make tax reform a Democratic issue, and decided to jump in with both his feet and signed alongside the President. He was a charismatic man and is often compared to Tip O’Neill and Lyndon Johnson in his ability to get things done. In his announcement that Dems are looking to reform taxes he asked constituents to write letters of support for tax reform to Rosty (i.e. himself); may bumper stickers and buttons were printed that said “Write Rosty”. Knowing that the tax reform plan will originate from this committee, various industries lobbied and started campaigns against the members of the committee (e.g. “DO YOU WANT TO PAY MORE FOR YOUR OWN HOME?” campaign targeting Congressman Bob Matsui). Also, right at this point, both Ways and Means and Treasury figure out that tackling SALT deduction would be too hard. Rosty also realized that the public was not clamoring for a bill (because if the American people did not think a bill could pass, any bill had very low approval ratings), and so he leaned on Bill Bradley, the junior member of the Senate Finance Committee (who was never in charge at the Senate Committee, but now had the ability to push a reform that was close to hi heart and he could do it through his partnership with Rosty).
The bill got off to an agonizing start (began Oct 1st ’85) and almost died on Oct 15th when an amendment by Alabama Dem Ronnie Flippo, which expanded the bad debt reserve deduction, was adopted 17-13, leaving a huge hole in what was planned to be a deficit-neutral bill, and was widely celebrated by the banks as a defeat of the tax overhaul. Rosty always figured that the bill had to die and be resurrected for it to pass, and wasn’t too worried about these initial failures.
They kept working, and even as the plan neared its eventual passage in the House (Dec 17th), as of Dec 3rd, the bill was opposed by several business lobbyists such as Chamber of Commerce, National Association of Manufacturers, Business Roundtable, National Association of Home Builders, American Bankers Association, among others (though a couple, such as Tax Reform Action Coalition and CEO Tax Group did embrace it).
On Dec 11th, the first vote on a rule that would pave the way to the reform, went down horribly, by a vote of 223 – 202, with ONLY 14 Republicans voting for it, going against their very popular President. Reagan got personally involved afterwards, and soon, on Dec 17th the act, H.R. 3838, passed without even a recorded vote.
Passage in the Senate: Bob Backwood didn’t like the House plan and was hoping it’d fail so that it wouldn’t become his problem. His plan took many meandering turns, but he muscled it through the Senate Finance Committee with a unanimous 20-0 vote, because the plan was pretty radical with very low rate structure (and far fewer special-interest amendments), which made it easy for people to come around.
After the passage, when polling was done, WSJ/NBC poll showed that the public optimism about the effects of the reform had risen from 39% in Nov ’85 (after the House plan had passed) to 47% now (Apr ’16). This was even more interesting because the House bill actually gave the average tax-payer a bigger tax cut, but again the siren-song of the lower tax rate of Backwood’s plan, worked to skew perceptions.
With this backdrop and with much fight on transitions–when the new tax laws would take place etc. Senate voted 97-3 on Jun 24th to pass the tax bill.
House-Senate Conference: The conference was complicated by a new JCT report (due to a new economic forecast by the CBO), after which they had to find an additional $17 bn of revenue, but eventually, with a lot of back-room dealing (I do not use this phrase pejoratively) between Packwood and Rosty, the conference eventually found sufficient compromised to send a bill to the President.