Economic PolicyEconomyFederal TaxesTax ReformTaxes

Time to Revisit the ’86 Tax Reform — In America and Arkansas

taxreform-01What words come to mind when you think of taxes?
If I had to guess, “simple” and “fair” aren’t among them. That’s too bad. An ideal tax system would indeed be simple and fair. It would not contain loopholes that benefit certain behaviors or politically-connected businesses. It would not have many different rates, treating some taxpayers worse than others.
As any Arkansas taxpayer knows, neither our state nor our federal tax code lives up to this ideal. But at the federal level, there was one brief moment when the tax code came close to becoming simple and fair.
That time was 1986.
That year, Democratic members of Congress worked with a Republican president to enact true tax reform. They reduced the number of tax brackets from over a dozen down to two. They slashed the top rate from 50% to 28%. They scaled back or eliminated many special interest tax breaks. They made the tax code simpler, fairer, and more pro-growth.
Generally, politicians love to “reform” the tax code by introducing narrowly-targeted tax breaks for industries or individuals. Each of these tax breaks provides a big benefit for a few people, and these individuals are very happy with the politicians. The cost of a single tax break may only impose a slight burden on every other taxpayer, so the larger group often takes little notice. Concentrated benefits with diffused costs – that’s a recipe for political success.
In 1986, however, members of Congress and President Reagan turned the usual way of doing business on its head. They aimed to reduce the special interest tax breaks in order to provide lower tax breaks for the general public. While the final tax reform bill was not perfect, it was far more successful than other efforts to enact this type of sound tax policy.
The results not only improved the tax code’s fairness, it also helped the economy. This tax reform allowed people to keep more of their own money, and many people responded to this incentive.
Wouldn’t it be nice to have something like this happen today? Our federal tax code is a mess. There are tax loopholes for just about every lobbyist in Washington, D.C. People are making spending decisions based on what will lower their tax burden, not on what’s good for their family or their business. And we could surely use a tax reform that truly stimulates economic growth across all industries, instead of tax “reform” that provides giveaways to politically-connected business owners.
We need this in Arkansas just as much as at the national level. That’s why it’s refreshing to see incoming governor Asa Hutchinson propose lowering tax rates. He seems to understand that lowering rates for everybody, not just tax cuts for a small group of people, is the way to enact meaningful, pro-growth tax reform.
Unfortunately, some legislators are more concerned about benefiting small groups than advancing the welfare of the general public. At the same time as Hutchinson is proposing broad-based tax relief, Rep. Charlene Fite wants to exempt veterans’ retirement pay from income taxes and Rep. Joe Jett is proposing to give farmers a tax break on machinery parts and repairs.
Adding more special interest exemptions to the Arkansas tax code is a step backwards (even if the special interests benefiting from the tax break are very laudable groups). Everyone in the state deserves a tax cut, not just veterans and farmers. Cutting tax rates benefits everyone who pays taxes, not just members of politically popular groups.
In 1986, politicians put the public interest ahead of politics. America benefitted when they did this. Let’s see them do the same thing today at both the federal level and in Arkansas.

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