(As delivered to the Tax Council, Nov. 14, 2011, by Jeffrey Birnbaum, President, BGR Public Relations and co-author of Showdown at Gucci Gulch)

Thank you Lynn, Thank you everybody, thank you for the honor of this invitation. Do not tell my wife that I told you this. I hope to give you the CliffsNotes version of Showdown at Gucci Gulch, so you won’t have to re-buy it. But if you want to its ok.

This is a great time, actually, to talk about tax reform. What I have been asked to do, and I am more than happy to do, is describe what happened a quarter century ago when the tax reform act of 1986 was passed, despite many doubters at the time. Describe how it happened and why it happened. And to give you some assessment if it can and will happen again and if so what that means. I do so now in a different position than I had in the 1980s, when I was the tax reporter for the Wall Street Journal—I was a young man then, and still am. I remember when I was given that job at the WSJ—it was a fairly big job for someone 25 years old. At that time David Ignatius was a reporter for the WSJ in Washington and he walked past me after that announcement went up. He said “congratulations Jeff,” and then he looked at me, gave a pregnant pause and said, “Don’t screw the pooch.”  Thanks a lot David for that vote of confidence. No one could imagine at that time how big a story it was going to be. I was truly privileged and, I can say, very lucky to have the chance to write about what was the biggest story of its day—the complete rewrite of federal income tax, both personal and corporate, a feat that very few people imagined could happen. But in fact, it did. And I’m here to tell you today that I think it could happen again and relatively soon.

I say this, in the spirit of being a journalist—and I am at heart, while disclosing that I am no long really a journalist, although I do commentary here and there including on Fox New Radio. I am now the president of a public relations firm, BGR Public Relations. I am here with my colleague Erin Billings, who is also a recovering journalist, the former deputy editor of Roll Call until not too long ago, when I stole her away. And we are actually for hire, so after the speech please go up to Erin and give her your cards and we will be happy to take each of you as clients. That was a joke, it really was a joke.

It is hard to remember and imagine how big taxes were back then.  I know all of you are tax lobbyists and experts in the field. But you also spend a lot of your day not being noticed by the public—which is a great benefit of your work. That was not the case in 1985 and 1986, when the Tax Reform Act of 1986 was making its way through the House and the Senate.

One of the first things to remember about that time, and to remember right now in the closing weeks of the super committee, is that tax legislation takes a very long time to percolate. The notion that the super committee can rewrite the tax code in weeks, months or even years I think is an exaggeration that defies policy and electoral logic. It was a great story at its time- -the Tax Reform act of 1986. But it also was a story that almost didn’t happen at least a dozen times. The Tax Reform Act died in the Ways and Means Committee, on the House floor, in the Senate Finance Committee, on the Senate floor and several places in between. So much so that one of the Chapters in Showdown at Gucci Gulch was called the Phoenix Project because the legislation would rise from the ashes—and did so so many times that it became a pattern. A kind of sin curve of legislation—up and down—and I fully expect that if tax reform happens again, it would take the same pattern although with a lot more people watching.

So, let’s just start with why it may not happen. That is because the safe bet in Washington is always to say that nothing will happen. You probably can’t be wrong telling your bosses “it’s not going to happen” and there were people that believed that the Tax Reform Act of 1986 would never happen. In fact, Bill Gradison, a Republican member of the House Ways and Means Committee at the time, and one of the readers of the manuscript of Gucci Gulch before it was published, wrote back and said he enjoyed the narrative and the book, generally, but that the entire exercise was a fluke—that it couldn’t happen again and that it was a miracle that it happened in the first place. 

To the extent that the public wants tax reform, they want a tax code that’s fair and simple, right? But you can’t actually have a tax code that is both. You can have a code that is simple—meaning getting rid of all sorts of deductions, credits and exemptions and lowering the rates enough so, as Rick Perry likes to say now, where you can file on a postcard. Or you can have it fair, that is keeping some exemptions and deductions for good public purposes. Such as charitable deductions, home mortgage deductions, state and local tax deductions—one of those issues that almost brought down Tax Reform in 86. But if you make it fair, therefore it can’t be all that simple, or make it really simple, and then it can’t be all that fair. So what people are asking for is something that can’t literally get. I think it will be especially difficult to have a major reform in part because of the rise of the internet, which did not exist 25 years ago. More information is available to people who can be mobilized a lot faster to protect their own particular part of the tax code. Election and campaign money is much larger than it was back then and I guess is getting larger all the time because of the Citizens United decision in the Supreme Court. And as we all know, partisan distrust is at an all time high or low, you know what I mean. Republicans and Democrats in ‘85 and ‘86 talked to each other, just imagine that -- something that doesn’t even happen these days. And last but not least, what Congress is good at doing is improving things incrementally, or I should say, changing things incrementally.  That’s the way the system was put together and only those things that have a real consensus have a chance at moving forward in small ways. It is the rare moment in history, when something big, huge really, can happen and redoing the tax code is huge because it affects everybody and every business.

But I believe that tax reform can happen and that there is a very good chance that it will begin to happen after the next election, because in part, even though I am a reporter at heart I am not cynical about the process. I saw with my own eyes that the Congress was able to act in a very big way when faced with a major problem. When forced to act it in fact can. It’s the miracle of democracy. I don’t mean to get dewey eyed about it, but in fact it is quite remarkable that the Congress that we love to ridicule, even though we work with them all the time, can accomplish great things when handed a  great opportunity or more importantly a gigantic problem that needs to be solved, and that was the case back then.

Congress can act and has acted in spasms to make major change.  Another way to put it is, Congress does two things well; it does nothing and it overreacts. I do believe that Congress is on the verge of being given the chance to overreact, and is likely to do so starting in 2013, with the federal income tax. 

But first, how did it happen in 1986?

It happened because there was a real problem with the income tax that was widely perceived as a problem by the American public; that’s two, separate things that are important. Back in the mid 80s after the Reagan tax cuts of the early nineteen eighties, the income tax code was on the verge of collapse.  Most people don’t remember it that way, but there was a palpable feeling of inequity about the tax code. People and business with similar incomes could pay drastically different amounts of taxes because of loopholes and tax shelters--especially in real estate.  You might remember the see-through buildings in Houston; that is, entire skyscrapers that were put up that did not need tenants to be economic because of the tax benefits that flowed from them.  You might also remember Citizens for Tax Justice, which is still around. It put out reports indicating that very large corporations that were making large profits were paying nothing in taxes, and in fact getting refunds of large size.

The American public read these stories and reacted to them by giving the income tax a low rating.  So low that experts here in Washington were seriously discussing whether the voluntary filing of income taxes would continue without interruption. We take for granted that people and companies volunteer to pay their taxes every year.  Back in the mid 80s, it was not clear that this was going to continue.  Because of distrust of the income tax -- and in fact there was a serious problem with the income tax -- it was not just a political reaction. So the word reform became a very important word, and it was one that Republicans and Democrats, rich people and poor people, companies, a few of them anyway, believed was necessary to happen to the income tax in order to save it. 

Second, there was a bipartisan approach to the problem, a synthesis that was so simple, it was genius.  Put together largely or I guess we could argue, popularized, by former senator and basketball great Bill Bradley. He decided that the tax code needed to be overhauled and that there was one way to do it that would bring into the fold both Republicans and Democrats. He put together what we now know as tax reform, which was a lowering of tax rates, something that Republicans dearly wanted—especially President Reagan -- and an elimination of a host of exemptions, credits and deductions—something the Democrats dearly wanted—to get rid of special interest provisions in the tax code. The combination, the synthesis, of a Republican and a Democratic idea into one idea that solved a big problem, was the genius that started tax reform moving.

There was a moment -- that we have not seen since -- that sparked the tax reform movement. Ronald Reagan got on television and said that he wanted a tax reform that lowered rates. Followed by the Democratic response by the chairman of the House Ways and Means Committee, Dan Rostenkowski. He said “Yes!” When was the last time that happened? Rostenkowski, who was not really made for television, was so proud to have his full name up on the screen but he knew that most people couldn’t remember it or spell it for sure, so when he asked people to write in—in favor of tax reform—to support the initiative that he and the Republican President supported, he said, “Write Rosty,” his childhood name, because even his friends had trouble pronouncing his full name. As a result, thousands, tens of thousands of letters came into Washington, saying, “Yes, we want reform, we need to change the system” and that was the beginning of a public movement to change the tax code—supported by both Republicans and Democrats.

Number three: Partisan competition. That would seem like an impediment to tax reform but, in fact, it was the opposite. There was a Republican President, a Democratic House and a Republican Senate, at the time. So the President and his Treasury Department came up with two separate ideas for tax reform—Treasury One and Treasury Two—that went to the House and there were plenty of people that hoped that would put an end to this ridiculous idea of redoing the tax code. And it went to the House, and the Democrats in charge could not let the cat die at its doorstep. There was a decidedly negative motivation to moving tax reform forward. It wasn’t that all of these politicians, who were all deeply dedicated to their own parts of the tax code, were hungry for reform. But politically speaking, they could not allow themselves to be blamed for its death. So once the President suggested a reform, it was up to Rostenkowski to come up with something—and he did. Even though it died in the Ways and Means Committee, at least once, there was a big vote on a banking provision. And then Jack Kemp, who was actually one of the Republican fathers of tax reform, led a revolt in the House that killed the rule on tax reform and that killed tax reform momentarily. The House could not let it die and had to pass it somehow. Ronald Reagan came up to the Hill and with the Democrats forced it through the House and put it on the doorstep of the Senate where it also died in the Senate Finance Committee until Packwood came up with the crazy idea of raising excise taxes to pay for it, managed to get it through the Finance Committee and ultimately through the Senate floor.

The short version is—that if it were not for the competition between Republicans and Democrats, I’m not sure the whole thing would have worked as well.

Fourth, there was a division in the corporate community. You might think that companies would have automatically said no. One of the innovations of Rostenkowski was that he found a group of companies that would benefit from the lower tax rates, helped organize them and had them stand with him every chance he could get in front of cameras. So it looked like there was a deep division in the corporate community. The Tax Coalition was born back then and still exists today; it’s a group that is in favor of lower tax rates. By dividing the corporate community -- as the saying goes “a house divided will fall” and the corporate interests were split and therefore cleared the way for approval of the corporate side of the tax code, which in fact was a gigantic net loss for the corporate side. There was a 100 billion dollar transfer over five years from corporations to individuals. A large group of corporation, primarily made up of those that lost deductions and credits—the capital intensive industries—paid for the individual tax rate reductions and that was because the house divided in the corporate side allowed the bill to pass. So a division in the corporate community was very important.

The last reason for the success of the unlikely tax reform was that budget deficits were not an issue. It was one of those rare moments in the last 30 years in which the size of the budget deficit was not a meaningful amount and the tax code could be operated on in a pristine fashion, just on its own. So the entire effort could be done in a revenue neutral fashion. It reduced a potential burden on the tax writers to come up with something that actually reduced the deficit.  

Those are the reasons that it happened back then.

Now, how could it happen again?

The first reason, I think, is that the ground work is being laid for tax reform. We are seeing all sorts of straws in the wind. Certainly all Republican candidates for president are talking about some version of major change in the tax code, which has inserted that into the public dialogue in a way that I think is very important. The American public is now well aware of the problem of the current tax code and they now understand that there are a number of solutions, and several of them are very bold solutions. President Obama, as well, has spoken in very broad terms, about the need for a classic style of tax reform. So we have Republicans and Democrats, at a very high level, speaking publicly and often about the need for tax reform.

Those discussions are also happening on Capitol Hill. I know that all of you noticed and read, very closely, Chairman Camp’s territorial reform that he suggested just a couple of weeks ago. I think that is an important building block for what could be tax reform legislation somewhere in the future. That actual serious work is being done on the elements of what could be a major change in the tax code is definitely worth noticing. As you all know, Chairman Camp is sincerely interested in tax reform. He may not be as interested with President Obama in the White House, but he is certainly interested in tax reform and so are his top aides. In addition, the discussions on the Hill on tax reform have gone, I think, very far and we need to take them seriously. Speaker Boehner, over the summer, in his grand bargain negotiations with the President, included tax reform as an element that Republicans might be able to accept as part of a deficit reduction package. Even the talk of the Buffett Rule, that is the need to change the tax code for very rich people, all fit into the general rubric of the tax code not being in good shape, that it needs to be fixed and needs to be fixed in a big way.

These discussions take a long time. The Tax Reform Act of 1986 was something that began at least 5 years before then. When Bill Bradley introduced his tax reform plan with Dick Gephardt it was done in a restaurant bar where there were so few people that showed up, the most notable event other than Bradley speaking was that a dog walked in off the street and wandered around during the press conference. It takes a long time for the public to hear from their leaders about the need for tax reform before that actually gets into the public psyche.

Second, the tax code, I think, is in trouble. I’ve looked at the polling on the income tax and going back a year or two, I really can’t find any support for the tax code that exceeds 40%. In other words, about two thirds of Americans think the tax code is in trouble and needs to be repaired in a major way. Of course, that would not be simple to do, but there are good reasons for it. The U.S. corporate tax rate is the second highest in the world-below Japan’s. I think the emphasis on jobs makes that an issue people understand. And once again, thanks in part to Citizens for Tax Justice and Robert McIntyre, who is still around, we do know that there is a large and growing problem with nonpayment of taxes by large profitable corporations.

Citizens for Tax Justice came out just last week with its newest report, which said in the last three years, of the largest corporations, 30 did not pay any taxes in any of the last three years and that 78 of them did not pay any taxes in one of the last three years. Many of them have negative tax rates, which a layman might shorten, oversimplify as getting refunds. But nevertheless, if big profitable corporations are not paying anything and are owed more by the federal government, that is a very big problem. I’m not sure it’s a problem as large as it was in 1986, but I think that the American public understands that it is a problem that needs to be fixed.

Now, there are two key differences between now and 1986 that I think help the argument that tax reform could happen after the next election.

First is that, one way or the other, the federal government is about to reformed itself. There is about to be a massive change to the way and amount the federal government spends money. I don’t think there is any question about that. There is a true revolt about Washington, how it works, where it puts its appropriations and how it decides where that money goes. After the 2012 election, I think the first order of business, no matter who wins the Presidency or whether the Senate is taken over by Republicans or not, will be an effort to streamline the federal government. As part of that effort, it is hard for me to imagine that there won’t also be a streamlining of the tax code. Because the tax code is, I think, an integral part of the entire government reform effort.

That brings me to the second, and perhaps the most important difference between now and 1986, and that is that budget deficits are a serious problem now, and they were not then, and the solution of the budget deficit problem is exactly what tax reform will be done for. Tax reform is a way that Republicans and Democrats can increase revenue to the government in a way that is satisfactory to both sides and there may not be another way. The way I  look at it is, this is the big lie of tax policy, that Republicans cannot possibly raise revenue—it is against their principles—but if it’s part of tax reform then it’s something that they could do. It’s what we heard from Speaker Boehner, from Senator Toomey just last week and it’s what we hear more and more from Republicans. This is the fig leaf for revenue increases, which are absolutely necessary if we are going to get the budget deficit under control. Once again, as the bipartisan synthesis, the ingenious solution, tax reform, the lowering of rates and the eliminating tax preferences will be an answer to deficit reduction at a time when the entire federal government is going to have to do exactly that.

My best guess is, an overhaul of the tax code will have to wait for a mandate from the voters. But right after that, in 2013, a serious effort to redo the tax code will begin as part of government reform. It makes perfect sense, for every interest, to get ready for that likelihood. Groups that don’t take seriously the chance for tax reform are the ones that are going to be victimized by it as soon as the elections are over.

My experience is that long preparation and public education is absolutely necessary for even the most obvious parts of tax reform. For example, the reduction of corporate rates—you don’t have tax reform unless you lower the corporate rates, and there are a lot of good reasons to do so; except in an era of Occupy Wall Street, the Buffett Rule and the talk of the haves and the have-nots—which has been rampant lately. So, companies that benefit from lower corporate tax rates, in my view, have to begin to make the case for lower corporate tax rates now or they will lose the chance to have a truly lower corporate tax rate structure when the government reform train begins to leave the station early in 2013. The way to do that, in part, is to vilify the tax code, which is a problem for capital intensive industries.

I know a lot of people say all of these debates are about policy; right and wrong; good and evil; and all that stuff. I gave that up a long time ago. Taxes, and tax legislation, is about winners and losers and you can actually calculate who the winners and losers are, just by looking at the numbers on the bottom line. The “losers,” traditionally, in tax reform are those interests that have and use large amounts of tax preferences—capital intensive industries, in particular, real estate has a lot to worry about. If these groups do not begin to lobby on the Hill and with the public soon, they will lose their chance to be a “winner” or less of a “loser” once tax reform begins to move. Moving quickly on this front will be the difference between those who are victors and those who are not.

In general, then, I think tax reform can happen; tax reform is likely to happen. Those groups that do not prepare for the coming tax reform are the ones that will be on the wrong end of the success or failure equation of tax legislation.


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