Be it good or bad, let's stop calling it "tax reform"

The media pervasively uses the term "tax reform" to describe the income tax changes that the Republicans are seeking.  And it pervasively compares these changes to 1986 tax reform. This should stop.

My reason for saying this is not just rhetorical - it's about using terms meaningfully to convey information. But I'll admit that the rhetorical aspect matters here. "Tax reform" sounds like it's a good thing. I happen to think that any tax changes that the Republican Congress passes and Trump signs will be horrendously bad - increasing the fiscal gap, hugely benefiting the top 0.1% at the expense of everyone else, and very possibly un-leveling the playing field (e.g., in favor of "business owners" at the expense of "employees"). But there's more than just rhetoric going on here - there's an implicit descriptive claim that appears to be false.

Historically, one thing that "tax reform" has meant is indeed "changes that I, the proponent, think are good." So by definition anyone who wants to change the tax laws is proposing "tax reform," and anyone who opposes those changes doesn't think that they constitute "tax reform."

But historically it has long had a more specific meaning than that, as I discussed in my 5/25/11 Tax Notes article, "1986-Style Tax Reform: A Good Idea Whose Time Has Passed." And the Republican plans aren't sufficiently well-related to this idea in order to be called "tax reform," other than in the "we think it's good, even if you think it's bad" sense.

From at least the 1950s through the early 1980s, "tax reform" tended to mean repealing income tax preferences, and broadening the tax base, so that the tax would become more progressive, with the high statutory rates at top income levels coming closer to be true effective rates.

Thus, for example, the Reagan changes in 1981 - mainly, greatly reducing income tax rates and speeding up cost recovery for business assets - weren't called "tax reform." Obviously, the proponents thought that these were good changes, but they didn't use a label that they knew meant something else.

Then the meaning of "tax reform" changed. A key moment was the introduction of Bradley-Gephardt by two Democrats, followed by Kemp-Kasten by two Republicans. The Reagan Administration Treasury I and Treasury II plans, followed by House and Senate bills that gave rise to the enactment of the Tax Reform Act of 1986, cemented the new meaning.

Now "tax reform" meant broadening the base and lowering the rates, with the aim of being both revenue-neutral and distribution-neutral. So it was no longer about increasing progressivity, but it also wasn't about reducing it.

Whether or not this is a good model, it is what the term "tax reform" has generally meant for more than 30 years. (In the above-cited article, I argue that it's no longer a good model for how we should change the tax laws.) The line of argument for it, which is pretty compelling if one agrees that the "preferences" it would eliminate are bad, relies (perhaps naively) on horizontal equity between taxpayers along with inter-asset neutrality. The underlying political economy theory holds that stuff Congress put in that diverges from taxing all income the same is likely to reflect interest group politics, administrative problems, or something else other than good policymaking.

More recent Republican-led "tax reform" efforts have often aimed at something quite different: reducing not only tax rates but progressivity and net revenue. Not always - Dave Camp's international tax reform plan when he was House Ways and Means chair tried to do something akin to "tax reform" as typically defined. And Mitt Romney in 2012 at least gestured towards revenue and distributional neutrality, although he was rightly criticized because that was not realistically achievable under his parameters (which he had deliberately left vague).

Now, however, Republicans in both the Administration and Capital Hill are pretty clearly - although there is occasional lying about it - aiming to reduce business taxation, reduce progressivity, and reduce revenues. Reducing tax rates is now the main feature, rather than one of two paired features. There may be some offsetting items that at least arguably constitute base-broadening, but they will be greatly outweighed by the rest of it.

This also, notoriously, will no longer be a bipartisan process. The idea of being revenue-neutral and distribution-neutral was crucial to the once-bipartisan character of "tax reform." In effect, the Democrats and Republicans said to each other: "Since we disagree about distribution and revenue levels, let's take all that off the table and find things about which we can agree." One reason that the likes of McConnell are so vehement about excluding Democrats from the process is that it would push them towards retaining those features, which they now oppose.

BTW, just as an aside, in the academic community the chief focus of discussion and interest has long since moved past 1986-style exercises. When we talk about tax reform, we are usually focused (whether pro or con) on (a) partially or wholly switching from income taxation to consumption taxation, and/or (b) finding more neutral ways to tax business income, be it domestically or internationally. This often proceeds under the view that revenue and/or distributional neutrality should be a key feature of the switch, so as to keep the main focus on the structural issues.

Okay, back to the bottom line. The term "tax reform" has come to have a clear historical meaning, beyond simply "we think this is good," based on attributes that emerging Republican proposals in Washington are certain to lack. So let's drop any pretense that the term is properly descriptive, other than in the sense that the proponents of course are arguing that their proposals are good.

And let's drop the analogy to 1986, which involved a very different set of changes, adopted in a very different era through a very different process. It's not illuminating here.