Senate Finance Hearing on Tax Reform
Senate Committee on Finance
“Getting to Yes on Tax Reform: What Lessons Can
Congress Learn from the Tax Reform Act of 1986″
Tuesday, March 10, 2015
Key Topics & Takeaways
- Business Only Reform: Sen. Grassley asked how important it is to have comprehensive reform rather than business or individual reform alone. Packwood said it was “critical to raise revenue from business tax reform and lower the rates for individuals.” He added that he would have “misgivings about doing just business” reform.
- Bipartisan, Quick, & Closed Doors: Packwood said the only way to reach the deal they made in 1986 was through “bipartisan efforts, quickly, and behind closed doors.”
- Factors for Tax Reform: In addition to the principles, Bradley asserted that the following factors are also needed: 1) a president willing to put his prestige and clout on the line to drive the agenda through inevitable obstacles; 2) a Treasury secretary designated by the president to deal with tax reform each day; 3) chairmen of the House Committee on Ways and Means and Senate Finance Committee willing to accomplish the task; 4) committed and knowledgeable Committee staff; 5) a zealot that talks about tax reform nonstop; and 6) a consistent message.
Witness
- The Honorable Bob Packwood, Former Chairman, United States Senate Committee on Finance, Portland, OR
- The Honorable Bill Bradley, Former Member, United States Senate Committee on Finance, New York, NY
Opening Remarks
In his opening statement, Chairman Orrin Hatch (R-Utah) said “we need a clear vision of what we want success to look like” and that “a successfully reformed tax system will make America the best place to work.” Hatch described former Senators Bob Packwood (R-Ore.) and Bill Bradley (D-N.Y.) as two of the great leaders in the Senate when Congress passed the Tax Reform Act of 1986 into law. Since then, Hatch contended, the current system has become overly costly, burdensome, and complex. For these reasons, Hatch explained that he had introduced seven principles as a guide to tax reform: 1) economic growth; 2) fairness; 3) simplicity; 4) revenue neutrality; 5) permanence; 6) competitiveness; 7) promotion of savings and investment.
In his opening statement, Ranking Member Ron Wyden (D-Ore.) said Packwood and Bradley were “at the heart of tax reform in 1986.” According to Wyden, one obvious similarity between 1986 and today is that people are “quick to say that tax reform is absolutely impossible.” Next, Wyden highlighted that the status of the middle class is at the top of the list of compelling issues for tax reform. He also stated that tax provisions expire year after year, adding to the reasons that tax reform is needed. However, Wyden suggested that tax reform “cannot come at the expense of slashing rates at any cost.” He recommended that Republicans and Democrats come together on shared principles.
In his testimony, Bob Packwood, former Chairman of the Senate Committee on Finance, said the “circumstances were different” in 1986 and that the issue of fairness was important because “there were a lot of people who paid no income tax at all.” Packwood explained that the House Committee on Ways and Means held hearings for a year in 1985 and “picked up enemies” from single issue groups as a result of the process. He said the House of Representatives’ version of the Tax Reform Act of 1986 “had enough barnacles that it did not have enough votes to pass it” until President Ronald Reagan told members to send the bill to the Senate and it was passed by voice vote. Packwood said the only way to reach the deal they made in 1986 was through “bipartisan efforts, quickly, and behind closed doors.” He recalled that the chairman of the House Committee on Ways and Means at the time was “basically saying to write this bill in the Senate.” Packwood admitted that he had to “make a deal with ‘oilies'” to reach support for a vote on the Senate floor. Packwood said most of the Senate Finance Committee members did not see the entire bill until the night of the vote. He encouraged Hatch and Wyden that they too can accomplish tax reform, but will have to make an agreement and show a willingness to work across party lines.
In his testimony, Bill Bradley, former member of the Senate Committee on Finance said the ideal income tax system provides the greatest number of people with the lowest rate. He explained that in 1986 several principles were used to determine “what was in and what was out” including: 1) efficiency; 2) equity; 3) fairness; and 4) simplicity. In addition to the principles, Bradley asserted that the following factors are also needed: 1) a president willing to put his prestige and clout on the line to drive the agenda through inevitable obstacles; 2) a Treasury secretary designated by the president to deal with tax reform each day; 3) chairmen of the House Committee on Ways and Means and Senate Finance Committee willing to accomplish the task; 4) committed and knowledgeable Committee staff; 5) a zealot that talks about tax reform nonstop; and 6) a consistent message. Bradley said that he was the “zealot” and talked about tax reform for three years prior to the 1986 deal. Next, he said it is important to ask people what they are willing to give up in order to have the capital gains deduction.
Question and Answer
Revenue Neutrality
Hatch said taxes are higher now than they have been historically, making it increasingly difficult to raise revenue through tax reform, and asked the witnesses if the next version of tax reform should be revenue neutral. Packwood said he recommends revenue neutral tax reform that combines individual and business reforms. Bradley acknowledged that some additional tax might be required today, but that the Tax Reform Act of 1986 was revenue neutral. He added that they “found that upper income Americans will pay a higher percent.”
Territoriality
Hatch asked the witnesses if the United States should move to a territorial system of international taxation. Packwood said “other countries have an advantage” and “we ought to go to that system.” Bradley said that a territorial system makes sense in terms of the overall picture, but in reality some other way may need to work. He added that the President’s FY2016 Budget proposal offers an alternative way of taxing profits overseas.
Budget Reconciliation
Wyden asked the witnesses if the “normal process that was used in 1986 was helpful and promotes bipartisanship.” Packwood agreed that a bipartisan process is helpful and stated that no majority leader would have thought to take up a bill outside of the committee process. He urged for regular order and said it makes the process more credible. Bradley also agreed and said the normal process is better, but it is also important to watch how the Senate Finance Committee members behave on the floor. For example, he explained that the Senate Finance Committee members of 1986 agreed not to vote against the Committee-passed bill on the Senate floor. He shared his own experience with the oil industry and lamented that he had to vote against his own amendment when it was offered by a colleague on the Senate floor.
Treatment of Wages and Capital
Wyden asked how Packwood and Bradley were able to find common ground on income from wages and income from capital. Packwood said they lowered the rates tremendously and “had to get rid of capital gains” to make sure the progressivity was the same. Bradley said that “there is a lot more coherence with a bill that treats capital and labor the same.”
Presidential Leadership
Sen. Chuck Grassley (R-Iowa) asked Packwood if he thought the Tax Reform Act of 1986 would have become law if President Reagan had not made tax reform a priority for his administration. Packwood responded that presidential leadership is essential and helpful, but not necessarily critical. Bradley said the president’s clout is needed but it could be manifested through the Treasury secretary.
Sen. Bill Nelson (D-Fla.) asked the witnesses how they would suggest President Obama can “tamper down” the opposition to tax reform in Congress. Packwood said that if members of Congress are saying “no bill unless…” then Congress may be better off on a trade agreement.
Sen. Tim Scott (R-S.C.) asked how to find common ground when “finding a serious partner for tax reform appears to be missing in the president’s proposals.” Packwood suggested to “work on something else” if that is the case.
Grassley asked how important it is to have comprehensive reform rather than business or individual alone. Packwood said it was “critical to raise revenue from business tax reform and lower the rates for individuals.” He added that he would have “misgivings” about doing just business reform.
Passive vs. Active Income
Sen. Johnny Isakson (R-Ga.) asked the witnesses to discuss the treatment of passive income. Packwood responded that “if there’s an industry that was hit, it was real estate” and acknowledged that he had not thought about it this way at the time.
Tax Extenders
Nelson asked the witnesses if tax extenders should be addressed in a broader reform. Bradley described tax extenders as a “lobbyists’ full employment act.” Packwood said he has “mixed feelings on extenders” because it is “hard to get rid of them if they are permanent.”
Process
Sen. Dan Coats (R-Ind.) recalled that he was serving in the House of Representatives in 1986 and wondered if tax reform could really be accomplished today. Packwood reminded Coats that in 1986, tax reform was not a “planned procedure” and that agreements were not reached until the smaller group worked together each day for a week. He said he was “not sure you can plan it… it arrived.”
Sen. Thomas Carper (D-Del.) said the important ingredient is leadership and asked the witnesses to tell the Committee what they need to do to accomplish tax reform. Bradley repeated that leadership starts with the president, secretary of Treasury, and the chairmen of the tax writing committees.
Sen. Michael F. Bennet (D-Colo.) asked how the 1986 leaders dealt with interest groups. Packwood explained that the Senate bill was written in seven days and no hearings were held, but if they had to vote on individual provisions it would have been a different situation.
Permanency
Carper asked the witnesses if Congress should try to preserve parts of the tax code. Bradley explained that “it can be washed away the next year” and “there is no institutional fix to make things permanent.”
Lessons from Chairman Camp
Sen. Dean Heller (R-Nev.) asked the witness what lessons can be learned from the House Committee on Ways and Means former chairman Dave Camp’s (R-Wis.) “dead on arrival” efforts. Packwood replied that Camp’s plan was dead on arrival, but also “covered a lot of things that needed to be covered.” Bradley stated that “Camp did a coherent job in putting together a package.”
Pro-Growth Reform
Sen. Robert Menendez (D-N.J.) asked how to ensure that tax reform will accomplish economic growth. Bradley responded that it is important that the economy grows and that everyone benefits.
Capital Gains
Sen. John Thune (R-S.D.) asked Packwood to share his views on capital gains tax at the same rate as ordinary income. Packwood said “you can do very well if you have a low rate with capital gains at the same rate.”
For more information on this event, please click here.
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Senate Committee on Finance
“Getting to Yes on Tax Reform: What Lessons Can
Congress Learn from the Tax Reform Act of 1986″
Tuesday, March 10, 2015
Key Topics & Takeaways
- Business Only Reform: Sen. Grassley asked how important it is to have comprehensive reform rather than business or individual reform alone. Packwood said it was “critical to raise revenue from business tax reform and lower the rates for individuals.” He added that he would have “misgivings about doing just business” reform.
- Bipartisan, Quick, & Closed Doors: Packwood said the only way to reach the deal they made in 1986 was through “bipartisan efforts, quickly, and behind closed doors.”
- Factors for Tax Reform: In addition to the principles, Bradley asserted that the following factors are also needed: 1) a president willing to put his prestige and clout on the line to drive the agenda through inevitable obstacles; 2) a Treasury secretary designated by the president to deal with tax reform each day; 3) chairmen of the House Committee on Ways and Means and Senate Finance Committee willing to accomplish the task; 4) committed and knowledgeable Committee staff; 5) a zealot that talks about tax reform nonstop; and 6) a consistent message.
Witness
- The Honorable Bob Packwood, Former Chairman, United States Senate Committee on Finance, Portland, OR
- The Honorable Bill Bradley, Former Member, United States Senate Committee on Finance, New York, NY
Opening Remarks
In his opening statement, Chairman Orrin Hatch (R-Utah) said “we need a clear vision of what we want success to look like” and that “a successfully reformed tax system will make America the best place to work.” Hatch described former Senators Bob Packwood (R-Ore.) and Bill Bradley (D-N.Y.) as two of the great leaders in the Senate when Congress passed the Tax Reform Act of 1986 into law. Since then, Hatch contended, the current system has become overly costly, burdensome, and complex. For these reasons, Hatch explained that he had introduced seven principles as a guide to tax reform: 1) economic growth; 2) fairness; 3) simplicity; 4) revenue neutrality; 5) permanence; 6) competitiveness; 7) promotion of savings and investment.
In his opening statement, Ranking Member Ron Wyden (D-Ore.) said Packwood and Bradley were “at the heart of tax reform in 1986.” According to Wyden, one obvious similarity between 1986 and today is that people are “quick to say that tax reform is absolutely impossible.” Next, Wyden highlighted that the status of the middle class is at the top of the list of compelling issues for tax reform. He also stated that tax provisions expire year after year, adding to the reasons that tax reform is needed. However, Wyden suggested that tax reform “cannot come at the expense of slashing rates at any cost.” He recommended that Republicans and Democrats come together on shared principles.
In his testimony, Bob Packwood, former Chairman of the Senate Committee on Finance, said the “circumstances were different” in 1986 and that the issue of fairness was important because “there were a lot of people who paid no income tax at all.” Packwood explained that the House Committee on Ways and Means held hearings for a year in 1985 and “picked up enemies” from single issue groups as a result of the process. He said the House of Representatives’ version of the Tax Reform Act of 1986 “had enough barnacles that it did not have enough votes to pass it” until President Ronald Reagan told members to send the bill to the Senate and it was passed by voice vote. Packwood said the only way to reach the deal they made in 1986 was through “bipartisan efforts, quickly, and behind closed doors.” He recalled that the chairman of the House Committee on Ways and Means at the time was “basically saying to write this bill in the Senate.” Packwood admitted that he had to “make a deal with ‘oilies'” to reach support for a vote on the Senate floor. Packwood said most of the Senate Finance Committee members did not see the entire bill until the night of the vote. He encouraged Hatch and Wyden that they too can accomplish tax reform, but will have to make an agreement and show a willingness to work across party lines.
In his testimony, Bill Bradley, former member of the Senate Committee on Finance said the ideal income tax system provides the greatest number of people with the lowest rate. He explained that in 1986 several principles were used to determine “what was in and what was out” including: 1) efficiency; 2) equity; 3) fairness; and 4) simplicity. In addition to the principles, Bradley asserted that the following factors are also needed: 1) a president willing to put his prestige and clout on the line to drive the agenda through inevitable obstacles; 2) a Treasury secretary designated by the president to deal with tax reform each day; 3) chairmen of the House Committee on Ways and Means and Senate Finance Committee willing to accomplish the task; 4) committed and knowledgeable Committee staff; 5) a zealot that talks about tax reform nonstop; and 6) a consistent message. Bradley said that he was the “zealot” and talked about tax reform for three years prior to the 1986 deal. Next, he said it is important to ask people what they are willing to give up in order to have the capital gains deduction.
Question and Answer
Revenue Neutrality
Hatch said taxes are higher now than they have been historically, making it increasingly difficult to raise revenue through tax reform, and asked the witnesses if the next version of tax reform should be revenue neutral. Packwood said he recommends revenue neutral tax reform that combines individual and business reforms. Bradley acknowledged that some additional tax might be required today, but that the Tax Reform Act of 1986 was revenue neutral. He added that they “found that upper income Americans will pay a higher percent.”
Territoriality
Hatch asked the witnesses if the United States should move to a territorial system of international taxation. Packwood said “other countries have an advantage” and “we ought to go to that system.” Bradley said that a territorial system makes sense in terms of the overall picture, but in reality some other way may need to work. He added that the President’s FY2016 Budget proposal offers an alternative way of taxing profits overseas.
Budget Reconciliation
Wyden asked the witnesses if the “normal process that was used in 1986 was helpful and promotes bipartisanship.” Packwood agreed that a bipartisan process is helpful and stated that no majority leader would have thought to take up a bill outside of the committee process. He urged for regular order and said it makes the process more credible. Bradley also agreed and said the normal process is better, but it is also important to watch how the Senate Finance Committee members behave on the floor. For example, he explained that the Senate Finance Committee members of 1986 agreed not to vote against the Committee-passed bill on the Senate floor. He shared his own experience with the oil industry and lamented that he had to vote against his own amendment when it was offered by a colleague on the Senate floor.
Treatment of Wages and Capital
Wyden asked how Packwood and Bradley were able to find common ground on income from wages and income from capital. Packwood said they lowered the rates tremendously and “had to get rid of capital gains” to make sure the progressivity was the same. Bradley said that “there is a lot more coherence with a bill that treats capital and labor the same.”
Presidential Leadership
Sen. Chuck Grassley (R-Iowa) asked Packwood if he thought the Tax Reform Act of 1986 would have become law if President Reagan had not made tax reform a priority for his administration. Packwood responded that presidential leadership is essential and helpful, but not necessarily critical. Bradley said the president’s clout is needed but it could be manifested through the Treasury secretary.
Sen. Bill Nelson (D-Fla.) asked the witnesses how they would suggest President Obama can “tamper down” the opposition to tax reform in Congress. Packwood said that if members of Congress are saying “no bill unless…” then Congress may be better off on a trade agreement.
Sen. Tim Scott (R-S.C.) asked how to find common ground when “finding a serious partner for tax reform appears to be missing in the president’s proposals.” Packwood suggested to “work on something else” if that is the case.
Grassley asked how important it is to have comprehensive reform rather than business or individual alone. Packwood said it was “critical to raise revenue from business tax reform and lower the rates for individuals.” He added that he would have “misgivings” about doing just business reform.
Passive vs. Active Income
Sen. Johnny Isakson (R-Ga.) asked the witnesses to discuss the treatment of passive income. Packwood responded that “if there’s an industry that was hit, it was real estate” and acknowledged that he had not thought about it this way at the time.
Tax Extenders
Nelson asked the witnesses if tax extenders should be addressed in a broader reform. Bradley described tax extenders as a “lobbyists’ full employment act.” Packwood said he has “mixed feelings on extenders” because it is “hard to get rid of them if they are permanent.”
Process
Sen. Dan Coats (R-Ind.) recalled that he was serving in the House of Representatives in 1986 and wondered if tax reform could really be accomplished today. Packwood reminded Coats that in 1986, tax reform was not a “planned procedure” and that agreements were not reached until the smaller group worked together each day for a week. He said he was “not sure you can plan it… it arrived.”
Sen. Thomas Carper (D-Del.) said the important ingredient is leadership and asked the witnesses to tell the Committee what they need to do to accomplish tax reform. Bradley repeated that leadership starts with the president, secretary of Treasury, and the chairmen of the tax writing committees.
Sen. Michael F. Bennet (D-Colo.) asked how the 1986 leaders dealt with interest groups. Packwood explained that the Senate bill was written in seven days and no hearings were held, but if they had to vote on individual provisions it would have been a different situation.
Permanency
Carper asked the witnesses if Congress should try to preserve parts of the tax code. Bradley explained that “it can be washed away the next year” and “there is no institutional fix to make things permanent.”
Lessons from Chairman Camp
Sen. Dean Heller (R-Nev.) asked the witness what lessons can be learned from the House Committee on Ways and Means former chairman Dave Camp’s (R-Wis.) “dead on arrival” efforts. Packwood replied that Camp’s plan was dead on arrival, but also “covered a lot of things that needed to be covered.” Bradley stated that “Camp did a coherent job in putting together a package.”
Pro-Growth Reform
Sen. Robert Menendez (D-N.J.) asked how to ensure that tax reform will accomplish economic growth. Bradley responded that it is important that the economy grows and that everyone benefits.
Capital Gains
Sen. John Thune (R-S.D.) asked Packwood to share his views on capital gains tax at the same rate as ordinary income. Packwood said “you can do very well if you have a low rate with capital gains at the same rate.”
For more information on this event, please click here.