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HAPPY BIRTHDAY!

October 22, 2002

No doubt many of you will join us today in setting aside a few moments of quiet contemplation to observe the 16th birthday of the Internal Revenue Code of 1986. Signed into law by President Reagan October 22, 1986, the Tax Reform Act of 1986 renamed the old 1954 Code and set the broad outlines for the tax law we know and curse today.

At its birth, the 1986 Code seemed overwhelming in its scope and complexity. Passive Loss Rules, Uniform Capitalization of Inventory Costs, Operating Loss Restrictions, and the current Alternative Minimum Tax Regime all joined the tax law that fateful day.

OH, FOR THE SIMPLE TIMES. Amazingly, the complicated regime of 1986 seems almost pastoral and quaint in its simplicity compared to today’s tax law. For all of its complexity, the 1986 Act was based on a remarkable achievement: it eliminated deductions, credits, gimmicks and preferences in exchange for a drastically lower rate. For all of its complexity, the 1986 Code came into being with a top individual tax rate of 28%.

CONTINUING “IMPROVEMENT.” An entire bookshelf groans under the changes Congress has made to the 1986 Code. Over a dozen major tax laws passed since 1986 have raised individual rates as high as 39.6%, added deduction phase-outs, and created three capital gain rates. Congress has enacted HOPE Credits, Lifetime Learning Credits, Indian Employment Tax Credits, Enhanced Oil Recovery Credits and New Markets Credits. We now have at least eight different education tax incentives. And every complication introduced has been praised as a bipartisan triumph.

SUCCESS! With all of this improvement, the tax law could hardly get any better. For practitioners, that is; we charge by the hour. The rest of the country has to cope with the looming imposition of the Alternative Minimum Tax on the entire middle class, the proliferation of shaky tax shelters marketed by major financial service and professional firms; the need for even the lowest income taxpayers to hire professional help to prepare their tax returns; and the sneaking suspicion that tax compliance is for saps.

WHAT NOW? The tax law could really use another clean-up, with an exchange of a broader tax base and an elimination of credits for much lower rates across the board. This seems about as likely as Trent Lott inviting Tom Daschle to Biloxi to discuss post-modern literature over cappuccino.

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