There's an iron law of tax politics: Reform happens when it must, not when it should. It's a fiscal corollary of the sword-and-shield paradox: Any hope of overcoming the immovable object of the revenue status quo requires an irresistible force in the form of a revenue crisis.
At least that's the lesson of history. Like most historical lessons, it's not without its exceptions, including arguably the Tax Reform Act of 1986. And as they say on Wall Street, past performance is no guarantee of future results. The future has a way of challenging expectations and upending settled "truths."
Especially when that future includes President Donald Trump.
Indeed, the GOP sweep in last week's election has put tax reform back on the agenda. Yes, it was ostensibly already there, judging by good intentions, earnest white papers, and the website of the House Ways and Means Committee. But the lack of a suitable crisis -- acute and irresistible -- has kept tax reform forever on the horizon yet never within reach.
But now, as we enter the era of Trump, Republicans are in a position to act on tax reform without having to placate Democrats. The path to meaningful, fundamental, and durable reform seems clear. But that doesn't mean it's going to happen. Tax reform is more likely now than anytime in the recent past, but it's still a long shot.
The problem is that pesky crisis. Now to be sure, there is a real and genuine crisis that might produce reform: the economic struggle of the middle class. Trump tapped into the resentment flowing from that struggle to win the election, and it's a deeply powerful force in U.S. politics.
But it's not yet clear whether that crisis is acute enough to serve as a catalyst for tax reform. And even if it is, it may not sustain that reform against future challenges. Enacting a law is only the first hurdle: To make it meaningful, you have to ensure its survival in a hostile future. If you doubt that historical fact, just talk to a few Democrats as they contemplate the dismantling of Obamacare.
If tax reform is going to happen -- and survive -- the crisis of the middle class will be why. Republicans generally, and Trump in particular, must develop a program and an argument that convincingly links abstract tax reform to real middle-class struggles.
That link will not be some sort of modest but symbolic tax cut -- welcome, to be sure, but unlikely to provide real relief. Rather, Republicans will need to devise a program that eases the painful and tenacious struggle of middle-class Americans to survive in a highly competitive, globalized world economy.
First, let's settle on some terms. Tax reform -- real tax reform -- is not about small-bore policy destruction. Republicans are certainly capable of repealing and reducing some of their most detested tax targets. The estate tax, for instance, seems certain to go. It has no friends among Republicans, and even many Democrats dislike it. Plus, in the grand scheme of things, repeal would be cheap and extremely popular with the GOP's core constituencies.
Likewise, many taxes associated with the Affordable Care Act are certain goners, either as part of wholesale ACA repeal or even on an à la carte basis. The medical device tax and the "Cadillac tax" on high-end insurance plans have few friends, even on the left. Other ACA levies, like the net investment income tax, also seem likely targets.
But none of those tax changes would constitute real tax reform. For that, we need to look to someone like House Ways and Means Committee Chair Kevin Brady and his much-discussed blueprint. To be sure, some of the changes might be part of wholesale reform on the Brady model. But they are not its core. And more to the point, they won't move the needle for middle-class Americans. Real reform needs to be bigger in scope and broader in the distribution of its long-term benefits.
It's often said that meaningful tax reform -- defined as a durable, fundamental remaking of the tax system -- requires a rare alignment of the stars. While popular, this metaphor is hopelessly vague. Conveniently, historians have managed to define it a bit more precisely.
In a series of articles and books, W. Elliot Brownlee, professor emeritus at the University of California, Santa Barbara, and reigning dean of American fiscal history, has offered a model for identifying and describing the inflection points in U.S. tax history. (Prior coverage: Tax Notes, June 10, 2013, p. 1247 .) Dubbed "democratic statism," Brownlee's model identifies the four not-so-easy pieces necessary for reform: ideas, institutions, democratic forces, and crisis.
Applied to our current situation, it seems to me that several and perhaps all of those pieces are in place. But several are also highly uncertain, and that makes tax reform uncertain, too.
Ideas. We have plenty of ideas. Brady's Ways and Means blueprint is probably the most important source, since it's broad in scope, ambitious in goals, and institutionally rooted (more on that below). Further, policymakers have any number of other percolating reform proposals that might inform their legislative efforts, including Republican Senate Finance Committee Chair Orrin G. Hatch's hopes for corporate integration.
Some deep thinking about tax reform even enjoys real bipartisan support. Many Democrats have paid lip service, at least, to reductions in the corporate tax rate.
That said, not all ideas are created equal and not all ideas are easily reconciled with one another. In particular, debates over corporate tax reform tend to expose rifts within the business community. Breezy rhetoric about "tax reform" tends to obscure those divisions, but there's nothing like actual lawmaking to make them visible.
Institutions. There are many institutions crucial to successful tax reform, and in the wake of the election, many seem poised for action. To begin with, Republicans now control two branches of the federal government and seem poised (at least eventually) to dominate the third. With both Congress and the White House already in GOP hands, partisan obstacles to fundamental tax reform are as manageable as they ever will be.
A second institution also seems poised to make tax reform possible: the Republican Party itself. Once upon a time, American parties had enough internal diversity to complicate any program of meaningful tax reform. Nowadays, by contrast, both parties are more internally coherent, having dispensed with the moderates within their ranks.
Or at least that's the story we hear. In fact, both parties still have plenty of internal dissent. Sure, measured on some sort of timeless ideological scale, we can agree that old-school moderates have pretty much disappeared. But as each party's ideological center of gravity has moved toward the wings, new "moderates" have appeared. Today's GOP moderates would have been called rock-ribbed conservatives not that long ago, but that doesn't change the fact that they are legitimate moderates when compared with their party colleagues.
And here we encounter the first major obstacle to tax reform. The current Republican Party is riven with internal conflict, much of it rooted in real policy differences. In particular, there's a serious fight brewing between small-government, balanced-budget Republicans and those committed to other priorities, including higher defense spending and a major infrastructure initiative.
Indeed, infrastructure seems likely to be a flash point. Trump has signaled his interest in pursuing a major building initiative, and Democrats have responded with what might be called despondent enthusiasm. But paying for Trump's new roads, bridges, and walls won't be easy.
On the other hand, it may not be necessary; Trump may be willing to borrow the money. (He has a demonstrated personal fondness for debt, after all.) That probably explains some of the Democratic support for his plan; House Minority Leader Nancy Pelosi and her colleagues may be hoping that Trump will channel his inner Eisenhower and ask for debt-funded construction. (For more on Eisenhower's debt preference, see Tax Notes, Nov. 7, 2016, p. 751 .)
But all that red ink would be certain to antagonize many congressional Republicans. Similarly, the eventual need to raise the federal debt ceiling may well expose still more fissures within the GOP. As the governing party, Republicans will own the debt limit. If the past is any guide, that may dampen their opposition to raising it. But history also suggests that Democrats will rediscover their own distaste for raising the limit; out-of-power parties traditionally use the debt limit as a cudgel with which to beat their opponents.
And finally, of course, there is plenty of garden-variety, personal tension within the Republican Party. Personalities and bureaucratic imperatives inevitably breed conflict among erstwhile allies, especially when they are in the majority. And with a divisive figure like Trump placed front and center, it seems likely that those tensions will play a central role in coming fiscal debates.
All of this reduces to a single caveat: The institutions necessary for tax reform are more aligned now than at any other time in recent memory, but there is still plenty of room for things to go wrong. Much will depend on Trump's ability to lead both party and nation toward the often-abstract benefits of tax reform.
Democratic forces. The election has revealed a sea change in U.S. politics. Or has it? Trump's popularity, especially in some regions and socioeconomic strata, is undeniable. But so is the fact that many other Americans genuinely loathe him. Moreover, with Hillary Clinton having won more popular votes than Trump, it's hard to claim a real mandate for the GOP.
Of course, that probably doesn't matter. George W. Bush had the same problem after his 2000 victory, and it didn't slow his drive for tax reform. (For more on the problematic nature of so-called mandates, see Tax Notes, Nov. 10, 2008, p. 644 .) For presidents, mandates are what you make of them, especially in an era of stubborn partisan divide and narrow election victories. But even if Trump can't claim a mandate, congressional Republicans probably can. The GOP's success in defending its Senate majority -- even in the face of a hostile election map -- seems reasonable evidence that 2016 will be remembered as a banner year for the party.
More important than any of this mandate talk, however, is the undeniable political reality of middle-class disaffection. Trump put their struggles at the center of his campaign, and his victory seems to validate that decision and underscore its political potency. Data from several sources reveal the deep and abiding problems confronting middle-class Americans, including wage stagnation and more generalized economic insecurity. Together, those worries may well serve as a springboard for legislative action.
But only if Trump and his fellow Republicans can convincingly connect tax reform to the real world of Americans. Generalizations about "pro-growth" changes to the tax system will probably not get the job done. And even if they do succeed in the short term, they're unlikely to protect legislated tax reforms from a disappointed electorate should the promised improvements fail to materialize.
Crisis. Here's the real problem: We lack the sort of acute imperative crisis that traditionally serves as a change agent in the inertial swamp of fiscal policymaking.
Of course, tax reform can sometimes succeed without a crisis. TRA '86 is the most famous case in point, its success more volitional than imperative. But I would argue that this exception is less convincing than it first appears.
Yes, TRA '86 made its way into law without the help of any irresistible imperative (unless you count Ronald Reagan's charm and political charisma, which you shouldn't). But 1986 tax reform was more ephemeral than durable. Yes, it permanently eliminated some dysfunction in the tax code, but many of its key provisions (including its vaunted rate reductions) began to erode almost immediately. If TRA '86 was built on a bipartisan trade of lower rates for a broader base, I think it's fair to say that both sides ended up feeling cheated over the long, medium, and even short term.
The erosion of TRA '86 underscores the importance of real crisis in the enactment of durable tax reform. If tax reform happens when it must, it survives when it must, too. The last real inflection point in American fiscal history came during World War II, when lawmakers created the mass-based personal income tax. They did it because they had to. That tax regime went on to survive a steady series of conservative attacks over the next 75 years. And it survived because lawmakers couldn't afford to change it. The tax answered a need -- a revenue imperative. And while its operation and efficiency left much to be desired, it continued to do its basic job: providing adequate revenue while satisfying (at least barely) popular conceptions of fairness.
If Republicans want to build a tax reform that lasts, they must develop a program for fundamental tax reform that is similarly responsive to current and future economic conditions. In some respects, I think they are doing exactly that. They appear serious about replacing the beleaguered (and probably doomed) corporate income tax, at least as currently implemented. That tax is poorly adjusted to the modern world of globalization and tax competition, and while international cooperation may sustain it for a while, it seems ill-suited to the future.
The decline of the corporate tax, however, is not an acute, change-forcing crisis. People keep saying that corporate reform is an absolute imperative, that a status quo marked by high rates and huge stores of unrepatriated earnings cannot last. And yet it does, year after year. The corporate tax may be in crisis, but if so it's a slow-moving one.
More importantly, it's a crisis for the wrong constituency. The populist wave sweeping the globe draws strength from the suffering of individuals, not corporations or even corporate stockholders. (For more on the importance of populism to the future of tax reform, see my colleague Martin Sullivan's insights at Tax Notes, Nov. 7, 2016, p. 745 .) If Republicans need a crisis to sustain their drive for tax reform, they should look to the people who elected them. They need to help the middle class.
As it happens, Brownlee agrees with that assessment. "The presidential election has just dramatically exposed the economic crisis of the American middle class, and confirmed that the crisis has been deepening during our era of fiscal gridlock," he wrote to me in an email. "Resolution of this crisis may well demand ambitious fiscal initiatives, including tax reforms that fund social programs of greater social reach, provide a fairer distribution of tax burdens, and raise levels of public tax consent."
Brownlee has put his finger on the real issue. If tax reform is to succeed, it must deliver real and tangible benefits to the middle-class voters who've been struggling since the 1970s. As Brownlee suggests, any effective and durable response to that suffering may look strange to many GOP leaders; broader social programs and progressive tax reforms are not traditional items on the Republican agenda.
But Trump is not a traditional Republican. And as it happens, many of his plans (to the extent that campaign vagaries can be interpreted to imply an actual legislative agenda) seem consistent with Brownlee's outlook. Trump has promised to protect the nation's most popular entitlement programs, despite their enormous long-term cost. He seems to be embracing elements of traditional Keynesian demand management, principally through his call for a massive infrastructure program.
If Trump can combine those proposals with a tax program that also speaks to middle-class voters, tax reform -- real, lasting, ambitious, and durable tax reform -- may actually have a shot.