When signing the Revenue Act of 1971, President Richard Nixon hailed its eclectic achievements. “This is the kind of Christmas bill we like to get,” he told the press. “It is a bill which truly benefits virtually all Americans.”
Not everyone shared Nixon’s enthusiasm. Harvard law professor Stanley S. Surrey would later describe the 1971 act as “the worst piece of tax legislation in modern history,” thanks in large part to its export incentives for U.S. manufacturers, which he considered unwise and excessive.
But at least Nixon cared. The 1971 legislation was a direct outgrowth of his request for tax legislation, and his administration played an active role in shaping the measure (for better or worse). By contrast, the most important piece of tax legislation enacted during the presidency of Nixon’s successor, Gerald Ford, took shape with only modest presidential input.
And it showed.
Tax Reform After Nixon
In 1973 Congress was mulling the possibility of fundamental tax reform, perhaps following the model of the 1969 law. The House Ways and Means Committee conducted extensive hearings, and Treasury eventually submitted a comprehensive list of proposals. Many were distinctly familiar. “What is curious about this list is that although the innovations were highlighted, the majority of the provisions were old ones, some slightly modified and some exact duplicates of former proposals,” noted political scientist John Witte in his study of the tax legislative process, The Politics and Development of the Federal Income Tax. “Tax reform legislation was beginning to fall into an established and almost institutionalized pattern, with repeated efforts to shift policies along familiar lines.”
In 1973 the established pattern was not fated to end with actual legislation; Ways and Means Chair Wilbur Mills, D-Ark., found himself embroiled in a nontax scandal that ended both his long political career and any short-term prospect for tax reform.
The next significant tax bill arose in Congress after Mills and Nixon had both left the political scene. As its name made clear, the Tax Reduction Act of 1975 was not really about reform at all. Rather, lawmakers designed it as a fiscal stimulus, enacting individual and business tax cuts that they hoped would boost growth. Major provisions of the law included:
A 10 percent rebate on 1974 individual income tax liabilities, capped at $200.
An increase in the minimum standard deduction.
A temporary, nonrefundable $30 tax credit for every individual taxpayer and dependent.
A 10 percent refundable tax credit based on earned income up to a maximum of $4,000 (available only to families with dependent children and phased out for higher-income taxpayers).
A 5 percent nonrefundable tax credit for home purchases.
A temporary increase in the investment tax credit to 10 percent, lasting through 1976.
The 1975 legislation was never intended to be the last word on tax legislation for the 94th Congress. Lawmakers finished work on the measure in March, but by the end of the year, they had already produced the first draft of much more ambitious legislation.
Tax Reform Act of 1976
Under the leadership of its new chair, Rep. Al Ullman, D-Ore., the Ways and Means Committee reported a tax reform bill in November 1975. The Ford administration showed only passing interest in the effort. As Surrey recalled: “There was no push from the executive branch for tax reform. Indeed usually only obstacles, disinterest, or incompetence, depending on the particular issue.”
As it happened, Surrey considered this abdication of responsibility to be a blessing. In his mind, the White House was too focused on business-friendly tax provisions: “It really had no desire for tax reform in the traditional sense of ending inequities but was only interested in ‘capital formation’ and encouragement to investment.” Indeed, had the administration played a more active role, Surrey suggested, “its recommendations would have led to new unfairnesses.”
Surrey was not exactly a neutral observer in making this assessment; his effort to frame “ending inequities” and “capital formation” as incompatible goals is illuminating. But Surrey was certainly right that the Ford administration was content to let Congress take the lead in crafting the 1976 legislation.
The reform bill emerging from Ways and Means contained numerous provisions that addressed “fairness” concerns. For instance, it tightened the minimum tax provisions adopted in previous tax laws and increased effective tax rates on capital gains. The legislation also featured provisions to simplify aspects of the tax law, including those related to child care, retirement income, sick pay, and alimony.
The Ways and Means bill encountered immediate problems on the House floor, where Republicans insisted on pairing it with a spending ceiling. GOP lawmakers had support in this effort from President Ford, who threatened to veto any legislation that lacked such a ceiling. But the GOP amendment failed, and the issue remained unresolved.
The Senate Finance Committee didn’t deliver its version of a tax reform bill until May 1976. Generally speaking, the Senate’s measure featured less reform and more relief than its House counterpart. It eased provisions on capital gains, including the House’s extension of the holding period necessary to qualify for long-term gains.
When the bill reached the Senate floor, debate was long and bitter, “reminiscent of the floor battles of the twenties and thirties led by Progressives and liberal Democrats,” observed Witte in his history of the measure. The liberals won a few battles but lost somewhat more. One highlight, however, came when Finance Committee Chair Russell Long, D-La., offered a notably cynical (or perhaps realistic) definition of tax reform. “I have always felt that tax reform is a change in the tax law that I favor, or if it is the other man defining tax reform it is a change in the tax law that he favors.”
The bill eventually passed by the Senate was more generous to taxpayers than the House measure, avoiding many of the latter’s more unpopular reforms. As a result, members of the conference committee had their work cut out for them. One especially difficult issue concerned estate and gift taxes. Provisions regarding these levies had been included in the Senate bill but omitted entirely from the House measure; a companion measure addressing them had actually failed in the House earlier in the session. But the committee managed to include a compromise measure that contained many of the original House provisions, melded with some Senate concessions.
As eventually passed by both houses and signed by President Ford, the Tax Reform Act of 1976 was designed with six objectives in mind, according to the Joint Committee on Taxation:
Equity: To enhance “the equity of the tax system at all income levels without impairing economic efficiency and growth,” the law featured provisions to curb tax shelters, targeting their “excessive tax deferrals” as well as their attempts to convert ordinary income into capital gains. One provision increased the holding period for long-term capital gains from six months to one year. Another provided for “a stiffer minimum tax on tax-preferred income and a revision in the maximum tax designed to discourage use of tax preferences.”
Simplification: The act modified various deductions and credits to make them more straightforward, increased the standard deduction in a bid to encourage taxpayers to stop itemizing, rewrote complex sections of the law, and deleted obsolete or little-used provisions.
Fiscal Stimulus: The economic stimulus provided by earlier revenue measures, including the Tax Reduction Act of 1975, was extended by making individual tax cuts permanent.
Capital Formation: The act encouraged capital formation by extending earlier increases in the investment credit by an additional four years, extending and revising the incentive for investing in employee stock ownership plans, and liberalizing the net operating loss carryover.
Administrative Improvements: The JCT asserted that the act improved “the administration of the tax laws by making it more efficient” while also “strengthening taxpayers’ rights.”
Estate and Gift Taxes: The law enacted a major revision to the estate and gift taxes, including a unified rate schedule with a $175,000 exemption. The impact of levies for small and medium-size estates was reduced, while many tax avoidance possibilities were also eliminated. Notably, the law changed the tax treatment of inherited assets, eliminating the step-up in basis. The change proved unpopular, however, and Congress delayed implementation before eventually repealing the provision retroactively in 1980.
In describing these and other changes, members of the JCT staff allowed themselves to make a modest complaint. Reforming the tax system was hard, they observed almost plaintively. “The difficulty faced in improving the system is that the American people want different things from their tax system,” they said, adding:
On the one hand, they want every individual and corporation to pay a fair share of the overall income tax burden. In a system that depends heavily on voluntary compliance with the tax laws, as ours does, tax equity is especially important. However, at the same time, Americans do not want the income tax system to interfere with economic efficiency and growth. This implies that tax changes to promote equity should not retard either the current recovery from what has been the worst recession since the 1930’s or impede the long-run growth of the economy.
The staff members were right, of course. As a result, the 1976 measure was a half measure — just like every other piece of tax legislation ever enacted by Congress. Still, critics were forgiving. While noting the measure’s shortcomings, they also praised its achievements.
Surrey, for instance, offered a balanced take on the law’s marquee shelter provisions. “Clearly some shelter activity of individuals seems to be badly hit,” he wrote, including “farming, motion pictures, equipment leasing, [and] some oil activity.” But the legislative process had allowed other industries to escape with only minor injury. “Real estate seems to have survived in reasonably good shape,” he noted, “though even here new obstacles and uncertainties will have to be sorted out by the developers, syndicators, and investors.”
The late-breaking changes to estate and gift taxes were harder to parse. Reform was “long overdue,” Surrey noted, but the 1976 legislation was a patchwork of special interest provisions. “The act offers a wonderful political study in how the destiny of a few thousand farm families shaped a wide revision of the estate and gift taxes,” he wrote.
As a whole, the Tax Reform Act of 1976 was ambitious but limited. The Ford administration’s detachment deprived the legislation of a vital champion. Without leadership from the White House, tax reform struggled in the face of myriad special interests. As Surrey concluded:
The limits of the steps taken in the 1976 Act thus lay in the absence of one of the three ingredients necessary to genuine tax reform. These ingredients are a public interested in tax reform, a moderate-liberal Congress willing to respond to that interest, and an executive branch really concerned to achieve tax reform and provide leadership.
In 1976 the last ingredient was missing. And it would take another decade before tax reform found a presidential champion.