ACCIDENTAL TAX REFORM In 1986 ''politics'' miraculously led to an overhaul that most politicians didn't particularly care for.
By IRWIN ROSS

(FORTUNE Magazine) – The Tax Reform Act of 1986, perhaps the largest revision of the tax code in U.S. history, was an astonishing event. It took place despite the determined opposition of legions of lobbyists -- and also despite opinion polls showing the American public was not all that hot for tax reform. The act's principal sponsors were politicians who had previously shown no great interest in the issue. Senator Bob Packwood, strategically placed as chairman of the Senate finance committee, was at one point quoted as saying that he liked the old tax code. So how could reform have prevailed? That is the central question in Showdown at Gucci Gulch: Lawmakers, Lobbyists, and the Unlikely Triumph of Tax Reform (Random House, $18.95), by Jeffrey H. Birnbaum and Alan S. Murray, a riveting account of the political process that produced the new law. (The ''gulch'' of the title refers to the corridors outside congressional committee rooms, where expensively shod lobbyists spend a lot of time.) Political outcomes in Washington are sometimes described as a clash of ideas, sometimes as a competition among interest groups. Birnbaum and Murray, both Wall Street Journal reporters, invite attention to a third model of Washington reality: They leave you very much aware of the role played by chance. In large measure, it would appear, the great 1986 tax reform was an accidental event, driven by gamesmanship and political maneuvering. The engines of reform originally got rolling because each party was unwilling to let the other capture the issue. Late in 1983, James A. Baker, then White House chief of staff, feared that the Democratic presidential candidate would campaign for tax reform. In the end this fear proved groundless: Walter Mondale was less concerned about reform than about raising taxes to cut the deficit. But Baker's fears led to Ronald Reagan's first initiative. To prevent the Democrats from preempting the issue, the President proposed in his 1984 State of the Union Message that the Treasury undertake a study of tax reform, to be ready in December. Cynics laughed: In mandating a date after the presidential election, Baker was plainly looking to move the issue onto a back burner. The next move was made by Democrat Dan Rostenkowski, chairman of the Ways and Means Committee. In his view tax reform had always been a Democratic cause, and he was not about to let the Republicans swipe it or smother it. And so Rostenkowski, a Chicago politician not previously noted for any great interest in tax equity, transformed himself overnight into a zealous reformer. Baker's initiative also had the unintended consequence of making a tax reformer out of Donald T. Regan, then Secretary of the Treasury, who now had the job of producing the report the President had promised. Showdown depicts Regan in an unusual light. He was, write the authors, something of a ''contrarian,'' and he enjoyed shocking the business establishment with bold proposals. Furthermore, Regan was greatly influenced by his top tax experts, who proved to be radicals in matters of reform. The goal of such reformers has traditionally been one of elegant tax simplicity: Remove all the tax preference items in the code in pursuit of what is called ''horizontal equity'' -- equal treatment for taxpayers of equal income. So Regan was soon enough agreeing to some fairly radical proposals: Tax employee fringe benefits, reduce the deductible charitable contribution, reduce the tax break for the blind and elderly, eliminate the deduction for state and local taxes, limit the deduction for consumer credit. At one point, the Treasury staffers got to wondering about the tax-free allowance for ministers' housing. Joked one member of the group: ''We've already stuck it to the blind, elderly, and cripples. We might as well get the preachers too.'' Regan's plan, which became known as Treasury I, left much of the business community aghast. The plan eliminated the investment tax credit as well as the rapid depreciation schedule in Reagan's 1981 tax legislation -- both widely touted at the time as necessary stimulants of capital formation. Also vowing resistance were officials of states with high income taxes: Governor Cuomo of New York led the attack. The backlash prompted Baker, who had now moved over to the Treasury and who was a much more political animal than his predecessor, to sound retreat. Treasury II, which the President laid out in a television speech on May 28, 1985, was far less drastic than Treasury I. Still, it eliminated or reduced a host of preference items and capped individual tax rates at 35%, down from 50%; it also enabled Ronald Reagan to continue casting himself as a doughty tax reformer. AFTER THE PRESIDENT finished, Dan Rostenkowski followed on the tube to pledge cooperation -- and to insist that the Democrats too were reformers. Said Rosty: ''A Republican President has joined the Democrats in Congress to try to redeem this longstanding commitment to a tax system that's simple and fair.'' The legislation still needed all the breaks it could get to navigate through the House, where enthusiasm for reform was plainly limited. What ultimately made the trip possible was a compelling political logic that left even enemies of reform feeling they could not be seen to be dropping the ball. In December 1985, the House Republicans tried to derail the bill in a procedural maneuver. In a revolt organized by Trent Lott, the Republican whip, the House unexpectedly rejected the rule governing debate on the bill; without the rule, there could be no vote on reform. Lott's motive was clear. The authors quote him as saying rejection of the rule offered Republicans a chance ''to get rid of the bill without putting their fingerprints on the trigger.'' Tip O'Neill, the House speaker, gloated that ''Republican Congressmen voted to humiliate the man who led them to victory.'' But with the President's prestige on the line, the White House mobilized itself to reverse the vote, and the bill passed. The House passage changed the politics of tax reform. Having delivered, Rostenkowski could now relax, secure in the knowledge that any defeat for the bill in the Republican-controlled Senate would leave the propaganda advantage with the Democrats. But Republican Bob Packwood, chairman of the Senate Finance Committee, understood this logic too. Against all his instincts, it made a reformer out of Packwood. IN THE OPENING rounds of the Senate deliberations, Packwood's colleagues punched so many holes in the reform package that it threatened to dissolve in a heap. On April 18, 1986, Packwood and his chief aide, Bill Diefenderfer, gloomily went to lunch, quaffed two pitchers of beer, and had an inspiration: a top rate of 25% for the individual income tax, combined with a ruthless scrapping of every tax break that stood in its way. The idea they found in the foam was indeed brilliant: If marginal rates could be brought that low, a good deal of opposition to specific reforms might blow away. The strategy worked. The bill that finally emerged from the Senate committee looked like tax reform, though it was harder on individual tax preferences than on those of business. (The House bill had the reverse thrust.) Packwood proved unable to hold the line at 25%, and ultimately had to settle for 28% plus another 5% on some income. After much high drama in the House-Senate conference, a version close to the Senate bill finally made it to the President's desk. Why were the men and women in Guccis unable to stop the legislation? The answer seems to be that all of them were pressing their parochial interests, and they never coalesced to present a common front. Richard Darman, deputy secretary of the Treasury, remarked at one point that the lobbyists ''were brought down by the narrowness of their vision.'' He added: ''Precisely because they defined themselves as representatives of single special interests, they failed to notice their collective power.'' Their lack of vision might be thought of as the final lucky break that made tax reform possible.