We’re in the midst of wrangling about tax laws from a new Administration and a new Congress. What the tax rules will ultimately turn out to be is uncertain. There will be changes, but how they will affect small businesses is unclear. It’s interesting…at least to me…to look back on some tax policies from previous Presidents to see their challenges and solutions. As Shakespeare said: past is prologue.
Overview of tax policies
Taxes aren’t just about raising revenue and reducing the deficit. They’re also at times about stimulating the economy, incentivizing certain actions (e.g., hiring new employees, buying new equipment, going green), or providing economic relief to individuals and businesses (like the legislation during COVID-19). How these goals are achieved can be controversial. For example, will tax policy be fair? Will it increase inflation? Will tax cuts be paid for themselves (i.e., increased revenues)? Will tax cuts spur economic growth? There’s no consensus on this last question; it depends who you ask.
There’s little agreement about the validity of scoring proposed legislation by the Congressional Budget Office and the Joint Committee on Taxation, making it difficult for legislators to decide on the fiscal wisdom of pending tax bills. Revenue concerns often lead to temporary tax rules. But the backdrop to tax legislation—what’s going on in the economy, which party is in control, etc.—greatly influences what happens, as you’ll see…
FDR
He faced a country in the grips of a depression and then had to finance the war effort. There was frequent tax legislation. For the most part, his strategy was to raise taxes. For example, excess profit taxes were levied in 1933 and 1935, and 4 times between 1940 and 1943. The rates were continually changed, but just to give you an idea, the excess profits tax in 1940 was 25% to 50% percent and in 1941 from 35% to 60%. In 1942, there was a flat rate of 90%, with a postwar refund of 10%.
JFK
When President Kennedy took office in 1961, the recession of 1958 hadn’t subsided, and the unemployment rate was high. He campaigned on “getting America moving again” and to this end he proposed dramatic tax changes. I can remember sitting at the dinner table with my family listening to the Huntley-Brinkley Report and hearing a discussion of President Kennedy’s proposal of an investment tax credit of 7% of costs. My dad, who co-owned a machine shop, thought it was great and would help him afford to buy new equipment. Kennedy also proposed in 1963 to cut income taxes from a range of 20-91% to 14-65% and cut the corporate tax rate from 52% to 47%. Eventually, the Revenue Act of 1964, which was signed into law by President Johnson, reduced the top tax rate on individuals to 70% and the top corporate rate to 48%.
Reagan
When President Reagan came into office, there was double digit inflation, the unemployment rate was high, and a general malaise in the economy persisted. As part of “Reaganomics,” tax cuts were a consistent theme of tax legislation during President Reagan’s administration.
- The Economic Recovery Tax Act of 1981 cut the top tax rate on individuals from 70% to 50% and lowered the capital gain rate from 28% to 20%.
- The Tax Reform Act of 1986, which totally revamped the Internal Revenue Code (the last time this happened was 1954), cut the top tax rate on individuals to from 50% to 38.5% and made many other changes.
George W. Bush
At the start of President George W. Bush’s first term, there was a recession from the dot.com bust, corporate accounting scandals (e.g., Enron), and disruption from the terrorist attack on 9/11. As a result, there was major tax legislation nearly every year. The two major laws were:
- Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). It lowered the top individual income tax rate from 39.6% to 35% and raised the limits for contributions to certain retirement plans and IRAs. It was also the created a “rate reduction credit,” which was essentially a tax rebate in the form of checks mailed to individuals with income below certain levels.
- Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). It increased the Sec. 179 first-year expensing deduction and decreased capital gains rates. On a personal note, I was in the Rose Garden of the White House when he signed this measure.
Obama
Faced with the “Great Recession,” President Obama’s tax measures were primarily stimulus packages. He also changed the health care landscape in the country.
- American Recovery and Reinvestment Act of 2009 (ARRA). Most changes were for individuals, but some business-related changed included extending bonus depreciation and credits for renewable energy.
- Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. This measure extended various sunset provisions from the Bush tax cuts. It also included a one-year reduction in the Social Security portion of FICA and self-employment tax.
- Small Business Jobs and Credit Act of 2010. This measure temporarily increased bonus depreciation from 50% to 100%.
- Patient Protection and Affordable Care Act of 2010 (referred to as ACA or the Affordable Care Act). This law overhauled health insurance coverage, creating a marketplace for buying it and requiring large employers to pay for it or face a penalty.
Final thought
In President Trump’s first term, the Tax Cuts and Jobs Act (TCJA) of 2017 made major tax changes designed to spur the economy, including reducing the top corporate tax rate to 21% and creating the qualified business income (QBI) deduction for owners of pass-through entities. Dozens of provisions in the TCJA are scheduled to expire at the end of 2025 and Congress is mired in discussions about whether to extend them, make them permanent, take a piecemeal approach, or introduce certain reforms. The goal of the current tax proposals is primarily to extend the TCJA rules, but other ideas (e.g., ending tax on tips and overtime pay) are being floated. Let’s see what happens.
