Reagan’s Tax Increases
Conservative renegade Bruce Bartlett agrees with Alan Simpson and me that today’s doctrinaire tax-cutters misunderstand or distort Ronald Reagan’s record.
I think it’s reasonable to assume that Simpson, like almost all Republicans in the Senate in the 1980s, probably voted for the many tax increases supported and signed into law by Ronald Reagan, which eventually took back half of the 1981 tax cut (see below).
It may come as a surprise to some people that once upon a time in the not-too-distant past Republicans actually cared enough about budget deficits that they thought raising taxes was necessary to bring them down. Today, Republicans believe that deficits are nothing more than something to ignore when they are in power and to bludgeon Democrats with when they are out of power.
He’s got a handy-dandy chart at the link.
I was reminded when refreshing my memory of the 1982 tax hike this morning of a 2003 NRO piece by Bartlett noting, “The year 1988 appears to be the only year of the Reagan presidency, other than the first, in which taxes were not raised legislatively.” He details those in the column.
Why did Reagan, who believed fervently in the power of low taxes, nonetheless wind up signing into law increases that gave back more than half of the tax cuts he signed in his first year? Bartlett says it’s simple:
But when all the political and economic elites of this country gang up on a president to raise taxes, history shows that they always get what they want. Indeed, they were even able to get Bush’s father to raise taxes in 1990, even though his political advisers knew that it would likely lead to his defeat in 1992, which it did.
How do the elites break down presidential resistance to tax increases? They do so by promising the moon. Tax increases, they say, will lead to huge reductions in interest rates, which will power economic growth and reduce unemployment. The rich only pay them anyway, which makes the president look like a populist. And tax increases are the price that must be paid to get spending cuts.
This last point is especially laughable. In 1982, Ronald Reagan proudly announced that he was getting $3 of spending cuts for every $1 of tax increase. He later lamented that all he ever got were the taxes. “Congress never cut spending by even one penny, ” Reagan complained in 1993.
As politically unpopular as raising taxes is, cutting spending is much, much harder. And it’s getting harder by the day, as the share of the budget going to entitlements and interest on the debt increases and therefore “discretionary” spending becomes an ever smaller slice of the pie.
Oooh, I have my popcorn ready for this thread. If I’d written this “As politically unpopular as raising taxes is, cutting spending is much, much harder.” Drew and Verdon would jump down my throat, calling me a socialist and a sheep going willingly to slaughter. No, seriously, they’ve called me both when I’m made this precise point… though in fairness, I guess you’re not making explicit what I take to be the implicit followup — which is that if you care about reducing the deficit, then you need to be willing to raise taxes.
Just for the record… are you willing to raise taxes, James, because you realize that cutting spending is very, very difficult to achieve?
Problem is like Reagan found out; promises to cut spending won’t happen even if you agree to raise taxes. We also found out the same thing on promises for border security in exchange for amnesty. Hopefully this time we make them cut spending and sustain them before agreeing on any tax hike. Not that taxes aren’t already going up.
Increase taxes will cause politicians to just spend that much more. However if they don’t break their addiction and cut spending and do it fairly soon, our system will break.
I don’t think there’s much choice, at least on the margins.
I’d much prefer spending cuts — including defense cuts and various corporate subsidies — but I don’t see much appetite for that. And that means more revenue is needed for sustainability.
My preferences are for consumption based taxes rather than taxing income. And I also prefer a more equitable distribution, such that even those near the bottom are paying enough to have a stake in the process.
Same here. I’d also like to see Social Security means tested. I’d like to see agricultural subsidies ended. I’d like to see actually cuts in reimbursement rates for Medicare and Medicaid.
But that said, I am more concerned with interest payments at this point. So I’m with you.
Drew, is Dr. Joyner also a sheep willingly marching to slaughter?
We are in the fiscal equivalent of trench warfare, wherein the constituencies of the elderly, the military-industrial complex, and the militantly anti-taxation are dug in, fortified, and probably immovable. Given the intractability of the interests involved, the safest bet would be on the status quo until it becomes absolutely untenable.
The low-hanging fruit would seem to be Medicare reform and renegotiating our worldwide defense commitments. Both could be accomplished and hardly anyone in this country would notice the difference. But I wouldn’t bet on cuts in either area happening anytime soon.
Thankfully I’ve grown used to Bernard’s mindless drivel.
To put some perspective on this:
If we look at the total tax burden, (and because of cost shifting we do need to look at it as a whole: Fed, state and local) as a percentage of our collective national resources: GDP, over time we would note that it has risen from about 20% just after WWII to about 30% today, a 50% increase. (Let’s leave aside the days of yesteryore, where taxes were less than 10%) And yet, today, we have record deficits projected as far as the eye can see. How’s that more taxes = lower deficits thingy working out for you, Bernard?
Further, we should note that defense spending as a percent of GDP has fallen over the same period from 12-ish percent to something like 4%. So we have efficiently raided that piggy bank.
Now its clear to me that Bernard doesn’t know jack squat about business and economics, but I believe he knows quite alot about defense expenditures. So I have no idea what the “right” amount of defense spending is (probably less, but I’ll leave that to Bernard and James) but I do observe as an undeniable fact that we have, over 50 years, funded our runaway social spending partially through lower (% of GDP) defense spending. But wet dreams come to an end.
Now, simply observing that cutting spending is politically hard, and then concluding that the only solution is to raise the tax burden is just mindless. But as I say, I’ve grown used to Bernard. And yes, its like a lamb lead to slaughter. I once heard a guy defending rape (a juror, no less!!!) by saying “well, there was nothing she could do about it, so she should have just laid back and enjoyed it.” Super.
The usual retort is that “we” have voted for the spending. Bull. Obama has made it a stock speech point that only 3% of the population will bear the burden. That, my friends is sick. “Vote for me, and I’ll give you your no good neighbor’s stuff.” “We” my ass.
As a pragmatist, I see no way to avoid new taxation. As such, I’d love to see a VAT. At least the people voting to begger thy neighbor would find out there’s no free lunch.
“How’s that more taxes = lower deficits thingy working out for you,”
The debt, as a percent of GDP was dropping steadily from around 100% of GDP at the end of WWII up until 1980 (down to about 30% of GDP IIRC), when we had massive tax cuts. The debt increased. Reagan did increase taxes and the deficits decreased. (BTW, is that second block quote really from Bartlett? I dont remember him saying that.) We had another brief period of debt reduction in the late 90s, associated with a tax increase and, yes, a bubble. Bush cut taxes, and the debt increased.
As I am sure you know, non-defense, discretionary spending is well within historical norms, though Bush did greatly accelerate it. Most of our growth is coming from entitlements. Unless someone is willing to cut entitlements, we cannot address our debt. The practical way to do this is with a combination of tax increases, I also prefer consumption taxes, and decreased spending on entitlements.
When Reagan took office, the top 1% controlled about 10% of income. By 2005, it was 23.5%. IIRC, when you look at total wealth, the top 20% control about 85% of total wealth. Growth for the bottom 90% during the Bush era was nearly stagnant. You are a numbers guy. If we add a significant tax increase to the bottom 90%, it means they will be taking home less, even ignoring inflation, than they were in 2000. The top 1% have had such huge growth during that time period, that the increase in top marginal rates, as I last saw proposed does not do the same to them. Link to Piketty and Saez charts on CBPP site.
http://www.cbpp.org/cms/index.cfm?fa=view&id=2908
Steve
But, gosh, that 3%’s got most of the money, no? Maybe it’s just the price they have to pay to keep the rest of us from going full-bore Commune and coming after them with pitchforks. Look, I know these guys give you a woody (well, maybe not Soros), but don’t you have to agree, at least a little bit given the times, with what this guy says:
47% of US households will not pay any federal income tax in 2009. Why wouldn’t this rapidly approaching 50% + 1 polity be in favor of raising taxes on those rich bastards who comprise the other 53% rather than take any cut in the freebies they get today? Is that why it is so much easier to raise taxes?
Spending on entitlements must give up its untouchable status. We can’t afford it. Period. No amount of additional taxes will ever sate the appetite for entitlements.
sam, after you’ve eaten the top 3%, then what?
The top 50% take in about 87.5% of the income. In terms of total wealth, the top 20% control about 85% of the wealth (from memory so may be slightly off). There is not much money there to tax. While I think it might be wise to have a symbolic tax, there is not much money to be gotten there.
http://www.taxfoundation.org/news/show/250.html
Steve
So, wait, when I make this point, I am a sheep. When you make it, you are a pragmatist?
Well, there ya go. Now I get it.
My view is simply that the costs of uncontrolled deficits are worse than the relatively slow — though seemingly inexorable — growth in spending. Seeing government spending eat up an extra 1-2% of GDP every decade is unquestionably a long-term problem. I would very much like to see us address it somehow. But that is a long-term problem. We’re not going to turn into Soviet Russia overnight, though, yeah, if federal spending continues to increase at the same rate for the next 100 years we might.
Having 30% of the federal budget going just to interest payment by 2020, not even discussing the secondary effects of massive borrowing on balance of payments, interest rates, geopolitics, etc. is a looming crisis that well make things very, very painful very, very quickly unless addressed.
I have never argued anything more or less than this point.
Yea, and you probably like that Obama feller too. I bet you are wearing your Mao hat even as we speak.
Bernard –
I just completed a piece for another blogsite on this very topic. I agree with you that a further prolonged rise in spending is going to have horrible results. (Think Greece or Japan) I happen to think sooner rather than later, by the way.
As for some muddle through strategy, suppose we had an increase in taxation of 2% of GDP. Obama’s own Christine Romer puts the multiplier at 3x. That means GDP must somehow grow at 6% just to keep up. Think that’s going to happen?? I don’t.
Here’s the real point. As you suggest, these things take a long time to occur. But over 50 years we’ve had a huge increase in taxation, and we have rotated out of defense spending and into non-defense spending. And yet we find ourselves in a fiscal mess. Not encouraging. And the day of reckoning is fast approaching.
But just look at the comments on this blog. No problem! Just soak the rich!! This is mindless commentary. No one is thinking like an economist or businessman. Those tax hikes come with a cost. Ask Ms Romer. And those costs are going to affect the Average Joe the most. That’s very unfortunate.
Mark my words. Before this is all over: a 50/50 shot at a double dip; a 12% unemployment rate.
That’s not good public policy. Someone needs to stand up to the pols and say no more, instead of defending yet another round of taxation that will simply get spent.