Muzzled (15 page)

Tax policy in the United States began to emerge as a core component of campaign rhetoric in the Reagan era. The Reagan revolution was fueled by the promise of large tax cuts.
Unemployment was high for that time, at 7.8 percent, and inflation hit 18 percent just before the 1980 election. The nation was hungry for an economic cure-all, a jolt, and Reagan delivered. His central idea was that simply lowering taxes created economic growth. In the 1960s, President Lyndon Johnson had created programs that widened the social safety net and federal spending. His Great Society plan had been defined by Medicare, federal payments to ensure health care for the elderly, and Medicaid, federal money to provide health care for the poor. Presidents Nixon and Carter had also expanded entitlement spending. All three presidents had allowed tax hikes to pay for the new spending. Running for the presidency in 1980, Ronald Reagan saw no need for increased taxes. He condemned them as a burden on American business and personal freedom and a damper on the spirit of innovation. The California Republican promised that tax cuts would create a “rising tide that lifts all boats.” He saw no need to compensate for lost tax revenue even as he proposed increased spending, particularly on defense and also on Social Security. The lost tax dollars, he promised, would be made up by increased economic activity.

Reagan called this tax policy “supply-side economics.” Reagan’s critics, meanwhile, called this theory nonsense. David Stockman, his director of the Office of Management and Budget, later admitted he knew it would not work. Reagan’s vice president, George H. W. Bush, during his 1980 presidential campaign, described it as “voodoo economics.” The critics proved to be right. During Reagan’s time in office the budget deficit spiked. In the year he was elected the deficit was $74 billion; by 1986 it had nearly tripled to over $220 billion.
For the first time the United States became a borrower nation instead of a nation making loans to other countries.

But this is only part of the story. As former Clinton economic adviser Robert Shapiro wrote for
Forbes
, “Everyone remembers Reagan’s 1981 tax cuts. His admirers are less likely to tout the tax hikes he accepted as the 1981 recession and his own tax cuts began to unravel his long-term fiscal picture—a large tax increase on business in 1982, higher payroll taxes enacted in 1983 and higher energy taxes in 1984.” Yes, on balance Reagan lowered taxes, and on balance the deficit and debt soared. But what’s interesting is that Reagan was not, in fact, allergic to
raising
taxes, and he did it more than a few times. At the very least, Reagan displayed the kind of ideological flexibility that seems so foreign to us now.

President Reagan credited his supply-side theory with victory when the U.S. economy eventually rose out of its late-seventies and early-eighties doldrums, but it was never clear that it was the president’s tax policy that had spurred the recovery. What
has
been clear ever since is that any pledge to cut taxes is a political winner for Republicans. It has led Republicans to champion smaller government—requiring fewer tax dollars—and to attack big government as a sponge for tax dollars. Reagan’s tax policy also fit with his celebration of less government regulation of Wall Street and big business. He gloried in the vilification of government bureaucrats. Reagan got big laughs when he told audiences the most dangerous words ever spoken are “I’m from the government and I’m here to help.” The myth and legend of Ronald Reagan has since been fashioned into a rigid conservative orthodoxy—no matter how at odds with reality it actually is.

The inherent contradiction between Reagan’s tax cuts and increased spending and his efforts to disguise tax increases with sleight of hand made it easy for Reagan’s opponents to mock his plan. Moreover, it forced his supporters into a defensive crouch as they created ways to refuse to admit the policy’s flaws. This brand of political correctness—the unquestioned virtue of cutting taxes—had risen to the fore.

Until Reagan’s presidential campaigns, tax policy had not been too polarizing a component of political rhetoric on the Right or Left. The United States did not even have an income tax until the Civil War. Once the War Between the States ended, so did most federal taxation. The government was funded with tariffs and excise taxes. Thirty years later, in 1894, to support a growing national government, Congress tried to enact a flat tax on all income. The Supreme Court overturned it because it did not meet constitutional requirements for apportionment of taxes according to the population of each state. But a national consensus emerged for increasing funding for the federal government as an act of patriotism. In 1913 Republicans and Democrats joined to pass the Sixteenth Amendment, giving Congress the authority to tax each citizen’s income. In the years that followed, tax increases stirred no partisan divide because they were directly tied to supporting the military during World War I.

As recently as 1930, 90 percent of all federal revenue was still collected from tariffs and excise taxes. With only minor debate, tax rates went up in the 1930s to compensate for shortfalls caused by the Great Depression and to pay for government programs to put people back to work. Income taxes rose, again following patriotic appeals to pay for increased military
defense in the years before World War II. Republican opposition to President Roosevelt’s plan emerged over how much to raise tax rates and deciding which income brackets to tax. But at a time of military and economic challenges to the nation, there was enough public support for raising taxes to drown out the Republican opposition.

The first critical change in tax policy came with passage of the Social Security Act of 1935. It included a 2 percent tax on income to pay for a number of new entitlements, the biggest of which included Social Security and unemployment insurance. The federal tax structure for the first time went beyond supporting the military. Now federal taxes also supported social programs. Again, the change was greeted by an economically depressed nation with overwhelming public support. And by comparison with today’s arguments over tax policy, there was almost no political rancor. Overall, between 1939 and 1945 there was a tenfold increase in the number of Americans paying federal income tax. In the four years between 1941 and 1945, federal taxes as a share of the gross domestic product climbed from 7.6 percent to 20.4 percent.

After World War II another major shift in tax policy took effect. Taxes became an instrument of federal fiscal policy, calibrated to slow or accelerate business cycles in order to prevent another Great Depression. But by the late 1950s and 1960s, the economy was growing fast and tax policy took a backseat. The country’s major political fights had to do with the cold war against communism in Korea, Cuba, and Vietnam; civil rights for blacks; law and order in the cities; and the rise of an antiestablishment youth culture, including rock
and roll, drugs, and a sexual revolution. Even with the advent of President Johnson’s Great Society programs, there was relatively minor debate over the impact of higher taxes. President Nixon, a Republican, later expanded Social Security benefits. Even then, debate over taxes was minor. It centered on inflation pushing more taxpayers into higher tax brackets, leading to taxes claiming an even bigger percentage of the gross domestic product.

It was when the federal government failed to control inflation in the late seventies that the door first opened wide to political candidates to offer remedies for fixing fiscal policy. The nation’s debate over taxes soon became everyday political fodder.

Those developments set the stage for Ronald Reagan to cast Democrats as big spenders who hindered economic growth with high taxes and intrusive regulations. The California Republican attacked Democrats with his “tax and spend” label. Once in office, however, President Reagan, ironically, followed President Nixon’s example, implementing another expansion of Social Security. In other words, government spending did not match Republican rhetoric. As a result, it was impossible for top Republicans to have an honest conversation with their own rank and file about federal spending. In fact, avoiding that debate gave the GOP a simple, winning message: cut taxes. (Years later another stalwart Republican, Vice President Dick Cheney, would dismiss concern about deficit spending by saying that President Reagan proved “deficits don’t matter.”) Reagan’s successor, George H. W. Bush, used a Reagan-like pledge—“Read my lips: no new taxes”—to win the White House in 1988. And when he broke that promise by
brokering a deal that included some tax hikes, it proved fatal to his run for a second term.

Democratic president Bill Clinton picked up on the Republican antitax message, creating a new centrist image for himself by getting tax cuts for the middle class enacted and balancing the federal budget. George W. Bush, who succeeded Clinton, went much further, making across-the-board tax cuts the center of his presidential campaign, arguing that the government surplus Clinton enjoyed indicated that tax rates still reached too deeply into the voters’ pockets. After the 9/11 attacks, President Bush passed a round of tax cuts to rev up a shaken economy. In 2003 he signed into law a new, expensive entitlement benefit for Medicare, a prescription drug benefit, without putting in place any new tax to pay for it. Incredibly, in 2003, with a Republican majority in the House and Senate, he passed a second tax cut. It was during that second round of tax cuts that the modern debate over taxes fell into a mixer of politically correct cement. From that point on, every discussion of taxes featured the Democrats’ complaint that Republicans wanted to make the rich even richer, by giving a disproportionate percentage of tax cuts to the wealthy, and the Republicans’ reply that Democrats were creating a welfare state with high taxes, taking money away from the small businesses that created jobs.

This frozen, crazy, frustrating dynamic originated with President Reagan’s success at increasing costly entitlement programs while refusing to raise taxes sufficiently to pay for those programs and while ignoring the soaring budget deficit in the name of supply-side economics. If taxes are not increased sufficiently to cover new costs, then the only way to
reduce the deficit is to cut spending. The fact is that budget cuts have little actual public support when it comes to eliminating specific programs. The problem is that every dollar spent by the federal government has a political constituency. Moreover, most private-sector jobs in the United States are tied to federal spending, a fact that few people generally recognize or acknowledge. Therefore, the government is a huge driver of the overall economy.

Washington is busy every day subsidizing farm commodities; offering tax-code incentives to buy homes, to build homes, to prop up the ailing U.S. auto industry, to promote car buying, and to expand factories and encourage research; and awarding government contracts for technology, for the defense industry, and to airplane and ship builders. Federal money is the foundation for most hospitals, colleges, and universities, highways, transportation systems, and more. On top of those dollars is the pile of federal, state, and local government dollars spent on salaries and benefits for government employees. All of this spending is controlled by politicians. And their reelection campaigns are supported by corporate political action committees and unions representing people with jobs that depend on continued government spending. The incentive for any politician—Republican or Democrat—looking to stay in office is to
increase
government spending to benefit their supporters. There is no reason to cut spending.

Americans react in anger when you puncture their personal myth that they are self-made and nothing like those freeloaders living off the federal government. The highly paid lobbying industry, in Washington as well as in state capitols and city halls, exists to ridicule and defeat any challenge to
its clients’ claim to a share of the treasury. The lobbyists get wealthy by keeping the money flowing to their clients. Those clients and the lobbyists, powerful people with beautiful homes and fashionable clothes, do not see themselves in the same class as others who get government checks.

This delusion creates its own form of political correctness. Breaking the spell requires an act of imagination. So imagine a curtain of misconceptions falling away to open a rare view on the political self-interest behind the government’s massive spending. What is revealed behind the curtain is a wizard—call him Uncle Sam. He is dressed as a politician, constantly switching blue and red ties that identify him as a Democrat or a Republican. No matter which tie he has on at any moment, he is always ready to declare that any budget cut is an attack on poor people, the middle class, and any other group worthy of empathy. The man behind the curtain will even defend rich people from calls to end subsidies for their development deals and corporations. Our political wizard behind the curtain is outraged at any budget cuts that take money away from good Americans such as the deserving, job-producing rich, the all-American farmers who grow our food, risk-taking investors, the hardworking small businessmen, the kind elderly, the children that are the future of our country, the nation’s brave soldiers, our courageous first responders who keep the public safe, our precious public schools, America’s working men and women, our loyal allies who need foreign aid.… The list goes on and on.

The political reality is that both parties use the wizard’s tactics to distract American taxpayers while pushing their hands deep into the federal treasury. Republicans may present themselves
as the vicars of responsible spending, but history shows that the GOP has been responsible for more federal spending than Democrats over the past fifty years. Jimmy Carter raised the national debt by 42 percent during his four years in the White House, while Bill Clinton in two terms raised the debt only 36 percent. By comparison, President Reagan raised the national debt by 189 percent and joked that he was not worried about the deficit because “it is big enough to take care of itself.” Reagan’s Republican heirs in the Bush-Cheney administration increased the national debt by 89 percent in eight years and left office with a $1.2 trillion annual deficit. Keep these numbers in mind the next time you hear a Republican lambaste Democrats for reckless spending and preach about the need to cut federal spending. The fact is, both have played central roles.