March 18, 2010
Ronald Reagan, Tax-Raiser

So here’s the truth: Ronald Reagan cut taxes once, and raised them twice.  As Alan Simpson, the former Republican Senator from Wyoming just said, Reagan was a lot more pragmatic than are those who use his words today.

For conservatives, one of Reagan’s great accomplishments was the massive tax cuts he pushed through Congress (a Democratic House and a Republican Senate) in 1981.  (I’d say conservatives offer two more “great” Reagan accomplishments: the rebuilding of the US military, and the collapse of the Soviet Union.  The first is real, the second nonsense, but that is another post.) Grounded in the logic of the Laffer curve and supply side economics, these cuts are seen by many to have set off several intersecting goods: starving the beast of the federal government; stimulating the American economy, and of course inspiring a new generation of conservatives to adopt the tax cut mantra as the core of Republican identity.  

The thing is, the 1981 tax cuts did not have the stimulative effect they were predicted to have.  The deficit exploded as government spending INCREASED as taxes were cut. Most of this increase, notably, was on defense.  Conservatives insist, of course, that Democrats failed to cut social programs to compensate for reduced revenues.  This is absolutely true, but why would they?  More, from a deficit-focused point of view, a dollar borrowed to spend on defense is financed at exactly the same price as a dollar borrowed to spend for welfare.  Increasing defense expenditures faster than the rate of revenue growth causes deficits every bit as much as increasing entitlements faster than revenue growth does.  

So, by gosh and by gee, as deficits exploded Reagan supported a massive tax increase in 1983.  In general, this increase shifted the tax burden from corporations and investors towards income tax payers; this shift has continued ever since.  (Yes, I know corporations pass on their taxes.  Then again, if the government doesn’t get the money from the corporations that then get it indirectly from you, the government just gets it from you directly.  It’s all your money.)  

Then, in 1986 he did it again.  Indeed, the 1986 tax reform set the basic template on which tax policy works today: relatively few rates (three in 1986, but more now), with fewer individual deductions, and lower rates for capital gains, etc.  

These increases stabilized the deficit until the recession of the late 1980s and early 90s caused it to rise out of control again; in response, in what I believe to be one of the most courageous acts of the George HW Bush presidency, he supported another increase in 1990.  This, of course, angered conservatives who had come to believe against all evidence that Ronald Reagan only ever lowered taxes, and that everything good that happened in America since 1981 was the result of these tax cuts.  So, facing an incipient rebellion in his party, Bush 41 repudiated the taxes (after they went into effect) but faced a primary challenge anyway.  However, the taxes he supported, in combination with an economic recovery (which Lafferites say shouldn’t happen with tax increases) set in motion the boom economy of the 1990s—which survived in the face of a Clinton tax increase, too.  

I am not any more a fan of paying taxes than anyone else.  But as Oliver Wendell Holmes, Jr., said, taxes are the price we pay for a civilized society.  You can certainly overtax a society, but you can undertax one too.  After massive tax cuts under Bush 43, cuts that were accompanied by massive defense expenditures, two wars, and a huge new domestic entitlement (the prescription drug benefit for senior citizens), maybe it’s time to act like Reagan.  Maybe it’s time to raise taxes.