StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between



Reagan's Forgotten Tax Record

22 Feb 2011
Posted by Bruce Bartlett
Feb. 6, 2011, was the 100th anniversary of the birth of Ronald Reagan and brought forth predictable tributes from conservatives eager to wrap themselves in the mantle of their hero. Many declared Reagan’s 1981 tax cut to have been one of the seminal economic accomplishments in history. I did not see any tributes to Reagan’s legacy as a tax increaser, however, an important part of his legacy that conservatives would like to forget.
 
Reagan’s record on raising taxes began almost the moment he entered politics. Elected governor of California in 1966, he inherited a large budget deficit from his predecessor, Pat Brown. Although a conservative, dedicated to shrinking government, Reagan nevertheless found the magnitude of spending cuts that would have been necessary in 1967 to be beyond reach. This led him to endorse a $1 billion per year tax increase, equivalent to a $17 billion tax increase today – an enormous sum equal to a third of state revenues at that time. Journalist Lou Cannon recounts the circumstances:
 
“No amount of budget reductions, even if they had been politically palatable, could have balanced California’s budget in 1967. The cornerstone of Governor Reagan’s economic program was not the ballyhooed budget reductions but a sweeping tax package four times larger than the previous record California tax increase obtained by Governor Brown in 1959. Reagan’s proposal had the distinction of being the largest tax hike ever proposed by any governor in the history of the United States.”[1]
 
The top income tax rate was raised from 7 percent to 10 percent, the sales tax rate went from 3 percent to 5 percent, the cigarette tax was increased from 3 cents to 10 cents per pack, the alcohol tax was raised from $1.50 to $2 per gallon, the bank and corporate tax rate went up from 5.5 percent to 7 percent, and the inheritance tax rose from a range of 2 percent to 10 percent to a range of 3 percent to 15 percent.[2] According to Cannon, this was essentially the Democrats’ wish list of tax initiatives, with the sole exception that it did not institute tax withholding, which Reagan adamantly opposed. In Cannon’s words, “An economist who analyzed the tax bill without knowing its political background might conclude that it had been crafted by a New Deal Democrat.”[3]
 
In 1970, Reagan proposed yet another big tax increase of $1.1 billion, which would have been used to finance property tax relief. Incomes above $32,000 would have been subject to a new 11 percent tax rate, and three years later a new 13 percent bracket would have applied to those with incomes above $36,000. The bill would have also instituted tax withholding, which ironically led to its defeat in the Senate by a single vote. However, many of these provisions were enacted the following year.[4] The 1971 legislation raised taxes by $508 million (about $6 billion today), including an increase in the top income tax rate to 11 percent, a rise in the bank and corporate tax rate from 7 percent to 7.6 percent, and institution of an alternative minimum tax and tax withholding.[5] State taxes were raised another $1.1 billion in 1972 (about $12.5 billion today). This legislation included another increase in the sales tax rate from 5 percent to 6 percent and a further rise in the bank and corporate tax rate from 7.6 percent to 9 percent.[6]
 
Reagan had little to say about these tax increases in his memoirs except to claim that he gave back $5 billion to taxpayers.[7] However, in many cases, the tax relief consisted of tax rebates and one-shot tax cuts.[8] In the end, it is clear that Governor Reagan presided over an astonishing expansion of taxes in California. According to the California Department of Finance, state revenues tripled from $2.9 billion in the 1966/67 fiscal year to $8.6 billion in the 1974/75 fiscal year, Reagan’s last.[9]
 
After leaving the governorship, Reagan ran for the Republican presidential nomination in 1976. No mention was made of the many tax increases he enacted in California. Instead, his principal focus was on cutting spending, which ultimately sank his chances for the nomination when he proposed dumping $90 billion in federal spending (almost $700 billion today) on the states in order to balance the budget.[10]
 
Over the next few years, Reagan came under the influence of Rep. Jack Kemp (R-NY), Wall Street Journal editorial writer Jude Wanniski, economist Arthur Laffer and other proponents of “supply-side economics.” While skeptical at first, in 1979 Reagan endorsed the Kemp-Roth tax bill, which would have cut statutory income tax rates by about 30 percent across the board. After winning the White House in 1980, Reagan sent the Kemp-Roth proposal to Congress and it was enacted in August 1981.
 
Almost immediately upon enactment of the 1981 tax cut, Reagan came under enormous pressure to do something about the federal budget deficit. While his preferred approach was to cut spending as much as necessary, it was not politically possible to so. His aides began pressuring him to support a tax increase. Conservative activists were appalled that Reagan would even consider such a thing, but he eventually endorsed the Tax Equity and Fiscal Responsibility Act of 1982. According to a Treasury Department analysis, it raised taxes by close to one percent of GDP, equivalent to $150 billion per year today, and was probably the largest peacetime tax increase in American history.[11]
 
This was just the first of many tax increases that President Reagan endorsed and signed into law. There were 11 major tax increases during his administration. And this doesn’t count the fact that Reagan intentionally delayed the start of tax indexing, which was part of the 1981 tax bill, until 1985 so as to capture a lot of anticipated bracket-creep for the Treasury. In fact, it was the failure of inflation to come in as fast as White House economists expected that created much of the deficit problem. I estimate that lower than expected inflation and the loss of bracket creep was responsible for about half the budget deficit in 1981 and 1982.[12] It’s also worth noting that the Tax Reform Act of 1986, which was revenue-neutral in the long run, was a fairly substantial revenue-raiser its first year, increasing taxes by $18.6 billion or 0.41 percent of GDP.[13]
 
According to a table in Reagan’s last budget (FY 1990), the cumulative legislated tax increase during his administration came to $132.7 billion as of 1988 ($367 billion today). This compared to a gross tax cut of $275.1 billion. Thus Reagan took back about half the 1981 tax cut with subsequent tax increases.
 
Legislation
Billions of Dollars
Tax Equity and Fiscal Responsibility Act
57.3
Highway Revenue Act of 1982
4.9
Social Security Amendments of 1983
24.6
Railroad Retirement Revenue Act of 1983
1.2
Deficit Reduction Act of 1984
25.4
Consolidated Omnibus Budget Reconciliation Act of 1985
2.9
Omnibus Budget Reconciliation Act of 1986
2.4
Superfund Amendments and Reauthorization Act of 1986
0.6
Continuing Resolution for 1987
2.8
Omnibus Budget Reconciliation Act of 1987
8.6
Continuing Resolution for 1988
2.0
Total cumulative tax increase
132.7
 
As with his California tax increases, Reagan had little to say about them afterwards. In his diary, he says only that the 1982 TEFRA bill “is the price we have to pay to get the budget cuts.”[14] He later tried to repudiate his consistent support for tax increases after 1981.[15] But it’s clear that getting control of the deficit in the 1980s required both spending cuts and higher revenues.
 
In the end, Reagan’s tax legacy fits neither the right-wing nor left-wing pigeonholes. Although he cut taxes when he could, he raised them when he had to. That’s something self-styled Reaganites today should remember.


[1] Lou Cannon, Governor Reagan (NY: PublicAffairs, 2003): 194.
[2] David R. Doerr, California’s Tax Machine, 2nd ed. (Sacramento: California Taxpayers’ Association, 2008): 89.
[3] Cannon, op cit., p. 199.
[4] Garin Burbank, “Speaker Moretti, Governor Reagan, and the Search for Tax Reform in California, 1970-1972,” Pacific Historical Review (May 1992): 199-200.
[5] Doerr, op. cit., pp. 136-37.
[6] Carl Greenberg, “$1.1 billion Bill to Shift Taxes Signed into Law by Reagan,” Los Angeles Times (Dec. 19, 1972): 3.
[7] Ronald Reagan, An American Life (NY: Simon & Schuster, 1990): 191.
[8] Doerr, op. cit., pp. 124, 142, 144-45.
[10] Cannon, op. cit., pp. 406-11.
[11] Jerry Tempalski, “Revenue Effects of Major Tax Bills,” Office of Tax Analysis Working Paper 81 (Sept. 2006): 15-17.
[12] Bruce Bartlett, The New American Economy (NY: Palgrave Macmillan, 2009): 121.
[13] Tempalski, op. cit., pp. 16-17.
[14] Douglas Brinkley, ed., The Reagan Diaries (NY: HarperCollins, 2007): 96.
[15] Ronald Reagan, “There They Go Again,” New York Times (Feb. 18, 1993); “Hurry Up and Wait,” Wall Street Journal (July 8, 1993).
 
Reprinted from Tax Notes.

Reality

Once again, you understand it - the rest of your fellow "Republicans" don't, including many of your columnists on CG&G.

Why do I find myself looking more and more at the Canadian immigration website?


even with all those tax

even with all those tax hikes, debt held by the public went from 25.8% of GDP in 81 to 41% in 89. thanks for the analysis.


American pathology

We deserved better than Reagan and the Democrat Congress, didn't we?

They both practiced forms of Santa Claus economics -- and there was nothing in the pile of poop but endless poop for the current generation -- and there children.


The public got what it deserved

Americans have been getting the leadership they deserve for the last thirty years. To become truly knowledgeable about the world around you, you need to put the time and effort in to research and learn about the issues, the problems and the proposed solutions so you can make the proper decisions in the voting booth. Americans would prefer to spend time on Facebook, MySpace and playing with their iPad. So, as a result, we get the leadership we have now.


I wish

We could go into the voting booth as an educated person on the issues and vote for a responsible course and get it. But there is a disconnect at that level as well. There aren't responsible knowledgeable people running, and when people who are elected get to congress giving things to corporations to the net harm of the citizenry is standard practice. It is really really really bad and there seems to be no way out.


The Reagan Recipe

It is a fact of political life that a President (or governor), regardless of party, eventually does what the facts dictate he or she needs to do. Reality most often trumps rhetoric. Apropos rhetoric, if one cuts through that in this article, Reagan did in fact cut taxes during his Presidential terms (one does not have to think too long why Mr. Bartlett took the trouble to express the "tax increases" in current dollars, but not the tax cuts). There has probably not been a President in the past 100 years who has not "raised taxes" if one merely looks at isolated pieces of legislation, but the more important issue is whether the net effect was an increase or a decrease. Per Mr. Bartlett's own numbers, Reagan reduced federal taxes during his terms as President.

One of the reasons one can find isolated pieces of legislation raising taxes during the Reagan administration is that he acheived during his terms what most economists and tax experts recommend we do now. The Reagan recipe was to reduce marginal tax rates and (mostly) pay for them by eliminating many tax preferences and deductions. The 1982 TEFRA didn't reverse the decrease in marginal rates under the 1981 bill; it eliminated many tax deductions and preferences. Similarly, the Tax Reform Act of 1986, which was nearly revenue neutral, reduced the marginal tax rate from 50 percent to 28 percent and introduced passive activity loss rules and restricted many other deductions and preferences.

Reagan probably did more than any other President during my lifetime to improve the tax code. Of course, this is not 1980 or 1986 and the economic circumstances are different. The starting point on tax rates is also different, thanks in part to President Reagan. Because trillions have been spent in the interim, we can no longer afford a tax cut. However, the same general recipe should generally be followed now to reduce the tax preferences, deductions and credits that have crept back into the Code. This is largely the recommendation of the Bowles-Simpson report and they were wise to take that page from the Kemp/Reagan playbook.


In 1978, tax revenue was 18%

In 1978, tax revenue was 18% of GDP. In 1988, tax revenue was 18.2% of GDP. In 1978, real GDP grew 5.6%. In 1988, real GDP grew 4.1%. Obviously tax revenue was not lower in 78 because of a recession. It's pretty clear that Reagan's reputation as a tax cutter is undeserved.


Picking Numbers

You sure know how to pick your numbers. Reagan entered office January 1981 and served to January 1989. Why start with 1978? In 1981, the year Reagan took office, the percentage of GDP of overall federal tax revenue was 19.6 percent. The year he left office in 1989 it was 18. 4 percent. The average during this period 1981-1989 was 18. Figures here include all federal tax receipts and employment taxes. In 1981 real GDP was 2.5 percent. The year Reagan left office it was 3.6 percent. The average from 1981 through 1988 was 3.4 percent. It is always difficult to draw annual lines to attribute ecnonomic success or failure of a presidency. The fact that Reagan had two terms makes it a bit easier in his case. The record here, absent your bit of cherry picking, compares favorably to the historical record.


It is too bad that

It is too bad that "Inconvenient Truths" has already been taken as a title.


"Where Did You Get This Silly

"Where Did You Get This Silly Notion That Reagan Raised Taxes?" From the February 4 edition of Premiere Radio Network's The Rush Limbaugh Show


Reagan was inevitable.

Reagan was inevitable. Corporatism had it's "manifesto" (see here:

http://www.reclaimdemocracy.org/corporate_accountability/powell_memo_lew... )

and all it needed was an executioner. The last thirty years have been a protracted
execution of the "American Dream."


Thank you Mr. Bartlett for

Thank you Mr. Bartlett for reminding us that Reagan not a God that could cut taxes and balance budgets at the same time. If Americans were honest about Reagan, maybe they could be honest that our current problems cannot be solved by cutting taxes.

Hopefully, you have sent a copy of this the Republican Leadership.




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