Posted on 06/14/2004 11:38:46 AM PDT by CatAtomic
A Taxing Experience The stars are aligning for a tax increase.
In a recent column, I predicted that President Bush will likely be forced into a budget deal involving higher taxes some time after next year's election because of rising interest rates. Some of my friends thought I was endorsing such an action. I was not. But my experience in Washington over the last 25 years left me no choice but to come to this conclusion. The stars are aligning for a tax increase and I think being forewarned means being forearmed.
Peter Wallison, who was White House counsel to President Reagan, responded to my analysis in the New York Times on October 26. He pointed to Ronald Reagan's resistance to tax increases in 1982, citing passages from Reagan's diary that were published in his autobiography, An American Life. The gist of Wallison's article is that Ronald Reagan successfully resisted efforts by his staff and many in Congress to raise taxes, thereby ensuring the victory of Reaganomics.
The only problem with this analysis is that it is historically inaccurate. Reagan may have resisted calls for tax increases, but he ultimately supported them. In 1982 alone, he signed into law not one but two major tax increases. The Tax Equity and Fiscal Responsibility Act (TEFRA) raised taxes by $37.5 billion per year and the Highway Revenue Act raised the gasoline tax by another $3.3 billion.
According to a recent Treasury Department study, TEFRA alone raised taxes by almost 1 percent of the gross domestic product, making it the largest peacetime tax increase in American history. An increase of similar magnitude today would raise more than $100 billion per year.
In 1983, Reagan signed legislation raising the Social Security tax rate. This is a tax increase that lives with us still, since it initiated automatic increases in the taxable wage base. As a consequence, those with moderately high earnings see their payroll taxes rise every single year.
In 1984, Reagan signed another big tax increase in the Deficit Reduction Act. This raised taxes by $18 billion per year or 0.4 percent of GDP. A similar-sized tax increase today would be about $44 billion.
The Consolidated Omnibus Budget Reconciliation Act of 1985 raised taxes yet again. Even the Tax Reform Act of 1986, which was designed to be revenue-neutral, contained a net tax increase in its first 2 years. And the Omnibus Budget Reconciliation Act of 1987 raised taxes still more.
The year 1988 appears to be the only year of the Reagan presidency, other than the first, in which taxes were not raised legislatively. Of course, previous tax increases remained in effect. According to a table in the 1990 budget, the net effect of all these tax increases was to raise taxes by $164 billion in 1992, or 2.6 percent of GDP. This is equivalent to almost $300 billion in today's economy.
I say all this not to besmirch Reagan's reputation, but simply to set the record straight. The point being that if Ronald Reagan could be corralled into signing tax increases year after year, it is not unreasonable to think that President Bush may falter as well when push comes to shove.
I don't believe that Reagan ever initiated any of the tax increases enacted during his watch. Nor do I think Bush will, either. 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.
Earlier this year, Reagan's chief of staff, James A. Baker III, wrote a sort of mea culpa in the Wall Street Journal, saying that he had underestimated the positive economic effects of tax-rate reductions. But he didn't repudiate his efforts to get Reagan to raise taxes. It will be interesting to see how Bush reacts when his staff tells him that taxes need to be raised.
Reagan faced a strongly Democrat-held Congress. That is not the case today, where both houses of Congress are held by the GOP.
Yes, but this does cast some doubt as to whether tax cuts produced the 80s boom.
Bruce Bartlett is a believer in good classical economics. But my first thought was the political reality you had already observed.
Even after the tax increase of the 1980s, Reagan had cut the top marginal tax rate in half. Your statements cannot stand the scrutiny of history.
It's arguable that the 80s boom was rooted in the improving security situation.
I'm still waiting for Bush to sign his first veto of a spending bill.
Reagan did raise taxes. You could hear that being discussed by any one of his former advisors or cabinet members last week. But he brought the high brackets down from 90% and pushed through some of the biggest overall cuts ever. He raised taxes when necessary to compromise with the Congress and to follow his foreign affairs plan of outspending the Soviets and being ready for them if something happened. He never denied it, his people have openly spoken about it, and it shows that although Reagan was committed to his principles, he was also realistic and willing to work with others when required.
The marginal tax rate is the rate on each dollar beyond a certain (low) income. Business decisions are often made based on the marginal rate of return. To suggest that this was not the reason for accelerated business activity is to invite derision.
There's a communication problem here. I fully realize that Reagan drastically cut the tax rates and I suspect that these cuts outweigh the increases. The argument I'm encountering outside this forum has some individuals claiming the positive economic numbers came as a result of these increases, and these are clearly significant increases.
What I was hoping to find here was a knowledgeable individual that could help break these stats down, not more generalizations.
I believe it was JFK who cut the top rate from 90% to the 70% that it was when Reagan got in.
President Reagan vetoed 22 spending bills during his first three years in office.
http://www.cato.org/dailys/06-09-04-2.html
So the year before Reagan the overall effective tax rate was 22.4% and it was 21.3% by the time he left office.1979 - 22.2% 1981 - 22.4 1982 - 20.7 1983 - 20.2 1985 - 20.6 1987 - 21.3 1989 - 21.3 ... 2001 - 21.5
1979 - 37.3% 1981 - 31.8 1982 - 27.7 1983 - 26.8 1985 - 26.0 1987 - 29.9 1989 - 28.2 ... 2001 - 33.0
Thanks,,, this puts things in perspective.
Reagan's tax increases doomed the first President Bush. He paid the price.
Sad to say but Bush is spending money like a drunken sailor. He has already spent more than his dad and Clinton combined, and that does not even include the cost of Iraq. I will still vote Republican but I see dark terrible times coming. The only way we will be able to survive this is to get the Feds to stop spending money.
Oh well. Didn't save social security and it didn't save the economy either. Altho the downturn was not as severe as it could have been during Bush 1......
Effective tax rates are meaningless. You need to look at the top marginal tax rate as others have done.
bttt
The republican congress and senate balancing the budget during X42 was really a giant step forward.
We can only hope that we get back on track during the next Bush administration.
The thought of a Kerry administration sends me screaming to hide in the closet or under the bed.
Let's look at an example:
WOT A COUNTRY...
There was a huge tax reduction in 1981 (not immediately effective). Then there was another marginal rate reduction in 1986 that closely followed Bradley-Gephardt (who had proposed two rates of 14% and 28%). There was also a 33% rate in the middle that eliminated the lower 14% bracket for higher-income taxpayers. Subsequent marginal rate increases occured after Reagan left office.
Capital gains drive tax revenues and business investment, which includes jobs. This is what made 80's tax policy the engine of our growth.
Only 50% of Americans pay income taxes at all. The top 5% of Americans pay 50% of income taxes. It is worthwhile to see how the tax code affects the most effective producers. (You and your neighbors probably are among the most effective producers.)
If you don't see the disincentives created by the first tax code in my example, then you are a lost cause. Effective tax rates are meaningless. We need to look at marginal tax rates.
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