Historical Perspective: The Reagan Legacy
by Joseph J. Thorndike
Date: Jun. 14, 2004

Full Text Published by Tax AnalystsTM

Former President Ronald Reagan's death has prompted an outpouring of sadness and appreciation. Americans seem to understand, on an almost visceral level, that Reagan was a transformative figure. He changed American politics, ending almost 50 years of liberal hegemony. And he did it with taxes.

Reagan began his presidency with a tax cut. A really, really big tax cut. In fact, the Economic Recovery Tax Act of 1981 (ERTA) was the biggest tax reduction in American history. The law bestowed its largesse on both individuals and corporations. Analysts have written extensively on the "bidding war" that erupted over the bill, with lawmakers competing to sweeten the pot for favored constituents. Ultimately, it passed with a host of very expensive provisions, including a phased-in 23 percent cut in individual tax rates. Even more important, the law indexed tax brackets for inflation, ending the "bracket creep" phenomenon that had buoyed federal receipts for decades. Meanwhile, corporate taxpayers got a number of goodies, including more generous depreciation schedules under the accelerated cost recovery system.

ERTA slashed federal revenue by $38 billion the first year, $91 billion the second year, and $139 billion the third year. As a percentage of gross domestic product, those cuts dwarfed anything before or since, according to the Treasury Department Office of Tax Analysis.

Lawmakers must have had fun in that binge of tax reduction, but the fiscal hangover proved to be a bear. Almost immediately, lawmakers began to have second thoughts. Deficit projections began to rise sharply, worrying traditional conservatives who still believed in balanced budgets. When those deficits began to materialize, pressure grew for a tax hike. In 1982 Reagan agreed to a substantial tax hike. More followed in 1984 and 1987, further eroding the 1981 reductions.

As Urban Institute economist and Tax Notes columnist Gene Steuerle has pointed out, ERTA marked the end of an era, the last in a series of tax cuts enacted in the 1960s and 1970s. But it also helped precipitate the beginning of a new era, one marked by profound fiscal stringency. Large and persistent deficits, attributable at least in part to the 1981 cuts, were to keep a tight lid on spending for years to come. The era of bold new programs in the New Deal mold was over. And Reagan had done everything possible to hasten that demise.

Reagan was not, however, an advocate of "starve the beast" fiscal policy: That cynical scheme to shrink government indirectly by reducing available revenue. Grover Norquist, president of Americans for Tax Reform, is the most prominent spokesman for that strategy, and he seems to draw his inspiration from Reagan. But Norquist's version of deficit discipline is far more radical, and much more irresponsible, than anything Reagan endorsed.

Indeed, Reagan's conservative credentials seem almost suspect by today's standards. He may not have championed the tax hikes of 1982, 1984, and 1987, but he certainly signed off on them. One suspects he may even have recognized, however grudgingly, that they were necessary. There isn't much room in today's GOP for that sort of fiscal responsibility. One can't help but wonder: If Reagan were running for reelection this year, would the Club for Growth target him for defeat, decrying his embrace of three major tax hikes?

Of course, the answer is no. Republicans recognize that Reagan's great gift to the conservative movement was not about policy, but politics. He changed everything, and the Democrats have never really recovered. When former President Bill Clinton declared that "the era of big government is over," he said more about the Reagan legacy than anyone writing obituaries last week.

In fact, Clinton was a bit like former President Dwight D. Eisenhower. Like Ike, Clinton inherited a political climate largely hostile to his party's ideology. Rather than challenge that ideology in its fundamentals, he tried to co-opt it. Eisenhower accepted the huge, new federal government that emerged from World War II, replete with mass income taxation; his conservative reforms had to work themselves out within the boundaries of the New Deal state. Similarly, Clinton embraced the Reagan agenda for limited government, squeezing his progressive reforms into Reagan's fiscal and ideological straightjacket. Sometimes you have to go along to get along.


A Fit of Collective Madness

Amid the outpouring of national grief last week, a subgenre of funereal writing has offered a eulogy for Reagan's signal tax achievement: the Tax Reform Act of 1986. This is well-trodden ground; people have been writing about the death of tax reform since the day it was enacted. And without question, much of that landmark law has been undone over the past 18 years.

But mourning the death of tax reform is ridiculous. Reform is a process, not a destination. The dynamics of American politics don't lend themselves to legislative monuments. Tax reform will never be like Mount Rushmore, etched permanently into the landscape for generations to come. (Of course, Mount Rushmore might not be like Mount Rushmore, either; Reagan partisans want to add the Gipper's likeness to the mountain.)

Nonetheless, the 1986 tax reform law was a landmark in American history -- a fiscal phenomenon so unusual as to be unique. It was and is the most important piece of tax legislation ever passed in peacetime. The law improved the tax system in any number of ways, both large and small. It was the crowning achievement of postwar tax reform: a distinctive version of revenue reform rooted in a simple mantra: "Broaden the base, lower the rates."

Tax reform of the 1986 variety is not the only sort of tax reform. Until the 1950s, "reform" often meant raising rates on the rich, although closing loopholes has been a perennial favorite as well. But the broader base, lower rates mantra was a product of the postwar tax establishment, finding its most ardent spokesman in Harvard lawyer and Treasury stalwart Stanley Surrey. On Capitol Hill, Rep. Wilbur Mills, D-Ark., carried the reform banner during his many years chairing the House Ways and Means Committee.

This classic, postwar version of tax reform enjoyed some modest and occasional success in the 1950s, 1960s, and 1970s. But 1986 was its high-water mark. The Reagan White House embraced tax reform as a centerpiece of its domestic agenda. And when the law struggled on Capitol Hill, Reagan put his personal prestige on the line, urging lawmakers to stay the course. Credit for the 1986 act properly belongs to many, including House Ways and Means Chair Dan Rostenkowski, D-Ill., Senate Finance Chair Bob Packwood, R-Ore., and Sen. Bill Bradley, D-N.J. But Reagan played a critical role, stepping in to save lawmakers from their own paralysis. The 1986 act demonstrates the importance of presidential leadership in the process of tax reform.

Historically, major tax reform comes only during wartime. Previous fiscal watersheds grew out of the Civil War, World War I, and World War II. By contrast, the 1986 act was a product of expert planning and presidential leadership. Treasury officials started the ball rolling, and Reagan gave political traction to their abstract planning. But that sort of reform, however impressive, comes without the durability of a true watershed. Lasting reform comes from structural changes in American society, not good intentions and careful planning. While the fiscal crisis of the 1980s was severe, it was not a transformative force.

As many observers have pointed out, lawmakers began to retreat from the 1986 tax reform almost immediately after it became law. Having succumbed to a collective fit of madness, they began to clutter up the tax code with the same sort of detritus they had just removed. But that shouldn't surprise anyone: Declension is a hallmark of tax reform. Indeed, a retreat from principle is much closer to the historical norm than any high-minded reform.

Can Reagan's support for tax reform serve as a model for today's Republicans? Perhaps. The White House reportedly plans to make tax reform a legislative priority during Bush's second term. But what sort of reform? Certainly nothing like 1986. Among other things, it's hard to imagine their embracing any reform that doesn't also cut taxes. Revenue neutrality is so yesterday.


Nickels, Dimes, and Dollars

But Republicans do understand Reagan's importance, even if they don't share his ardor for old-fashioned tax reform. Hence the renewed effort to find suitable vehicles for the Reagan likeness. Norquist has been working on this project for a decade, urging states and localities across the nation to rename parks, streets, and buildings for the Great Communicator. Now, however, there seems to be serious discussion about putting Reagan on the $10 bill, consigning Alexander Hamilton to monetary obscurity.

There's something deliciously ironic about that idea. Hamilton was a pro-business, pro-growth conservative with a soft spot for monarchy and a deep suspicion of democracy. Republicans should love this guy. Trying to run FDR off the dime made ideological sense, but this is some sort of Republican patricide.

I suspect the anti-Hamilton campaign reflects a decline in American cultural literacy, subgenre history, locus Capitol Hill. Ron Chernow's recent biography of Hamilton should be required reading for lawmakers of both parties. But then again, maybe Chernow would only add fuel to the fire. Hamilton was sort of suspiciously pro-tax. Like a number of those Founder-types, he believed in a strong federal government, complete with a robust taxing power. That's probably reason enough to banish him from the currency. I've always suspected that in the dark of night, many of today's conservatives harbor deep misgivings about the Constitution, what with its focus on centralized federal power. Maybe Hamilton does fail today's ideological litmus test.

Personally, I think they should throw Jefferson off the nickel. In the process, we could swap out his statue and transform the Jefferson Memorial into something more Reaganesque. And while we're at it, Monticello would make a good East Coast branch for the Reagan library.