previous sub-section
Twenty Counterpoint: The Improbable Triumph of Tax Reform
next chapter

Spending and Tax Reform: Two Radical Changes Compared

Such a radical change would not have been possible without Ronald Reagan as president, if only because no one would go to all that trouble only to face a veto. Reagan's role was far more positive than that, but it was not the role normally assigned to him: a "great communicator" with massive popularity. Although Ronald Reagan in the first two years of his second term was the most popular president since the origins of polling in the 1930s, that did not translate into an unbroken series of victories. On the contrary, he continued to be challenged: winning, only by great effort, small sums for his Central American policies; suffering major reverses on South Africa and defense spending; and failing to gain approval for most aspects of his domestic agenda. Whatever political realignment might be in the making, President Reagan was certainly not its beneficiary. How, then, in the midst of substantial dissensus over public policy and acrimony over many things (such as William Rehnquist's nomination for chief justice of the Supreme Court) were majorities, backed by the president, mobilized in favor of radical change in taxing? What did President Reagan do to facilitate radical tax reform?

His most important actions lay in a willingness to impose costs on his own followers in order to achieve a larger objective. Without transferring taxes from individuals to business, tax reform would indeed have been an impossible dream. On one side, such a president must be popular enough with his own followers and strong enough inside his own administration to make his preferences stick. On the other side, the president must be able to envision a larger benefit for which smaller ones might be sacrificed.

The president wanted a limited domestic government supported by a larger economy that operated under market incentives. Though a friend of business, Reagan believed that tax-induced investments, in general, were bad for enterprise. Low rates, on the other hand, were


503

good. He believed as well that it would be very difficult to raise rates again once they had come down. Low tax rates would be seen as—and Reagan surely would present them as—a promise to the American people. He may have realized that, save in wartime, Congress never raised the basic rate. Indexing assured it would not go up by bracket creep. Since 1981 revenues had been raised by eliminating preferences, and that might have continued. But tax reform wiped out most preferences anyone could imagine touching, in return for lower rates. What a deal! Reagan got a tax system that better fit his ideology, one that would be much harder to modify than the one he inherited. He traded short-term dissatisfaction among his constituents for a long-term policy structure that fit and favored his ideals. With revenue increases made even harder to achieve, Reagan's opponents might even be forced to admit the need for spending cuts to deal with the deficit.

Tax reform might have failed if Democrats had shared Reagan's calculation. But many of them, like Bradley and Gephardt and Robert McIntyre and Joseph Pechman, believed the new situation would make revenue increases easier. A broader tax base, they believed, meant more revenues could be raised with smaller rate increases. Smaller increases, if needed, might be easier to get. Maybe. We doubt it. Here, though, as with GRH and the Budget Act of 1974, the parties judged the strategic situation differently, based on differing visions of what the public really wanted.

The immediately preceding years had taught everyone lessons in advanced stultification. GRH and tax reform were designed to do for Congress what tariff and bank reform had done in prior times—restore both the reality and the appearance of effectiveness by reducing the clout of external interests while at the same time simplifying congressional consideration of controversial matters. The struggle over the fairness of the tax code has deflected attention from the main expected beneficiaries of reform—Congress and the president.

Moderates pushed aside severe doubts about the desirability of the policies contained in these reforms in order to defend Congress's capacity to govern. Whatever the results, no one could say that Congress was not in control.

Although reform as a restructuring to reduce overload has its attractions for those who identify with Congress and the presidency as institutions, what was in it for the more policy-minded? How could adherents of a lesser and greater spending role for government, domestic or foreign, or a more or less progressive tax, come together? As the host of a radio talk show asked one of us, is this a "liberal" or "conservative" tax reform?

Tax reform is a classic example of what Mary Parker Follette, early


504

in this century, called an "integrative solution": liberals feel they have helped the poor far more than they have advantaged the rich. Economic conservatives believe they have shored up free enterprise in a way that will compensate for the loss of spurs to investment. Moderates believe that to show Congress is able to govern will reinforce social order sufficiently to cope with the disruption invariably caused by large-scale change.

Now, most policies try to have something for everybody. Tax reform worked in part because of what it gave: distributional benefits to liberals who cared most about distribution; economic incentives to conservatives who cared most about market systems; legitimacy to moderates who cared most about the perceived integrity of the political system.

Because deficit reduction is so heavily minus-sum—each side ends up feeling like losers—there is no way to do much without angering enough interests to block a proposal. One can either think of the problem in terms of organized groups or just look at the polls: either way, $150 or $180 or whatever the current billion in deficit reduction is nowhere to be found. Politicians wanted deficit reduction even more than they wanted tax reform. But the constraints, against spending cuts and tax hikes, were overwhelming. The politicians blamed each other's hypocrisy or lack of courage, and in doing so they missed the point.

In a democracy politicians must balance two roles: exercising their own judgment and representing the public. The dilemma is as old as democracy itself. On many issues it does not arise because either active participants or citizens—or both—pay small attention to the result. When the dilemma does arise, politicians do follow their own judgment more than we or they might believe; but they will not take actions seriously disapproved of by majorities of the American public. In tax reform our governors stretched the boundaries of the constraints set by American democracy in the 1980s. On the deficit, they were locked in by the same constraints. They could not solve the deficit and still represent that huge, contentious, energetic, bewildered, and contradictory "interest group" called the American people.

Because it paid each side in the currency it valued most, tax reform became a positive-sum game; each side thought it ended up better off than it started. The president's insistence on tax reform, Congress's frustration and desire to show that it could govern, and the ability to appeal to the three major ideologies helped overcome the usual obstacles. Gramm-Rudman-Hollings tried to combine similar factors—presidential insistence, congressional concern with governance, and a widespread appeal—to solve the deficit problem; that is why it passed. It failed to work, however, because GRH did not really give anything to anybody.


505

Each faction's stake in GRH was negative; it would not help them, but it would hurt others. If we ever reach the point where political factions are more eager to hurt each other than to help themselves, then our political system really will be in trouble. When hatred and feuding override self-interest in living together, a polity becomes like Lebanon.


506

previous sub-section
Twenty Counterpoint: The Improbable Triumph of Tax Reform
next chapter