The Democrats Respond

The Democrats' strategy had been, in essence, to beat the individual rate cuts by using special provisions to win marginal votes. Now the Republicans had matched those bids. Tip O'Neill mused that "when they had

the pure Kemp-Roth and the 10-5-3 we had them licked and they knew we had them licked. But where we made our mistake was … in allowing them to get the information of what was in our bill … the sweeteners…. They took the goodies that were under our table."^[31]

The bidding for marginal votes could only continue; any bid, however obnoxious in itself, would seem the lesser evil compared to losing on the individual rate cut. Of the proposals circulating in Ways and Means Ken Holland (D-S.C.) remarked, "It used to be that these kinds of things were only being advocated by rednecks and Republicans."^[32] Anticipating the dynamic that would follow, the New Republic commented that "liberal citizens can only hope that the Democrats will come to terms before Reagan threatens to compromise further."^[33]

The bidding war that followed should not, however, obscure the real disagreement on policy. In mid-June, Ways and Means Democrats endorsed a 5 percent rate cut on October 1, 1981, and 10 percent on July 1, 1982, substantially tilted toward middle- and lower-incomes. In order to argue that their bill would be as generous as Reagan's, if the deficit allowed—a pretty good reading of opinion polls—Ways and Means designed "a gimmicky trigger that we knew could never be pulled," allowing a third-year, 10 percent cut if the economy did some miraculous things.

On the business side, Sam Gibbons, chairman of the task force responsible for drafting a Democratic plan, set the size of the Republican package as a rough standard. There seems to have been little controversy over that decision. The question was how to match the Republican offer. In mid-June Ways and Means Democrats pulled a whopper out of their hat; they endorsed "expensing," the provision under which a corporation could write off all the cost of an investment in the first year.

Although it essentially eliminated taxation on investment, expensing would not subsidize anything in particular—unlike the administration plan, which was estimated to cost $1.07 for every $1.00 of new investment. Economists, who dislike government trying to influence market actions, had to prefer expensing to the messy details of Reagan's Accelerated Cost Recovery System and to the investment tax credit. Former Senate Finance Chairman Russell Long commented that business had always wanted expensing; "they only didn't ask for it because they thought they couldn't get it."^[34]

In addition to expensing, the Democrats proposed reducing the corporate income tax, with top rates failing from 46 to 34 percent between 1984 and 1987. People with short memories, especially those who seek to judge responsibility for the deficit, should remember not only what Republicans got but also what Democrats were prepared to give.

Expensing was a bold stroke, attractive to businessmen and economists, a real reform that would simplify the tax code (eventually) yet,

supposedly, cost less than the GOP plan.^[35] Naturally the Democrats could not keep it all this simple; they added an investment tax credit for the smokestack industries (cars, steel—think of Chrysler) in trouble, particular beneficiaries of the GOP plan. The tax credits could be received as refunds even if these ailing companies had no profits to be taxed. "You guys have come a long way toward being Republicans on taxes," W. Henson Moore (R-La.) commented, "but this goes too … far."^[36] In the end Republicans matched the bid by allowing unprofitable companies to sell unused tax credits to companies that could use them, a variant that in a rather twisted way preserved a market role in this process—without reducing the government's loss and while strengthening the already strong. Sales of tax credits became a prime target for repeal in the 1982 tax act.

The Democrats' bold maneuver might have worked if politics was only about competing for support on the basis of the best offer. But that is the politics of amateurs, people in the game for only one round. To the professionals, long-term alliances are more important than short-term offers. The professional's question—here we include not only party politicians but also partisan policy experts and leaders of interest groups—is not, Whose proposal sounds better? but Who are my friends? Business lobbyists ignored the attractive Democratic proposal, rationalizing their disinterest with doubts the Democrats would actually follow through.^[37] A business lobbyist explains, "We didn't take expensing because it was just not invented here, that's all." Another says, "It was very late in the game, and in politics you don't change sides so easily." A Ways and Means source summarized what happened: "They were just on the president's side. We're big kids, we talked to these guys, and the message was coming from the CEOs. I don't care what we did, they were going to back Ronald Reagan." The fact that the Democrats' plan was slightly less generous surely did not help, but it would have required a much more generous plan to get business to defect from a Republican president. Sentiment as well as hard-sell motivates the managers of corporate capitalism.