Eight
Starving the Public Sector: The Economic Recovery Tax Act of 1981

How could the nation have gone from hope to gloom in less than two years? It is a critical question as the 1982 election approaches. Yet there is another, possibly more significant question to be asked: How could Mr. Reagan's economic plan have been enacted in the first place? For it was a program that lacked any sort of traditional constituency in Congress or in the Government, a program whose premises were challenged by conservative and liberal economists alike and that was widely characterized as a risky gamble with the nation's future .
STEVEN WEISMAN, NEW YORK TIMES

The business and finance community, popularly considered to be great worriers about the budget, suppressed its anxiety on this occasion—being so eager to have their taxes cut. When the tax bill was passed, in August, that was celebrated as a great victory for the President. Yet there was never any doubt that a tax bill very much like the President's would pass. It is, after all, one of the hoary axioms of political life that a Congressman should and will vote for every tax cut. When the tax cut provides some relief for all taxpayers, and when it is certified as essential by the most conservative President in fifty years, its adoption is assured .
HERBERT STEIN, FORMER CHAIRMAN, COUNCIL OF ECONOMIC ADVISERS

From one view the passage of the Conable-Hance, née Kemp-Roth, Economic Recovery Tax Act of 1981 is inexplicable, and from another inevitable. Weisman argues that few members of Congress actually believed in the supply-side theories that justified the reductions; Stein suggests that legislators like to give out benefits and, when encouraged by the president, have little reason not to do so. The journalist cites beliefs about the economy; the economist cites political truisms.

From President Reagan's perspective, politics always overwhelmed economics. Perhaps it is better to say that they both sprang from the same principles, which had little to do with economics as conceived by economists. Perhaps the tax cut would free productive energies previously chained by confiscatory tax rates. Certainly the obtrusive public sector could not grow any fatter if it were starved for funds. Whatever the short-term (or even permanent) fiscal effects, the tax cut could only

favor the individual over the government. That, in Ronald Reagan's mind, was what his revolution was all about, and so he fought for his tax cut with a certainty and persistence that overcame the doubts of his own staff and congressional allies. Large spending cuts might have passed without Ronald Reagan. The form of the final tax bill reflected the many contours of the American political process and the special circumstances of 1981. But the fact of the big individual rate reduction may be credited to the president.

"I had to subordinate my own feelings," recalled one senator. "I figured, Ronald Reagan was elected the Republican President. That was always in the back of my mind. I'm not here to pick a fight with a brand new President."^[1] When Robert Dole suggested that some compromise might be necessary, he was reprimanded in a note from the hospitalized Reagan.

Reagan's reaction—rejection of any compromise—was loud and immediate. When White House aides wanted Reagan to know he might have to compromise, they had Barber Conable, Republican leader on Ways and Means, brief their boss on the political outlook. Conable reported that the president told him, "if he started compromising now, what was left over wouldn't look like his original program."^[2] Conable couldn't argue with Reagan's tactical judgment. In all these cases, the president, by refusing to show any give, forced his somewhat reluctant allies to stand with him or against him; they stood with him.

Most Democrats believed that some tax relief was mandatory, not only to help the economy but also to lower taxes that had risen considerably in the previous three years. Between social security changes and bracket creep, a family of four with a 1977 income of $10,000 had seen its federal taxes rise from 10.2 percent to 13.8 percent of its income. In 1981 a 13.3 percent rise in inflation would cause a family of four earning $15,000 to lose $120 in real after-tax income.^[3] The tax increase was highest for low- and middle-income workers.^[4] As in 1980, most Democrats preferred smaller tax cuts distributed more to the lower end of the scale, but both policy and obvious political pressure meant they would produce some tax bill. As on spending, House Democrats could not simply stonewall.

Given uncertain control of the House and a Republican Senate and president, Ways and Means Chairman Rostenkowski's ideal had to be an agreement with Conable and Republicans on his committee. But Rostenkowski and other Ways and Means leaders, moderates used to bargaining across party lines, could not get a deal.

As a first cut, Rostenkowski adopted proposals justifiable on policy grounds and particularly attractive to Republicans. He proposed to reduce the "marriage penalty," in which, due to the progressive rate structure,

some couples who filed jointly paid more than if they lived together unmarried and filed separately. Rostenkowski also adopted estate tax reductions that some liberals disliked but were favored by a number of tax analysts. Most tellingly, the chairman and his staff decided to lower the top rate on capital income from 70 percent to 50 percent—a proposal that Reagan, on Meese's urging, had excluded from his program because it could be attacked as helping only the rich. The policy experts felt that, as one recalls, "to the extent that you wanted to stimulate investment, and there was not much money there anyway—nobody pays 70 percent—why don't we just go ahead and do it? We had studies showing that it would cost very little." "I guess it would be pretty hard for the Republicans to vote against that, wouldn't it?" asked Rostenkowski. "If Danny goes with that," Ways and Means Republican Bill Gradison commented, "he'll just steal the ball and make a basket."^[5] So Rosty hoped to make his slamdunk as a few liberals watched with despair from the sidelines.

With Republicans quietly nervous and conservative Democrats loudly skeptical about the deficit effects of the Reagan package, Rostenkowski's strategy—targeted policy changes for a smaller total tax loss than Reagan planned—made sense. It fit conservative policy preferences; even better, polls repeatedly showed that the public, too, believed a balanced budget more important than a tax cut.

Yet Conable would not deal. He blamed the Democrats for having stacked Ways and Means—twenty-three Democrats to twelve Republicans—at the beginning of the year. Given the stakes—if the committee endorsed Kemp-Roth, the game was over—the leadership wanted some extra margin of safety. "I told Danny," Conable reported in March, "that he robbed me of my independence. So I've got to go with the administration to have any impact."^[6] Ways and Means Republicans also hesitated to negotiate because nearly half the Republicans in the House had campaigned in support of Kemp-Roth. Rostenkowski and Conable, by many reports, were not the most congenial pair—the former a Chicago pol, the latter a more reserved self-conscious intellectual.

Conable had always preferred targeted savings incentives to across-the-board cuts because he believed, all other things being equal, people would spend rather than save. Conable never bought the argument that Kemp-Roth would increase savings. But he could see tax policy reasons to prefer rate cuts: preferences have to be paid for with higher rates, which in turn encourage tax avoidance and resentment.^[7] A wider tax base means more compliance, less administrative problems, and generally less frustration involved with raising revenue; this policy, which Conable and everyone else abandoned in July, would shape the 1986 tax reform. But beyond the policy argument the Ways and Means Republicans

had one overwhelming reason to sit tight: Reagan had far more political weapons than Rostenkowski.

If the Democrats had the votes to beat Kemp-Roth, it was better for Republicans to keep quiet rather than to risk a fight with their new Republican president. Although Kemp-Roth was less than popular, there was certainly no outcry against it. On taxes as well as on spending, Ronald Reagan, with his veto and control of the Senate, was in a far better position to deliver on or to thwart any bargain than were House Ways and Means Democrats.

Republicans gained much momentum for the tax fight when they won on the first budget resolution (Gramm-Latta 1). "If the White House decides to go to bat on Kemp-Roth the way they did on the budget," Leon Panetta predicted, "they're going to get it."^[8] At that time, however, the administration did not have the votes to pass its tax package in the House. Within the White House, the same deficit fears that fueled the ill-fated social-security initiative also fed worries about fiscal hemorrhage from the tax cut.

Don Regan and the Treasury had primary responsibility for negotiating with Congress. Regan, the salesman from Merrill Lynch, wanted to sell the president's program.

Senate Republican leaders Baker, Dole, and Domenici, worried about the deficit, also wanted to support the president. Their leanings fit their positions: Baker most interested in keeping his majority together; Domenici increasingly nervous about the deficit; Dole eager to pass a tax bill that satisfied his Finance Committee. Dole sent messages that 10-10-10 wouldn't fly; the final bill had to include other provisions of interest to his members.^[9]

Senate Democrats were still out of the game. Senator Byrd appointed Bill Bradley (D-N. J.) to head a task force to write a Democratic plan; it went nowhere. Russell Long kept blaming Byrd for having prevented a tax cut back in 1980 when he thought it might have saved the Senate majority. Every man for himself. House Republicans had taken themselves out of play. The White House essentially took them for granted, concentrating on cutting a deal with either Rostenkowski or the House boll weevils. The Administration's difficulty was that Rosty had to satisfy House Democrats to maintain his chair, while the weevils were worried about deficits and leery of defecting from the Democratic party on taxes as well as spending.

President Reagan and his advisers met on May 12 to discuss strategy. The advisers thought Rostenkowski might accept a two-year bill. The president accepted both adoption of the 70/50 reduction for the top rate in unearned income, which the Democrats had kindly endorsed (thereby temporarily solving Reagan's equity problem) and proposals to reduce

the marriage penalty. These provisions as well as short-term deficit worries could be accommodated by reducing the first year's cut to 5 percent, making it a 5-10-10 package. But that was as far as the president would go, and he did not want to go that far if he could help it.

Reagan authorized Regan to continue separate negotiations with Rostenkowski and the boll weevils in pursuit of the new, unrevealed bottom line. The Treasury secretary would report to the Legislative Strategy Group (LSG). An LSG member explained, "We needed either to deal with Rosty, where he had to worry about his Democrats (to his left) or do what we eventually did, creating a coalition with the boll weevils on the floor. The approach we hit upon was to use the threat of a boll weevil floor fight as leverage for a deal with Rosty." Negotiations proliferated both between the administration and congressional factions and among House and Senate leaders. Meeting with four boll weevils, Regan concluded the weevils would "go for 5-10-10 and a couple of other little things."^[10] Publicly the four southerners were noncommittal; they told Regan that they wanted to support a compromise from within their party, if possible, and that the membership of the Conservative Democratic Forum was split on the merits of Kemp-Roth. Rostenkowski, meanwhile, had been fattening his plan with more tax breaks, hoping thereby to attract wavering conservative Democrats and mainline Republicans. Among these temptations were reductions in the estate tax (justified as a particular burden on family farmers) and increases in the amount of money that could be placed in tax-free retirement plans (an investment incentive). Regan countered by offering Rostenkowski—and Dole, and boll weevil Kent Hance, a second-term Texan and member of Ways and Means who had assumed the role of mediator between southerners and the White House—a menu of items from the second planned tax bill in order to bring Rosty along on the three-year cut.

The bargaining had now taken a particularly bizarre turn; Rostenkowski was offering provisions to the House Republicans and boll weevils to avoid Kemp-Roth while Regan was offering them back to Rostenkowski to win support for the three-year cut. Rostenkowski, although he told reporters on May 27 that he might go for more than a one-year cut, was not willing to go for three. He met with Regan and Dole, who offered 5-10-10. Rostenkowski came back, "What about a two-year program instead of three?" And the Treasury secretary countered, "If I went to the President with that offer, I'd he fired."^[11]

Rostenkowski went back to his committee and reported to a caucus of twenty-three Democrats on the state of the negotiations. All but one rejected compromise on the available terms; "If that's the bottom line," Richard Gephardt declared, "then there are no further negotiations."^[12] Only two members favored even a two-year cut.

Rostenkowski relished the fact that business lobbyists had to learn to pronounce his long Polish name; he wanted to be a powerful chairman of Ways and Means, which meant, as he told his caucus on June 4, winning on the tax bill. He wasn't interested in being a principled loser: "Look, I want a tax bill that can win." Rostenkowski contrasted himself to his good friend, the Speaker, in an interview with Martin Schram of the Post: "Tip stands solid like an oak because he's got a basically liberal chemistry and he's got great pride in protecting what has been built in the last thirty years by the Democratic Party. I'm still at liberty to be the palm. I can sway."^[13]

Unlike James Jones, who had been out in front on budget and tax issues (in a conservative direction) long before he became Budget chairman, Dan Rostenkowski had no obvious, set views on most issues that came before his committee. But his interest in winning above all led him, like Jones, to search continually for grounds of compromise with either Republicans or conservative Democrats on his committee.^[14] Rostenkowski's career also revealed no objections to dealing with interest groups, whether hospitals or commodity traders or the savings and loan industry; searching for support, therefore, his willingness to use provisions that favored business groups was not out of character. Were concessions to other groups required for victory, he would have made those, too.

President Reagan told Democratic leaders on June 1, "Three years is a matter of principle with me. I'm already backed in a corner and I can't back up any more." Speaker O'Neill challenged Reagan's recitation of the supply-side premises, "Mr. President, you don't really believe that!" And he concluded, "If you roll us, you roll us."^[15] The Speaker told reporters that there was no hope of compromise, though Rostenkowski still claimed it was possible. Seeing a picture in the paper of the glum Rostenkowski, Reagan sent him a note: "Honest, Danny," wrote the president, "things aren't that bad…. Come on back—we'll try again. Warm regards, Ron."^[16] It was classic Reagan—friendly, personable, but behind that, unyielding.

Democratic leaders were split, with O'Neill adamant for a one-year cut, Wright arguing for a 5-5-5, and Rostenkowski leaning again toward two years. Both Ways and Means Democrats and the Conservative Democratic Forum caucused on June 2. The first group reached a loose consensus for a 5-10 plan; the second agreed to Reagan's idea of proportionately equal cuts but were split between supporters of two and three years. The next day the Ways and Means Democrats settled on a 5 percent cut on October 1, 1981, and 10 percent on July 1, 1982. The National Journal reported, "Many opposed a three-year cut out of fear that it would severely limit funds for social spending programs."^[17] Southerners

Ed Jenkins and Ken Holland endorsed the plan.^[18] Only one Ways and Means Democrat did not: Kent Hance, the second-term conservative from a very conservative Texas district who, like Gramm, had reaped a plum committee assignment as part of Jim Wright's effort to win over the boll weevils. "Hance was fidgeting in the corner, still on the fence," a participant recalls, "and we knew he had a meeting that afternoon at the White House." If he went, Hance knew his relationships with other members of the committee might never be the same; that afternoon he finalized his agreement with the administration.

The Die Is Cast: June 3–9, 1981

The day after telling Rostenkowski to "come on back," the president took the boll weevil option. The new package, announced on June 4, was cosponsored by Hance and Conable—a forced marriage if ever there was one, since Conable saw Hance as a pork-barreling oilman. At a breakfast that morning, Reagan told the southerners that though he could not prevent Republican opposition in their districts, if they supported the new bill, he would not campaign against them. That was one enticement; another was that Conable-Hance managed a smaller deficit than the original plan, while still adding some of Rostenkowski's appetizers.

Hance had suggested postponing the effective date of the individual cut as well as reducing the first year to 5 percent. He accepted a three-month delay, matching the Democrats' schedule, in return for a $700 million tax break for oil producers.^[19] The deficit projections were reduced, however, by deleting some parts of the original business tax package—precisely what Conable, and many other traditional Republicans, cared about most. Stockman was encouraged: the new steps "were consistent with good tax policy and also reduced the revenue loss by tens of billions of dollars in the out-years."^[20] But it was not to last.

Policy on depreciation involves formulas for estimating the useful lives of categories of capital plant. The rule for any item thus becomes part of the price the business pays for it. The inflation of the 1970s fueled demands for more generous depreciation rules, both because companies' assets were being overvalued and because more generous depreciation would lower the after-tax price of new investment. A lower price in theory would mean more investment and, eventually, more productivity. A crucial segment of Democrats—Jim Jones, Lloyd Bentsen, and Representative Sam Gibbons (the number-two man on Ways and Means)—wanted to liberalize depreciation rules on these grounds. Traditional Republicans like Barber Conable agreed.

The 10-5-3 accelerated depreciation plan reduced the many categories

and useful lives of equipment developed by the Treasury and Congress over the years to three categories: ten-year, five-year, and three-year writeoffs. Businesses loved the idea because most items could be depreciated much faster under 10-5-3 than under existing law. A series of other provisions, particularly tax credits, in the package made it even more attractive.^[21] The Treasury Tax Policy staff, and their political leaders, were less enamored. In the words of one participant, "It was considered too simplistic, too meat-ax. Machinery and equipment do have different useful lives. And it was too generous, it created negative tax rates." In essence, the government would give companies money to invest.

The argument blaming declining productivity growth on too little investment was dubious to begin with. The Commerce Department reported: in 1980 total investment (apart from housing) accounted for 11.3 percent of gross national product; in 1970 it had been 10.5 percent, 9.6 percent in 1960, 9.5 percent in 1950. For some reason, old levels of investment did not create the same productivity growth as before, but in that case more investment might not be the answer. Neither was more generous tax treatment clearly the key to greater investment. A survey of business reaction to the investment tax credit showed that "while business welcomes the tax reduction" firms "buy little or no additional equipment as a consequence of the tax credit."^[22] Yet the basic argument for business tax cuts seems to have been widely accepted.^[23]

Whatever its economic merits, the administration's original "Accelerated Cost Recovery System" (ACRS) was fervently supported by business interests and traditional Republicans. The new Conable-Hance package reduced the estimated tax cut by $15 billion over three years (and more later).^[24] This angered Ways and Means Republicans who didn't much like not having been consulted about it either.^[25] While they grumbled, the administration faced two threats that could provoke a defection.

The first difficulty involved the administration's economic projections. Senator Domenici had numbers from his staff and enough contacts with other sources to believe that the deficit picture was far worse than OMB had revealed. Because he was losing sleep over the prospects, the Senate Budget chairman finally told Chief of Staff Baker that he might have to lead a revolt against the tax bill. Baker, Darman, Stockman, all tried to get Domenici to back off. "I couldn't convince him," one senior aide recalls. "None of us could." They assured him they would seek more cuts, including those in defense, later in the year if necessary. Finally, "he went up to the residence with the president and practically got down on his knees to say he couldn't vote for the tax bill, and the president said, 'Pete, trust me, it will work.' And against all the advice of his staff,

of Bell, he voted for it." Domenici would huff and puff but simply could not defy his president. One of his aides reported in late 1982 that the New Mexico senator was still tortured about the decision; it would "haunt him for the next ten years."^[26]

The administration itself was divided over its projections. Regan, Baker, Darman, Stockman, and mainstream Republican economists all subordinated worries about long-term deficits to a concern with winning now as much as possible of the good things in the president's agenda. "As a group," Murray Weidenbaum would tell the president two months later, "your advisers decided that the midyear review should not be changed. It would have confused the tax picture."^[27]

A second and more powerful challenge to the revised tax package emerged from the business establishment. Most of Washington's top business lobbyists met regularly in a breakfast group at the Carlton Hotel. At White House urging this informal gathering had expanded into a more formal Budget Control Working Group that lobbied Capitol Hill for President Reagan's package. They "were not enamored of 10-10-10…. But [they] wanted the Accelerated Depreciation" and weren't sure that the tax cut would create horrible deficit problems. According to a group leader: "We did have some economists who said it would work, that the boost in the economy would be so great that we'd get it back in three years." One faction in particular, led by Chamber of Commerce President Richard Lesher and its chief economist Richard Rahn, included some fervent supply-siders. Groups like the National Association of Manufacturers (NAM) were more skeptical, but all had rallied to the president's side with uncharacteristic fervor. They were thrilled to be rid of Carter, wanted help from the new administration on environmental and other regulatory issues, trusted Reagan's old-hand advisers, and so had subordinated doubts about the tax cut.

On Thursday, June 4, at a routine morning meeting at the White House, the business community suddenly learned the administration couldn't confirm the business part of the package. Richard Rahn of the Chamber (whose black eyepatch and boots made him a fitting symbol of that group's individualism) erupted, declaring the new plan "a breach of faith." News of the business reaction spread quickly. Rahn and his colleagues were shocked by this new twist, but White House advisers with liaisons to business were equally stunned by Rahn's response. And "for some reason … they in the White House thought we would bolt."

Who could be sure? Looking back, it seems unlikely, but White House strategists were working on such a longshot game that even a lessening of enthusiasm might be dangerous. It was not as if they had enough boll weevils to give a cushion. Charles Stenholm estimated only fifteen to twenty members of the conservative Democratic Forum were with the

president on taxes.^[28] If business really wanted its own cuts, maybe some more traditional House Republicans would ally with Rostenkowski to help business, thereby torpedoing the individual reductions, which, after all, is what they wanted to do anyway. Another source reports:

The next morning all of us, about fifteen, met with Regan, Baker, and Ture. Regan said, "I hear you're unhappy; we want to do something about it." He looked at Rahn and said, "Let's not just complain." I asked Regan, are your feet in concrete on this? Regan said yes. I told him, "All I have to say is, the Roundtable [chief executives of the nation's largest corporations] meets Monday, and they've never really liked 10-10-10. The two guys who sold them were Wriston and Shultz, who are out of the country right now." Silence. Baker said, "Can this be fixed?" I said, "Three days ago it might have been fixed. Now you're set in concrete."

This participant reports that at the June 5 meeting someone suggested "that they just restore the last part but move it out past the third year of the budget horizon." In other words, they would postpone but not eliminate the deficit effects, moving them far enough into the future for the boll weevils not to have to look at them. There are conflicting reports about who came up with the idea and when, but it held the most promise of solving the political problem of holding both business and the boll weevils.

Secretary of the Treasury Regan was no fan of most of the excised provisions, but Baker was pressuring him to solve the political problem any way he could. The secretary then thought the most important part of his own job was to serve the president, which meant above all maintaining a coalition to support the individual tax reduction.^[29] Over the weekend, the Treasury redrafted Conable-Hance along the lines suggested by the business representatives. The revised package, actually introduced in the House on Tuesday, June 9, produced the same revenue loss for the budget period, FY82–84, as had the June 4 plan. But for FY81–86 it cost $163 billion, $ 10 billion less than the February plan but $40 billion more than on June 4.^[30] If business was bluffing, the bluff had worked.

The administration now had 5-10-10 on the individual side, a delayed version of the original business plan, and many provisions designed to win marginal, particularly Republican, votes.

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.

Senate Finance Moves

As Ways and Means Democrats worked on their package, public conflict shifted to the Senate, where Chairman Dole was working to report his bill before the July 4th recess. Dole wanted to keep the pressure on Ways and Means. He circumvented the constitutional requirement that revenue measures originate in the House by attaching the bill to a House-passed increase in the debt ceiling. His real difficulty was how to accommodate the intense pressure within his committee for "goodies" while keeping the deficit down.

In a markup that began June 18 and ended June 25, Finance adopted 5-10-10, the rerevised ACRS, and a raftload of additional provisions, ranging from a tax credit for oil royalty owners to one for rehabilitating old buildings included in the Conable-Hance package.

Finance then added, among other things, a reduction in the windfall (oil) profits tax and deductions to help truckers cover the costs of deregulation. The biggest addition was something called the All-Savers plan, under which savers could deduct from their income the first $1,000 of interest ($2,000 for couples) on special one-year CDs, paying 70 percent of the current T-bill rate.

As originally proposed by the savings and loan industry, the point of All-Savers was to generate deposits for thrift institutions, which had severe problems because inflation had made many of their old mortgages money-losers. The thrifts claimed that the tax break would encourage savings. Because that was such a good idea, senators extended it to banks and credit unions. Most observers assumed that All-Savers would just cause a shift of money from one kind of account to another. CEA member William Niskanen called it "one of the worst ideas I've seen in public life for a long time. I see no reason why it would increase savings."^[38] Dole called it an "all-subsidy" plan.^[39] Treasury and tax committee specialists were horrified, but pressure from senators, particularly Democrats, was too great to resist.^[40]

To compensate for some of these valuables, Dole included a few reforms. One would eliminate the "commodity tax straddle." When Finance approved its package, 19 to 1, on June 25, it seemed that Dole had fought off enough other tax breaks to have worked a miracle.^[41] He had hit the FY84 revenue-loss target of $150 billion almost exactly but included enough attractive items to get a nearly unanimous vote from his committee.

Only by the standards of the Senate was Dole's a victory for fiscal responsibility. He met the original target by first adopting the administration's compromise to 5-10-10 and then postponing the third-year business tax cuts beyond the budget horizon. Finance had not exactly reduced costs. On one major issue, the indexing of tax rates, Dole had arranged to increase the tax cut substantially, but Stockman didn't know that.

Indexing means raising the brackets each year by the amount of inflation, thereby not pushing people into a higher bracket by a wage increase that gives them no increase in real income. Like repairing the marriage penalty and reducing the estate tax, indexing was Reagan administration policy but not part of the first tax bill package.

Along with Finance member Bill Armstrong (R-Colo.), Dole had sponsored indexing proposals in 1979 and 1980.^[42] Because of inflation, Dole

said, some families' taxes were "nearly 50 percent higher than in 1965." Indexing, he said, "is more honest"; raising taxes was a decision "Congress should take responsibility for, rather than ceding that duty to the Consumer Price Index."^[43]

Although the administration supported indexing in principle, Regan, Baker, Stockman, and even the president insisted that indexing not be added to the bill. In reply, "Dole assured us in plain English," a member of the Legislative Strategy Group recalls, "that indexing would not be in the package at the time it was considered in Senate Finance." Whatever he said to the administration, Dole had his staff working on ways, to add indexing from the time the Reagan package was added in February. About a week earlier they had adopted a neat tactic: indexing, beginning in 1985, would be reported as a separate, committee-supported amendment. The date and separate reporting meant indexing would not count in the FY82–84 tax cut totals. The amendment (sponsored by Armstrong) was reported by a vote of 9 to 5. "There were a lot of absentees," one aide reports, "out of deference to the chairman."

By Stockman's account, the administration still thought Dole was on their side.^[44] Perhaps that is why, when Dole and Armstrong spoke for the amendment on the Senate floor on July 1, he and Senator Long had the following exchange:

Mr. Dole: The Senator from Kansas would like to speak in favor of the amendment prior to the vote.

Mr. Long: If the Senator wants to speak, go right on ahead.

Mr. Dole: If there are other speakers, I would sort of like to blend in with the group.^[45]

Understandably! According to estimates when the tax bill was passed, in FY86 indexing accounted for as much extra revenue loss as all other additions to the original package combined.^[46] The reasons for indexing were compelling, nonetheless, for an establishment politician like Dole, who worried about the perceived legitimacy of the tax code.

With only one Democrat, Bill Bradley, voting against Dole's plan in the committee, the game was essentially over in the Senate. The only question was how many riders would get on the tax-cut train. In late June, Russell Long had told the president, "You have the votes in the Senate to pass your tax bill," and the former Finance chairman was not one to misjudge such matters. Yet Long urged that the third year be subject to a trigger in the event of high deficits. Reagan refused. "Government," he replied, "spends all the taxes it gets. If we reduce taxes, we'll reduce spending."^[47] This restatement of his children's allowance theory was the essence of Reaganomics. There would be no further compromise.^[48]

Ways and Means Democrats were uniting behind a package that would have provided 80 percent of individual cuts to persons earning less than $50,000, compared to 65 percent in the Senate Finance bill.^[49] They would change depreciation to better fit their remaining principles. Ironically, the very fact that the Democrats had lost twice in a row encouraged unity. How many times could the boll weevils reject their party on crucial votes and still be able to live with their colleagues? A number of boll weevils wanted to make amends to the House leadership; they had done enough for Reagan. Charles Wilson, a defector on reconciliation, was working with the leadership to hold his Texas colleagues. When Congress returned from its July 4 recess, most estimates held that the Democrats might well win in the House.

The Bidding War

Which side are you on? Most members knew, but some were on the fence. Neither side could abide the prospect of losing, so they began an all-out bidding war for the swing votes. That war provided the year's most lurid political dramas, which almost obscured the battle's serious policy stakes.

Senate Republicans had saved money by attacking tax straddles. On July 10, House Democrats, on the instigation of Marty Russo (D-Ill.), reduced the savings from $1.3 billion to $900 million by allowing commodity traders to continue using tax straddles. This proposal was drafted by Joint Tax Committee staff after meeting with Russo, the chairman of the Chicago Board of Trade, and the special counsel to the Board of Governors of the Chicago Mercantile Exchange. Nothing could look more like "special-interest" politics. Each organization had given hefty campaign contributions to Russo and Rostenkowski. On July 14 President Reagan, in a speech in Chicago, proclaimed that the Democrats "have gone out of their way to offer 2,500 commodity speculators a tax break of over $400 million."^[50] Before the fight was over the president would abandon such rhetoric and raise Russo's bid.^[51] The real high-stakes auction, however, involved oil.

What could be more old style politics than oil? Long before OPEC, long before energy shortages and worries about the national security implications of war in the Persian Gulf, oil was at the center of politics. For years a precondition of appointment to Ways and Means was supporting a tax break for oil—the depletion allowance. Texas, Oklahoma, and Louisiana oil money—originally Democratic for reasons of either state politics or opposition to giant eastern oil companies (whose pipelines and market power continually threatened smaller but still rich operators)—became a major financial prop of the Democratic party.

As the Democratic party became more liberal, its conservative southern wing became less influential. The "small" operators of Texas and its neighbors came to realize that they were rich men, sharing some interest in national politics with the "Seven Sisters" of the international oil business. On the whole, Democratic biases, favoring price controls and other measures to ease customers' pain from the dramatic oil price run-ups during the 1970s, did not sit well with oil men. Republican biases toward letting the market decide were much more congenial to people who, for the moment, supplied a commodity for which there was great demand. Democrats had lost their grip on the oil money; it was missed.

The oil industry was not merely of interest to a few fat cats. Many thousands of people received royalties from oil wells; hundreds of thousands more depended on the health of the industry. In Oklahoma there are oil wells on the grounds of the State Capitol; in Baton Rouge, capital of Louisiana, the giant Exxon refinery is a symbol of petroleum's importance. Oil is important in its region in the same way the auto industry is in Michigan or the federal government is in Washington and its suburbs. James Jones said that as many as twenty votes on thetax bill would depend on the treatment of oil. Secure in upstate New York, Barber Conable could call Kent Hance a "knee-jerk oil man";^[52] Hance had little choice in the matter if he was to serve his district.

Oil politics focused on redistributive issues: who would pay and receive more or less depending on governmental policy. When OPEC drove up prices during the Carter administration, the oil states raked in money from the rest of the country. In order to assure supply, Jimmy Carter worked for a phased decontrol of prices (which oil interests liked); to prevent further regional redistribution, however, he fought for the windfall profits tax. In this battle over energy policy, the oil-producing states had ideological allies in the Republican party; but it was essentially a regional battle of oil interests against everybody else's, and oil was outnumbered. In 1981 fortunes dramatically reversed. Instead of a losing protagonist in a policy battle, oil representatives found themselves—because of their ideology and the balance of power within the House—a crucial swing group, courted by both sides.

Democrats appointed Richard Gephardt—both budget and tax reformer, and deal maker from Missouri—as their negotiator with the oil Democrats. Senate Finance's proposal to increase the tax credit against the windfall-profits tax from $1,000 to $2,500 for royalty owners (generally, landowners who have sold rights to drill on their property) would be justified as an aid to the "little guy," the farmer who just happens to have an oil well on the back forty. The Ways and Means Democrats were looking for something more.

They came up with a plan for a tax credit of $4,300 for royalty owners,

that is, a windfall-tax exemption rising to three and a half barrels a day by 1986. This latter provision could be worth far more than the credit. With other exemptions for newly discovered oil, their bid was estimated to cost $7.1 billion through 1986.^[53]

Over in the Senate, during debate on the Finance Committee bill, Lloyd Bentsen proposed to more than double the House offer. Although Dole got Bentsen's amendment tabled, 61 to 38, the Finance chairman concluded that some compromise was necessary. He therefore proposed a further reduction, beyond the Ways and Means plan, in the windfall profits tax on "new" oil. Administration lobbyists were unhappy with the cost of this proposal (raising the ante to $11 billion) but could not say much because Reagan was known not to like the windfall profits tax.^[54] Northern Democrats, however, now began a filibuster—enough was enough. Dole found that he did not have the votes for cloture to limit debate, a development that may not have disappointed him very much; so on July 22 he dropped his amendment. As of that day, therefore, the Ways and Means bill was superior to either the Senate's or Hance-Conable as an oil subsidy. Charles Wilson was confident about the final outcome: "I will state categorically that we have the Republicans beat on this bill."^[55]

Christmas in July

That would not do. On July 23, the Post reported, "The Reagan administration, preparing for a confrontation in the House … abandoned all pretense of seeking a 'clean' tax bill and substantially altered its tax package to include special interest amendments for the oil industry, savings and loan firms and a collection of other groups."^[56] Stockman provides a vivid explanation of what had happened: "Everyone was accusing everyone else of greed, and cynically auctioning off the tax code. … At a White House strategy meeting, Minority Whip Trent Lott summed up the mood: 'Everybody else is getting theirs, it's time we got ours.'"^[57] Republican House leaders, over the resistance of Stockman and, more important, Treasury Secretary Don Regan and Assistant Secretary for Tax Policy John "Buck" Chapoton, won a series of concessions. Opposition to All-Savers was abandoned, and the commodity tax break, which Reagan had blasted on July 14, became part of the package on July 23. Regan explained that these revenue reducing "giveaways" were necessary for the "greater good" of passing the administration tax bill.^[58] Among other provisions added were a reduced holding period for, capital gains from one year to six months, the generous Democratic treatment of estate taxes, and indexing.

In a separate meeting with the boll weevils, the administration upped

the ante on oil, adopting not only Dole's proposed Senate treatment of new oil, but a series of other adjustments that raised the revenue loss to an estimated $13 to $16 billion. The White House had doubled the Democrats' bid.^[59]

The oil provisions were the most publicized aspects of the tax battle, but there were many, many more. The Senate adopted 80 of 118 proposed amendments to the Finance Committee bill, creating a beautiful Christmas tree. These ranged from lowering the minimum corporation tax rate to a one-time $1,500 credit for adoption of certain disadvantaged children to a $10 credit for each pecan tree planted in South Alabama to replace each one blown down by Hurricane Frederick in 1979.^[60] In short, the Senate adopted many amendments serving many ends.

The administration's July 23 agreements, about which Conable now had more of a say (some wags suggested calling it "Hance-Conable 2"), included special provisions ranging from sops for gypsy moths (tax credits for rehabilitating old buildings and for woodburning stoves) to a credit for investing in television shows, which Dole dubbed the "Gong Show amendment." By this time all parties to the great tax debate were embarrassed. "It's awfully easy to focus on the add-ons," declared Conable defensively. "If I were writing the bill, I would write it differently. Everybody would write it differently."^[61] Liberals in the House finally began crafting an alternative. "It would probably be cheaper," David Obey suggested, "if we gave everybody in the country three wishes."^[62] "It's terrible that we should be involved in a bidding war," Rostenkowski admitted. "But it all depends on whether you want to lose courageously or to win. I like to win."^[63]

Stockman and Darman were beginning to wonder. As the budget director watched Ways and Means Republicans extract concessions from the Treasury on July 23, he passed a note to his colleague. "'I hope they're enjoying this,' it said. 'They've just put themselves out of business for the rest of the decade.'"^[64]

The oil deal distressed Stockman further. He and Darman had assumed all along that they would have to compromise with Rosty: "[We] expected to have to give in on some spending, but it wouldn't matter because we wouldn't get all the tax cut." Instead the tax package kept getting bigger.

On the afternoon of July 23, the two most independent-minded members of the administration considered heresy: "Maybe," Darman suggested, "we should take a dive on this." If only they managed not to cut a few extra deals—they could see that more deals were needed—the tax cuts might not pass. "But in the end," Stockman reports, "we chickened out." Always the tactician and institutionalist, Darman told himself he was preserving the president's ability to govern. Stockman, more the

moralist, recalls that "calculated sabotage of the President's most cherished initiative was beyond the pale."^[65] At least for awhile.

With all the ornaments attached, however, the biggest bucks were in the most defensible addition: indexing. Its cost was estimated, by Joint Tax Committee staff, at $12.6 billion in FY85, and $37.4 billion in FY86. When the administration added indexing to its House bill, the proposal was now in the Republican packages on each side. The editors of the Washington Post objected:

Congress has shown itself fully capable over the last decades of legislating tax cuts sufficient to offset "bracket creep." … Legislating a massive three-year tax cut in an economy as uncertain as the present one is folly enough. Sharply limiting the freedom of future Congresses to deal with whatever failures of current unforeseen shifts may emerge is mid-summer madness.^[66]

A realist had to assume that fiscal policy would work better if choices were phrased as how much to cut taxes rather than how much to raise them. Democracies, in this view, need institutions that can help representatives do the unpopular and the necessary—in this case, match taxes and revenues. President Reagan, of course, would say the issue is too much spending, not too little collecting.

Whether sound or not, the argument against indexing based on grounds of fiscal flexibility is hard to sell. If the reader disbelieves us, try arguing that tax increases should be surreptitious, done in the dark of night, which is how bracket creep takes place. Indexing had already passed the Senate on July 16, 57 to 40 (Republicans, 43 to 8; Democrats, 14 to 32).

In the House, by July 17, Willis Gradison (R-Ohio) had 223 cosponsors on a separate indexing bill. Rostenkowski acknowledged that Gradison's bill would sweep through the House if a vote were taken but vowed to keep it off the House floor. Thus, Treasury Secretary Regan was under intense pressure when he capitulated on July 23.^[67]

"It's like the arms race between the United States and the Soviet Union," said Representative William Brodhead (D-Mich.). "For every move, there's a countermove; for every weapon, a counterweapon."^[68] There was one big difference: in the tax battle all the weapons were used.

The parties organized home district lobbying of possible swing votes. Democrats set up a "boiler room" in the Capitol with telephone banks for calls to newspaper editors in key districts. Party Chairman Charles Manatt asked contributors to contact wavering legislators. Democrats also tried to pressure the gypsy moths, particularly through labor unions, since many of the more liberal Republicans represented districts with strong union organizations.^[69] The gypsy moths were uncomfortable at

being placed under such continuous pressure by the administration's unwillingness to compromise. "They don't have to put us to the wall every week," declared Carl Pursell (R-Mich.).^[70] But it was hard to see how union pressure could be any stronger on taxes than on reconciliation. Ed Madigan (R-Ill.) concluded, therefore, that the "tax vote should not be too tough for them, but," he added presciently, "if Stockman tries for another $20 billion in cuts next year, it will be very hard."^[71]

Republicans had bigger guns. As on reconciliation, they were helped by the fact that they controlled the Senate and the presidency. They had the money ($500,000) for a series of radio ads in swing districts. Most of all they had the president. He used the soft sell, inviting fourteen waverers to a barbecue at Camp David on Sunday, July 26. The waverers generally reported no change of mind; Charles Bennett declared that he felt that any tax cut was a bad idea and had told Reagan so three times. In the end, a sense of being personally courted could not have hurt as eleven of them did back the president. With some members Reagan made specific deals. Then on Monday, July 27, he went on television to sell his program.

Mobilizing the Public

Reagan's audience that night was basically favorably inclined toward him but not convinced about his policies. His Job approval rating, which was 68 to 21 percent favorable in early May after his dramatic recovery from the wounding, dropped to 59 to 28 percent in early June, where it remained through the summer. The most likely cause of this decline was Reagan's social security package, which the Republicans' own polling showed to be very unpopular.^[72]

Reagan's approval rating, as Table 4 shows, was based more on attitudes toward his leadership than on his budget policies; the latter were as likely to produce opposition as support.^[73]

A Time poll a little later in the month, however, showed 32 percent of the public supporting the three-year tax cut, while 36 percent supported a one-year cut, and 22 percent no cut at all.^[74] These figures could give the Democrats some hope.

Yet the public did not share the Democrats' intense opposition to Kemp-Roth. In a July poll only 16 percent expected the big tax cut to increase inflation; far more people expected the cut to help them through increased employment.^[75] The public's seeming preference for a smaller tax cut had more to do with preferring moderation on principle than with objecting to the cut itself.

When Reagan gave his speech on July 27, he therefore had a chance to define the issue in his favor. He wanted to use the speech to make

the case for both his tax and social security cuts. That coupling might well have been a mistake.

Howard Baker and Robert Michel were so worried by that prospect that they sent Reagan a written request that he confine his speech to taxes. "I think it would be a terrible mistake to drag the Social Security issue into the tax and budget fight," added William Armstrong, one of Reagan's strongest supporters on that issue. Republican pollsters advised that the issue had almost caused Republican Michael Oxley to lose a special election in a very Republican congressional district in Ohio.^[76] The president backed down, saying in his speech only that he had been unfairly attacked on the social security issue and that his administration certainly wouldn't take away anyone's benefits—correct, though not for lack of desire.

His speech about taxes was a stunning success—"by common consent of ally and adversary," Laurence Barrett reports, "his best television performance up to that time."^[77] Reagan called his plan "the first real tax cut for everyone in almost twenty years." In simple and powerful language he attacked the main Democratic objections (that is, his plan's distribution of benefits and riskiness) and suggested what the real reasons for Democratic objections might be:

The majority leadership claims their [bill] gives a greater break to the worker than ours and it does—that is, if you're only planning to live two

more years. The plain truth is, our choice is not between two plans to reduce taxes, it is between a tax cut or a tax increase. There is built into our present system, including payroll Social Security taxes and the bracket creep I've mentioned, a 22 percent tax increase over the next three years…. If the tax cut goes to you, the American people, in the third year, that money … won't be available for Congress to spend, and that, in my view, is what this whole controversy comes down to. Are you entitled to the fruits of your own labor or does government have some presumptive right to spend and spend and spend?^[78]

Reagan asked his audience to phone their congressmen to urge support. The response was overwhelming:

Until the President's Monday night speech on television, House Democrats honestly believed they had a margin of 10 or more votes. But after the speech, Mr. Rostenkowski related … he sat in his office until 11:30 p.m., listening to the phone ringing in response to Mr. Reagan. It was then that Mr. Rostenkowski began to worry. His apprehension deepened Tuesday morning, when most Democrats in the Georgia delegation informed the House leadership that they were going with the President.^[79]

What the Speaker called "a telephone blitz like this nation has never seen" set switchboards ablaze on Capitol Hill.^[80] Offices were flooded with calls, according to one estimate, favoring Reagan by about six to one. On Gramm-Latta 1, Carroll Hubbard had resisted the blandishments of a state dinner and the president's appeal, but on the tax bill his office received 500 calls, 480 of them siding with the White House. "It is obvious that the president's tax cut has overwhelming support in western Kentucky," said this previously loyal moderate who then voted for Hance-Conable.^[81] Beverly Byron had not been convinced by the Camp David barbecue, but 1,000 phone calls won her over to the president's side. Bo Ginn of Georgia received a call from Jimmy Carter urging him to hold fast, but, though Carter was Ginn's 405th caller, he was only the fifth to back the Democrats.^[82] Ginn also defected. "The constituents broke our doors down," he explained. "It wasn't very subtle."^[83]

Some lobbying was orchestrated by interest groups. The Chamber of Commerce, for instance, organized a telegram blitz of forty-three Democrats whom the White House suggested might be winnable, and twenty-nine of them did defect. Most congressmen, however, concluded that many of their calls were from "real people."^[84]

The lobbying after the speech was intense. Dan Glickman (D-Kan.) reported calls from the secretaries of Agriculture, Energy, and the Treasury, and two from the president. Bob Traxler (D-Mich.) reported that at 10:00 a.m. on Tuesday he was called by the president and turned him down. He was called again at 1:30 p.m. by a White House aide. Beginning

twenty minutes later, he received calls from top executives of General Motors and Dow Chemical, a Ford vice president, and then a Chrysler lobbyist. Traxler continued to resist, but Glickman, loyal to his party on spending votes, gave in. So did Dan McCurdy of Oklahoma, who explained that after Reagan called him on July 28 (McCurdy also had been at the barbecue), he finally decided to support the president for the sake of "accessibility. You like to know you have access and I feel I have it more so now. The president said he would remember…. I have three military bases in my district. I just want to know that if we come to a crunch over that, they're going to remember me."^[85]

Other Democrats received more tangible considerations. Reagan gave Glenn English a handwritten note promising to veto "with pleasure" any windfall tax on natural gas. That was no concession for Reagan who already opposed such taxes. The note, however, did enable English to look especially good in his district; it sealed his vote. Some members took kind words as promises; Mario Biaggi of New York announced that Reagan had promised to back legislation to reverse the Gramm-Latta 2 repeal of the social security minimum benefit. That was a big change, if true, as the minimum benefits issue was simultaneously part of the controversy over the conference on Gramm-Latta 2.^[86] In every way available to a president, Ronald Reagan sought votes for his tax plan, the centerpiece of his program to change the course of American government.

We cannot judge whether members were convinced by the indicators of Reagan's popularity or found it instead a convenient excuse for a vote shaped by other considerations. Georgia Representative Bo Ginn, for example, explained his vote by constituency pressure; yet both Stockman and one key Democratic strategist had a different explanation: peanuts. As Stockman explains, "The Georgia delegation notified Ken Duberstein [the administration's House lobbyist] it was 'for rent.' … I gagged at the prospect. They wanted us to stop our attempts to abolish the peanut subsidy program." Peanuts symbolized, for Stockman, the "corruption of state power." It was "a government-subsidized producer's cartel."^[87] Still he agreed; the prize was too big. As his Democratic rival put it, "We had votes we could muscle; they had some; but when you lose eight at once…." Most likely it was peanuts and popularity. One member of the Georgia delegation told us he gave a series of speeches against the tax cut in his district, but people wouldn't hear it.

Emphasizing the attack on programs, on the federal government's social mission, inherent in the tax plan, Democratic leaders pleaded for support. "Let us cut spending, yes. Let us cut taxes, yes," Jim Wright proclaimed, "but let us leave the round table intact at Camelot. Let's not burn it for firewood to warm the wealthy."^[88] Reminiscent of the New Deal language of class differences ("malefactors of great wealth"),

Speaker O'Neill declared that passage of Hance-Conable would, when added to the Prince Charles wedding in London that day, make it "a big day for the aristocracies of the world."^[89] Republican leader Robert Michel defined the stakes a little differently, tellingthe House, "Let us face it, the Speaker wants to hold onto as much federal revenue as he can."^[90] The Speaker lost, 238 to 195. Forty-eight Democrats voted for Hance-Conable; one Republican opposed it. That same day, after approving eighty amendments in twelve days of debate, the Senate passed the Finance Committee's bill, 89 to 11.

Meanings

What were the political lessons of the tax battle?^[91] Ultimately Reagan won all but two of those who had voted with him on the reconciliation rule. His lobbying and the public outcry picked up a few moderates, like Glickman and Biaggi. He showed that a president can successfully appeal to the people or to some of them. The tax cut was popular when it passed; in mid-August a Gallup sample approved it by a two to one margin.^[92] Reagan was helped, in a way, by the Democrats, who created a package they had trouble defending because they did not much believe in it. "All the Democrats achieved by compromising was to undercut their own arguments against our position," commented a Reagan adviser.^[93] But the president also sold the package by continually down-playing its radicalness.

It was hardly a tax cut at all, he argued, much as the spending cuts had not really been spending cuts. There seemed, to be sure, some truth in these arguments. The Kemp-Roth tax cuts would serve in some sense to offset previously established tax increases from social security and bracket creep. Yet while Reagan invoked brilliantly the residual American suspicion of "the guvmint"—always speaking of government as if it were some strange creature with a mind of its own, separate from the people who voted, lobbied, demanded and complained, paid taxes, pocketed the benefits, and staffed the bureaucracy—he did not make his case against the welfare state on its merits. He had some desire to try, as with social security, but was talked out of the attempt.

In short, Reagan's great victories were not truly revolutionary. He did not change the minds of the American people. But he did rouse existing beliefs to a point where many people petitioned their senators and representatives. Reagan used all the powers at his command to obtain, in only seven months, a major redirection of the priorities of the American government. Yet he had not won the public over to "Reaganism."

Congress passed the conference report on the tax bill on August 4. Conferees compromised on various benefits attached to the package

during the bidding war. Some miscellaneous special-interest provisions—pecan trees, "the gong show amendment," the freeze of the oil depletion allowance, tax credit for wood-burning stoves—were removed. The mild cleanup of the tax bill was just as traditional as the previous Christmas-treeing of the package.

The bidding war was the most dramatic aspect of the 1981 tax battle. Yet the fact that Reagan won all but three of the votes on taxes that he had won through reconciliation should remind us that the basis of his victory was a coalition created by the 1980 election: Republicans held together by party unity and a minority of conservative Democrats from conservative districts. There was uncertainty, so members of Congress exploited the situation to demand benefits for their districts. Yet the auction proved not that the president had to dominate Congress but that even he had to lobby it. As surely as he raised a political windstorm, just as surely he knew there were limits to how hard he could push. When Charles Wilson was committed to his party on the tax bill, the president ceased his personal lobbying.^[94] When Claudine Schneider opposed him on the final Gramm-Latta 2 vote, he called her the next day to pledge his support against unhappy Republicans in her district.^[95]

Stockman drew another conclusion; Greider quotes him:

"I now understand," he said, "that you probably can't put together a majority coalition unless you are willing to deal with those marginal interests that will give you the votes needed to win. That's where it is fought—on the margins—and unless you deal with those marginal votes, you can't win"^[96]

He added something that meant more then he perhaps realized: "Power," said the disappointed budget director, "is contingent."^[97] The oil auction was a wonderful example. Oil interests, relatively weak in the late 1970s, took full advantage of the new contingencies. If power is contingent, however, so is weakness. The oil interests exploited the bidding war, but that was possible only because the bidders chose to play. The game could change very quickly and with it the seeming distribution of power.

Some legislators exploited the need for their votes in late July for personal ends. But to party leaders, and (we hope by now) to our readers, the "situation" meant more than the tax battle of July. That battle was set in a larger context—economic crisis, Democratic party disarray, elite confusion, a dramatic election, Republicans enjoying the prospect of governing, a new president at the height of his power. Those were the circumstances Reagan used, not only for short-term ends but also to shape the long-term results.

The attention paid to the special-interest battle also should not be

allowed to obscure the fact that if that battle had not occurred and the president had won his original cleaner bill, deficits would still have been huge.^[98]

The fiscal crisis that followed had far more to do with the original plan than with the add-ons. Estimates at the time projected that big differences would not show up for five years (in FY86, $46 billion). There was plenty of time to fix up those differences, if they were significant. The original $221.7 billion revenue loss for FY86 was far more intractable.

From the beginning of the battle, both sides knew that the real stake was constraining government in the future. The Speaker and his allies fought to prevent constraints; they did not believe in the supply-side boom. The president believed in both the boom and in spending cuts. Taxes were the worst part of government, so cutting taxes would cut government, reversing what Reagan believed to be the pernicious momentum of the federal machine. The tax and authorization changes were now part of the law. Attempts to change these would have to overcome not the president's popularity but his veto. He held the key to later action. In that sense, he had set the agenda for coming years.

But the agenda would depend as much on the economy as on Reagan's victories. The crucial consideration was raised by veteran Pennsylvania Republican Representative Joe McDade shortly after he voted for the Hance-Conable bill: "Pray God it works. If this economic plan doesn't jell, where are we going to get the money for anything?"^[99]