As the Obama administration begins its quest to right the economy through government spending, a counter story of recovery comes from admirers of the Reagan administration. President Reagan’s admirers point out that he was also faced with a horrible economy upon his inauguration which, they assert, Reagan cured with deep tax cuts. Rather than relying on a stimulus package of infrastructure expenditures to drag us out of a long recession, these conservative thinkers suggest that tax cuts are the more appropriate course of action to engage in now. Yet, what these tax cut supporters forget is that Reagan did not, in fact, cut taxes.
The great Reagan tax revolution was based on revenue neutrality. The Reagan tax changes that produced the 1986 Internal Revenue Code were based on a deal with Congress requiring that every change in the Code that lowered taxes was offset by another provision that raised taxes. So in the end, the same amount of revenue was raised before and after the 1986 tax changes.
Reagan tax cut supporters will counter that Reagan brought rates down from 70 percent to 28 percent and surely that is a tax cut. True, Reagan lowered the tax rate on income, but he also included a great deal more types of income in the tax base. Thus, by getting rid of a whole host of tax shelters, Reagan was able to make the Internal Revenue Code simpler, the rates lower, and the amount of revenue collected constant.
As we know, not all conservatives act alike. The Bush tax changes destroyed the revenue neutrality of the Reagan tax cuts. The Reagan tax cuts were degraded in the Bush years with rates that declined to 15 percent or below for the types of income earned by the wealthy. Warren Buffet illustrated this failure of the Bush tax cuts when he offered any CEO $1 million if that CEO could show he paid a higher tax rate than the CEO’s secretary. No CEO was able to take advantage of Buffet’s offer because almost all of the income earned by wealthy people is now sheltered by low rates or exemptions that produce little or no tax at all.
Throughout this election cycle the right has consistently made two claims: Reagan was a wonderful president and tax cuts are the best way to cure economic ills. Yet, the right has never called for a return to the Reagan tax cuts. The reason is simple. The tax scheme created by the president most admired by conservatives would raise taxes significantly more than the tax program suggested by the Obama administration.
This country would do well to consider returning to the Reagan tax scheme which at least was able to tax the rich more than the middle classes, rather than the endless round of tax cuts we have engaged in over the last eight years that have certainly not protected our economy or increased our employment.
[This opinion piece was originally published in The Tennessean Feb. 22, 2009. Beverly Moran, a professor of law and sociology, is a leading tax scholar whose recent work includes a path-breaking analysis of the disparate impact of the federal tax code on African Americans and an innovative new text on the taxation of charities and other exempt organizations. Moran is currently on leave as an American Council on Education Fellow at MIT.]
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