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The Water Cooler
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Title: Taxes: What People Forget About Reagan
Source: CNNMONEY
URL Source: http://money.cnn.com/2010/09/08/news/economy/reagan_years_taxes/#
Published: Sep 9, 2010
Author: CNNMONEY
Post Date: 2010-09-09 12:09:46 by Brian S
Keywords: None
Views: 7815
Comments: 15

chart_reagan_taxes5.top.gif By Jeanne Sahadi, senior writer



NEW YORK (CNNMoney.com) -- Those who oppose higher taxes and are fed up with record levels of U.S. debt may pine for Ronald Reagan, the patron saint of lower taxes and smaller government.

But it's worth considering just what Reagan did -- and didn't do -- as lawmakers grapple with many of the same issues that their 1980s counterparts faced: a deep recession, high deficits and a rip-roaring political divide over taxes.

Soon after taking office in 1981, Reagan signed into law one of the largest tax cuts in the postwar period.

That legislation -- phased in over three years -- pushed through a 23% across-the-board cut of individual income tax rates. It also called for tax brackets, the standard deduction and personal exemptions to be adjusted for inflation starting in 1984. That would reduce "bracket creep" since the high inflation of the 1970s and early 1980s meant incomes rose very fast, pushing taxpayers into ever higher brackets even though the real value of their income hadn't changed.

The 1981 bill also made certain business deductions more generous.

In 1986, Reagan lowered individual income tax rates again, this time in landmark tax reform legislation.

As a result of the 1981 and 1986 bills, the top income tax rate was slashed from 70% to 28%.

Despite the aggressive tax cutting, Reagan couldn't ignore the budget deficit, which was burgeoning.

After Reagan's first year in office, the annual deficit was 2.6% of gross domestic product. But it hit a high of 6% in 1983, stayed in the 5% range for the next three years, and fell to 3.1% by 1988. (By comparison, this year it's projected to be 9% but is expected to drop considerably thereafter.)

So, despite his public opposition to higher taxes, Reagan ended up signing off on several measures intended to raise more revenue.

"Reagan was certainly a tax cutter legislatively, emotionally and ideologically. But for a variety of political reasons, it was hard for him to ignore the cost of his tax cuts," said tax historian Joseph Thorndike.

Two bills passed in 1982 and 1984 together "constituted the biggest tax increase ever enacted during peacetime," Thorndike said.

The bills didn't raise more revenue by hiking individual income tax rates though. Instead they did it largely through making it tougher to evade taxes, and through "base broadening" -- that is, reducing various federal tax breaks and closing tax loopholes.

For instance, more asset sales became taxable and tax-advantaged contributions and benefits under pension plans were further limited.

"What people forget about Ronald Reagan was that he very much converted to base broadening as a means of reducing deficits and as a means of tax reform," said Eugene Steuerle, an Institute Fellow at the Urban Institute who had helped lay the groundwork for tax reform in 1986 and served as a deputy assistant Treasury secretary during Reagan's second term.

There were other notable tax increases under Reagan.

In 1983, for example, he signed off on Social Security reform legislation that, among other things, accelerated an increase in the payroll tax rate, required that higher-income beneficiaries pay income tax on part of their benefits, and required the self-employed to pay the full payroll tax rate, rather than just the portion normally paid by employees.

The tax reform of 1986, meanwhile, wasn't designed to increase federal tax revenue. But that didn't mean that no one's taxes went up. Because the reform bill eliminated or reduced many tax breaks and shelters, high-income tax filers who previously paid little ended up with bigger tax bills.

"Some of these taxpayers were substantial contributors to the Republican Party and to the president's re-election campaign, and had direct access to the White House. Reagan rebuffed their pleas," wrote J. Roger Mentz, the Treasury assistant secretary for tax policy in 1986, in a Tax Notes commentary last year.

All told, the tax increases Reagan approved ended up canceling out much of the reduction in tax revenue that resulted from his 1981 legislation.

Annual federal tax receipts during his presidency averaged 18.2% of GDP, a smidge below the average under President Carter -- and a smidge above the 40-year average today.

How might Reagan fare today?

Reagan's behavior might not pass muster with those voters today who insist their Congressmen treat every proposed tax increase as poisonous to the republic.

"By today's standards, the Gipper would easily qualify for status as a back-stabbing, treacherous RINO [Republican in Name Only]," wrote Tax Analysts contributing editor Martin Sullivan, in an article for Tax Notes in May.

C

Thanks in part to the increases in defense spending during his administration, Reagan also didn't really reduce the size of government. Annual spending averaged 22.4% of GDP on his watch, which is above today's 40-year average of 20.7%, and above the 20.8% average under Carter.

Indeed, in one very symbolic respect he enlarged it. While in the early years of his presidency Reagan tried to shrink the IRS, by the end, the number of IRS employees hit an all-time high, according to Steuerle in his book Contemporary U.S. Tax Policy.

The reason was two-fold, Steuerle said. The first was a desire to crack down on the proliferation of tax shelters. But the point of cracking down was to boost tax revenue. That, in turn, could reduce the need to impose other tax increases to combat budget deficits. To top of page

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Begin Trace Mode for Comment # 6.

#1. To: Brian S (#0)

Nobody with Reagan's record could survive in today's GOP. Reagan would have switched parties.

go65  posted on  2010-09-09   12:15:11 ET  Reply   Untrace   Trace   Private Reply  


#6. To: go65 (#1)

Two points:

A.) The author is confusing tax rates and tax revenue. Reagan cut tax rates and tax revenues exploded due to the resulting economic boom. The same thing happened under Clinton / Gingrich when the capital gains tax was cut from 28% to 20%.

B.) Reagan came to office with several priorities. The one he decided to prioritize was defeating communism. Disappointingly, he had to go along with the domestic spending plans of the Democrat Congress to get what he wanted on defense spending. I wish he would have held a harder line on spending, but it is what it is.

jwpegler  posted on  2010-09-09   16:24:45 ET  Reply   Untrace   Trace   Private Reply  


Replies to Comment # 6.

#7. To: jwpegler (#6) (Edited)

The author is confusing tax rates and tax revenue. Reagan cut tax rates and tax revenues exploded due to the resulting economic boom.

The only one confused is you. After Kemp Roth, revenues FELL. After Dole forced Reagan into accepting the largest tax increase on incomes ever, revenues recovered but at a pace slower than the previous three decades.

war  posted on  2010-09-09 16:38:17 ET  Reply   Untrace   Trace   Private Reply  


#8. To: jwpegler (#6)

Reagan came to office with several priorities. The one he decided to prioritize was defeating communism. Disappointingly, he had to go along with the domestic spending plans of the Democrat Congress to get what he wanted on defense spending. I wish he would have held a harder line on spending, but it is what it is.

That's a tired old myth. Sorry.

In 1984 Reagan told the Soviet Foreign Minister "the United States "respects the Soviet Union's status as a superpower and has no wish to change its social system."

And there's more:

http://www.foreignpolicy.com/articles/2010/06/07/think_again_ronald_reagan? page=0,2&showcomments=yes

When they did meet in Geneva, in November, Reagan whispered to Gorbachev, "I bet the hard-liners in both our countries are bleeding when we shake hands." An initial meeting scheduled for 15 minutes lasted five hours. The following year, in Reykjavik, Iceland, Reagan and Gorbachev came within a whisker of agreeing to destroy all their nuclear weapons (a deal Reagan scuttled because he would not limit "Star Wars"). But in 1987, the two men signed the Intermediate-Range Nuclear Forces (INF) Treaty, the Cold War's most far-reaching arms-reduction agreement.

By 1988, though the Soviet Union had not yet released Eastern Europe from its grip, Reagan was explicitly denying that the Soviet Union still constituted an "evil empire" and had begun calling Gorbachev "my friend." And contrary to the conservative fable, it was this second-term dovishness that played the crucial role in enabling Gorbachev's reforms. From virtually the moment he took office, Gorbachev was desperate to cut military spending, which by the mid-1980s constituted a mind- bending 40 percent of the Soviet budget. But within the Politburo, vast unilateral cuts would have been politically impossible; Gorbachev needed an American partner. And once he found that partner in the less-menacing second-term Reagan, Gorbachev was able to convince his Kremlin colleagues that the Soviet Union could risk losing its Eastern European security belt without fearing Western attack. In the words of longtime Soviet Ambassador to the United States Anatoly Dobrynin, "If Reagan had stuck to his hard-line policies in 1985 and 1986 ... Gorbachev would have been accused by the rest of the Politburo of giving everything away to a fellow who does not want to negotiate. We would have been forced to tighten our belts and spend even more on defense."

And...

http://mises.org/freemarket_detail.aspx?control=488

In 1980, Jimmy Caner's last year as president, the federal government spent a whopping 27.9% of "national income" (an obnoxious term for the private wealth produced by the American people). Reagan assaulted the free-spending Carter administration throughout his campaign in 1980. So how did the Reagan administration do? At the end of the first quarter of 1988, federal spending accounted for 28.7% of "national income."

Even Ford and Carter did a better job at cutting government. Their combined presidential terms account for an increase of 1.4%—compared with Reagan's 3%—in the government's take of "national income." And in nominal terms, there has been a 60% increase in government spending, thanks mainly to Reagan's requested budgets, which were only marginally smaller than the spending Congress voted.

The budget for the Department of Education, which candidate Reagan promised to abolish along with the Department of Energy, has more than doubled to $22.7 billion, Social Security spending has risen from $179 billion in 1981 to $269 billion in 1986. The price of farm programs went from $21.4 billion in 1981 to $51.4 billion in 1987, a 140% increase. And this doesn't count the recently signed $4 billion "drought-relief" measure. Medicare spending in 1981 was $43.5 billion; in 1987 it hit $80 billion. Federal entitlements cost $197.1 billion in 1981—and $477 billion in 1987.

Foreign aid has also risen, from $10 billion to $22 billion. Every year, Reagan asked for more foreign-aid money than the Congress was willing to spend. He also pushed through Congress an $8.4 billion increase in the U.S. "contribution" to the International Monetary Fund.

His budget cuts were actually cuts in projected spending, not absolute cuts in current spending levels. As Reagan put it, "We're not attempting to cut either spending or taxing levels below that which we presently have."

The result has been unprecedented government debt. Reagan has tripled the Gross Federal Debt, from $900 billion to $2.7 trillion. Ford and Carter in their combined terms could only double it. It took 31 years to accomplish the first postwar debt tripling, yet Reagan did it in eight.

go65  posted on  2010-09-09 20:08:30 ET  Reply   Untrace   Trace   Private Reply  


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