PART 1 OF 2
3. BAIT AND SWITCH
The political drama of taxation provides what is probably the best measure of democracy's condition, the clearest evidence of where power truly resides in the society. Aside from sending someone to war or to prison, government's ability to make people involuntarily give over their money is its strongest exercise of authority over private citizens and their institutions.
Indeed, the classical case against democracy has always been a theoretical supposition that, sooner or later, the many would use their democratic control of government to violate the property rights of the few. The mob's insatiable appetites would be fed by unscrupulous. politicians, who would use the tax system to confiscate the incomes and wealth of those who have more.
This has not been the case in America, to put it mildly. On the contrary, during the past fifteen years, the monied interests and allied governing elites have used their political power to accomplish the opposite result: Federal tax burdens were steadily shifted from them to everyone else. Clearly, governing power does not reside with the people.
From 1977 to 1990, Congress enacted seven major tax bills and many other minor ones, raising or lowering tax liabilities for individuals and corporations. The results of this legislative torrent are startlingly one-sided. Citizens for Tax Justice, a labor-supported advocacy group, calculated the cumulative effects:
If Congress had done nothing since 1977 to alter the U.S. tax code, passed no new legislation at all, nine out of ten American families would be paying less. That is, a smaller share of their incomes would be devoted to federal taxes.
Yet, paradoxically, the government would be collecting more revenue each year -- almost $70 billion more -- if none of those tax bills had been enacted.
How to explain this? Where did all that money go? Roughly speaking, it went to corporations and to the one in ten families at the top of the income ladder. Their taxes were cut by spectacular dimensions. [1]
The tax burden on the richest 1 percent of the population fell cumulatively by a staggering 36 percent, compared to what they would have owed under the 1977 tax code. As politicians from both parties congratulated themselves on delivering one tax cut after another, families in the very middle of the income ladder experienced a 7 percent increase in their federal tax burden.
Nothing demonstrates the atrophied condition of modern democracy more starkly than those facts. Behind all of the confusion and complexity of the tax debate, democracy's natural inclinations were literally thrown into reverse -- rewarding the few at the expense of the many.
For those who blame Republicans for what has happened and believe that equitable taxation will be restored if only the Democrats can win back the White House, there is this disquieting fact: The turning point on tax politics, when the monied elites first began to win big, occurred in 1978 with the Democratic party fully in power and well before Ronald Reagan came to Washington. Democratic majorities have supported this great shift in tax burden every step of the way. [2]
The politics of taxes pulls together everything that has been described thus far about the deformed power relationships in government. While the preceding chapters focused mainly on the losers -- the ranks of citizens displaced from politics -- this chapter concentrates on the winners, the people and institutions that hold the high ground of power. Though a small minority of the population, they accomplished hegemony on taxation by exploiting all of the systemic weaknesses described in earlier chapters -- from the warped social sensibilities in affluent Washington to the special-interest clientism to the vast resources that monied interests deploy for scholarly expertise and manufactured "opinions."
Those are the common ingredients of the power relationships, but the issue of taxes involves more sophisticated elements as well. After all, this is not an obscure issue like savings and loan regulation or junk bonds that affects people in unseen ways. Everyone cares about taxes and most everyone has strong opinions on the subject.
Therefore, in order to accomplish such distorted outcomes, the governing elites and monied interests are required to create a series of elaborate screens around the subject of taxes -- a moving tableau of convincing illusions that distracts the public from the real content and gives politicians a place to hide. Meanwhile, behind the screens, the action proceeds toward the results they seek. In public, the two major parties struggle contentiously over tax issues. Yet the reality is the collaboration between them. Expert opinion is marshaled in behalf of broad economic goals that seem desirable to everyone -- economic growth and jobs. Meanwhile, elites work out among themselves how these broad goals can be translated into reducing their own tax burdens.
Given the fundamental nature of tax politics, the powerful economic interests have a large and continuing advantage over unorganized citizens at large. The tax contest plays out in the news as dramatic climax -- a tax bill is passed, the president signs it. The real drama, however, continues, year after year, and no outcome is ever permanently decided. Thus, the monied interests are always mobilized and working toward better results, knowing that the continuum of legislative action does not stop with one victory or one setback. Citizens may grow weary and move on to something else, but for obvious reasons, the wealthy are always on the case.
Over a period of some years, the politics of taxation degenerated into what looks like a running game of bait and switch -- a hustle in which the governing system plays the clever salesman while the taxpayers are the mark. The bait is the continuing political rhetoric that seems to promise tax cuts. The sleight-of-hand involves switching this promise for something else.
***
During the 1988 presidential campaign, George Bush comforted voters with a manly promise to enact "no new taxes," and his pledge resonated profitably with popular opinion. If voters had wished to know what George Bush would actually do as president, they should have been listening to other voices.
An elite consensus of opinion leaders from both political parties -- economic policy gurus, financial and business leaders, strategic lobbyists and, more discreetly, some prominent politicians -- had already developed an agenda for what the next president should do to correct the economic imbalances created by the Reagan era. The next president, they declared more or less openly, should reduce both the federal budget deficit and the trade deficit by first slowing the economy and suppressing personal consumption, perhaps even accepting a recession, and then raising taxes on consumers. Americans, it was said, had been on an irresponsible binge of buying and borrowing during the 1980s and now it was time to sober up.
This could be accomplished, these thinkers explained, by raising taxes on consumption -- on gasoline and other staples -- as well as by cutting back on government benefits such as Social Security, Medicare and Medicaid, assistance to veterans, and civil-service and military retirement. Their logic, roughly speaking, was that if families had less to spend on things, they would buy fewer foreign goods and thus shrink the trade deficit. To encourage savings, they added, the investor classes should be given additional tax relief -- a reduction in the taxes on their capital.
The most influential (and most radical) articulation of this case was made by a prestigious Republican investment banker, Peter G. Peterson, in a magazine article, "The Morning After," published in The Atlantic in October 1987. Peterson, who served as secretary of commerce in the Nixon administration, delivered a scary sermon on what would unfold if Americans did not swiftly rediscover self-discipline. His painful remedies, however, were entirely directed at the population at large, while shielding his own class, the wealth holders, from sacrifice. Peterson suggested, for instance, repealing the tax deduction for interest on home mortgages that is so important to the middle class and imposing a national sales tax of 5 percent on all goods.
Savings, he declared, could be encouraged "by trading off increases in consumption-based taxes for reductions in investment-based taxes." All Americans consume, of course, but only a relative few have the surplus income and wealth to be investors. Eighty-six percent of the individual net financial wealth in America is owned by 10 percent of the people. [3]
In less extreme form, the same general argument was voiced so frequently by other influential voices that it became something of a cliche among the well-informed minority who listen to elite channels of discourse. The shorthand label given this strategy was" austerity" and its appeal seemed bipartisan. Peterson's partner in investment banking, Roger Altman, a Democrat, served as policy advisor and Wall Street fundraiser for Bush's opponent, Michael Dukakis, and echoed the same ideas. Lawrence H. Summers, a Harvard economist who was the principal economics advisor to Dukakis, coauthored a study making similar recommendations.
C. Fred Bergsten, a former Carter advisor who heads the Institute for International Economics, a Washington think tank funded by major foreign and U.S. financial institutions, prescribed a "consumption recession" for the next three or four years. The Cuomo Commission, a committee of notables assembled by the New York governor to study the nation's economic condition, recommended a more moderate version of the same approach -- a gasoline tax, a national sales tax or perhaps higher income taxes on the Social Security benefits of the elderly.
Some analysts at Wall Street brokerages were more blunt: What the country needed was a government-induced recession to clear away the excesses of the eighties and shrink the trade deficit. [4]
Though little noted at the time, the most influential endorsement of this economic strategy came from the chairman of the Federal Reserve Board, Alan Greenspan. Greenspan did not, of course, call openly for an "austerity" regime but he agreed with the others that domestic consumption must be suppressed by government policy, both budget cuts and higher interest rates. "Domestic absorption has to be restrained by macroeconomic policy," he told the Senate Banking Committee in early 1988. [5]
Unlike the other voices, Greenspan had the independent power to carry forward this strategy, regardless of the promises of "prosperity" that both presidential candidates were simultaneously making to the voters. In the summer of 1988, while the two major parties were in noisy convention nominating their candidates for president, the Federal Reserve initiated its own campaign to discourage consumption -- by raising interest rates and retarding the pace of economic growth.
The government's campaign to suppress consumption was conducted by the Federal Reserve with the president's acquiescence and occasional kibitzing for two years. By 1990, it was obvious that the Fed had done its job too well: The nation was in recession. Bankruptcies were multiplying and, as many important borrowers failed, major financial institutions fell into trouble themselves.
"Elite debate" is one of the screens that conceals decision making on the largest economic questions -- taxes and recession -- from the clear view of the general public. The elite discourse goes on more or less in public (though much more explicitly in private), but the talk is disconnected from the formal politics of parties and candidates covered by the press. Ordinary voters are not tuned in (nor are political reporters), since the opinions of various notables have no explicit connection to the candidates.
Neither presidential nominee would address these economic prospects candidly during their campaigns in 1988. Nor were they pressed to do so by the press. The candidates are free to offer woolly platitudes about economic growth and brisk slogans -- "read my lips: no new taxes" -- while serious men in other places are left to discuss the real terms of governing among themselves.
In early 1988 only sophisticated observers could discern that the two major parties were maneuvering toward another compact on taxes of the sort they had entered into many times before. For obvious reasons, they did not wish to share this postelection surprise with the voters.
Democrats in Congress created a bipartisan blue-ribbon commission -- grandly titled the National Economic Commission and composed of "party elders" like corporate lawyer- lobbyist Robert S. Strauss -- which was designed to provide political cover for the next president when he had to undertake such unpopular measures as raising taxes and cutting government benefits. The NEC intended to announce its bipartisan recommendations right after the 1988 election. In the meantime, it kept its mouth shut.
"The White House is putting horrendous pressure on the commission to make no public statements on anything substantive before the election," a staff aide to one commission member told me during the campaign summer. "Their logic is that if the commission positions are aired now, the candidates will have to lock themselves into positions of denial -- no tax increases, no gas tax, no entitlement cuts. It could be counterproductive."
George Bush seized that ground anyway. As a candidate, he accused the Democrats, accurately enough, of plotting to raise taxes if they won back the White House. What Bush did not say was that many influential Republicans were in on the plot too. While the Republican candidate exploited the antitax posture, Richard G. Darman was privately advising key players in both parties not to worry. Darman was then a partner in a major Wall Street brokerage, . Shearson Lehman Brothers, but insiders assumed he would become budget director if George Bush became president.
Never mind the campaign rhetoric, they were told. At the appropriate political moment, a grand bipartisan deal would still be doable. If the Democrats were there on spending cuts, Darman confided, George Bush would be there on raising taxes. This scenario, widely heralded among Washington insiders, became known as the "Big Bang" strategy.
There was only one problem: This elite bipartisan consensus was promoting a policy agenda directly counter to what voters at large wanted. Raising taxes and cutting benefits would be poison for any presidential candidate who touched the subject, which is why such conversations are necessarily private.
"The elite view of what should be done is completely different from everybody else's," said Stephen E. Bell of Salomon Brothers, who had formerly served as Republican staff director of the Senate Budget Committee. "Opinion leaders strongly support a big increase in the gasoline tax. They want big cuts in Social Security and Medicare or higher taxes on the elderly. The public is against all those."
Bell's analysis was confirmed in a Gallup Poll survey, conducted for the Times Mirror Company, which found opinion leaders from finance, business and government aligned against public opinion on these tax questions and 'many others. Only 10 percent of the people favored higher taxes on Social Security benefits; 66 percent opposed higher gasoline taxes; 69 percent opposed a national sales tax. If there must be a tax increase, the citizens said, tax the upper-income brackets. Raising income taxes on those earning more than $80,000 a year was favored by 82 percent of the public. Neither Dukakis nor Bush seemed interested in that solution. Business and financial leaders were, not surprisingly, overwhelmingly opposed, for it meant taxing them. [6]
Thus, the only suspenseful political question, as George Bush took office in 1989, was how the elite consensus might work its will in the face of the stubborn resistance of the citizenry. This is usually the core of the action on taxes: how to distract public anger while things get done. The feat had been accomplished many times during the previous decade, but Steve Bell was dubious that it would succeed again.
"Why can't elites do this deal? Because they won't have the votes," Bell predicted. "The elites understand the precariousness of their situation, not just the financial elites, but the governing elites in this town. The alienation between the governed and the governors is starting to have palpable consequences. The politicians no longer have the ability to go home and persuade their folks to follow when they lead. They know the response will be: Fuck you."
***
The distorted federal tax code is, as Bell suggested, a central element feeding the popular disenchantment with government and politics. For well over a decade, ordinary voters had heard the perennial chatter from Washington about tax cuts.
While they might not know any of the statistics, they knew at least that their own taxes had not been cut. The public's fierce resistance to new taxes, derided by elites as selfish and short-sighted, is firmly grounded in the facts of their own experience.
Popular anger toward the federal tax system was not always the case, as some assume. In the early postwar years, when income-tax rates were steeply progressive, the public overwhelmingly described the federal tax code as "fair" -- 85 percent, according to the Gallup Poll. By 1984, according to an opinion survey conducted for the Internal Revenue Service, 80 percent believed the contrary: "The present tax system benefits the rich and is unfair to the ordinary working man and woman." [7]
Among the "benefits" reserved for the rich is the fact that even the enforcement of the tax laws was seriously compromised during the Reagan era. The Internal Revenue Service reported that, as of September 1989, the government was owed $87 billion by taxpayers who had underreported or simply not paid their admitted obligations (compared to $5 billion in 1973 and $18 billion in 1981). The chance of getting caught at grand-scale tax evasion was reduced substantially because the sample of income-tax returns that are closely examined by the IRS has been shrunk by 42 percent, thanks to Reagan's severe cuts in the IRS enforcement budget.
The "tax cheats" are not, on the whole, "little guys" who depend on wages and salaries. Most citizens pay their federal income taxes involuntarily through payroll deductions and they file the simplified reporting form that leaves little opportunity for evasive tactics. Only $1.4 billion of the missing $87 billion was attributed to wage earners.
Among the delinquents were 17 taxpayers who owed more than $100 million each and 3,335 taxpayers who each owed more than $1 million. About $10 billion of the uncollected taxes involved income from invested capital, stocks and bonds and capital gains. About one fourth of the missing revenue, $21 billion, was owed by business -- mostly major corporations."
Washington insiders were not unaware of the public anger that had accumulated on these matters. "The American people didn't understand what was happening at first, but now they are beginning to get it," Charls Walker, the premier tax lobbyist for corporate interests, acknowledged in early 1990. "This is an explosive situation we've got here. The political leaders may be able to stanch it this time, but it could blow up if Tom Foley and George Mitchell [the Democratic leaders in Congress] aren't sufficiently responsible."
Something much more complicated than greed is driving the modern tax contest -- an economy that no longer produces enough returns to provide ample shares for everyone. In this economic environment, tax politics is a way to protect oneself or to stick someone else with the loss. For nearly thirty years following World War II, the growth and distribution of incomes in American society had been fairly constant (though grossly unequal). Economic expansion was widely shared among citizens of all classes.
Since 1973, however, wages in real terms, discounted for inflation, have been stagnant or declining. Factory workers in Italy now earn more per hour than U.S. workers. The rewards changed most dramatically in the 1980s -- at the very time government was cutting tax burdens for the well-to-do. During the last decade, the top 1 percent of American families grossly increased their share of total U.S. income -- from 8 percent or 9 percent to more than 14 percent. [9]
"Something's gone wrong with the American dream, at least in material terms," Walker observed. "This is part of the source of the political resentment."
Republicans, historically the party of money, naturally demurred and denied this new reality, at least so long as Republicans were in the White House. But Democrats, supposedly the party of working men and women, turned away from it too. Senator Daniel Patrick Moynihan of New York expressed his own distress:
"The people to whom this is happening know that it's happening to them and they also know that the Democrats don't know it. At least, we don't talk about it. If this were the 1960s, that's all we would be talking about. Good God, what's happening to our country? We're losing touch with that kind of reality. If this is not a crucial proposition for the Democratic party, then our politics have changed."
When the pie is shrinking, someone has to give up his or her slice. Starting in the late 1970s, a fierce political contest ensued on many fronts around this, never-acknowledged question: Who will hang on to their share and who must lose theirs? The U.S. tax code, as revised over the last fifteen years, reveals the winner.
This broad economic explanation, however, does not answer the question of politics: How could this betrayal of the many be accomplished in an ostensible framework of democracy? The short, though overly simple answer is: collusion, artful collusion among governing elites and the politicians who claimed to be adversaries. A government that is ostensibly divided between the two parties has learned to work as one.
As Richard Darman once baldly explained, important tax legislation can be achieved by "the political equivalent of an immaculate conception: a compromise that materializes without any politician having to take blame." [10]
***
The politics of taxation creates its own ideologies and, through most of the twentieth century, the argument has often pitted elite groups against the general population. The graduated income tax, in which the burden rises in relation to one's wealth and income, was the Populists' answer to the gross maldistribution of economic returns generated by modern industrial society. Its Justifying principle, stripped of corollary arguments, is that government's core function is to preserve the social order. People of great material wealth inevitably benefit from that service more than other citizens -- since social chaos would put their private property at risk. [11]
The monied elites' counterargument was first effectively framed during the 1920s by Andrew Mellon, the wealthy banker who served as Treasury secretary under three Republican presidents. Soaking the rich, Mellon argued, was bad for the economy and, therefore, bad for everyone. His goal was to eliminate the graduated tax system altogether and replace it with flat taxes on consumption, in which rich and poor would pay the same toll. This is not very different from the contemporary tax arguments, except that Mellon enunciated his purpose more candidly than modern conservatives would dare.
"The prosperity of the lower and middle classes depends upon the good fortune and light taxes of the rich," Mellon declared. [12]
The opposing view was expressed by remnant populists like Senator Ralph Yarborough of Texas, who employed this flavorful campaign slogan: "Put the jam on the lower shelf where the little man can reach it." [13]
In most seasons, the politics of taxes plays out between those two poles -- an argument for social equity versus the economic hegemony of the investor classes. This might be called the ideology of taxation, and it provides another important screen that the public cannot see through. Once a politician has accepted the ideological assumptions proffered by the monied interests, then he may proceed on a straight path to their conclusions about whose taxes should be reduced. Since the late 1970s, Andrew Mellon's side has won nearly every contest, but with an ingenious twist -- tax cuts for the rich are sold as tax cuts for the "little guy."
The Reagan conservatives' celebrated doctrine of "supply-side" economics was, one might say, Andrew Mellon in drag-dressed up in populist denim. The economic logic was Mellon's, but the covering rhetoric justified reducing the tax burdens of the wealthy by promising to spread the jam around a little -- to cut everybody's tax rate at once. The regressive effects of the proposal were transparent (and freely acknowledged afterward by the Republican draftsmen), but the basic logic was not challenged by the Democratic opposition. They had already bought into it.
The most dramatic political shift of the 1980s was not in the Republican party, which, after all, had always sided with money. It was among the Democrats who employed facile arguments to abandon the goal of social equity in favor of "trickle-down" economics.
This ideological transformation was accomplished within a political structure very different from what had existed a generation ago. Political parties, whose internal control had been weakened over twenty-five years, were less able to dictate terms to rank-and-file members. In this environment, the political labor necessary to sell a program door-to-door, so to speak, is naturally best suited to the interests with the resources to deploy coordinated networks of lobbyists and chum out the supporting propaganda. In this new environment, business was more creative than organized labor or its other adversaries. It developed new modes of salesmanship -- the myriad clusters and temporary coalitions formed among corporations and across trade sectors, always accompanied by systematic money giving.
With no reliable party structure to defend them or poke holes in the deceptive arguments, unorganized voters were hopelessly outgunned. Whatever its other virtues, the new politics of liberated individuals in Congress has not proved to be a reliable defender of the people on the core question of taxation.
The elites also recognized, however, that intensive lobbying is not sufficient by itself. They must also advance a broad public purpose for their objectives -- a screen that will distance the specifics from their own obvious self-interest. Yes, the wealthy will get a larger tax cut, but that's not the real purpose. The real purpose is to create jobs. To broadcast this disinterested assurance, they create such mechanisms as bipartisan study groups and so- called "blue-ribbon commissions" composed of public-spirited opinion leaders.
"How do you get around the problem that we don't have a Sam Rayburn or a Lyndon Johnson to ram this thing through?" Charls Walker asked rhetorically. "You go the route of the blue-ribbon commission."
The loss of centralized control has left governing elites in a seemingly permanent state of anxiety. Despite their repeated victories on taxes, opinion leaders, with evident sincerity, regularly lament the government's inability to govern -- that is, to implement their far- righted solutions. Since they never get everything they want, they plead constantly for more courageous "leadership." While citizens generally feel abused and ignored by politics, the political elites describe the opposite condition -- a "plebiscite democracy" ruled by the fickle impulses of the voters.
Bush's budget director, Richard Darman, spoke of the public's "self-indulgent" attitudes with droll condescension. "Now-nowism," he called it. "Our current impatience is that of the consumer not the builder, the self-indulgent not the pioneer," he complained. The Reagan tax cutting had begun with the Great Communicator's paeans to the energies of everyday working people. A decade later, with the government mired in debt, Darman likened the American public to a "spoiled child." [14]
Disparaging public opinion is, of course, a necessary prelude to ignoring it. The elites' language of despair over the commonweal is a vital element in their politics, for it creates another screen -- a climate that encourages political leaders to be "responsible" by going against the obvious wishes of their constituents. The hesitant are scolded. Gross deceptions are legitimized in pursuit of the greater good. The oblique dialogues that surround the subject of taxation can then be conducted with a broad wink among the players. Over fifteen years, the screen has worked again and again.
***
The last progressive tax measure proposed by a U.S. president came from Jimmy Carter in fall of 1977. It was decimated -- in a Congress controlled by Democrats. Egged' on by corporate lobbyists, an uprising in congressional ranks led by right-of-center Democrats turned on their leaders and prevailed. Campaigning for president, Carter had called the tax code a "national disgrace" and promised to eliminate many of the most flagrant loopholes for corporations and the wealthy. He proposed to raise the tax on capital gains and lower rates for individuals. A year later, Congress cut the capital-gains rate in half, lowered the corporate tax rate and made the temporary investment-tax credit for business permanent.
"Carter was screaming that this was a handout for rich people and peanuts for poor people," said Charls Walker, whose Council on Capital Formation helped to inspire the revolt of the haves. "We beat their ass two-to-one on the House floor."
The turning point was the 1978 tax bill, in which governing elites changed the premises of tax policy from achieving equity to augmenting the returns on capital. Amid the aggravations of rising inflation, Walker's corporate clients and like-minded economists persuaded politicians that the problem of lagging productivity in the American economy was caused by the cost of capital. Merrill Lynch, the New York exchange, the Brookings Institution and others all produced expert studies, seconded by influential senators in both parties, that proclaimed the "capital formation problem."
The liberal response to this was quite limp, partly because the Democratic party had been playing its own deceptive game of empty "tax cuts" in prior years. As the persistent inflation of the 1970s swelled government revenues and pushed many wage earners into higher tax-rate brackets, Democrats would magnanimously enact a new "tax cut" every couple of years -- in effect, giving back some of the money to the taxpayers while devoting the remaining surpluses to narrow tax loopholes for special interests or for new government spending. Democrats were not in a position to be too self-righteous about either equity or economic growth.
The Democratic party, furthermore, was getting more distant from its traditional working- class constituencies. A swarm of newly elected younger Democrats who came to office after the 1974 Watergate scandal were mostly not from working-class neighborhoods, but from the suburbs and often from Republican districts. They were intellectually inclined to be more sympathetic to the business argument and also anxious to dissociate themselves from their patty's fading power centers, organized labor and the big-city machines.
Newer Democrats, as Thomas B. Edsall has pointed out, were also reading the election returns. As voter participation declined year after year, most dramatically among lower- income citizens, the remaining active electorate became increasingly skewed toward the upper brackets -- the people who cared most about tax provisions like capital gains. In the process, a large, unorganized bloc of citizens was being left behind. [15]
But the conservatives' attitudes toward tax politics were changing too. Robert S. McIntyre, director of Citizens for Tax Justice, explained the shift:
"Typically, prior to the seventies, Republicans were not big fans of tax breaks for business because it was economic tinkering by government. And Democrats weren't for them because it went against their constituents. In the 1970s, there was a flip-flop. The Republicans started playing constituency politics -- appealing to the people who contribute to their campaigns and their core constituency. Democrats, as big-government types, like to tinker around with the economy through the tax code. It feels good and, ideologically, they have no problem with it."
In terms of who benefited, the 1978 tax bill was perhaps the most regressive measure since the 1920s, but it was only the beginning. Its ingredients led directly to the feeding frenzy of 1981 and Ronald Reagan's famous victory -- a tax measure that would deprive the government of $750 billion in revenue over the first five years.
The across-the-board reduction of 25 percent in individual tax rates was transparently regressive since, as a matter of simple arithmetic, the larger one's income, the greater would be the reduction in the tax burden. The corporate tax code was so thoroughly gutted in 1981 that hundreds of profitable corporations became free riders in the American political system -- paying no taxes whatever or even collecting refunds.
The 1981 tax legislation was so generous in the tax breaks for commercial real estate that it launched the nation's gaudy boom in new office buildings -- the boom that collapsed in bankruptcies at the end of the decade. The new tax rules for depreciation were such that developers and investors found they could put up a new building and make money on it, even if it was half empty. They built lots of them. When the real estate-lending regulations were loosened for commercial banks in the 1982 financial legislation, the stage was fully prepared for the great financial collapse that engulfed both builders and their bankers later -- and led to another taxpayer bailout.
By focusing on the partisan combat over internal disputes, the media portrayed the 1981 legislative showdown as a test of strength between the two political parties, as it was on the surface. The Republicans won on that level. But the partisan clashes obscured the deeper bipartisan consensus that already existed. Most Democrats in the House and Senate had already endorsed the general concept of a regressive "supply-side" tax cut, many of them before Ronald Reagan was even elected. In the end, only a handful of Democrats voted against the idea.
It was not Reagan, for instance, who opened the floodgate of tax giveaways for business interests but Representative Dan Rostenkowski, Democratic chairman of the House Ways and Means Committee. Prompted by Walker and the corporate lobbyists, Rosty initiated the bidding war over tax favors that Republicans were hoping to avoid. In the end, Democrats lost the contest to the more generous Republican White House.
When neither party attempts to impose restraint, power always flows to the margins -- the handful of swing votes that can decide an issue-and opportunistic representatives made deals for scores of clients, trading their votes for tax concessions. "The hogs were really feeding," as budget director David Stockman said. The problem, he added, "is unorganized groups can't play in this game." [16]
Further, it was the Democrats, not the Republicans, who first proposed bringing down the top tax rate on unearned income -- eliminating the traditional distinction that passive earnings from dividends or interest should be taxed at a higher rate than wage income derived from human labor. The Reagan White House graciously accepted the Democrats' proposal and the marginal rate of 70 percent on unearned income was abolished.
"The people who are really active politically are the upper-income people," Walker explained, "and a lot of them happen to be Democrats."
The general public, however, opposed this change at the time and, indeed, still favors a tax code that treats income from work more generously than income from capital. A Wall Street Journal poll in 1990 found that, by 59 percent to 22 percent, people still think earnings from investments should be taxed at a higher rate than income from wages and salaries. Even two thirds of the upper-income people think so. [17]