It Was 40 Years Ago Today. . .

That the Gipper signed his three-year, 25 percent income tax cut package up at the ranch in the mountains north of Santa Barbara, the capstone in many ways of the “supply side revolution.” Needless to say, reversing this has been the top priority of the left ever since, with partial success.

It was a close run, epic legislative struggle. Here’s my account of the climax of the story from The Age of Reagan:

In the face of this [Democratic Party] resistance, the White House decided that Reagan should make another nationwide TV speech.  He went on the air on July 27, two days before the tax vote was scheduled in the House.  The power of Reagan as the “great communicator” was never more fully displayed then in this speech.  More notable than Reagan’s persuasiveness, though, was the ideological ferocity of the speech.  He scorned “the cries of protest by those whose way of life depends on maintaining government’s wasteful ways,” and then went on to attack the sincerity of Democrats:

Now, when I first proposed this—incidentally, it has now become a bipartisan measure coauthored by Republican Barber Conable and Democrat Kent Hance—the Democratic leadership said a tax cut was out of the question. It would be wildly inflationary. And that was before my inauguration. And then your voices began to he heard and suddenly, in February, the leadership discovered that, well, a 1-year tax cut was feasible.  Well, we kept on pushing our 3-year tax cut and by June, the opposition found that a 2-year tax cut might work. Now it’s July, and they find they could even go for a third-year cut provided there was a trigger arrangement that would only allow it to go into effect if certain economic goals had been met by 1983. . . So what is the purpose behind their change of heart? They’ve put a tax program together for one reason only: to provide themselves with a political victory.

If I could paraphrase a well-known statement by Will Rogers that he had never met a man he didn’t like, I’m afraid we have some people around here who never met a tax they didn’t hike.

Reagan then turned to he comparative merits of his tax bill, noting that without the tax indexing feature that had been added to Reagan’s bill, inflation and previously enacted payroll tax increases (for Social Security and Medicare) would swallow up any tax cut in just two or three years.  To illustrate the effect of indexing Reagan did something almost no president has ever done in an Oval Office speech: he used a visual aide—a blow-up chart, prepared by Treasury aide Steve Entin, as though he were a classroom teacher:

The majority leadership claims theirs 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’s between a tax cut or a tax increase.  There is now 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 3 years. The committee bill offers a 15-percent cut over 2 years; our bipartisan bill gives a 25-percent reduction over 3 years.  Now, as you can see by this chart, there is the 22-percent tax increase.  Their cut is below that line. But ours wipes out that increase and with a little to spare. And there it is, as you can see. The red column—that is the 15-percent tax cut, and it still leaves you with an increase.  The green column is our bipartisan bill which wipes out the tax increase and gives you an ongoing cut.

From here Reagan turned up the pressure on the Democrats by making the issue a matter of personal honor, telling the story of a Democratic congressman who had a constituent ask him, “What I want to know is are you for ‘im or agin ‘im?”  Reagan closed with an appeal for the public to lobby capitol hill: “I urge you again to contact your Senators and Congressmen. Tell them of your support for this bipartisan proposal. Tell them you believe this is an unequalled opportunity to help return America to prosperity and make government again the servant of the people.”

Reagan’s speech produced the desired response.  Phone calls and telegrams poured into capitol hill at ten times the normal rate, running 12 to one in Reagan’s favor.  Democrats tried valiantly to hold the line.  Former President Jimmy Carter telephoned Georgia Congressman Bo Ginn to urge him to stick with the Democratic tax plan.  Reagan also called Ginn; Ginn went with Reagan.  Washington Democrat Norm Dicks told both sides he was undecided; 400 pro-Reagan phone calls to his district office helped him make up his mind to go with Reagan.  An unnamed congressman told Newsweek, “I sure hope Reagan doesn’t go on the tube again and say no more sex.”  O’Neill admitted that “We are experiencing a telephone blitz like this nation has never seen.  It’s had a devastating effect.” One-by-one most of the supposedly rock-solid votes that had been dearly bought with concessions from Rostenkowski were peeling off to Reagan’s bill.  Missouri Democrat Richard Gephardt said, “the dam broke… It just fell apart.”

The final House vote on July 29 was 238-195; 48 Democrats defied the party leadership to back Reagan.  (Among them was South Dakota’s lone representative, Tom Daschle.)  Only one Republican voted against Reagan’s tax cut—Vermont’s Jim Jeffords, a name that would become celebrated for a more brazen betrayal of a Republican president nearly 20 years to the day later, also on the eve of a tax cut vote.  In the Senate, Democratic opposition to the tax cut had collapsed a few days before.  The Democrats could only rally 11 No votes.  Nineteen of the 20 Democratic senators up for re-election in 1982 voted with Reagan.  (The sole exception was Ted Kennedy.)  The effectiveness of Reagan’s television appeals was nearly unprecedented.  Although it is common to think every president enjoys the built-in advantage of the “bully pulpit,” academic studies have found surprisingly that nationwide presidential appeals usually have no effect or even a slight negative effect.

Banner headlines about the tax cut had to share the front pages with another spectacular event that occurred the same day, the marriage of Prince Charles and Lady Diana Spencer in England.  This prompted a slap from O’Neill: “This has been quite a day for aristocracy: a royal wedding and a royal tax cut.”  O’Neill was more gracious in his congratulatory phone call to Reagan, telling Reagan that he was “stunned” at the rout; Reagan, who had told his staff not to gloat, replied that he was stunned too. New York House Democrat Stephen Solarz summarized the glum mood of Democrats when he told a reporter, “Now I know how the Japanese felt when they signed the instrument of surrender on the battleship Missouri.” Oddly enough, the most memorable misgiving about the tax cut after its passage came not from O’Neill or a liberal icon, but from Republican Senate leader Howard Baker, who called the tax cut “a riverboat gamble”—less than a ringing vote of confidence.

The full story requires telling some of the numbers.  There were still 15 income tax brackets—or 15 different rates—under the Reagan plan.  The top rate, starting with income on a joint return of $162,400, fell from 70 percent to 50 percent.  For a couple with $30,000 income, the rate fell from 37 percent to 28 percent; at $50,000, the rate fell from 49 percent to 38 percent.  A household earning the median income of $22,000 in 1984 saved about $500 in taxes.  Another set of numbers is also important to know: because of all the “sweeteners” added to the bill to win votes, the revenue loss in the early years from the final tax package was about twice the amount of Reagan’s original 30 percent tax cut proposal.

The economic results of the tax cut shall be surveyed in due course, but one important point is that the Reagan tax cut was heard around the world just as loudly and dramatically as the bullets fired at him in March.  In the ensuing years, nearly all industrialized nations would emulate the Reagan tax cuts and reduce their marginal income tax rates.  Even the Scandinavian social welfare states of Sweden, Norway, and Finland got in on the act.  Norway cut its top tax rate from 75 percent to 54 percent, Finland cut rates from 71 percent to 54 percent, and Sweden from 83 percent to 75 percent.  (Supply-siders suggest Sweden’s relatively poor economic performance relative to her neighbors is explained by the fact that Sweden didn’t cut its tax rates enough.)

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