Friday, June 11, 2004
As Ronald Reagan is laid to rest today, Tax Profs offer their remembrances of our 40th President:
• Ellen Aprill (Loyola-L.A.): “Although a liberal Democrat, I was completely comfortable serving in the Office of Tax Legislative Counsel during President Reagan’s second term. My experience confirmed the reputation of the office for quality work and bipartisanship. In fact, when tax policy and politics intersected, the administration protected the work of our office. At one point, the idea of denying tax exemption to any charity performing abortions was floated by abortion foes. As the staffer responsible for exempt organizations, I remember worrying that I would be forced to resign from my job. Quickly, however, it was decided that any discussion of that possible new rule would come from the White House and not from the Office of Tax Policy. Moreover, former Assistant Secretaries for Tax Policy from both parties publicly opposed the idea. President Reagan’s death reminds me that, not so long ago, politics was not as polarized as it is today.”
• Michael Waggoner (Colorado): “President Reagan and his appointees were among many people who helped to produce the 1986 Tax Reform Act. Many students of taxation consider that act to have been the recent high water mark in the U.S. tax system.”
• James Maule (Villanova): “Unquestionably, Ronald Reagan’s impact on the tax world was the enactment of the Internal Revenue Code of 1986. Replacing the Internal Revenue Code of 1954, it simplified the tax law by removing a variety of exclusions and deductions in exchange for fewer and lower tax rates . . . . Reagan’s tax legacy was tarnished long before he reached his grave. No matter how many things are named after him, the trashing of the tax code will remain as a reminder of what once was, replaced by something that cannot, under any circumstance, be called an improvement. The best memorial to Reagan, and the best gift to all citizens, would be for Congress to fix the tax code. Don’t hold your breath.” For the full tribute, see here.
• Jack Bogdanski (Lewis & Clark): “I think Paul Krugman of The New York Times said it best the other day. Reagan pushed through some of the most irresponsible tax cuts of all time, in the 1981 tax act (ERTA), but then he quickly came to his senses. In 1982 (TEFRA) and 1984 (DRA or TRA), he wisely took back some of the massive giveaways with which he started out his term. Of course, the current occupant of the White House is not even close to being smart enough to see the parallels. Says Krugman:
Ronald Reagan does hold a special place in the annals of tax policy, and not just as the patron saint of tax cuts. To his credit, he was more pragmatic and responsible than that; he followed his huge 1981 tax cut with two large tax increases. In fact, no peacetime president has raised taxes so much on so many people. This is not a criticism: the tale of those increases tells you a lot about what was right with President Reagan’s leadership, and what’s wrong with the leadership of George W. Bush.“
• Calvin Johnson (Texas): “When Reagan was elected, he came in with fervor of the supply siders to enact ACRS depreciation. McKee says that Treasury could have adopted any depreciation it wanted to in 1981, so long as it was ACRS. ACRS with the Investment Tax Credit gave tax benefits that were as good as or better than exempting income from equipment from tax, that is, the discounting present value of the tax savings from investing in equipment were more valuable than the cost of tax on the revenue stream from the equipment. Real estate got both 15 year writeoffs and 30 year decelerated mortgages in the commercial world. My “tenure piece” said that ACRS with debt created tax shelters. The indictment against tax shelters had two counts: (1) they allowed luxurious consumption in the highest classes, when that was by consensus the single best source of tax is suppression of low utility luxury consumption by the top brackets. (2) tax shelters wasted capital by allowing empty real estate and bad projects to go forward even though those projects could not meet the prevailing cost of capital, set by the free market. ACRS was not free market, but subsidy. When interest rates dropped and discount rates dropped, ACRS for equipment was better than tax exemption: mere tax exemption would have reduced the value of the equipment. Tax shelters are also stealth tax exemption at the top: The rates remained the same nominally, but were too easily avoidable at the top. Leona Helmsley was nearly right: Mostly only Little People pay tax.
Part of the awfulness of the 1981 Act must rest on Rostenkowski’s “defense.” Rostenkowski decided that the Republic would be better served if the bill passed had a Democratic party label on it, and he decided that that was possible only if the Democratic bill had more hogs at his trough than the Republican Bill had. In the end, the hogs decided to stay with the Republican bill, but the combination of two parties each trying to destroy tax base meant that the final bill had very little loyalty to the soundness of the tax base. I remember feeling at the time that”the lights were going out all over Europe and that they would not be relit in our time.” 1981 was a big act and the end of the commitment to the progressivity principle that money is more valuable in the hands of the less rich.
The rest of the 1980s was a correction of the error of 1981, and Reagan was a constructive participant in the correction. Norman Ture, Mr. Supply sider, expressed disappointment that supply side tax cuts increased the deficit rather than fixing it. The Treasury announced that perhaps ACRS had gone a little far. The 1982 Act cut back on the value of ACRS depreciation, and the 1984 Act took on time value of money errors that supported shelters.
The big effective weapon action against tax shelters, however, was in the passive activity provisions of section 469, which basically deferred tax losses until the end of the investment when the fake deductions disappeared and the real ones showed up in cash. It is an Aggie shelter to deduct only money you have actually lost, so that section 469 against all prognostications, was surprising effective against shelters.
The big deal in 1986 was a truce in class warfare: that is, all tax changes had to be distributionally neutral and revenue neutral. The rich got a cut in tax rates, from 50% to a target (not quite met) of 25%. But they had to give up their tax shelters. Investors who were zeroed out with shelters were bitter about the tax rise. The 1986 Act deal was the best act of century, however, because both in decreasing rates and restricting shelters so severely, the Act increased economic efficiency. In adopting distributional neutrality, hwoever, it did confirm the distributional aspects of the 1981 act, giving tax cuts to the rich without their having to buy into shelters.
Reagan played a personal role in making the 1986 possible and making it go forward at critical junctures. His Treasury did the leg work for expanding the tax base rationally. He pushed the rate cuts-base strengthening in the Republican Senate where it could not have gone forward without his support.
One of his most important roles was in trying to control the crazy wing of his party. One of the leaders of the crazy-wing revolt against the Tax Reform Act of 1986 was a Republican Congressman and chairman of the Republican policy committee who left Reagon “angered and perplexed.” Jeffery Bernbaum & Alan S. Murray, Showdown at Gucci Gulch: Lawmaker, Lobbyists and the Unlikely Triumph of Tax Reform 165-166 (1987). Trent Lott, Michels and Jack Kemp were in favor of the bill, but his Congressman “just dug himself in, absolutely opposed to both the rule and the bill.” Both Donald Regan and Treasury Secretary James Baker had meetings with this Congressman, described as “tense.” But the Congressman, Richard Cheney of Wyoming, called the Tax Reform Act of 1986 ”an abominable piece of legislation” and said, “he best we can do is to kill it.” “People don’t give a damn about tax reform.,” Chaney said.
We should give thanks today for the moderating presence of Ronald Reagan. We will miss him when we need him.”
• Jeffrey Sherman (Chicago-Kent): “De mortuis nil nisi bonum.” (Let nothing be said of the dead but what is good.)
• Bryan Camp (Texas Tech): “Ars longa, Reagan brevis.” (Art is long, life is short.)
The Tax Foundation has prepared an interesting historical perspective on President Reagan’s tax legacy.
