Confusion about tax cuts traces to Reagan

President Reagan gave Americans a biased explanation of tax cuts and the deficit in 1981.

I think I may have found the seeds of the “largest tax increase in American history” rhetoric–the start of Americans’ confusion about tax cuts vs. tax increases, whether tax cuts add or subtract from the deficit, and whether tax cuts shrink or grow the size and reach of government.

One of my kids first shared the photo above, from a July 1981 address of President Reagan to the nation on competing tax proposals being considered in Congress at that time. Only when I first saw the photo I didn’t know what “our bill” vs. “their bill” referred to and the first thing to come to me (perhaps because the photo came from my daughter) was that “our bill” meant “our generation’s bill” (what we would pay for) and “their bill” meant “our kids’ bill” (what they would end up paying for).

I had to hunt down and watch the video of the address (on YouTube, here) to figure out that Reagan was referring to his Administration’s favored tax cut proposal (which he labels a “bipartisan” bill) versus a competing Democratic proposal (which also was for a tax cut but a smaller tax cut that ends up being labeled a tax increase).

In any case, how is this address supposed to have helped Americans understand what was at stake regarding tax proposals, the deficit, and the role of government? Note the highly informative (not) labeling of the Y axis scale in the chart Reagan features, and the general obfuscation of the choice between the competing tax (cut) proposals.

If you read Chapter 5 on “The Early Reagan Era: 1981″ in Gene Steuerle’s excellent book “Contemporary U.S. Tax Policy”, you’ll see this assessment of Gene’s in the section titled “It Didn’t Add Up” (pages 96-97):

The 1981 tax reductions were in many ways an extremest parody of previous tax reform efforts, especially the Kennedy round of tax reduction. Investment incentives proliferated and drove many tax rates to zero or below…Base broadeniing to remove special preferences that reduced that tax base was abandoned–not just early on, as in the Kennedy round–but completely.

Most of all, the change in underlying budget conditions was set in the law, and Congress in 1981 effectively removed the fiscal slack that the next congresses would need to enact their own laws and set their own priorities. This was the biggest mistake of all…The 1981 cut…was enacted in an era when it would be vastly harder to harvest future revenues that hadn’t yet been committed.

I know there’s a lot of nostalgia right now about President Reagan given his 100th birthday, but it’s clear our politicians didn’t need that as an excuse to renew the early-Reagan-era rhetoric. But they should read ahead to the next chapter in Gene’s book that talks about the tax increases that began the very next year (1982). Tax policy tends to be cyclical like fashion; what goes around comes around.

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