Kennedy and Reagan

by Scott Farris

  Reagan had been very clear in his inaugural address that his top domestic priority was “to curb the size and influence of the federal establishment and to demand recognition of the distinction between the powers granted to the federal government and those reserved to the states or to the people.” He was also very candid as to how he intended to force this reduction in the size and influence of the federal government. On February 5, 1981, in his first nationally televised speech following his inauguration, Reagan explained that he would seek significant reductions in federal income tax rates even as he also sought significant cuts in domestic spending. Reagan said the old argument had been that you could not cut taxes until you cut spending first. He vowed to “try something different.” As he told his audience, “Well, you know, we can lecture our children about extravagance until we run out of voice and breath. Or we can cure their extravagance by simply reducing their allowance.”

  Reagan certainly expected tax cuts to stimulate economic growth, but his primary reason for seeking to reduce tax rates was that he thought the progressive income tax was morally wrong, claiming, “The entire structure was created by Karl Marx. It simply is a penalty on the individual who can improve his own lot.” Given that Reagan had long been one of the nation’s top wage earners, it is not surprising he felt that way. At Warner Brothers during the 1940s, Reagan was making $3,500 per week when the average annual salary in the United States was less than $3,000 per year. He had particularly resented being subject to the highest marginal tax rate of 91 percent (though it should be noted that with various deductions and other methods of reducing a tax obligation, neither Reagan nor anyone else paid fully 91 percent of their income in taxes).

  Despite his natural antipathy toward high taxes, Reagan’s philosophy on the issue was never cut in stone. It evolved. As governor of California, he had proposed and signed into law the largest state tax increase in the nation’s history, but then, a few years later, he (unsuccessfully) proposed placing a limit on state taxes within the California constitution. The unformed nature of his ideas was demonstrated during his 1976 presidential campaign. Reagan did not argue for simple tax rate reductions but instead proposed shifting a wide variety of federal programs and responsibilities back to the states. This “creative federalism,” he said, would reduce an individual’s tax burden by 23 percent, though it was not clear exactly how it would do so. If the states were picking up the tab, it seemed that the tax burden would simply land at the state or local level. The proposal likely cost Reagan victory in the New Hampshire primary—a victory that might have propelled him to the GOP nomination that year—because the idea was unpopular in a state that had no income tax, and where the federal government paid 62 percent of the state’s welfare costs. Reagan also proposed making Social Security voluntary, which likely cost him the Florida primary, where Gerald Ford won 60 percent of the senior citizen vote.

  But in the four years between Reagan losing the Republican nomination in 1976 and winning it in 1980, there was a grassroots tax revolt among the American people. California voters led the way, which may be why Reagan was able to tap into the antitax mood more effectively than any other Republican candidate for president that year.

  Where Reagan had been unsuccessful in placing a constitutional limit on taxation in California, a stout, spectacled seventy-five-year-old activist named Howard Jarvis collected 1.5 million signatures to place on the 1978 ballot what was known as Proposition 13, a measure to restrict how quickly property taxes could increase. Inflation was causing real estate values to increase in California by as much as 20 percent per year, which meant that many California homeowners had seen their property taxes double in five years, and sometimes less. Prop 13 passed by a two-to-one margin, which led the New York Times to label Jarvis’s victory “Evidence of U.S. Tax Revolt”—but the story was buried on page twenty-three.

  Jarvis, who became such a popular celebrity that he had a cameo role in the movie Airplane!, had adopted as the Prop 13 slogan the signature line from the 1976 film Network, “I am mad as hell!” In the movie, the rest of the line is “and I’m not going to take it anymore.” That seemed to be the national mood on taxes, even if it flew under the radar of the national media at the time. In 1963, when the top marginal income tax rate was 91 percent, only 49 percent of Americans thought taxes in general were too high; by 1976, even with the lower federal income tax rates pushed through by Kennedy and Johnson, 72 percent thought taxes were too high.

  Antitax sentiment was rising at the very time America also began to celebrate the excesses of the rich and famous. The television show Dallas, a nighttime soap opera on the shenanigans of a wealthy Texas oil family, premiered in 1978, and it was followed by the premier in January 1981 of another soap called Dynasty that also reveled in how the better half, or rather the top 1 percent, live. Both were among the top-rated shows on television, and Dynasty was able to convince such luminaries as Gerald Ford and Henry Kissinger to make cameo roles on the show. As one of the creators of Dynasty said, after experimenting with simpler lifestyles during the 1960s and early 1970s, she and other Americans “felt like dressing up again.”

  Reagan, meanwhile, was honing a populist message pioneered by Barry Goldwater. In the nineteenth century, populism had meant distrust of big business, but Goldwater and later Reagan insisted the real enemy of the people was big government. Even though he was now advocating tax cuts that would disproportionately benefit the rich, Reagan said during his 1980 campaign, “We Republicans have to show people we’re not the part of big business and the country-club set. We’re part of the Main Street, the small towns, the city neighborhood; the shopkeeper, the farmer, the cop on the beat, the blue-collar and the white-collar workers.”

  In promoting antigovernment populism, Reagan was tapping into an American sentiment that dates from Thomas Jefferson and Andrew Jackson and the belief that government, rather than serving to equalize power between the “haves” and “have nots,” too often tilts in service to powerful special interests. As Jackson wrote when he vetoed the re-charter of the Bank of the United States in 1832, “It is to be regretted that the rich and powerful too often bend the acts of government to their selfish purposes.” Much like Jackson, “Reagan’s populism did not play to the dispossessed, but to those with some possessions to lose,” as historian Gil Troy noted.

  Reagan took office when the United States was facing a set of circumstances that were unique in the postwar period. Oil prices were high, the value of the dollar was falling, and there was a rising trade deficit. In January 1981, the unemployment rate stood at 7.5 percent, the inflation rate was 13.3 percent, and the previous year’s economic growth was an anemic 1.2 percent.

  President Carter had been unsure how to respond to these challenges, but some of the actions he did take seemed to pave the way for Reagan’s more conservative policies. Carter had already begun to deregulate the airline, trucking, and railroad industries and had begun deregulating banking as well. He proposed a large tax cut to stimulate the economy, but rising inflation and budget deficits caused him to postpone the proposed cuts. Summoning his key advisors to a retreat at Camp David in July 1979, Carter concluded that the greatest problem facing America was not an economic issue. In a televised address, he told the nation of “a crisis of confidence . . . that strikes at the very heart and soul and spirit of our national will.” The speech became known as the “malaise speech,” and whatever its several merits, Carter had badly misjudged the national mood.

  As Reagan took office, a Washington Post/ABC News poll found two-thirds of respondents agreed with the incoming president that it was time for a new approach. Reagan further helped his cause when he announced in February 1981 that his planned tax and budget cuts would not impact the most popular social welfare programs, especially Social Security and Medicare. Of course, by refusing to tackle entitlements, it was clear Reagan’s purported goal of a balanced budget was unreachable.

  Still,
the Democratic House majority remained skeptical of Reagan’s proposals—until Reagan gallantly survived the attempt made on his life on March 30, 1981. As House Speaker Tip O’Neill said, “The President has become a hero. We can’t argue with a man as popular as he is. . . . I’ve been in politics a long time and I know when to fight and when not to fight.” The Democrats were disorganized and dispirited. New York Times reporter Adam Clymer called the Democrats more “a federation of caucuses . . . than a united party.”

  O’Neill also expressed admiration for the White House efforts in lobbying Congress to approve the tax cuts. “Members of Congress have never been subjected to such White House pressure—not even during the years of Lyndon Johnson,” he said. The effort paid off for Reagan. When the tax cuts were approved in the Senate in July 1981, it was by a vote of 89 to 11, while the House voted for the tax reductions by a vote of 238 to 195, with forty-eight Democrats supporting the president.*

  * One aspect of the Reagan presidency, presaging the political polarization that began enveloping the country in the 1990s, was the extraordinary loyalty he received from congressional Republicans. When Eisenhower was president, House Republicans supported him from 60 to 79 percent of the time; under Nixon the “loyalty rate” was 73 percent, and for Ford only 65 percent from his former House colleagues. Reagan could count on House Republicans supporting him 92 percent of the time, and if only tax and budget issues are considered, that level of support rose to 99 percent.

  The new law reduced the highest marginal rate from 70 percent for those making more than $108,000 per year to 50 percent for those making more than $41,000 per year. The package reduced the income tax burden on individual Americans by almost a third, or $280 billion over the next three years, and also included $130 billion in cuts in federal spending.

  But then two things happened in relatively short order to dim the luster of Reagan’s victory: It became clear that the tax cuts were going to explode the federal deficit, and the economy went into the tank.

  On the very day Reagan signed the tax cuts into law, August 3, 1981, his director of the Office of Management and Budget, thirty-four-year-old wunderkind and former Michigan congressman David Stockman advised Reagan that the country was “headed for a crash landing on the budget” with no balanced budget in sight. The White House had been fibbing to the public, worried that actual deficit projections would jeopardize congressional approval of the tax cuts.

  Using inflated estimates of how much the tax cuts would stimulate economic growth and increase revenues, the White House had been insisting a balanced budget was achievable by 1983. Now it was clear to Stockman that even if the tax cuts caused GDP to rise 5 percent and if Reagan got every budget cut he requested, “Reaganomics” was still going to add $600 billion to the federal debt in just five years—a more than 60 percent increase from the size of the debt Reagan had inherited from Carter. During the eight years Reagan was president, the national debt nearly tripled, from just less than $1 trillion in 1980 to $2.8 trillion in 1989.

  “Dave, if what you are saying is true, then Tip O’Neill was right all along,” Reagan said. Stockman said Reagan had two options: He could simply drop the goal of a balanced budget, or he could reduce the proposed 10 percent annual increases in defense spending that were set to occur during the following six years. Reagan said no to both. He said he still hoped to someday balance the budget, but told Stockman, “Defense is not a budget issue. You spend what you need.” He later added, “If it comes down to balancing the budget or defense, the balanced budget will have to give way.”

  Things did not go well for Reagan over the next eighteen months. Stockman was quoted in an infamous interview with The Atlantic Monthly as acknowledging, “None of us really understands what’s going on with all these numbers. . . . It’s not clear how we got here.” Stockman also called Reagan’s tax cuts a “Trojan horse” whose real intent was to provide benefits to the rich. Reagan expressed disappointment in his budget director but kept him on the job for another three and a half years.

  The economy sank into a deep recession. By late 1982 the unemployment rate rose to 10.7 percent, the highest rate since the Great Depression, and banks failed in greater numbers than at any time since 1940. There were also record numbers of personal bankruptcies and farm foreclosures. The safety net remained intact for the poorest of the poor, but the losers in Reagan’s budget cuts were the working poor. They lost access to job training, education, health care, and other social services once eligibility requirements were tightened.

  There was a growing belief that Reagan was oblivious to the economic pain many average Americans were feeling. A Time magazine poll found 70 percent of Americans agreeing with the statement, “Reagan represents the rich rather than the average American.” Reagan’s image as a president of all the people had not been helped in the fall of 1981 when his administration, to save money on the school lunch program, announced that henceforth ketchup would be considered a vegetable, and it was announced that very same day that Nancy Reagan had ordered $209,508 in new china for the White House—$900 per dinner plate—albeit she was raising the money for the purchases from private donors.

  Economic conditions and revelations about the true nature of the federal budget deficits led to some buyer’s remorse on the tax cuts. With the economy in tatters and budget deficits now equaling 6 percent of GDP (a record that would stand until 2009), The Business Roundtable, comprising the CEOs of some of the nation’s large companies, suggested that implementation of the tax cuts be delayed. Reagan replied, “I have been a little disappointed lately with some in the business community who have forgotten that feeding more dollars to government is like feeding a stray pup. It just follows you home and sits on your doorstep asking for more.”

  By fall of 1982, polls showed 43 percent of Americans now felt the tax cuts “went too far,” and Democrats picked up twenty-six House seats in the 1982 midterm elections. While the surveys also showed that the public did not believe supply-side economics worked, 49 percent said they were still willing to give Reagan’s program more time to work—a sign of his popularity and credibility with the public.

  But Reagan realized he needed to do something to stem the tide of red ink. Unwilling to reduce his planned increases in defense spending, unwilling to touch such entitlement programs as Social Security, and unable to cut any other part of the budget enough to make a real difference, Reagan finally conceded he would be open to new taxes to reduce the rapidly mounting budget deficits—though he insisted these weren’t really tax increases, merely “revenue enhancements” or “adjustments” to his tax cut legislation.

  In each of his final seven years as president, Reagan signed off on tax increases of one sort or another. There were about a dozen such measures in all, most relatively small excise taxes on gasoline or tobacco, but some were quite large. The biggest was the 1982 Tax Equity and Fiscal Responsibility Act, which raised $37.5 billion per year by closing “loopholes” and enacting other tax-reform measures. Conservative commentator M. Stanton Evans calculated that by 1987, the increase in revenues would total $227.7 billion. Either way, presidential assistant Richard Darman, who worked closely with Stockman on budget issues, acknowledged the legislation was “the largest single tax increase in history.”

  The most important tax increase was one Reagan personally helped draft, a $165 billion increase in the payroll tax to ensure the future solvency of Social Security. Social Security would have been technically unable to meet its obligations as of July 1, 1983. When a tentative Reagan proposal to trim benefits for early retirees received a hostile reception on Capitol Hill, Reagan and Tip O’Neill appointed a bipartisan National Commission on Social Security Reform to address the issue.

  Conservative economist Alan Greenspan chaired the commission, but “Reagan controlled the process more than people knew”—another indication that Reagan had no trouble getting into policy details when the issue intereste
d him. Under Reagan’s guidance, the payroll tax for individuals was increased from 6.7 percent to 7.65 percent, the retirement age for receiving full benefits was set to rise from sixty-five to sixty-seven over a forty-year period, cost-of-living adjustments were delayed for recipients, and government employees were now required to pay into the Social Security system. Reagan, once an ardent New Deal Democrat turned conservative Republican, had helped preserve the centerpiece program of the New Deal.

  Despite these revenue “enhancements” and “adjustments,” Reagan had been able to preserve his lower income tax rates; in 1986, tackling another round of tax reform, Reagan lowered the top marginal rate even further—all the way down to 28 percent, the lowest level since 1931.*

  * The top marginal rate in 2013 was 39.6 percent for incomes greater than $400,000 per year.

  The recession, however, was primarily due to the tight money policies instituted by the Federal Reserve Board under Chairman Paul Volcker, who kept interest rates high in an effort to drive down inflation—which he did. The dramatic reduction in the inflation rate may be the greatest economic achievement of the Reagan years. Carter had originally appointed Volcker as chair of the Fed, but Reagan reappointed him, and Reagan deserves tremendous credit for sticking with Volcker’s policies even as unemployment and unhappiness with his presidency rose.

  Volcker pursued an aggressive tight money policy in part because he was “unnerved” by the growing budget deficits (exacerbated by the Reagan tax cuts) that he thought were inflationary. Volcker deliberately kept interest rates high, even during and after the 1982 recession. His policies worked. Inflation, which had been above 13 percent when Reagan took office, was brought down to below 4 percent in 1983. Even though unemployment stayed above 7 percent through most of 1985, the public was pleased to see inflation under control. They viewed controlling inflation as more important than creating jobs—just as Kennedy had noted the public would back in 1961. Reagan was rewarded with a landslide reelection victory, winning forty-nine states in 1984. By keeping inflation down, Volcker “enabled Reagan’s revolutionary tax cuts, which would otherwise have been inflationary.”