by Alan Murray
PRAISE FOR
Showdown at Gucci Gulch
“Showdown at Gucci Gulch reads like a thriller, which it is, with a remarkable cast of characters and a payoff in billions. That it is also a superb piece of reporting on one of the most important pieces of legislation in years—the 1986 tax bill—is an added bonus … a great case study of the political process—and a terrific read.”
—David S. Broder, chief political reporter and columnist, Washington Post
“I really enjoyed it. It will serve a long, long time as a guide to how the sausage is made up here.”
—Treasury Secretary James A. Baker III
“I think it has a good chance of becoming a textbook on the legislative process.”
—Senator Bill Bradley
“A tremendous and well-told story. This is a book for everybody—as interesting as it is illuminating. I learned a lot about the legislative process in the 1980s—and enjoyed myself thoroughly.”
—Richard Neustadt, professor of government at Harvard University and author of Presidential Power
“The tax reform act of 1986 was one of the most extraordinary economic policy initiatives of the twentieth century. Messrs. Birnbaum and Murray have done a first-rate job in delving into the politics and personalities of the key players.”
—Dr. Alan Greenspan, chairman of the Federal Reserve
“Showdown at Gucci Gulch is likely to be the standard narrative of tax reform for years to come.”
—Boston Globe
To our beloved personal exemptions:
DEBORAH AND MICHAEL;
AND LORI
Acknowledgments
This book was made possible by the generous and unfailing support of Albert R. Hunt, the Washington bureau chief of The Wall Street Journal. He guided the Journal’s day-to-day coverage of the legislation itself and remained, through to the completion of the book, the best-informed tax reporter in Washington. As the manuscript’s first editor, he saved the authors from making some embarrassing mistakes and allowed them to take credit for his insights.
The authors also would like to thank the senior editors of The Wall Street Journal, particularly Norman Pearlstine, the managing editor, for encouraging comprehensive coverage of the tax bill, for permitting the leave of absence during which this book was written, and for making the Journal’s resources available during that period.
Throughout the writing of this book, we received invaluable help from Terence Patrick Moran, who provided crucial research and editing assistance, and who was always able to find the answers to the questions that stumped us. We also owe a debt of gratitude to Linda Himelstein, who gave up her summer weeks at the beach to contribute to the research effort. And our lives were made much easier by our speedy transcriber, Jamie Richardson. We also thank our attorney, Robert Barnett, of Williams and Connolly.
Like all reporters, we are indebted to our editors. Peter Osnos of Random House deserves special thanks for coming to us with the idea for this book and for taking the lead in keeping our effort on track and turning two daily journalists into book writers. But we must also thank those who guided us in our work at the Journal: Paul Steiger, Ken Bacon, Bob McGilvray, Walter Mossberg, and Henry Oden and his skilled editors.
We owe a great deal, of course, to our sources. Since most of the tax story took place behind closed doors, they became our eyes and ears in reporting this story. Many prefer to remain anonymous, but we give them all our heartfelt gratitude. This is their book. And special thanks to those on congressional staffs, at the Joint Tax Committee, and at the Treasury Department, who took time out of their busy days to explain complicated tax matters to two green reporters.
Special thanks to the readers of our manuscript: Richard Fenno and James Wetzler. Thanks also to Willis Gradison, Catherine Porter, William Wilkins, and John Wilkins.
Writing a book is no easy task, and it would not have been possible without the support of our families. We are grateful to our parents, who deserve credit for the best we have achieved, but no blame for the rest: Esther Birnbaum, Earl Birnbaum, Catherine Murray, and John Murray. We also thank other members of our families, including Ezra Franks, Rhoda and Norman Galembo, Lucy Mele, and Erich Alan Murray.
Most important, we thank our wonderful wives, who supported us throughout this project and who contributed many suggestions that led to the improvement of the book: Deborah Birnbaum and Lori Esposito Murray.
Contents
Acknowledgments
Introduction by Albert R. Hunt
Note on Sources
Chronology
1. Showdown
2. The Beginnings
3. The Horse You Rode in On
4. A Politician Comes to the Treasury
5. “Write Rosty”
6. The Phoenix Project
7. The Bear Takes One in the Back
8. The Gucci Boys’ Revenge
9. The Two-Pitcher Lunch
10. Politics Is Local
11. The Running Shoes and the Sledgehammer
Epilogue
Appendix A: The Evolution of Major Provisions Affecting Individuals
Appendix B: The Evolution of Major Provisions Affecting Businesses
Introduction
by Albert R. Hunt
The Tax Reform Act of 1986 was the best political story of its time, full of suspense, and with a vivid cast of characters. It marked the most significant achievement of the second Reagan administration. Indeed, in the history of the Republic, very few pieces of legislation have more profoundly affected so many Americans.
This saga was all the more dramatic because it was so unlikely. When the Ninety-ninth Congress convened, tax reform barely was on the agenda. Ronald Reagan, of course, won a resounding reelection victory in 1984, but so did 95 percent of incumbent congressional Democrats, many of whom had spent the previous four years challenging the president. The only tax message in that campaign was a rejection of Walter F. Mondale’s call for a tax increase. The issue of tax reform never was joined in that campaign; so clearly no consensus on what to do could be formed.
Further, most political scientists, lawmakers, and informed analysts were convinced that radical or fundamental change was impossible. Even the first Reagan term produced only a modest amount of really significant change, and second terms traditionally are less productive. Above all, any fundamental change that affected the powerful, growing special interests seemed a political pipe dream. The importance of special-interest campaign contributions caused many to suggest that this was the “best Congress money could buy.”
The 1986 tax bill endured a roller-coaster existence for almost two years. Tax reform never has been easy, and its rare successes have been aberrational. In 1969 Congress cracked down on abuses by foundations and initiated a minimum tax for the wealthy, but only after outgoing Treasury Secretary Joseph Barr caused a national uproar when he revealed that hundreds of millionaires didn’t pay any income taxes. In 1975, the oil depletion allowance was repealed for major oil companies, but only after long gas lines and soaring prices made the oil industry public enemy number one.
That this measure even was considered defied the conventional wisdom. No modern president has so opposed the concept of corporate taxes or had as many rich friends who benefited from tax loopholes as Ronald Reagan. Yet the Reagan tax-reform initiative involved the largest corporate tax increase in history and the most drastic crackdown on loopholes for the affluent.
On Capitol Hill, there was never much enthusiasm for the measure, reflecting, in part, what the lawmakers were hearing at home. Most of their constituents viewed the current tax system as a disgraceful sop to the privileged, but this never translated into public support for any tax-re
form proposal. A skeptical public generally felt that as bad as the current tax system was, any changes probably would compound the inequities and increase taxes for the average citizen.
And there were powerful economic and political interests arrayed against any sweeping changes in the tax law. While the public opposed special tax breaks for the other guy, attitudes changed when it came to provisions that might benefit them: home-mortgage deductions, write-offs for charitable contributions, or union dues.
Even when it came to the hundreds of loopholes benefiting only the narrower and wealthier interests, the politics were difficult. Many Americans resent these special tax breaks, but their elimination is not a top priority for them. The intensity of the beneficiaries of such favors, however, is overwhelming. They marshall sophisticated economic arguments on the economic cataclysms that would result in changing the tax code; some of these claims are even legitimate. If those arguments fail, many of these interests are able to muster something even more persuasive to certain lawmakers: money in the form of campaign contributions.
Money is the engine that fuels much of our politics. A few simple facts: From 1974 to 1984 the money spent on House general elections soared to $182.9 million from $45.1 million, more than a fourfold increase; in the Senate it skyrocketed in the same period to $146.7 million from $28.9 million. The average winner in 1974 House contests spent about $75,000; in 1984, that same typical victor spent almost $300,000. In 1984, Senate winners averaged almost $3 million per race, with North Carolinian Jesse Helms alone spending $17 million. Most politicians spend enormous time raising these funds; rarely does a night go by in Washington without a political fundraiser populated chiefly by special interests.
Nowhere are vested interests, through their political action committees, more omnipresent than in tax writing. The possibility of a sweeping tax bill that would touch virtually all these interests brought the campaign money merchants out in droves. In 1985, when the tax-writing panels were considering tax reform, political action committees gave $6.7 million to fifty-six members of the House Ways and Means and Senate Finance committees, according to a reliable survey by the self-styled citizens lobby Common Cause. This was two and a half times more money than was given to members of the same committees two years earlier. Where did the money come from? Insurance companies, banks, oil-and-gas interests, real estate, big Wall Street investment concerns, and labor unions, to name a few—all the groups that would be affected by the tax-reform initiative.
But as Alan Murray and Jeffrey Birnbaum demonstrate, these obstacles were overcome by some very forceful political personalities and a very powerful idea. One of the more unusual heroes stands as the very antithesis of the fat cats who so often dominate Washington: Bob McIntyre, the young Ralph Nader-trained, labor union-backed tax-reform advocate whose studies showing corporate nonpayment of taxes were a catalyst for this entire endeavor.
Then there were the political heavyweights: On Capitol Hill, there was Dan Rostenkowski, a longtime Chicago machine politician who learned the legislative process at the knee of Wilbur Mills, the legendary chairman of the Ways and Means Committee and the bane of most tax reformers. In the Senate, there was Bob Packwood, the smart Finance Committee chairman whose brand of Republican moderation—conservative on business issues, liberal on social issues—saw the tax code as a critical vehicle for economic and social goals.
These two veteran lawmakers were unlikely heroes of tax reform, but ultimately their political prowess and reputation rested on its success; in a political institution, that counts far more than philosophy. Yet both Rostenkowski and Packwood almost blew their opportunities on several occasions.
In the House, Rostenkowski’s vaunted toughness started to crumble as even some of his closest allies began to desert him. In the end, the veteran lawmaker pulled it off with a deal that infuriated the Reagan administration but enabled him to get a bill sufficiently attractive that the White House couldn’t disown it.
In the Senate, the political venality of the Finance Committee surfaced as the panel dismembered every remnant of tax reform and actually began approving new loopholes. Packwood almost beat a strategic retreat at a critical moment, but with the encouragement of a couple of pitchers of beer, he and his top aide decided to gamble instead on a bold but highly risky approach.
In the Reagan administration, the cast of characters was as improbable. Few of the rich Wall Street set suspected that Donald Regan, one of their own, would propose killing most of the tax breaks that enabled some of them to avoid paying taxes. Later the initiative would be shepherded by Treasury Secretary James Baker, a man whose political professionalism was antithetical to “reform” efforts and whose main interest in taxes had been to protect the Texas oil-and-gas interests that would surely be clipped by any tax-reform measure. The guiding strategic thinker was Deputy Treasury Secretary Richard Darman, a man with New England blue-blooded roots who could see the populist appeal of this undertaking, and a political intellectual whose public-policy insights were rivaled only by an ego that was large even by Washington standards.
These top principals all had their shortcomings and made their share of mistakes. Don Regan’s political handling of the measure was inept from the inception; nevertheless, without his steadfast determination, the bill would have died several times along the way to passage. Jim Baker’s loyalty to his Texas oil-and-gas buddies made some enemies and rarely picked up any converts to the tax-reform banner, but without Baker’s political instincts and skills, which were second to none, there would have been no bill. Dick Darman’s intellectual arrogance sometimes threatened the fragile support for this measure, but his rare appreciation of both the politics and the substance of this undertaking provided indispensable assistance to key lawmakers at critical moments.
Finally, there were two pivotal figures, both of whom made lots of money at a young age in the entertainment field and paid what they thought were confiscatory tax rates. This would motivate these two very disparate men to push tax reform with a resoluteness and intensity without which the measure clearly would have died.
The first was Bill Bradley: Rhodes scholar, former star forward for the New York Knickerbockers professional basketball team, and the U.S. senator from New Jersey. In 1982 Bradley proposed a sharp reduction in tax rates accompanied by a dramatic broadening of the base by eliminating many tax preferences. The idea received scant attention at first, but Bradley, with the same dedication and determination that made him a basketball legend, persevered, even though in a major blunder, the 1984 Democratic presidential nominee, Walter Mondale, rejected the Bradley approach. Like many of his liberal soulmates, Bradley believed the tax code was unfair and full of loopholes that made the economy less efficient, but he also appreciated the need for a tax system that encouraged entrepreneurialism and economic growth. He won the confidence of skeptics ranging from Don Regan to Jack Kemp to Dan Rostenkowski to Bob Packwood. At every critical juncture Bradley stepped in to provide an important push; rarely has a legislator with no formal leadership role or committee chairmanship played such an instrumental role in a major piece of legislation.
The other pivotal figure was Ronald Wilson Reagan, who abhorred high tax rates even back when he was a Democrat. The president’s ignorance of the specifics of his own proposal was startling; throughout, he misrepresented or misunderstood the measure’s tax increase on business. But President Reagan’s attachment to lower rates was real and his commitment to the concept of this tax reform was even more powerful than his ignorance of the details. He never quite convinced the public, but his political persona and communicative skills commanded such respect that they scared off a lot of potential opponents. Only a few years ago, intelligent men and women were lamenting that our political system doesn’t work, that presidents can’t govern in a first term because they’re fixated on reelection and can’t govern in the second term because they become almost-instant lame ducks. Reagan refuted the former contention in his first term, and the pas
sage of the sweeping tax bill in 1986 refuted the latter.
The coalition put together to support this measure borrowed from two important, but quite different, movements. The first was that of the tax reformers of the 1960s and 1970s, mainly liberal Democrats, guided by the late Stanley Surrey of the Harvard Law School and Joseph Pechman of the Brookings Institution. These liberals made compelling cases against an inequitable and inefficient tax code ridden by special-interest loopholes. But, more often than not, they wanted to close these loopholes to raise taxes, a losing political proposition.
The other group was the supply-siders, launched by economist Arthur Laffer and popularized by Congressman Jack Kemp in the late 1970s. They convincingly argued that cutting marginal tax rates would significantly enhance incentives and productivity; an important convert was Ronald Reagan. But they rarely talked about closing any existing tax preferences in the process; thus the rate cuts would inevitably lose revenue at a time of huge budget deficits, also an unacceptable political proposition.
Merging the lower rates of the supply-siders with the base broadening of the liberal tax reformers was the glue that held the 1986 tax bill together. Neither the supply-siders nor the liberals trusted one another, and each periodically examined the bill with an eye to understanding why their ideological adversary supported it. But both agreed it was preferable to the existing situation.
The ability of this unholy alliance to stick together throughout an arduous process—ironically with two former professional athletes, Democrat Bill Bradley and Republican Jack Kemp, as the political point men—was the key to success.
What emerges in this story, and in this book, is a fascinating human dynamic. Readers learn a lot about complicated aspects of the tax code, some of which are surprisingly interesting. They also see important institutions—Congress, the Treasury, the business lobbying forces, even the outgunned public-policy advocates—at work. And there are the human dimensions—the Bob McIntyres, the Dick Darmans, the Jim Bakers, the Dan Rostenkowskis, the Bob Packwoods, the Jack Kemps, the Bill Bradleys, and above all, the Ronald Reagans—that provide the real sustenance of this story.