Showdown at Gucci Gulch

by Alan Murray

  Even after the 1984 bill, large deficits remained. The deficit in each of the following three years was expected to hover in the $170 billion range. Deficit reduction was still the top issue; tax reform was widely considered to be a luxury that the nation could not afford. Senator Long, for example, derided the Bradley bill as little more than “an attractive conversation piece.”

  “Most of us realize that Bradley-Gephardt conceptually is good, but it will never become law,” said Representative Robert Matsui of California, a Democratic member of the Ways and Means Committee. “You will never eliminate all those deductions you have to eliminate. It would be like pulling teeth out of a lion. Bradley-Gephardt isn’t doable.”

  As the 1984 election campaign approached, several advisers to the Democratic front-runner, former Vice President Walter Mondale, argued that the Bradley-Gephardt plan provided a much-needed solution to his party’s problems. Whatever its practical failings, the Bradley-Gephardt bill had a certain political appeal. Polls showed that the Democrats were still viewed favorably by the American people as the party of fairness and compassion, attributes that held together the party’s foundation among poor people, city dwellers, and the labor movement. But they had allowed Ronald Reagan’s Republicans to become the standard-bearers for opportunity and growth—terms that appealed to the postwar baby-boom generation just coming of age. The trick for the Democrats in 1984 was to try to claim the mantle of growth and opportunity without abandoning the high ground as the party of fairness and the friend of the disenfranchised.

  Bradley-Gephardt offered a rare chance to do that: It promised that no one would escape carrying his or her share of the tax burden, but it also offered sharply lower tax rates. What better promise, what better incentive to give a young middle-class American, with eyes looking eagerly up the economic ladder, than to say that no matter how far up that ladder you climb, the federal government will take no more than thirty cents out of any dollar you earn?

  In a speech in May of 1983, Mondale told a group of businessmen meeting in Washington that he liked the general outlines of the Bradley-Gephardt plan. The speech was reported in The Wall Street Journal the next day. It was the candidate’s first public flirtation with reform during the campaign, and the results were scarcely encouraging. The phones in the candidate’s headquarters rang ceaselessly, as Mondale supporters with tax breaks to defend called and registered their complaints. “The next forty-eight hours were hectic ones in the Mondale camp,” recalls Bill Galston, the candidate’s issues adviser. “The list of people we heard from was a long one.” Campaign workers insisted the Journal story had exaggerated Mondale’s comments, and tax reform quickly disappeared from the candidate’s rhetoric.

  Bradley, eager to sell his plan to Mondale, tried for months to arrange a meeting with campaign chairman James Johnson to reignite interest in his plan, but his entreaties were ignored. He finally managed to schedule a breakfast with Johnson in his Senate office in early 1984 and spent an hour there, waiting over coffee and doughnuts for Johnson to arrive. In a gesture that seemed to illustrate the campaign’s regard for the Bradley-Gephardt plan, Johnson never showed. He never even called to say he could not make it.

  “The meeting was shortly after our defeat in the New Hampshire primary by Gary Hart,” explains Johnson. “I’ve known Bradley for years, I felt badly about it, but I wasn’t thinking of seminars on tax policy at the time. I was in Georgia or Alabama or somewhere trying to keep us alive.”

  Bradley never really got a chance to make his case to Mondale until August of 1984, when much to his surprise, he and Gephardt were asked to meet with the candidate in the living room of the Mondale home in North Oaks, Minnesota. They talked about taxes with Mondale and a few of his campaign advisers for nearly two hours. (One of these aides, ironically, was Dick Leone, the man Bradley had beaten in a Democratic primary in 1978.) Bradley made an impassioned plea for his proposal, saying that he had traveled around the country talking to groups of voters and that the idea appealed to many of them, but his arguments never sank in. Mondale offered a few throwaway lines about the virtues of Bradley-Gephardt to reporters waiting at the base of his wooded driveway, and that was the end of it.

  By the time of that meeting in North Oaks, the tone of the Mondale campaign was set in concrete. The candidate had already delivered his infamous speech at the Democratic convention that resonated through the final three months of the campaign and sealed his fate:

  Let’s tell the truth. It must be done, it must be done. Mr. Reagan will raise taxes, and so will I. He won’t tell you. I just did.

  Dan Rostenkowski, standing next to the candidate in front of the cameras and the cheering crowd at the convention after the fateful speech, whispered to Mondale, “You’ve got a lot of balls, pal.” According to Rostenkowski, Mondale whispered back, “Look at ’em, we’re going to tax their ass off.”

  Mondale’s bold step to back tax increases rather than tax reform turned out to be the biggest blunder of his campaign. The statement, for all its honesty, reinforced the voters’ worst fears about Democrats. The candidate’s lame retort that Reagan had a “secret plan” to raise taxes never made a dent in the president’s support. Mondale lost the election by a landslide, winning only 13 electoral votes to Reagan’s 538. Whether an endorsement of tax reform would have helped Mondale’s cause is unclear. But the truth is that other than the brief flirtation in May of 1983, tax reform never came close to being adopted by Mondale. At the highest levels of his campaign, where the political advisers and fundraisers held sway, it never even got serious consideration. It just did not fit into the Mondale game plan, for a number of reasons.

  First, although Mondale had fought to close loopholes as a member of the Finance Committee in the 1970s, he had met with little success. The Democratic chairman of the panel, Russell Long, was uninterested in such efforts, and Mondale had learned that it did not pay to cross Chairman Long. “I’d go up that hill and get knocked back down,” Mondale recalls. “It was a dispiriting environment.” As Jimmy Carter’s vice president, Mondale once again watched reform fail utterly and was not eager to repeat the performance.

  Second, as a politician with roots in Minnesota’s progressive Democratic-Farmer-Labor Party, Mondale was clearly uncomfortable with the sharp cut in the top tax rate proposed by Bradley-Gephardt. “I thought there ought to be an additional bracket for high-income taxpayers,” he said later. Lowering the top rate so drastically, he and other liberals believed, would give the wealthiest Americans an undue break.

  Third, Mondale was convinced that the budget deficit was the “central problem in the American economy.” Bradley-Gephardt was not a solution to that problem; indeed, Bradley, unlike Gephardt, believed any effort to turn the proposal into a revenue-raiser would spell its doom. Thus for Mondale, tax reform was a sideshow, an attempt to distract voters from the real economic problem that faced them.

  A fourth reason that Mondale avoided tax reform, according to some in his camp, was campaign contributions. Although Democrats considered themselves the party of the little man, they had been far less successful in building a base of small contributors than their Republican counterparts had. They depended on a relatively small group of large contributors, and among those, real estate developers loomed large. Real estate magnates like Nathan Landow of Bethesda and Thomas Rosenberg of Chicago were kingpins in the Mondale fundraising apparatus. Any version of tax reform would undoubtedly take a swipe at the generous tax breaks for real estate, and a move to embrace reform could have thwarted the campaign’s fundraising efforts.

  Mondale vigorously denies that campaign contributors had anything to do with his decision to steer clear of tax reform. “There’s absolutely no basis to that at all,” he says. He even recalls that Landow once told him he liked the Bradley-Gephardt bill because it would drive the get-rich-quick charlatans out of real estate and leave more room for serious developers like himself.

  The ultimate reason that Mondale avoided
tax reform, a reason that was rooted in the nature of the campaign itself and that overshadowed all other reasons, was this: Mondale’s was a campaign of the special interests. Its goal was to build a coalition by attracting organized groups one at a time. Tax reform was the antithesis of that strategy: It tossed out special interests in favor of the general interest. The legislation offended groups that ranged from real estate to labor to heavy industry. It would have hurt his efforts to build a coalition of special interests in a dozen different ways.

  “Mondale had served on the Senate Finance Committee, and he knew that losers in tax changes are intense and aware, while the winners are for the most part not intense and unaware,” says campaign chairman James Johnson. “That meant… you potentially pay a high price with the people who are hurt.” It was a price Walter Mondale was not willing to pay.

  In retrospect, Mondale has few regrets. “I made a decision which in hindsight may not have been correct, but I still think I would have done the same thing at the same time again, which was to emphasize the budget deficit,” he says. “I thought Bradley-Gephardt was a good idea. It made sense to me. But I didn’t emphasize it in the campaign because it was a revenue-neutral objective.

  “What might have been done, what should have been emphasized more, was the record of outrageous loophole benefiters during the Reagan administration,” he adds. Why didn’t he do at least that? “I don’t know,” he says with a touch of wistfulness. “You get into these things, and you get awfully tired, and your mind doesn’t work.”

  While Bradley’s tax-reform ideas were ignored by the Democrats in the Mondale campaign, they found growing acceptance at the opposite end of the ideological spectrum, among Republican supply-siders.

  In August of 1983, a group of about twenty supply-side journalists, politicians, and intellectuals gathered on the slate patio next to the swimming pool in the rear of the suburban Washington home of Jack Kemp. It was a sparkling evening, and the group conversed in animated fashion as Kemp’s wife Joanne served them food and beer. They were a small band of fellow travelers, conspiratorial in nature, and often split by factional disputes. Their differences were at times so severe that they refused to speak with each other, and this evening was no exception. But they had gained inordinate influence in the Republican Party and within the Reagan administration. They were the moving force behind the Kemp-Roth tax cuts of 1981, and they were looking for new policies to push during the second Reagan term.

  The purpose of the poolside meeting, in the words of one of the group, was “to plot how to dominate the Republican platform” in 1984. Among those attending, in addition to Kemp, were the leading lights of the supply-side movement: Irving Kristol, the neoconservative New York University professor who was publisher of a journal called The Public Interest; Lewis E. Lehrman, who had launched and lost a supply-side bid for the New York governorship in 1982; Paul Craig Roberts, who had served as Reagan’s assistant Treasury secretary for economic policy during the first year of the administration; Richard Rahn, chief economist for the Chamber of Commerce of the U.S.A.; Jeff Bell, who had run against Bradley in the 1978 New Jersey senatorial race on a supply-side platform; Jude Wanniski, an economic consultant who was forced to leave his job as an editorial writer at The Wall Street Journal because of his active campaigning for Bell; and Alan Reynolds, Wanniski’s partner in his consulting business.

  For the supply-siders, tax cuts always ranked at the top of the list of preferred policies. The problem with the American economy, they believed, was that tax rates were too high and were suffocating incentives to work, save, and invest. But since their surprising success in 1981, the supply-siders had been forced to lay low. The tax cuts enacted that year had not led to an economic boom, as they had predicted, but to a bust. Budget deficits had not disappeared, but had skyrocketed. For the supply-siders to simply endorse further tax cuts in the face of such problems would have been viewed by the public as highly irresponsible (although many in the camp would have favored just that course).

  During the poolside meeting, Kristol made an unusual proposal: Why not endorse Bradley-Gephardt as stage two of supply-side efforts to get tax rates down? Sure, the plan would hit some important big-business constituents of conventional Republicans, but it offered the only chance, in the face of prolonged budget deficits, of getting tax rates down further.

  The idea was appealing to many in the group. Endorsing a Democratic tax bill would certainly attract attention, which the supply-siders always craved, and it would undermine efforts by the Democrats to make tax reform an election issue. Wanniski was intrigued by the proposal, as was Bell, who had become an admirer of the former basketball player who had trounced him in his Senate bid. “We came to the conclusion,” Kemp said later, “that Kristol was right, that Reagan and Kemp should endorse Bradley-Gephardt. That would have thrown the Democratic party into a state of real confusion.”

  Others in the group expressed their opposition to the Bradley bill. In particular, Rahn and Roberts, who both had close ties to the corporate community, were disturbed by Bradley’s proposal to trim back investment incentives for business. Lehrman argued that for political reasons, it would be wiser for the group to have its own bill, rather than simply embrace the Bradley measure. The discussion continued for some time, and twilight fell over the patio. In the end, Lehrman won out: The group agreed that Kemp should draft a new version of tax reform that Republicans could rally behind.

  Thus began one of the most unusual, and most important, alliances fostered by tax reform. Bradley had argued fiercely against the supply-side agenda in his 1978 campaign against Bell, and his interest in tax reform had been born out of his strong opposition to the 1981 supply-side cut. But now, as his own party was deserting him, Bradley found supply-siders turning to adopt his concept, and he welcomed them.

  Shortly after that meeting in Kemp’s backyard, Bell telephoned Bradley, to whom he had not spoken since their heated debates during the campaign of 1978. Bell requested an audience, and Bradley consented. The two met in September at Bradley’s Union, New Jersey, office. It was a busy time for Bell, who was to be married within the week, but he was glad for the opportunity to talk to Bradley. “Bradley was very friendly and very gratified,” says Bell, and out of the meeting grew a new partnership. Bradley says he was happy for the vote of confidence and was equally glad to have Bell as a resource for him in the supply-side camp. Bell kept Bradley apprised of what Kemp and company were up to; and Bradley used Bell to send messages to the supply-siders and their friends in the Reagan administration.

  Kemp, in the meantime, went to work developing a Republican version of Bradley-Gephardt. Unlike Bradley’s plan, the Kemp proposal sought to enhance business investment incentives by allowing rapid write-offs for equipment purchases. The Kemp plan also contained a $2,000 personal exemption to help families; it retained the full deduction for mortgage interest, maintained the full deduction for charitable contributions, and kept low capital-gains tax rates. As his Senate cosponsor, Kemp chose Robert Kasten of Wisconsin, whose successful effort in 1983 to defeat Dole and repeal the interest-withholding provision attracted Kemp’s attention. Kemp and Kasten introduced their version of tax reform in April 1984.

  Because of the Kemp plan’s generosity in retaining tax breaks that were curbed by Bradley, Kemp-Kasten faced a serious shortcoming from the start. The original version was not revenue neutral by the calculations of either the Treasury Department or the congressional Joint Committee on Taxation. Had it been enacted into law, it would have added tens of billions to the nation’s budget deficits. Nevertheless, the Kemp-Kasten tax bill helped make the quest for tax reform bipartisan, and only as a bipartisan effort did reform stand a chance. Tax reform was too big, too complex, and too controversial to be pushed through Congress by one party alone. With the power in Washington clearly split between the Democrats, who had consolidated their control of the House in the 1982 elections, and the Republicans, who still controlled the Senate and t
he White House, support from both sides was needed to provide even a small chance for success.

  The Reagan administration focused its sights on tax reform in late 1983, as work got under way to prepare for the president’s 1984 State of the Union address. White House aides were coming under pressure from the supply-siders to advocate reform, and they were also convinced—wrongly—that Walter Mondale was about to make Bradley-Gephardt the centerpiece of his election campaign.

  Still, Chief of Staff James Baker was reluctant to support reform. He had heeded the advice of pollster Richard Wirthlin, who warned that “tax reform” would mean “tax increase” to many voters. He felt it would be a dangerous policy to push during an election year.

  Tax reform had been discussed in the White House before. In September of 1982, Treasury officials met with the president on three occasions to review their upcoming testimony on reform at a hearing before the Finance Committee. That same year, Secretary of State George Shultz, a former Chicago economist who was intrigued by the “flat-tax” proposals of economists Robert Hall and Alvin Rabushka, tried to interest the president in the idea. In a golf match described by former Budget Director David Stockman in his book The Triumph of Politics, Shultz told the president that a low-rate tax system would end the inefficiency caused by tax loopholes and cause the economy to grow faster. By the eighteenth hole, the president was convinced, Stockman writes, and soon, “everyone around the White House was talking flat tax.” After the golf match, then-Treasury Secretary Regan received a short note from the president extolling the idea, scrawled in the margin of an article on the issue.