Showdown at Gucci Gulch

by Alan Murray

  The group discussed the rates at great length, with disappointment expressed all around the table. Pearlman and McLure went over their computer runs and tried to come up with more satisfactory numbers, but to no avail. No one was happy with the way things were turning out.

  Secretary Regan was particularly disturbed. The rates 16-28-37 sounded “like a football call,” he complained. Others in the group erupted in laughter at the secretary’s quip, but he was serious. He wanted something more symmetrical, like the 10-10-10 proposal of Kemp and Roth, or the 10-5-3 plan of the Carlton group. Thompson suggested that 15 percent, 25 percent, and 35 percent would be better rates, and Regan agreed. He instructed Pearlman to make the rates 15-25-35.

  The change seemed like a small one, but its effects were profound. While pleasing to the ear, the 15-25-35 rates would raise far less revenue than 16-28-37. Pearlman and McLure went back to their computers and found that to make the plan work, the corporate tax rate would have to be pegged at 33 percent, rather than 28 percent. That eliminated their concern about the wide spread between the top corporate and individual rates. But it also meant corporate taxes would increase by an astounding $150 billion over five years—the largest corporate tax increase ever proposed.

  None of the Treasury officials had expected their tax reform plan to be a corporate-tax increase. From the start, members of the group had assumed their plan, like Bradley’s, would not alter the split in the tax burden between corporations and individuals.

  But in his desire to set easy-to-remember rates, Regan agreed to accept the $150 billion tax hike, with little further discussion. It was an astonishing development. Just two years earlier, Ronald Reagan said “there is no justification” for taxing corporate income. Now, his own Treasury Department was proposing to boost corporate taxes by 36 percent. For three decades, the burden on corporations had been declining; now Regan was proposing to abruptly reverse that slide for the sake of aesthetics!

  Almost as an afterthought, Secretary Regan drastically changed the nature of the tax-overhaul effort. By raising corporate taxes, Regan was able to cut not only individual tax rates, but also individual tax bills. The plan offered taxpayers an average cut of 8.5 percent in their annual payments to Uncle Sam.

  Later, after the plan came out, Regan and his advisers were accused of being politically naïve, but in the end, the large rise in corporate taxes turned out to be a political godsend. Without it, tax reform might never have made it through Congress. Only a conservative Republican administration could get away with proposing such a drastic hike in corporate taxes. Once the administration led the way, other politicians were glad to jump on board. Tax reform turned into old-fashioned tax cutting, with corporations picking up the tab. “Tax reform must be bought,” Barber Conable had said. Donald Regan accidentally discovered a way to buy it.

  Throughout most of 1984, Regan was successful in keeping his tax plan from leaking out into the press; seldom in Washington has such a major policy initiative been kept so quiet for so long. But as the political season came to an end, reporters began to pay more attention to what was happening in that small conference room at the Treasury Department. Attention turned to tax reform and what it might hold in store for the American people.

  Regan himself was the source of the first information to leak about the plan. He agreed on October 3 to attend a “Sperling breakfast” for an on-the-record discussion with reporters. A principal topic was tax reform.

  Washington reporters belong to various breakfast groups, lunch groups, and dinner groups. Much of the news gathering in the nation’s capital is done over meals. But the granddaddy of all these meal-meetings, and the one which regularly produces major news, is hosted by Godfrey Sperling, Jr., a longtime reporter for the Christian Science Monitor, who goes by the name of “Budge.”

  Sperling started his breakfast group in 1966, and it has since grown into a Washington institution. The breakfasts feature a major political or government figure and are attended only by newspaper and magazine reporters. Television and radio reporters are excluded, as are the news wire services. The breakfasts are always “on the record”—Sperling early on decided to eschew the common practice in Washington of allowing his guests to speak “on background” or “off the record.” Usually held in the Sheraton Carlton Hotel—also home to the Carlton group’s Tuesday morning breakfasts—the Sperling breakfasts provide eggs, bacon, and viscous black coffee to countless droopy-eyed reporters, invited by Sperling to come in search of an early-morning story. Washington’s most famous and powerful people, as well as many of its less famous and powerful, have spent an hour with this group. Sperling now averages about one hundred of these breakfasts each year, and has hosted nearly two thousand since he began. The group has eaten breakfast with Presidents Reagan, Carter, and Ford; it has, over the years, by one calculation, downed 468,000 oranges, 187,200 eggs, 17,531 pounds of bacon, and 234,000 pounds of sautéed potatoes. If the guests say something worthwhile, their words will appear in newspapers all across the country the next day. Usually, there’s no mention of Sperling; the comments are said to have been made “at a breakfast meeting with reporters.” In the nation’s capital, everyone knows that means breakfast with Budge.

  On the morning of October 3, Regan was in a talkative mood, and in answers to questions from the twenty or so reporters, he gave some important hints about the direction his revolutionary tax plan was taking. It would be a “modified flat tax” (an income-tax system with fewer and lower tax rates), he said, rather than a consumption-based tax. He also suggested vaguely that the investment incentives of 1981 might be repealed. Echoing the rhetoric of Pearlman and McLure, he said: “We have to decide whether we want our corporate tax policy to be an industrial policy. Accelerated depreciation and the investment tax credit have definitely favored manufacturing over services. We are considering whether we should continue these.”

  The comments whetted the press’s appetite for reform stories. Later that month, The Wall Street Journal published a story about Treasury’s plans to curb tax deductions for mortgage-interest payments on second homes. Then The Washington Post reported that the Treasury proposal would tax unemployment compensation and eliminate the deduction for state and local taxes. The state-and-local story elicited a response from President Reagan, who was still on the campaign trail. “It would have to be proven to me that there’s a valid excuse” for eliminating the state and local deduction, he said. “I don’t believe there is.”

  In mid-November the Journal published another story about the debate over whether to eliminate the 1981 investment incentives. Regan cavalierly referred to these reports as “not leaks, but drippings”; nonetheless, they put tremendous pressure on the Treasury group. The politically controversial parts of the plan were coming out a piece at a time, and the plan faced the possibility of being leaked to death. White House officials were angry at the Treasury for allowing the piecemeal revelations; they feared that the plan Regan was putting together would become an albatross for the administration. Tempers at the Treasury flared, as fingers pointed and accusations flew wildly as to who was responsible for leaking the information.

  At Kingon’s urging, Regan finally decided the plan had to be released ahead of schedule to stop leaks. During a meeting in his office with Pearlman, he impatiently picked up the telephone and called Chief of Staff Baker at the White House. “What’s the president’s schedule for the next couple of weeks?” Regan asked. “When can we schedule a meeting on this? When can we see him?” He then looked over the phone at Pearlman and asked, “Can you have it done in a week?” Pearlman hesitated, knowing there was about a month’s worth of work left, but he replied, “Yes.” The meeting was arranged, and Pearlman limped back to his office to spread the news.

  The next week at the Treasury was filled with long days and sleepless nights. Everyone involved was scurrying about, trying to put the final touches on the plan in preparation for its release.

  One issue that had to be
resolved quickly was a title, which became a source of considerable amusement. McLure, who by this time was convinced that the plan would be a historic endeavor, played with various possible titles. A sentimental man, he wanted to pay private tribute to his mother, who was called “Baby” by her grandchildren. After trying various alternatives, he came up with the title Broad-Based, Simple, and Fair Tax, which in shortened form—BBS Fair Tax—would, at least to him, sound like “Baby’s fair tax.” Without mentioning the motive behind the name, he took it to Regan and asked what he thought.

  “Broad-based, simple, and fair; broad-based, simple, and fair,” muttered Regan, with a frown on his face. “We can’t use that, it sounds like a girl I used to date!” In its stead, Regan decided to take the title from the president’s words in the State of the Union address: Tax Reform for Fairness, Simplicity, and Economic Growth.

  On Sunday, November 25, there was a final meeting of the group to review the plan, one day before it was to be taken to the president. Regan brought jelly donuts. The group discussed the controversial changes in capital-gains taxes and investment incentives one more time. They now knew for certain the proposal would cause a political uproar. But Regan was ready; he told the White House that he would release it as his own plan, not the president’s. That would protect the president from the fallout, and at the same time allow Regan himself to take the spotlight.

  On November 26 Regan and Pearlman walked across East Executive Avenue to the White House for the briefing with the president. The meeting took place in the Cabinet Room, just a few steps away from the Oval Office, where the president held most of his meetings with cabinet members and other advisers. It was a rectangular room, with large French doors facing out into the Rose Garden. On the walls were portraits of three former presidents Reagan particularly admired: Eisenhower, Coolidge, and Taft. The president sat at the center of the long, oval table, with his back to the Rose Garden. Regan and Pearlman sat across from him, while others at the meeting scattered themselves around the table. The presentation lasted nearly two hours. The Treasury officials feared the president would object to their proposal to end the deduction for state and local taxes, but he did not. His comments a month earlier about eliminating the deduction apparently had been mere campaign rhetoric. The only serious objection the president raised to the massive plan was its proposal to end the deduction for country-club dues!

  The president’s eyes grew hazy as Regan explained the changes in corporate taxation, and he didn’t seem to grasp the significance of the proposal. But other White House officials in the room immediately realized they were being handed political dynamite. The president’s own Treasury Department was proposing a monumental corporate tax increase. The proposal, they thought, bordered on treason, spitting in the face of a whole host of Republican constituencies. It was a complete denunciation of the president’s policies in 1981. It was, in the view of most of those gathered about the cabinet table, an outrage.

  When Regan’s presentation was through, there was an awkward silence. Most of the men in the room were reluctant to embarrass the Treasury secretary in front of the president and said nothing. The only exception was the president’s acting chief economic adviser, William Niskanen, a man who throughout his career had had a habit of stating his views without hesitation. He had been fired from the Ford Motor Company for denouncing that firm’s policy of advocating barriers to Japanese car imports, and now he was about to make another comment that would wipe out any chance he might ever have had of eliminating the word “acting” from his title.

  The president turned to Niskanen and asked his evaluation of the plan. Niskanen replied, “Walter Mondale would have been proud.” It was the ultimate insult, an idea that had entered the heads of others, but one which no one else dared to utter.

  The next morning, Regan briefed key members of Congress on the plan, and they too raised their eyebrows in disbelief. At 11:20 A.M. he called Dan Rostenkowski in Chicago and gave him the basic details, but was quick to add “this plan’s not set in cement.” At 2:00 P.M. he held a press conference in the “Cash Room” of the Treasury, a grand, marble-walled room that got its name because it once was a disbursing office for Treasury funds. After describing the controversial proposal, Regan, already beginning to question the soundness of his own work, said these fateful words: “This thing is written on a word processor. It can be changed.”

  At the White House, most of the president’s aides were anxious to push the “delete” key. While it may have been a policymaker’s dream, the tax plan was a politician’s nightmare. It stung a multitude of powerful pressure groups. In background conversations with reporters, aides were quick to declare the controversial package dead-on-arrival and to distance President Reagan from it. A statement issued by the White House said the president would not embrace a tax plan until he had the opportunity “personally to review the Treasury’s recommendations carefully.” Secretary Regan had worked hard to put this tax reform package together, but everyone in Washington seemed convinced that his efforts were in vain. Tax reform once again seemed to be stopped in its tracks.

  Chapter 4

  A Politician Comes to the Treasury

  Chris Hicks, Secretary Regan’s young executive assistant, was sitting in his Treasury Department office on the morning of January 8, 1985, looking over some papers, when the telephone rang. David Chew, the deputy comptroller of the currency and a friend of Hicks, was on the other end of the line. “Have you heard the news?” Chew exclaimed. “Regan’s going to the White House.”

  Hicks glanced out the window. The sky was slightly overcast, but from his desk, Hicks could still look across the street and see the windows of the president’s Oval Office. He knew that his boss had been mysteriously summoned to the president’s office earlier that morning, but he did not know why. “Regan’s already at the White House,” he told Chew.

  “No, I mean Regan’s becoming chief of staff. He and Jim Baker are switching jobs. They’re announcing it right now in the press room!”

  The news stunned Hicks, and the rest of Washington as well. The capital is in many ways a small town, and secrets are seldom hidden for long. The rumor mills usually get word of major administration personnel shake-ups days or even weeks before they happen. But no one, not even the Treasury secretary’s closest aides, had foreseen this. Regan, after all, was trained on Wall Street and seemed ill-suited for a White House post. The job he was getting, White House chief of staff, required a keen political mind, something Regan demonstrably lacked. Jim Baker, on the other hand, was a consummate politician, but he had little expertise in the tax and financial affairs that are overseen by the Treasury Department.

  While the job swap shocked official Washington, it offered the moribund tax proposal new hope. Before the announcement of the change, Regan’s tax plan seemed to be sinking rapidly into oblivion. The White House showed no clear sign of interest in the proposal, and the chorus of complaints from special interest groups discouraged even the Treasury secretary.

  With Regan and Baker switching jobs, however, the outlook changed dramatically. As chief of staff, Regan would be better situated to secure the president’s blessing for reform. “At least now you can be sure you’ll have White House support,” Regan joked with reporters later that day, after the switch was announced. At the same time, Baker’s reputation for accomplishing near-impossible legislative feats improved the odds for winning congressional approval of some sort of tax reform. Baker had no abiding interest in reform, to be sure, but he was loyal. He would push for tax reform if that was what the president wanted. Wyoming Representative Dick Cheney, a chief of staff in President Ford’s White House, put it this way: “The tax policy has been developed. What’s needed now is a fine political hand to move it, and that’s Jim Baker’s meat.”

  It was Regan who first suggested the job switch, even before his tax plan was unveiled. As a former corporate chief executive, Regan was accustomed to having total control, and he had always b
ridled under the reins of the White House. He longed for the power that accompanied the chief of staff’s job, a power that often eclipsed cabinet posts, and he suspected Baker might be willing to go along with the swap. Watching Baker during the fall of 1984, in the midst of a whirlwind of legislative and campaign issues, Regan had seen the chief of staff grow fatigued and restless. In a private meeting in Baker’s office right before the election, Regan broached the issue:

  “You know, Baker, your trouble is you’re tired of this job, you’re weary,” Regan said. “You’re right,” Baker replied.

  “You know the best thing that could happen to you? You and I should swap jobs.”

  “You’re kidding.”

  “No, I’m not.”

  Baker was indeed weary. The tough task of running Ronald Reagan’s White House showed in his face and in his demeanor. He had aged noticeably during his four years in the demanding job. The chief of staff had to broker the many interests that vied for the president’s attention, and work on dozens of different issues of national and international importance, all at the same time. Baker was ready to move on to the less hectic life of a cabinet post. His first choice was to become secretary of State, and his second was probably secretary of Defense, but neither job was open. At one point, Baker even considered giving up his White House job to succeed Bowie Kuhn as commissioner of baseball. By the fall of 1984, with no major cabinet shake-ups on the horizon, Baker was thinking of packing up his things and returning to his native Texas.

  Baker mulled over Regan’s surprise offer for days and discussed it in detail with his White House protégé, Richard Darman. As was his habit, Darman drew up long lists of the pluses and minuses of the Treasury job, analyzing the possibilities and problems to the last detail. On Friday, November 30, Baker walked across the street to the Treasury building to have a private lunch with Regan and to explore the issue further. It was clear that Regan’s offer was serious; Baker indicated he was interested as well. The two men then discussed the swap with Michael Deaver, a longtime aide and friend of the president who was the only other obvious candidate for the White House post. Deaver was getting ready to leave the White House himself and move to a more lucrative job as a lobbyist in the private sector, so he readily gave his assent. On Monday, January 7, Baker, Deaver, and Regan approached the president and told him their idea. “Let me sleep on it,” the president replied. Nancy Reagan had reservations: She feared Regan’s brusque personality was not right for the chief of staff’s job. But early the next morning, the president called Baker and Regan to his office and gave them his blessing.