by Alan Murray
Along the corridors of K Street, where many of Washington’s highest-paid corporate lobbyists keep their offices, news of President Reagan’s comments to the Journal was greeted with cheers. Charls Walker was away at Harvard’s Kennedy School of Government, attending a conference on corporate taxation, when the interview was published. He was up at 6:45 A.M., got a copy of the Journal in the hotel lobby, saw the story about the president’s comments, walked into the dining room, and exclaimed: “Look! Look! Look what the president said! We may as well call off the conference.” The story, he recalls, “made my day.”
Despite his comments, Reagan’s interest in tax reform did not wane. Chief of Staff Regan quashed his boss’s concerns about corporate taxes by arguing that only some corporations—those that had escaped taxes entirely in recent years—faced a tax increase. It was a less-than-candid explanation, but it was enough. Reagan’s feelings about corporate taxes faded quickly when confronted with his desire to lower individual tax rates. If a tax reform that boosted corporate taxes was the only way to get rates down, then he was for it.
Once the president decided he wanted tax reform, Baker and Darman had to deliver. Their reputations were at stake.
For Baker, the role of a tax reformer was one he assumed with some reluctance. Ron Pearlman assessed the secretary’s feelings this way: “I think Baker’s philosophy through this whole process was: (a) I wish tax reform had never come up; (b) I wish the Treasury package had never come out; (c) we can’t drop it so let’s make the best of it; and (d) what we really want out of it is reduced rates, and we’ll do anything we can within reason to get those.”
For Darman, tax reform had a more fundamental goal—it addressed a deep and abiding problem in the American political and social psyche. The disintegration of the tax code over the past few decades had undermined people’s faith not only in the tax system, but in government itself, he believed. Although he served in an administration that portrayed government as a parasite, Darman was, at heart, a true believer in government. He held a deep-seated conviction that the government can and should be a positive force in society. Perhaps it was the triumphant visit by President Kennedy to Harvard two decades earlier, perhaps it was that his own career was tied up so closely with government service, but the cynical Darman became something of a romantic when conversation turned to the importance of federal government in American society. People’s faith in government had been battered by two decades of tragedies: the Vietnam War, Watergate, the Iranian hostage crisis. Darman felt tax reform was one of the ways in which the Reagan administration might help restore that faith.
“Kennedy was shot and died,” he told a reporter for The New York Times. “Reagan was shot and survived. He personifies the restoration of this notion of the possible.”
Treasury I clearly had to be changed before it could be either embraced fully by the president or enacted by Congress. It had too many problems; it stepped on too many toes. Baker’s job was to do what Regan had avoided; to bring politics fully into the process. He had to walk a very narrow and treacherous line: restoring enough tax breaks to keep a coalition of powerful special interests from killing the entire effort, while at the same time repealing enough preferences to make meaningful tax reform possible. It was no easy task.
Baker and Darman were encouraged by one aspect of the reaction to the Treasury proposal. For the first time, a Reagan administration initiative was winning kudos from the political left. Many liberal reformers were heaping praise upon the plan, calling it a tremendous step in the right direction. Secretary Regan even received a warm and encouraging handwritten note from George McGovern, the liberal Democrat who had led his party’s ticket in the 1972 election. “I hope it won’t hurt your tax proposal to have my support,” McGovern wrote. “It is a fair, common-sense reform.” Regan’s aides were embarrassed by the letter and tried to hide it from the press, but Baker and Darman saw in such reactions an opportunity. They knew tax reform could only be achieved as part of a bipartisan effort; partisan squabbling would surely doom such a complex and controversial bill. If they could calm some of their GOP supporters without losing the left, tax reform might actually have a chance. They had an opportunity to enhance their own reputations by accomplishing the legislative feat of the decade.
In fact, Darman eventually came around to the view that Treasury I was a brilliant, if inadvertent, strategic move: It convinced liberal Democratic reformers that they should support the administration’s effort. At the same time, it put the gold-cufflinked lobbyists on the defensive; special interests would have to fight the tough proposals threatened by the Treasury plan. In order to avoid the worst, they might be willing to settle for something less onerous. For all their supposed political ineptitude, the framers of Treasury I might not have had such a bad idea. “I sometimes wish I had thought of it myself,” Darman said.
In devising their strategy to get tax reform through Congress, Baker and Darman hailed back to one of their greatest successes in the White House: the 1983 rescue of the Social Security system. Like tax reform, Social Security seemed an impossible issue for the political process to deal with. The Social Security system at the time was on the verge of insolvency, yet no one dared offer a solution. When the Republicans proposed even modest cuts in Social Security benefits, the Democrats immediately piled on, whipping up fear in the minds of senior citizens that the GOP was going to destroy their economic lifeline. When Democrats proposed boosting payroll taxes to pay for continued benefits, the GOP was quick to shout its favorite refrain: Democrats are the party of “tax and spend.” Mutual fear resulted in a dangerous stalemate.
To defuse the issue in the 1982 midterm elections, President Reagan appointed a commission, headed by economist Alan Greenspan, to study the issue and make recommendations after the November elections. The ploy worked temporarily, but even after the election the commission remained deadlocked.
Aware that failure to deal with the Social Security issue could cause irreparable damage to the Republican party, Baker launched a rescue mission. Huddling in private with small groups of key legislators and commission members, Baker, Darman, White House Budget Director David Stockman, and chief White House Congressional Lobbyist Kenneth Duberstein hammered out the needed compromises. It was a classic Baker operation: The meetings were held in secret, at the elegant Blair House mansion across the street from the White House. Baker and Darman went to incredible lengths to avoid reporters, using back driveways and rear doors at every opportunity. At first they met with legislators and commission members one or two at a time. Gradually they built up a small “core” group of power brokers and worked out an acceptable compromise. The group included Senate Majority Leader Howard Baker and Senate Finance Chairman Bob Dole on the Republican side, and Senator Daniel Patrick Moynihan and a representative of House Speaker Tip O’Neill on the Democratic side. With such powerful support, the final compromise was pushed through Congress in less than three months with few major changes.
Baker and Darman envisioned a similar course for tax reform. They feared that if dealt with in the normal, wide-open legislative process, the tax bill would be picked apart by legions of lobbyists. Their best chance of success was to negotiate a “precooked” deal in private with a few key members of Congress. Then after the plan became public, it could be rushed through the legislature, just like the Social Security plan, before the lobbyists had an opportunity to pounce.
It was a bold scheme—and probably a naïve one. Rewriting the nation’s tax code was far more complex than propping up a single program like Social Security. The tentacles of the tax system reached into every area of American life; lawmakers were not likely to rubber stamp such a far-reaching set of proposals. Nevertheless, Baker and Darman thought their strategy was tax reform’s best shot.
As the two Treasury officials saw it, the negotiations had to include the four congressional tax reformers—Senator Bradley, Representative Gephardt, Representative Kemp, and Senator Kasten—as wel
l as the four chief tax writers—Chairman Rostenkowski of the Ways and Means Committee; John Duncan, the Republican who was the ranking minority member of the committee; Chairman Packwood of the Finance Committee; and Russell Long, the senior Democrat on the Senate panel. If a secret agreement could be reached among all eight of these men, Baker and Darman thought, it could move rapidly through Congress. Recalls Darman:
We had to make sure that the next document we came out with did not get declared dead on arrival as Treasury I had…. What we hoped for was a kind of joint announcement of Rostenkowski and Packwood and the president and a few others, arm in arm, announcing, not a Reagan I, but some sort of Consensus I.
The two Treasury officials began holding secret meetings with the legislators, trying to gauge where the political center might lie. Some of the meetings were held on Capitol Hill, in the offices of the lawmakers. Others were held in Baker’s home on fashionable Foxhall Road. The participants met in the Treasury secretary’s den on the bottom floor, which had a large picture window looking out onto the back lawn and the woods beyond. The walls in the den were decorated with stuffed ducks and big-game trophies bagged by the Treasury secretary on an African safari. A zebra skin was layed out on the floor. In these surroundings, Baker, Darman, and the various legislators compared Treasury I, Bradley-Gephardt, Kemp-Kasten, and the existing law, trying to find an acceptable middle ground. Of the four reformers, Bradley, Gephardt, and Kemp all showed a strong knowledge of their plans, and a willingness to deal. Kasten was another case. The baby-faced Wisconsin senator had clearly not taken the time to study his own complex proposal. In a discussion about taxing a multifaceted fringe-benefit package known as a “cafeteria plan,” Kasten commented, “We can’t tax those lunches.” At a later breakfast meeting, he failed to show.
Chairman Packwood indicated a grudging willingness to play along, provided the plan did not tax fringe benefits. Senator Long seemed willing to participate as well, despite his doubts about the value of such an exercise. Duncan attended the meetings, but showed no interest in reform. A conventional Republican with an undistinguished legislative record, Duncan worried about the businesses in his Tennessee district that would be hurt by such a proposal.
But a big kink blocked the Baker-Darman strategy: Dan Rostenkowski. The proud Chicago politician did not think it was proper for him, as chairman of the House Ways and Means Committee, to negotiate with junior members of Congress like Bradley, Gephardt, Kemp, or Kasten. More important, he viewed the entire administration effort as a Republican trap. If he agreed to be part of Baker’s “consensus” negotiations, the Democrats might be tricked into accepting tax reform without ever having an opportunity to put their own stamp on it or to claim credit for it, and putting Democrats back on the map with tax reform was what Rostenkowski was all about. Recalls Rostenkowski:
Baker said to me, “Danny, we can do it.” We can do it? What’s this “we” crap? He said, “Danny, my God, do you realize what’ll happen? Do you know what we could do?” And I said, “Jimmy boy, you’re massaging me. I have been handled by better than you, and your hands are cold.”
Baker and Darman insisted that they wanted to complete the bill in 1985; Rostenkowski resisted that as well. That was just impossible, he said. Legislation of this magnitude would take time—lots of it. He complained privately that the new Treasury officials were just political hotshots on the make. He thought of the duo as “young analytical geniuses” who had “just left the White House thinking all they had to do was say this is dictatorial policy from the White House.”
With Rostenkowski resisting, the Social Security strategy was doomed. Baker and Darman considered alternative versions of the strategy that would exclude Rostenkowski. The administration had managed to work around the stubborn Ways and Means chairman in enacting the tax plans of 1981 and 1982, as well as the Social Security plan of 1983. Tax reform, however, was different. It was a fragile undertaking and could quickly fall apart if the powerful chairman worked against it. The House, after all, was designated under the Constitution as the place where all tax bills must originate, and Rostenkowski was the chief tax writer there. Baker and Darman decided they had no choice but to put together a tax package of their own, send it to Rostenkowski, and allow him to work his will. It was a dangerous strategy, they knew, but in the face of Rostenkowski’s intransigence, it was the only way.
Within the Treasury Department, a new tax-writing group was formed to craft a revised plan. On the surface, the group bore a resemblance to the team that wrote the first Treasury proposal. It met in the Secretary’s conference room, with the windows overlooking the White House. Pearlman was still there, and so were McLure, Johnson, Thompson, and Egger.
But the new Secretary and the two aides who accompanied him in the meetings—Darman and Margaret Tutwiler—set a very different tone. The meetings were frequently held on Saturdays, a practice that Regan nearly always avoided. Baker would show up in casual corduroys and pick a seat on the side of the table (unlike Regan, he seldom sat at the head). He propped his cowboy boots on the table, crammed a wad of Red Man chewing tobacco in his mouth, and placed a large plastic cup in front of him to use as a spittoon (“That’s disgusting,” said Tutwiler, a former Alabama debutante). Where Regan avoided all talk of politics, Baker talked about little else. He had scant patience for the theoretical presentations of Pearlman and McLure. He would lean back and spit in his cup or scratch his nose and then demand, “What are we hearing on that one?” or “Who’s working against it?”
For Pearlman and McLure, it was a demoralizing period. All the elaborate and elegant rationale for their original plan was simply ignored. Neither Baker nor Darman showed any tendency to defer to the two tax experts. Indeed, Darman felt that lawyers like Pearlman were poorly equipped to make judgments about economic policy and that economists like McLure knew nothing of the motivations of ordinary businessmen. The tax experts had enjoyed remarkable influence and power in the drafting of Treasury I; now that influence was being undercut as their plan was recast to reflect political realities.
Relations between Pearlman and Darman grew particularly tense. Traditionally, the assistant Treasury secretary for tax policy maintained a high profile on issues of tax policy. Pearlman’s predecessor, Buck Chapoton, had been an independent force, handling all the department’s tax negotiations with Congress. But after Darman arrived, it quickly became clear that he planned to take charge of reform. Says Pearlman:
I viewed my role as the historical role of the assistant secretary for tax policy, as the principal liaison between the secretary and Congress. I wasn’t about to give that role up. Dick came in with the idea that he was going to take over tax reform, and I just wasn’t going to let that happen. There was continuous tension because I didn’t view myself as working for Dick Darman. I viewed myself as working for the secretary.
Baker and Darman would go up to the Hill and see a member and I would never know they’d gone and the next thing I’d know, I’d get a call from the Hill staff saying there was a meeting, and they’d start talking to me about the meeting and I wouldn’t know what the hell was going on. It wasn’t just embarrassing, I couldn’t function that way. I discussed it with the secretary, but he didn’t do anything.
For Manuel Johnson, the new Treasury team was a welcome change. Suddenly, he found the table tilting toward him. Baker and Darman agreed to repeal the investment tax credit, but they were not willing to go so far as to repeal the rapid depreciation write-offs that they had labored to enact as White House strategists in 1981. They wanted to retain some incentives to encourage investment in equipment, and they worked with Johnson to keep those incentives.
Johnson had always complained that Pearlman and McLure resisted his suggestions, but with Baker backing him up, that quickly ended. One day, after Pearlman reported that he still did not have a revenue estimate ready on Johnson’s proposals, Johnson went to the secretary to protest Pearlman’s foot-dragging. Baker, completely sympathetic
, launched into a folksy reminiscence, comparing Johnson’s problems with Pearlman to the plight of his youngest son, Dougie, on Easter:
One Easter we decided to buy little Easter ducks for all my kids. We bought them, had them ready the night before, so they could come downstairs and look at them. So they all got up the next morning, ran down, and found one of the ducks had died. My oldest son said: “Aw, look, Dougie’s duck died!” And what was worse, Dougie said: “Aw yeah, my duck died.”
“Now, isn’t that the way you feel, Manley?” Baker asked.
“That’s exactly how I feel,” Johnson replied.
“Well from now on, you’re going to get your revenue estimates on time.”
Afterward, Johnson virtually took over the job of fashioning a revised system of depreciation write-offs, with Pearlman and McLure providing the technical expertise needed to make the plan work.
Practical politics was a new and shocking change for the veterans of Treasury I. The transformation was typified by an encounter between Pearlman and a group of angry war veterans. The veterans were deeply disturbed about the Treasury I proposal to tax veterans’ disability payments, which for years had enjoyed tax-free status. Representatives of various veterans’ groups demanded a meeting with Pearlman, and he agreed. A small army of them stormed into his Treasury office, led by Chad Colley, national commander of the Disabled American Veterans, who had lost both legs and one arm while fighting in Vietnam.