Showdown at Gucci Gulch

by Alan Murray

  The day before the final meeting, Pearlman’s staff brought him more bad news. There was another revenue error—not as big as the last one, but big enough to cause serious problems. It appeared that the revenue estimators had overcounted and that the plan was short by about another $10 billion.

  Pearlman was flabbergasted. Going back to the White House and having to explain yet another error would be too much to bear. “They’ll kill me,” he told his staff, raising his hand to his forehead, “they really will.” Some of his aides said he should just ignore it, but the conscientious tax official felt obliged to shuffle down to Secretary Baker’s office and tell all. Baker took the disturbing news calmly and told Pearlman to have his people check the numbers and get back to him in the morning.

  That night, Pearlman dined with Rostenkowski and some of his aides. It was a social dinner that had been arranged a few days earlier. Pearlman was in a dejected mood, but he did not mention the troublesome new development to Rostenkowski. After dinner, he went home to get some sleep and prepare for dealing with the disaster the following day.

  The next morning, Pearlman was up early and on his way to work well before six o’clock. Besides his all-important meeting with the president, he also was scheduled to testify before a committee in Congress. As he approached the Treasury gates, however, he felt a sharp pain in his stomach and a flash of heat through his body. He threw off his tie, turned his car around and drove past the Treasury building to nearby George Washington University Hospital. He was feeling so ill, he simply left his car out front and rushed into the emergency ward.

  The Treasury official was in the hospital for almost three hours and treated for what doctors finally decided was a bad case of food poisoning from the previous night. When he was released, he discovered his car had been towed to make way for rush-hour traffic. Sick, exhausted, tie-less, and car-less, Pearlman hailed a cab back to his office.

  As he trudged in, his staff gave him a tie and some good news. The previous night’s revenue problem, they said, was a mathematical error that had been found and corrected. There was no new revenue crisis. Nevertheless, the experience of the previous twenty-four hours seemed to symbolize the new Treasury plan for Pearlman. It was scarcely an exhilarating experience.

  The final meeting with the president that afternoon held even more defeats for the beleaguered Pearlman. The meeting was to deal with the few major issues that remained. Among those: capital gains. Baker had proposed simply leaving the top capital-gains rate at the same level as under existing law: 20 percent. Pearlman wanted to boost it to at least 22 percent to help solve the plan’s “distribution” problem. As it was, the plan was far too generous to the rich, and a higher capital-gains rate would cut back the benefits to those in the upper-income category. But the president had often expressed his view that lower capital-gains rates are good for the economy, and he did so again in this meeting. Regan quickly joined the bandwagon, and the irony could hardly have been heavier. As Treasury secretary, the chief of staff had approved raising the top gains rate to 35 percent only five months earlier; now he did yet another backflip and proposed lowering the rate to 17.5 percent. The reason for the reversal? Aesthetics, the chief of staff argued. A rate of 17.5 percent would be an even half of the proposed top rate on ordinary income of 35 percent. It would be a nice, neat exclusion of 50 percent of all long-term capital-gains income.

  Regan’s capital-gains proposal came as a blow to the Treasury team. Lowering the gains rate only exacerbated the plan’s distributional problem. It meant the president’s proposal would cut the tax bills of those earning more than $200,000 a year by nearly 11 percent, while cutting the bills of those earning $20,000 to $50,000 by only 6 percent to 8 percent. It was sure to be attacked by Democrats as another giveaway by President Reagan and the Republicans to the wealthy. Nevertheless, the president liked his chief of staff’s arguments and agreed to the lower gains rate.

  The oil-and-gas provisions also were on the agenda. Chief of Staff Regan argued oil ought to take a bigger hit than Baker proposed. But the oil industry was defended by Baker’s fellow Texan, Vice President George Bush, who attended the meeting. Bush argued that the plan ought to be even more generous to the oil and gas industry than Baker’s proposal. In one of his rare involvements in the tax-reform debate, the vice president pointed to the president and said: “This man and I campaigned on a platform of keeping the energy industry strong. Mondale and Ferraro were the ones who wanted to go after the oil industry!” Bush argued that the oil and gas industry was essential to the nation’s security. All oil-and-gas tax preferences must be preserved.

  Troubled by the split among his advisers, the president muttered, “Oh, Lord,” but in the end, he decided in Bush’s favor. The oil industry, one of the largest beneficiaries of tax preferences in the existing code, was allowed to keep virtually all of its favorite tax breaks. Once again, the politics of oil had proven too powerful to be tangled with.

  Right up to the last day, Darman was still trying to get the rate below 35 percent. Even 34 percent, he thought, would be worthwhile. It would enable the Treasury officials to claim they had gotten the rates lower than the president wanted. But Chief of Staff Regan defended the Treasury I rates. He repeated his earlier argument: other mixtures of rates sounded like “football calls” or the “combinations for a lock.” The 15-, 25-, and 35-percent rates were best, he said, and the president agreed.

  In the end, the new plan was much less pure reform than Treasury I had been. It retained many tax breaks, but it ended or reduced many others and brought down the top tax rate dramatically to 35 percent. Most important, the new plan had the full support and approval of the president of the United States. With Ronald Reagan solidly behind it, tax reform could no longer be ignored.

  The President unveiled the new plan in a nationwide television speech delivered from the Oval Office on the evening of May 28, with the grand rhetoric that had become his hallmark:

  My fellow citizens, I’d like to speak to you tonight about our future, about a great historic effort to give the words “freedom,” “fairness,” and “hope” new meaning and power for every man and woman in America….

  No other issue goes so directly to the heart of our economic life. No other issue will have more lasting impact on the well-being of your families and your future….

  Death and taxes may be inevitable, but unjust taxes are not. The first American Revolution was sparked by an unshakable conviction—taxation without representation is tyranny. Two centuries later, a second American revolution for hope and opportunity is gathering force again—a peaceful revolution, but born of popular resentment against a tax system that is unwise, unwanted and unfair….

  Let’s not let this magnificent moment slip away. Tax relief is in sight. Let’s make it a reality. Let’s not let prisoners of mediocrity wear us down. Let’s not let the special interest raids of the few rob us of all our dreams…. We can do it. And if you help we will do it this year.

  Chapter 5

  “Write Rosty”

  A week before President Reagan’s televised plea for tax reform, House Speaker Tip O’Neill called Ways and Means Chairman Dan Rostenkowski to ask if he would deliver the Democratic response to the president’s address.

  “Not really, necessarily,” Rostenkowski grumbled in reply, and the answer was natural enough. The often scowling, gruff-voiced chairman of the Ways and Means Committee was not exactly telegenic. He was big, brash and bellowing—a door slammer and, at times, a bully. He was reared as the kind of beef-eating, ward-heeling machine politician who considered the blow-dried world of TV to be sissy stuff.

  Okay, said O’Neill. The Democrats in the Senate were eager to put their own man up for the job. If Rostenkowski did not want it, a senator would be happy to make the televised response.

  “Whaddya mean?” Rostenkowski shot back. The mere thought of some self-important senator stealing the limelight got his back up. He felt that he was the Democrats’ number-o
ne man on taxes. If anyone was going to talk about tax reform, it should not be a member of the Senate; it should be Dan Rostenkowski, chairman of Ways and Means.

  “Goddamn right I want to do the response,” he blustered. And so, in a fit of pique and pride, he consented to put the nation on notice that he and the Democratic party were reformers too.

  In truth, Rostenkowski had decided some months earlier to join forces with President Reagan to fight for tax overhaul, but his agreement to, in effect, link arms with the president in consecutive appearances on national television raised the stakes of that commitment. The prime-time display of bipartisan cooperation on the issue symbolized a new political reality: With the support of the top House tax-writer, tax reform had a chance.

  The speech was scheduled for May 28, and Rostenkowski and his staff took the task of preparation very seriously. They knew the risks were high, and the odds against them were great. Tax reform was still a tough issue, with little support yet among the public or members of Congress. On top of that, the history of Democratic responses to Reagan addresses was abysmal. Many of the previous replies failed to stir public sentiment, largely because they attacked the enormously popular president. Pitting mere politicians against the “Great Communicator” was inevitably a mismatch.

  So Rostenkowski took a different tack. Instead of picking a fight, he decided to embrace both Reagan and tax reform. It would be a partisan speech, blaming the Republicans for making a mess out of the tax system, but it also would position the Democrats as allies of the president in the battle against the special interests. “All I wanted to say was, ‘This is my president too,’ ” Rostenkowski recalls. “If he wants to pass this one, Democrats will support him. We should support him.”

  To ensure that the rough Rostenkowski made a smooth TV appearance, John Sherman, Rostenkowski’s speech writer, hired Joseph Rothstein, a media consultant. Rostenkowski had not dealt with such people before, but he realized this time was different, and he was willing to endure the training. “John,” the chairman told Sherman, “this son of a bitch down at the White House talks in simple language that people understand. He gets on the couch in the living room of every person that watches. I want to get on that couch with him. I want to say to the people, put my arm around ’em and say, ‘Our president wants what’s great and best for you—and so do I.’ ”

  Joe Rothstein had never met Rostenkowski, but on the Sunday morning before the speech, he saw a television interview with the chairman that made him realize what a monumental task he faced. Here was a politician who clearly was not made for television. He had a tough-guy demeanor and the kind of gravelly voice that others can imitate only after shouting at the top of their lungs for two or three hours. He was prone to mumbling and stumbling and mashing clichés. Malapropisms were his trademark. When presented in a speech with the word hyperbole, he pronounced it hyper-bowl. He referred to the dapper lobbyists who populated the hallways outside his committee as “pencil-striped,” and when explaining the delicate decisions necessary to steer a bill through Congress, he said he was “walking through an egg field.” After watching Rostenkowski’s performance, Rothstein’s wife turned to her husband with a knowing glance and said, “Good luck.”

  The goal of Rothstein and the Rostenkowski advisers was to transform this big-city, arm-twisting pol into a man of the people. They decided to shun anything artificial. Rostenkowski, for all his hardball reputation and coarse manner, possessed a peculiar kind of vulnerability, a sort of charm. On the flip side of the scowl that could curdle milk, there was a beaconlike smile that made his round, expressive face boyish and oddly compelling. Sherman and Rothstein worked to tap this softer side, to make the tough-as-nails power broker appear on television as a cuddly teddy bear.

  They also strove to highlight Rostenkowski’s ethnic roots, to reach back to his northwest Chicago neighborhood. The strategists wanted to evoke the sense in the audience that Rostenkowski was one of them—just a guy—a Polish friend from the neighborhood who did well but never forgot where he came from; an emotional man, a family man, and a man who wore a medallion around his neck engraved with the birthdates of his four daughters. Sherman wrote the speech almost as if Rostenkowski were to deliver it to his chums at old St. Stan’s Church, across the street from the big brick house in Chicago his grandfather built, in which he and his family still lived.

  Rostenkowski and Rothstein were an odd couple. Rothstein was an elfish man with graying hair and a gentle smile that matched his manner. The blustery chairman, on the other hand, stood six-feet two-inches tall and weighed more than 225 pounds. Normally, if his aides could get Rostenkowski to read over a speech just once before he delivered it, they felt lucky, but this time, Rothstein and the chairman worked together for six hours, going over the text, and practicing the presentation. They worked in the Capitol building itself, using the two offices that the chairman kept on the first and second floors of the three-story structure. Sherman, who had toiled as Rostenkowski’s press aide since 1981, penned the draft. The former newsmagazine correspondent had developed a knack for authentically impersonating his boss’s speaking style. With a few alterations by Rothstein, every word slipped naturally off the chairman’s tongue.

  By the end of the day on that Tuesday, Rostenkowski was ready. He was calm, he knew what he had to do. At one point, when the final minutes were ticking away before his big face would be broadcast into millions of homes, he suddenly jumped to his feet. “Shit,” he shouted, “I’m not gonna do it!” The camera crew gasped, but Rostenkowski broke into a smile. Just kidding, he said, and sat back in his seat. Ronald Reagan finished his own address, in which he had labeled tax reform “a second American revolution.” Then, Rostenkowski was on the air.

  Good evening, I’m Dan Rostenkowski from Chicago. Let me read you something that pretty well explains what tax reform is all about, and what Democrats are all about.

  Rostenkowski coolly picked up a book and read from an open page. Rothstein was pleased; the chairman was doing better than in any of the rehearsals.

  “The continued escape of privileged groups from taxation violates the fundamental democratic principle of fair treatment for all and undermines public confidence in the tax system.” That was Harry Truman’s message to Congress thirty-five years ago.

  Trying to tax people fairly: That’s been the historic Democratic commitment. Our roots lie with working families all over the country, like the Polish neighborhood I grew up in on the northwest side of Chicago. Most of the people in my neighborhood worked hard in breweries, steel mills, packing houses; proud families who lived on their salaries. My parents and grandparents didn’t like to pay taxes. Who does? But like most Americans they were willing to pay their fair share as the price for a free country where everyone could make their own breaks.

  Every year politicians promise to make the tax code fair and simple, but every year we seem to slip further behind. Now most of us pay taxes with bitterness and frustration. Working families file their tax forms with the nagging feeling that they’re the biggest suckers and chumps in the world. Their taxes are withheld at work, while the elite have enormous freedom to move their income from one tax shelter to another. That bitterness is about to boil over. And it’s time it did.

  But this time there’s a difference in the push for tax reform. This time, it’s a Republican president who’s bucking his party’s tradition as protectors of big business and the wealthy. His words and feelings go back to Roosevelt and Truman and Kennedy. But the commitment comes from Ronald Reagan. And that’s so important and so welcome.

  He nestled into the last words as if reclining into a La-Z-Boy chair.

  Because, if the president’s plan is everything he says it is, he’ll have a great deal of Democratic support. That’s the real difference this time. A Republican president has joined the Democrats in Congress to try to redeem this long-standing commitment to a tax system that’s simple and fair. If we work together with good faith and determination,
this time the people may win. This time I really think we can get tax reform.

  As he neared the end of the speech, Rostenkowski asked the audience to send letters of support, and he uttered the words that would become the symbol of his effort to overhaul the tax system. The lines were written by Sherman, but were withheld from the speech by other aides who thought they sounded too gimmicky for the powerful chairman of Ways and Means. At Rothstein’s insistence, however, they were added back shortly before the performance.

  “Even if you can’t spell Rostenkowski, put down what they used to call my father and grandfather—Rosty.” He pronounced it “rusty,” the way his childhood friends used to. “Just address it to R-O-S-T-Y, Washington, D.C. The post office will get it to me. Better yet, write your representative and your senator. And stand up for fairness and lower taxes.”

  When the speech was over, and the microphones were turned off, the camera crew did something Rothstein had not seen before: They broke into applause. “That was my first clue we hit it over the fence,” Rothstein says.

  The second was a telephone call from the White House. It was Don Regan to congratulate Rostenkowski on his speech and to pass along a comment from the president. “Jesus,” Regan quoted the president as saying, “he’s got me with Truman and Kennedy. Does he know I’m in the Roosevelt room watching his response?” Said Rostenkowski sometime later: “The president, I think, was pleased. At least the chairman of the Ways and Means Committee was willing to take a shot to support him.”