Tuesday, October 18, 2011

Bloomberg News: Rothbard was Right about Reagan and Taxes

It's rare to see MSM tell the facts about Ronald Reagan and taxes. The left adores increasing taxes, so they would never attack Reagan for tax hikes and the right simply adores Reagan, so they aren't going to bring it up.

Murray Rothbard was the only lone voice that saw Reagan for what he was, right from the start:

One of the few areas where Reaganomists claim success without embarrassment is taxation. Didn't the Reagan administration, after all, slash income taxes in 1981, and provide both tax cuts and "fairness" in its highly touted tax reform law of 1986? Hasn't Ronald Reagan, in the teeth of opposition, heroically held the line against all tax increases?

The answer, unfortunately, is no. In the first place, the famous "tax cut" of 1981 did not cut taxes at all. It's true that tax rates for higher-income brackets were cut; but for the average person, taxes rose, rather than declined. The reason is that, on the whole, the cut in income tax rates was more than offset by two forms of tax increase. One was "bracket creep," a term for inflation quietly but effectively raising one into higher tax brackets, so that you pay more and proportionately higher taxes even though the tax rate schedule has officially remained the same. The second source of higher taxes was Social Security taxation, which kept increasing, and which helped taxes go up overall. Not only that, but soon thereafter; when the Social Security System was generally perceived as on the brink of bankruptcy, President Reagan brought in Alan Greenspan, a leading Reaganomist and now Chairman of the Federal Reserve, to save Social Security as head of a bipartisan commission. The "saving," of course, meant still higher Social Security taxes then and forevermore.

Since the tax cut of 1981 that was not really a cut, furthermore, taxes have gone up every single year since, with the approval of the Reagan administration. But to save the president's rhetorical sensibilities, they weren't called tax increases. Instead, ingenious labels were attached to them; raising of "fees," "plugging loopholes" (and surely everyone wants loopholes plugged), "tightening IRS enforcement," and even revenue enhancements." I am sure that all good Reaganomists slept soundly at night knowing that even though government revenue was being "enhanced," the president had held the line against tax increases.

"Reagan's foreign economic policy has been the exact opposite of its proclaimed devotion to free trade and free markets." The highly ballyhooed Tax "Reform" Act of 1986 was supposed to be economically healthy as well as "fair"; supposedly "revenue neutral," it was to bring us (a) simplicity, helping the public while making the lives of tax accountants and lawyers miserable; and (b) income tax cuts, especially in the higher income brackets and in everyone's marginal tax rates (that is, income tax rates on additional money you may earn); and offset only by plugging those infamous loopholes. The reality, of course, was very different, In the first place, the administration has succeeded in making the tax laws so complicated that even the IRS admittedly doesn't understand it, and tax accountants and lawyers will be kept puzzled and happy for years to come.

Secondly, while indeed income tax rates were cut in the higher brackets, many of the loophole plugs meant huge tax increases for people in the upper as well as middle income brackets. The point of the income tax, and particularly the marginal rate cuts, was the supply-sider objective of lowering taxes to stimulate savings and investment. But a National Bureau study by Hausman and Poterba on the Tax Reform Act shows that over 40% of the nation's taxpayers suffered a marginal tax increase (or at best, the same rate as before) and, of the majority that did enjoy marginal tax cuts, only 11% got reductions of 10% or more. In short, most of the tax reductions were negligible. Not only that; the Tax Reform Act, these authors reckoned, would lower savings and investment overall because of the huge increases in taxes on business and on capital gains. Moreover savings were also hurt by the tax law's removal of tax deductibility on contributions to IRAs.

Not only were taxes increased, but business costs were greatly raised by making business expense meals only 80% deductible, which means a great expenditure of business time and energy keeping and shuffling records. And not only were taxes raised by eliminating tax shelters in real estate, but the law's claims to "fairness" were made grotesque by the retroactive nature of many of the tax increases. Thus, the abolition of tax shelter deductibility was made retroactive, imposing huge penalties after the fact. This is ex post facto legislation outlawed by the Constitution, which prohibits making actions retroactively criminal for a time period when they were perfectly legal.
Now Bloomberg News backs up Rothbard's take:
Republicans seeking their party’s 2012 presidential nomination are invoking Ronald Reagan when conveying their message of small government and low taxes.

Reagan championed tax cuts. He also agreed to raise taxes 11 times during his presidency from January 1981 to January 1989, tax historians say...

Eugene Steuerle, a senior Treasury Department official during the Reagan administration..said Reagan was intent on lowering individual tax rates and “he paid for a lot of that by allowing tax breaks to be cut or pared back.”

“We did more base broadening under Ronald Reagan than we did under any other president in the history of the tax code,” Steuerle, now a fellow at the non-partisan, Washington-based Urban Institute, said in a phone interview...

Reagan in 1983 enacted an increase in the payroll tax that funds Social Security, and he endorsed requiring higher-income recipients to pay taxes on their benefits.

He presided over the landmark Tax Reform Act of 1986, which further knocked down top individual tax rates, to 28 percent. That reduction was achieved largely by curbing and eliminating business tax breaks and by raising the rate for capital gains...

“Reagan, if anything, is more aroused by issues of tax equity than he is by rate reduction,” historian W. Elliott Brownlee, co-editor of The Reagan Presidency: Pragmatic Conservatism and Its Legacies, said in a phone interview.
Bottom line: Reagan was no tax cutter. He was a tax shifter, probably resulting in a shift of higher taxes on you.


  1. Ronald Reagan did more to harm the cause of freedom in the U.S. than any president, (republican or democrat) in the last 50 years because, like all republican presidents as of late, Reagan gave lip service to the ideas of liberty and capitalism but his actions were in complete opposition to those ideas. And when the growth of government under Reagans' eight years had the same awful affects that government expansion always has, he handed the left the ability to cite a statement by Reagan talking about small government and say "see, we tried shrinking government and deregulating under Reagan and look where it got us."

  2. The question is "Do we create a healthy and growing economy by increasing taxation?" While it is clear that Reagan pursued tax policies of questionable value, does that negate the right to private property? Does that mean that we improve the job opportunities for people to work their way out of poverty by a progressively burdensome tax policy?

    Reagan's assertions that smaller government and lower taxation were fundamental to a strong American economy are not made moot by the fact that he compromised those principles, primarily to destroy the Soviet Union. To get his military build up, he had to have the cooperation of the Congress, and had to give in on taxation.

    In the end, I can accept the Reagan conundrum; his philosophy remains for me the correct set of guidelines, particularly when placed in opposition to an intentional policy of increased taxation of wealth and government manipulation of the marketplace through excessive regulation.