Reagan’s Tax Increases Have Democrats Recalling Republican Hero

Democrats are claiming an unlikely ally in this year’s fight over the debt limit: Ronald Reagan.

Reagan, renowned by Republicans as a tax-cutter, also increased revenue about a dozen times when confronted with surging deficits. The Treasury Department has estimated those measures would be the equivalent of $300 billion annually today -- more than what many Democrats are now seeking as part of a deal to raise the U.S. debt ceiling.

That often-forgotten history has some lawmakers trading places, with Democrats hailing the former Republican president as an example for today’s budget negotiators.

“He’s a guy who was willing to compromise,” said Representative Chris Van Hollen, the top Democrat on the House Budget Committee. “He was a practical conservative” who “recognized that it’s unrealistic to get 100 percent of your demands.”

Republican opposition to tax increases has emerged as one of the main obstacles to an agreement on a deficit-reduction package that would clear the way to raise the $14.3 trillion debt limit by Aug. 2, when the Treasury Department says the government will be unable to meet its obligations.

The tax issue has stymied lawmakers all year, helping to scuttle Vice President Joe Biden’s efforts to find a solution to the debt dispute as well as an effort by President Barack Obama and House Speaker John Boehner to strike a “grand bargain.” It’s still frustrating lawmakers even as Standard & Poor’s and Moody’s Investors Service warn they may cut the government’s credit rating if lawmakers don’t act.

Photographer: Andrew Harrer/Bloomberg

“He’s a guy who was willing to compromise,” said Representative Chris Van Hollen, the top Democrat on the House Budget Committee. Close

“He’s a guy who was willing to compromise,” said Representative Chris Van Hollen, the... Read More

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Photographer: Andrew Harrer/Bloomberg

“He’s a guy who was willing to compromise,” said Representative Chris Van Hollen, the top Democrat on the House Budget Committee.

Senate Democrats yesterday balked at a potential deal between Obama and Boehner over the issue of raising taxes.

Changing Course

Reagan is remembered for his tax cuts, owing to his signature Economic Recovery Tax Act of 1981, which slashed the top marginal rate to 50 percent from 70 percent. And even with the later increases, he was a net tax-cutter: He didn’t rescind the marginal cuts, and lowered the rates again in a 1986 overhaul that traded rate reductions for the elimination of individual tax preferences. By the end of his administration, the top marginal rate had been dropped to 28 percent.

Still, his administration reversed course after the first tax-cut bill became law, when budget projections showed the deficit poised to reach levels not seen since the World War II era.

“We were scared out of our wits because that seemed to be unimaginable,” David Stockman, Reagan’s first budget director, said in an interview.

Corporate Breaks

Reagan’s biggest deficit came in 1983 when it reached 6 percent of the gross domestic product -- about two-thirds the size of the shortfalls the government has run in each of the past three years.

The Tax Equity and Fiscal Responsibility Act of 1982, then criticized as the largest tax increase in history, scaled back corporate tax breaks, increased unemployment-insurance levies, and raised excise taxes on cigarettes, among other changes.

“The goal is simple and just: to see to it that everyone pays his fair share,” Reagan said in August 1982. He predicted the tax increase would help the economy because it would reduce the deficit, which he said would lead to lower interest rates.

Reagan later signed the Highway Revenue Act of 1982, which temporarily doubled the gasoline tax. Both measures came as millions struggled with the 1981-1982 recession, when the jobless rate was stuck at about 10 percent for almost a year.

Undercutting the Argument

“That put the lie to the current arguments of Republicans that the economy is too weak to bear a tax increase” because “the next year 3.5 million jobs were created,” said Stockman, who says tax increases are now needed to help reduce the deficit. “When the Republicans rhetorically say now, ‘Who would raise taxes in a recession?’ the answer is Ronald Reagan.”

The following year came the Social Security Amendments of 1983, which was designed to head off the program’s insolvency. It raised the Social Security payroll tax and, for the first time, began taxing the benefit checks of wealthier seniors. The Deficit Reduction Act of 1984 raised the estate tax, cut more business tax breaks and boosted taxes on distilled spirits, among other items.

A review of Reagan’s budget requests to Congress shows his administration expected those and a handful of smaller levies to raise about $1 trillion between 1983 and 1992. A 2006 Treasury Department report shows that Reagan’s tax increases now would bring in about $300 billion a year, if the increases were measured against today’s economy.

Those higher taxes replaced about half the revenue lost to the Treasury with the 1981 cuts, according to Reagan’s budget documents.

‘A Mistake’

“I would hope that today’s Republican Party can learn from President Reagan and work with Democrats,” said Representative Steny Hoyer of Maryland, the No. 2 House Democrat.

Grover Norquist, head of the anti-tax Americans for Tax Reform, blamed Congress for the Reagan-era tax increases, saying “every one of those was a mistake.” Reagan was “pushed” into them by the Democrats who then controlled the House and the “liberal” Republicans who ran the Senate. “Reagan didn’t get to win every fight,” said Norquist.

He said Reagan helped him in 1986 write his group’s anti- tax pledge, which has now been endorsed by most Republican lawmakers.

“This is a different Republican Party you’re talking about,” he said. “The modern Republican Party does not raise taxes.”

Focused on Today

Representative Richard Nugent, a freshman Republican from Florida, called Reagan’s tax increases “ancient history,” saying, “I live in the present.”

“I’m more focused on what’s happening today,” said Senator Marco Rubio, another Florida Republican. “I’ve yet to meet a job creator who’s told me they’re looking for higher taxes.”

Senator Jon Kyl, the chamber’s second-ranking Republican, said, “Reagan was in a situation where he had to compromise in order to get some things done” and “presidents sign lots of things that they’re not for.”

Van Hollen, of Maryland, said if Reagan were around today, he’d have to fight to win his party’s nomination.

“In today’s environment, Ronald Reagan would be primary-ed by a Tea Party candidate.”

To contact the reporter on this story: Brian Faler in Washington at bfaler@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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