Starving the Beast: Ronald Reagan and the Tax Cut Revolution
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STARVING THE BEAST Starving the Beast RONALD REAGAN AND THE TAX CUT REVOLUTION Monica Prasad Russell Sage Foundation New York The Russell Sage Foundation, one of the oldest of America’s general purpose foundations, was established in 1907 by Mrs. Margaret Olivia Sage for “the improvement of social and living conditions in the United States.” The foundation seeks to fulfill this mandate by fostering the development and dissemination of knowledge about the country’s political, social, and economic problems. While the foundation endeavors to assure the ac- curacy and objectivity of each book it publishes, the conclusions and interpretations in Russell Sage Foundation publications are those of the authors and not of the foundation, its trustees, or its staff. Publication by Russell Sage, therefore, does not imply foundation endorsement. board of trustees Claude M. Steele, Chair Larry M. Bartels Michael Jones- Correa Sara S. McLanahan Shelley E. Taylor Karen S. Cook Lawrence F. Katz Martha Minow Hirokazu Yoshikawa Sheldon Danziger David Laibson Peter R. Orszag Kathryn Edin Nicholas Lemann Mario Luis Small Library of Congress Cataloging- in- Publication Data Names: Prasad, Monica, author. Title: Starving the beast : Ronald Reagan and the tax cut revolution / Monica Prasad. Description: New York : Russell Sage Foundation, 2018. | Includes bibliographical references and index. Identifiers: LCCN 2018028875 (print) | LCCN 2018047839 (ebook) | ISBN 9781610448765 (ebook) | ISBN 9780871546920 (paperback) Subjects: LCSH: Finance, Public—United States—History. | Taxation—United States—History. | Income tax—United States—History. | Corporations—Taxation—United States—History. | Political parties— United States—History. | Reagan, Ronald. | BISAC: SOCIAL SCIENCE / Sociology / General. | POLITICAL SCIENCE / History & Theory. | POLITICAL SCIENCE / Public Policy / Economic Policy. | SOCIAL SCIENCE / Research. | POLITICAL SCIENCE / Political Process / Political Parties. Classification: LCC HJ9801 (ebook) | LCC HJ9801 .P73 2018 (print) | DDC 336.2/060973—dc23 LC record available at https://lccn.loc.gov/2018028875 Copyright © 2018 by Russell Sage Foundation. All rights reserved. Printed in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permis- sion of the publisher. Reproduction by the United States Government in whole or in part is permitted for any purpose. The paper used in this publication meets the minimum requirements of American National Standard for Infor- mation Sciences—Permanence of Paper for Printed Library Materials. ANSI Z39.48- 1992. Text design by Linda Secondari. RUSSELL SAGE FOUNDATION 112 East 64th Street, New York, New York 10065 10 9 8 7 6 5 4 3 2 1 CONTENTS LIST OF ILLUSTRATIONS vii ABOUT THE AUTHOR ix Introduction 1 Part I. Tax Cut Clientelism Chapter 1. The Tax Cut Santa Claus 19 Chapter 2. Convincing the Republicans 39 Chapter 3. Convincing the Voters 55 Chapter 4. Beasts and Dogs 70 Chapter 5. “Thank God, and Bring Down Prices” 93 Chapter 6. Tax Cut versus Tax Cut 108 Chapter 7. How Ronald Reagan Betrayed Business 122 Chapter 8. After Reagan 143 Part II. American Conservatism and American Hegemony Chapter 9. Running to Stay in Place 171 vi Contents Chapter 10. Pocketbook Politics and the Rise of Conservatism 190 Chapter 11. Democracy’s Deficits 207 Conclusion. Lessons and Limitations 225 ACKNOWLEDGMENTS 237 APPENDIX 239 ARCHIVAL SOURCES 245 NOTES 249 REFERENCES 283 INDEX 317 ILLUSTRATIONS Figures Figure 1.1. The Purported Laffer Curve Napkin 29 Figure 5.1. Letters of Pupils in Mrs. Noble’s Third- Grade Class to President Ronald Reagan, Germantown, Ohio, February 1981 96 Figure 7.1. Revenue Loss from the Economic Recovery Tax Act, 1981–1986, as Projected in 1981 125 Figure 8.1. Revenue Effects of Major Tax Bills: Percentage Change in Federal Receipts 145 Figure 8.2. State- Level Republican Success, 1937–2011 151 Figure 8.3. Average Federal Tax Rates (Income, Payroll, Corporate, Excise), by Quintile, 1979–2013 162 Figure 8.4. Public Opinion on Which Party Will Keep the Country Prosperous, 1951–2017 165 Figure 9.1. Investment as Share of GDP in the United States and Twenty- Two OECD Countries, 1950–2014 175 Figure 9.2. Capital Gains Taxes on Individuals in the United States and Nineteen OECD Countries as a Percentage of GDP, 1965–2016 185 Figure 9.3. Applied Tariff Rates (Simple Mean), All Products, Percent, in United States and in European Union, 1988–2016 186 viii Illustrations Figure 10.1. Household Consumption as Share of GDP in United States and Twenty- Two OECD Countries, 1950–2014 192 Figure 10.2. Total Gross Savings as Percentage of GDP in Nine Countries, 1870–1987 193 Figure 10.3. Income, Profit, and Capital Gains Tax as Percent Total Tax Revenue in the United States and Twenty- Two OECD Countries, 1965–2016 200 Figure 10.4. Evolution of Tax Structure under the Great Inflation, OECD, 1965–1982 202 Figure 10.5. Predicting Tax Dissatisfaction among Americans, 1956–2017 203 Tables Table 4.1. Racism and White Respondents’ Attitudes toward Tax Cuts, 1980 80 Table 4.2. Tax Cuts and the Presidential Vote of 1980 86 Table 4.3. Tax Cuts and Race of Respondents, 1980 88 Table 4.4. Tax Cuts and Labor Union Membership of Respondents, 1980 90 Table 9.1. Statutory, Effective Average, and Effective Marginal Corporate Tax Rates, G20 Countries, 2012 180 Table 9.2. Were Free Market Policies “Running to Stay in Place”? 182 Table A.1. Effect of Inflation on Tax Structure, as Measured by Role Played by Each Tax in Total Tax Revenue 242 Table A.2. Effect of Inflation on Tax Structure, as Measured by Tax as Proportion of GDP 243 ABOUT THE AUTHOR monica prasad is professor of sociology and faculty fellow in the Institute for Policy Research at Northwestern University. Introduction once you start to think about it, everything seems to come down to taxes. I began this project wondering why the United States has so much more poverty than other similarly wealthy countries.1 Why is there such a concern to cut taxes in America—even though total taxes here are already lower than in almost any other developed country—instead of using gov- ernment revenue to bring poverty down?2 But taxes and tax cuts affect more than poverty. Climate change? Experts agree that a carbon tax would be the best, least economically disruptive method to address climate change, but it’s impossible to say the t-word in American politics today. Economic growth? Long- term growth requires spending on education, research and development, and infrastructure. But all of that depends on tax money. Inequality? Thomas Piketty, the economist who has done so much to put inequality back on the public agenda, comes back again and again to tax reductions as the reason for rising inequality in the United States and tax increases as a possible solution.3 Automation? The difference between a utopian future in which machines do all the work and a dystopian future in which machines do all the work is a well-functioning tax system. The lead poisoning of Flint, Michigan? Partly about the eco- nomic collapse of Detroit, but also partly about the state’s refusal to raise taxes.4 Black Lives Matter? Two of the central cases that inspired that movement, the deaths of Sandra Bland and Michael Brown, are tax stories. 2 Starving the Beast Because the states of Texas and Missouri lowered their taxes, their police departments began raising revenue by aggressively pursuing minor infrac- tions, like changing lanes without signaling (in Bland’s case) and walking in the middle of the street (in Brown’s). Doing so multiplies the number of altercations that police get into with citizens, and some of these are bound to go wrong. Underlying the direct racism of the police is a form of struc- tural racism and classism that often goes unnoticed: working-class members of society, including working- class police officers, have borne the brunt of our unwillingness to support a sufficient tax base.5 Responding to the opi- oid epidemic, implementing policies that would address the root causes of populism, maintaining public education, subsidizing child and elder care, upgrading infrastructure—all of it comes back to taxes. Some of these problems would have occurred even without the con- straints imposed by tax cuts. For example, an ideologically inclined Con- gress might not agree to an infrastructure program even if we had the money to spend on it. But no one wants children to suffer from lead poisoning, or innocent prisoners to languish in jails for lack of legal representation.6 Even most libertarians agree that the state should fund courts and police— indeed, libertarians were horrified when a wealthy white man was killed by police who concocted a story about marijuana possession so that they could claim his property.7 The tax cut program has gone off the rails and is caus- ing real damage to the capacity of the American state to provide the frame- work, the rules, the roads and the water pipes that allow an economy to function. Every few years we have another round of budget brinkmanship in Washington, and many observers wonder how much longer this can go on without damaging the country’s reputation as a safe place to invest. Why are tax cuts always on the agenda, whether the economy is doing well or doing poorly, whether the budget is in surplus or deficit, whatever the actual needs of the moment, and despite the findings of economists that tax cuts are not a reliable recipe for economic growth? This book is the story of how it all began. It traces the history of the tax cut that started the tax cut fervor in 1981—the “Laffer curve” tax cut, the “supply- side” tax cut, the “trickle- down economics” tax cut that has gone down in so much fame and infamy.