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Dishonoring Reagan's Tax Legacy

Steven Pearlstein
Washington Post Business and Economy Columnist
Wednesday, June 9, 2004; 11:00 AM

Washington Post columnist Steven Pearlstein was online to talk about how Congress is failing to live up to Ronald Reagan's tax legacy by passing a slew of new corporate tax breaks that complicate the tax code and fail to promote economic growth. He writes in a column today that if Republicans really want to honor the memory of Ronald Reagan, they should toss in the trash the corporate tax legislation making its way through Congress. A transcript follows.

About Pearlstein

_____Past Columns_____
China's Confounding Contradictions (The Washington Post, Sep 15, 2004)
Choice Is Overrated (The Washington Post, Sep 10, 2004)
Getting Out Of Biotech's Second Tier (The Washington Post, Sep 8, 2004)
Column Archive

Steven Pearlstein writes about business and the economy for The Washington Post. His columns on the economy appear every Wednesday and Friday.

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Mt. Lebanon, Pa.: The death & deification of Ronald Reagan has sucked all of the oxygen out of the news space this week. On Saturday when he died, Smarty Jones had to run a long, hard race on a somber overcast day - a day already darkened by the death of Mr. All American.

Would you agree that in a nod to fair play, Smarty Jones should be allowed to walk in the funeral march for the president? Perhaps Smarty can walk alone with the boots turned backwards in his stirrups. A fitting tribute to two fine champions. What do you think?

Thanks much. HLB

Steven Pearlstein: I'm for it. But this time I hope we can make sure he doesn't get out front too fast.


Washington, D.C.: Steven,

Can you please help me understand why Americans suffer so often from amnesia? I am so sick of the wall-to-wall coverage of Ronald Reagan.

How quickly people forget about the Iran-Contra mess and his denial about having anything to do with it; his never mentioning the word AIDS in his 8 long years in office and refusing to do anything about it when it might have made a difference; the huge budget deficit during his presidency; his attack on the federal school lunch program (trying to classify ketchup as a vegetable as an example); his lack of aid to the poor; his anti-union attacks; and the list goes on.

Reagan was a man with many flaws, he was not a god. He does not deserve to have his face put on U.S. currency, on metro stops, airports or anything else. The people who are seen standing in line hour after hour with their flowers and stuffed animals are the same people that will vote for Bush in November because they either don't know or don't care that he took America to war in Iraq based on proven lies that have taken thousands of innocent lives, many of them American men and women and have destroyed thousands of lives of those left behind.

Grow up America!; Put away your stuffed animals, dry your eyes, educate yourselves and restore credibility to America. Send Bush back to Texas in November. It's your future and your country.

P.S. Steven, do you think Ashcroft should be held in contempt of Congress for not turning over the memos requested in yesterday's hearing on the abuse scandal?

Steven Pearlstein: Well, we hand a big front page story in the Post today by Eric Pianin and Tom Edsall that said just that, perhaps rebalancing the coverage a bit. But your basic complaint is not an uncommon one among liberal Americans. I'm not going to apologize for the press on this one because I agree with you in large part -- the volume of the coverage has been excessive. I do think that when somebody dies, its fair to accentuate the positive, even while noting the negative.


Alexandria, Va.: Steve: you praise the 1986 bill, but what do you think of the first big Reagan tax bill in 1981?

Steven Pearlstein: The first bill was right to try to get marginal rates down, but it had to wait five years to get the base broadening (i.e. loophole closing) that should have accompanied it, to reduce the deficit impact. I think liberals are too quick to criticize the usefulness of lowering rates and even lowering overall tax burden in the early 90s. It was one part of process by which we, as a country, rolled up our sleeves and changed the way we did business and invested again in old as well as new industries, to the point that by the end of the decade, what had been an economy that was widely written off as being a has-been emerged as the strongest in the world. It was a painful process, and yes it was unfair. But let me assure you that if we had kept on the previous course, and didn't challenge the bad part of the union movement and didn't hold the line on expanding the social safety net and didn't take steps to encourage savings and investment, it wouldn't have turned out as it did. We need to keep tweaking this model to make it fairer overall, but there is no doubt that American business became much more productive and competitive during this period, and Reagan deserves some broad credit for that.


Washington, D.C.: Steve: Bless you for your article. This Skinner-rat system of trying to train the tax payer to behave the way the prevalent social planners want them to behave is an outrageous dead weight loss to our economy. The 1986 tax code was a nice start, and to have the 1990 bill, the 1993 bill, and assorted Clinton and W measures micromanage the burden of taxes instead of simply keeping the rates low is a travesty. I could not understand why neither Bill Bradley nor Dick Gephardt had the sense in the past two campaigns not to run on tax simplification, in light of their role in the 1980s putting the matter on the national agenda. Of course, we can see where their campaigns ended up. Let's hope someone picks up the mantle.

Steven Pearlstein: The irony is that those who would use the tax code to try to micromanage the economy are no different than the Soviet commissars and their Ten Year Plans. Now it is the Republicans who want to do this, the same folks who keep saying they want government to keep its mits off the economy. Hypocrisy, I say.


Arlington, Va.: Are you giving the Gipper too much credit? After all, we had divided government in 1986. Would Reagan have endorsed a silly tax bill like the one you single out today if the GOP had been running the House of Representatives that year?

Steven Pearlstein: I think most of the people involved say he and his team were helpful when things started to get bogged down.


Silver Spring, Md.: Bravo on your column today. But if RR is to be commended for his tax policies, what about his general deregulation approach? Reagan set a deregulatory tone in Washington that may have accomplished a few good things but, overall, made government less likely to do the sorts of things government SHOULD be doing. Now the federal government seems to roll over time and again for industry whenever a regulation is the slightest bit controversial. Thoughts?

Steven Pearlstein: My thoughts are that progress tends to come in various ways. After years of regulatory expansion, it was probably a good thing to prune things back, like a bush, so it can grow again in a more healthy way. And the pruning can be a bit overdone and take out the good with the bad. But we've got a pretty good system here, and if truly valuable regulation is eliminated, it usually finds its way back before too long. The enviros and others who are always running around saying the sky is going to fall if this or that regulation is cut back overdo it. Despite the deregulation, we have cleaner air and water and safer workplaces than we used to. And we have eliminated some things with very little benefit relative to cost, which many of the interest groups never want to consider. There was also broader deregulation, like deregulation of telecom and railroads and airlines and trucking, which have been big boons to the economy, so let's not forget that as well.


Kennesaw, Ga.: Which is a truer cornerstone of Reagan's tax legacy:

- the 1981 tax bill that lowered rates and included a host of breaks for special interests (many of them pushed on the White House by Congress), or

- the 1986 tax bill that also lowered rates and eliminated a host of breaks for special interests?

My own preference, and I suspect yours, would be the 1986 Tax Reform Act, which in addition was drafted in large part by the Reagan Treasury Department. But the 1981 tax cut was popular, and Congress started backing away from the 1986 Tax Reform Act almost as soon as it was passed -- without much protest from Reagan, who never seemed as involved or interested in reforming taxes as in cutting them. So while the advocates of more corporate tax breaks may be unwise, is it really fair to claim they are being untrue to Reagan's legacy?

Steven Pearlstein: You seems to imply that Reagan can never be forgiven his other mistakes long enough to praise the things he did well. I guess I just think that is not a very wise way to think about the world.


Washington, D.C.: Your colleague Robert Samuelson today writes that it was the Fed's successful campaign against inflation in 1981-82 that fueled the 1980s growth, not the Reagan tax cuts. What do you think?

Steven Pearlstein: Many factors were involves, as I said just a minute ago. And Reagan can be credited for not fermenting political opposition to the Fed's tough policy.


D.C.: Steve,

Would you agree that one of the largest impediments to a less complicated tax code is the huge size and profitability of the tax practices of the legal and accounting industries, and their proportionate lobbying expenditures and influence in congress?

It seems to me that these many-tens-of-billions-a-year interest groups will never allow legislation that would reduce their income; such as a simplification of the tax code. Without muzzling their lobby, I don't see how we can force reform of the tax code through our legislature.

Steven Pearlstein: You might think they are crawling all over the tax committees trying to make things more complicated, but I don't think there is evidence that they are either that clever or that powerful. This is the corporations themselves that are pushing the provisions that create the complexity.


Louisville, Ky.: Don't pick on the tobacco farmers. They had their livelihood stolen by the federal government's war on smoking. If you knew anything about farming, you'd know that tobacco is mostly farmed small-scale, and it's the one cash crop that keeps the rest of a farm operation in the black. The payout you poke fun at will help farmers transition to new crops.

Steven Pearlstein: I've never understood why "small farmers" deserve direct subsidies from the government for years and years but not "small manufacturers" or "small newspapers." If tobacco farming isn't economic, our capitalist system should mean that enough people stop doing, at least until the price of tobacco rises to the point where it is economical. There's no guaranteed income transition money for steel workers or laid off call software workers whose jobs are shipped to India. What makes tobacco farmers so deserving?


Columbia, Md.: Do you find it ironic that Reagan, being against big wasteful government (despite all his defense spending) is being honored in part by giving all Federal workers another paid day off?

Steven Pearlstein: I suspect in his heart of hearts Reagan would have liked to give government workers EVERY day off.


Atlanta: You say in your article that the 1986 Tax Reform was a great achievement and then say towards the end of your article that it was one of the worst pieces of legislation. What is your stance?

Steven Pearlstein: I think either you misunderstand the last part or I misstated it. It was a great, if fleeting, achievement, the 1986 Act.


New York: Steven,

True or false?: Reagan, the alleged mighty tax cutter, cut taxes only once, but he raised taxes twice: once on corporations, once on payrolls.

True or false?: Many working families saw their net federal taxes increase during the Reagan years.

Steven Pearlstein: Indeed they did rise after the big 1981 cut. It is also true that working families saw the Social Security and Medicare system they rely on get healthier in a financial sense.


Watertown, Mass.: The Senate-passed bill only costs $2.7 billion over ten years and includes a significant number of provisions that raise revenue by closing personal and corporate loopholes. If these provisions are removed from the final bill, you may be correct in your assessment that this is the worst tax bill since 1986. However, if these provisions remain, this bill might contain more loophole-closers than any tax bill since 1986. What is your take on the revenue-raising side of the Senate and House bills?

Steven Pearlstein: It is true there are loophole closers and provisions to get tough with tax shelters, and those are mostly good. But many of the corporate provisions relating to international taxation, while billed as reforms and simplifications, are really nothing more than provisions to lower tax liabilities of favored companies and industries that don't simplify things at all -- in fact, almost surely open vast number of opportunities for games playing. Example: the tax holiday on repatriated profits only kicks in if the repatriated profits are reinvested in U.s. operations. Now I can assure you determining what that means will fill many pages or regulation and result in protracted litigation, while providing tax lawyers with lots of incentive to find ways to magically turn non-qualified investment into qualified. As for your assertion that the bills are virtually revenue neutral, this is achieved in both the House and Senate bill by "sunsetting" expensive provisions that, in fact, will never be sunset once inacted. Example: the House provision on allowing taxpayers in states without income tax to take a deduction for sales taxes. They have that in there only for two years. Put it in for 10 and you're talking another $10 billion.


Howard, Pa.: Is it true that revenue for the government went up, because of the tax cuts, but spending in the same period outpaced the income?

Steven Pearlstein: Its complicated because you have to factor out other things that may have been causing revenues to go up and down. People have tried and, because this is such a contentious issue, the debate on that still rages. But I think most objective analysis does not support the widely-held conservative view that cutting taxes actually increases revenues. Sorry.


Laurel, Md.: Wish I could find the website to link to it, but income disparity in this country has been growing since pretty much the day Reagan was inaugurated. It's not hard to see that his policies (basically making the return on investment greater than the return on labor) had something to do with it.

What role do his tax policies play in this?

Steven Pearlstein: Income inequality has been rising largely because of what has been going on in labor markets, as a result of trade and technology advances and weaker unions, among other factors. The rise in inequality of pre-tax earnings explains most of the rise in after-tax earnings. But to the degree that various tax bills have made the code less progressive, that has made a bad situation worse. Having said that, liberals are always running around complaining about the regressivity of the Reagan or the Bush tax cuts. But that's not always the case. For example, the various rate cuts and other changes to the income tax actually made the income tax a bit more progressive than it had been, albeing raising less money. It is the inheritance tax piece that is the real stinker in terms of regressivity.


Falls Church, Va.: Thanks for the chat, Steven. The media coverage of President Reagan's death seems to have evoked quite an angry reaction, typified by the first poster in this chat. Can't these people follow the lead of their recent President, Bill Clinton, and suspend their hatred of all things Republican until the man is at least in the ground. Is it too much to ask not to call those who line up to pay their respects stupid. Don't we need more civility on BOTH sides of the aisle. Even I, a Reagan supporter, think the coverage has been excessive but come on.

I found Robert Samuelson's editorial in today's Post fascinating. Do you have any thoughts on Reagan's economic legacy as it relates to controlling inflation?

Steven Pearlstein: And thanks for that comment. As for inflation, I think Sam said it all.


Steven Pearlstein: That pretty much does it for today, folks. See you next week.


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