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Bruce Bartlett

NRO Financial - Contributor


October 29, 2003, 8:53 a.m.
A Taxing Experience - The stars are aligning for a tax increase

In a recent column, I predicted that President Bush will likely be forced into a budget deal involving
higher taxes some time after next year's election because of rising interest rates. Some of my friends
thought I was endorsing such an action. I was not. But my experience in Washington over the last 25 years
left me no choice but to come to this conclusion. The stars are aligning for a tax increase and I think being
forewarned means being forearmed.

Peter Wallison, who was White House counsel to President Reagan, responded to my analysis in the New
York Times on October 26. He pointed to Ronald Reagan's resistance to tax increases in 1982, citing
passages from Reagan's diary that were published in his autobiography, An American Life. The gist of
Wallison's article is that Ronald Reagan successfully resisted efforts by his staff and many in Congress to
raise taxes, thereby ensuring the victory of Reaganomics.
The only problem with this analysis is that it is historically inaccurate. Reagan may have resisted calls for
tax increases, but he ultimately supported them. In 1982 alone, he signed into law not one but two major
tax increases. The Tax Equity and Fiscal Responsibility Act (TEFRA) raised taxes by $37.5 billion per year
and the Highway Revenue Act raised the gasoline tax by another $3.3 billion.
According to a recent Treasury Department study, TEFRA alone raised taxes by almost 1 percent of the
gross domestic product, making it the largest peacetime tax increase in American history. An increase of
similar magnitude today would raise more than $100 billion per year.
In 1983, Reagan signed legislation raising the Social Security tax rate. This is a tax increase that lives with
us still, since it initiated automatic increases in the taxable wage base. As a consequence, those with
moderately high earnings see their payroll taxes rise every single year.
In 1984, Reagan signed another big tax increase in the Deficit Reduction Act. This raised taxes by $18
billion per year or 0.4 percent of GDP. A similar-sized tax increase today would be about $44 billion.
The Consolidated Omnibus Budget Reconciliation Act of 1985 raised taxes yet again. Even the Tax Reform
Act of 1986, which was designed to be revenue-neutral, contained a net tax increase in its first 2 years.
And the Omnibus Budget Reconciliation Act of 1987 raised taxes still more.
The year 1988 appears to be the only year of the Reagan presidency, other than the first, in which taxes
were not raised legislatively. Of course, previous tax increases remained in effect. According to a table in
the 1990 budget, the net effect of all these tax increases was to raise taxes by $164 billion in 1992, or 2.6
percent of GDP. This is equivalent to almost $300 billion in today's economy.
I say all this not to besmirch Reagan's reputation, but simply to set the record straight. The point being
that if Ronald Reagan could be corralled into signing tax increases year after year, it is not unreasonable to
think that President Bush may falter as well when push comes to shove.
I don't believe that Reagan ever initiated any of the tax increases enacted during his watch. Nor do I think
Bush will, either. But when all the political and economic elites of this country gang up on a president to
raise taxes, history shows that they always get what they want. Indeed, they were even able to get Bush's
father to raise taxes in 1990, even though his political advisers knew that it would likely lead to his defeat
in 1992, which it did.
How do the elites break down presidential resistance to tax increases? They do so by promising the moon.
Tax increases, they say, will lead to huge reductions in interest rates, which will power economic growth
and reduce unemployment. The rich only pay them anyway, which makes the president look like a
populist. And tax increases are the price that must be paid to get spending cuts.
This last point is especially laughable. In 1982, Ronald Reagan proudly announced that he was getting $3
of spending cuts for every $1 of tax increase. He later lamented that all he ever got were the taxes.
"Congress never cut spending by even one penny, " Reagan complained in 1993.
Earlier this year, Reagan's chief of staff, James A. Baker III, wrote a sort of mea culpa in the Wall Street
Journal, saying that he had underestimated the positive economic effects of tax-rate reductions. But he
didn't repudiate his efforts to get Reagan to raise taxes. It will be interesting to see how Bush reacts when
his staff tells him that taxes need to be raised.

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