Presidential Politics And Deficit Reduction:The Landscape Of Tax Policy In The 1980S And1990S

No major tax legislation enacted since 1980 has escaped the pull of the often conflicting forces of White House politics and deficit reduction. Tax legislation over the last dozen years largely has stemmed from either Presidential political considerations or efforts to cut growing federal budget shortfalls, or both. These often conflicting forces continue to guide tax policy as the Clinton Administration and congressional tax-writers engage in debate over a 1993 tax bill.I. "REAGANOMICS": SUPPLY-SIDE ECONOMICS AND TAX-CUT BIDDINGIn 1980, Ronald Reagan ran for president on the theme of reversing the federal government's traditional reliance on "demand side" economics. In times of economic. downturn, the U.S. government typically has attempted to spur economic activity by stimulating demand for goods and services through tax cuts and spending programs. The side effect of this fiscal stimulus had been too many dollars chasing too few goods, which in turn produced inflation. Ronald Reagan's economic theme was to create supply by encouraging investment.In terms of tax policy, Reagan's supply-side economics promised tax cuts both for individuals and business. Individuals under the Reagan plan would receive a 30% tax cut, phased in over three years. As a result, the Administration believed that individuals would save more money, which in turn would spur investment and lead to robust economic growth. Businesses, on the other hand, would be allowed to accelerate depreciation, reducing the depreciable lives of assets from their longer "useful lives" to shorter cost recovery periods.Overall, the Reagan plan was projected to produce a balanced federal budget in four years. At the time of Reagan's inauguration, the federal budget deficit stood at about $75 billion. By 1994, however, the deficit had swollen to about $185 billion. What went wrong?In retrospect, the culprit appears to have been political posturing in the aftermath of the Reagan election. The Republicans in 1980 gained a majority in the Senate--for the first time in years-that was anxious to exercise its new clout. Meanwhile, the Democrat-controlled House of Representatives did not wish to be on the outside looking in as politically popular tax cuts were being formulated.The Republican majority in the Senate wanted to be an active player in the initial drafting of tax legislation, although the U.S. Constitution requires all revenue-raising matters to originate in the House of Representatives.(1) Typically, the House Ways and Means Committee will hold hearings, draft a tax bill, and then send the legislation before the full House for consideration. The Senate Finance Committee--the counterpart of Ways and Means--generally begins to act on the tax bill only after it has cleared the House.Senator Bob Dole (R-KA), the new chairman of the Finance Committee, decided that he did not want to be left considering a tax bill that was the product of the Reagan Administration's negotiations with House Democrats-a tax bill simply sent to the Senate for "rubberstamp" approval. As a result, the Finance Committee began moving on tax legislation before the House could act on a bill.At the time, two different versions of a tax bill were being contemplated in the House: a tax package drafted by the Democrats on the Ways and Means Committee and an alternative put forward by a group of conservative House Democrats. The conservative House Democrats ended up working with House Republicans to try to defeat the bill that the Democratic Ways and Means Committee members sent to the House floor.In the end, a bidding war erupted over tax cuts--the heart of Reagan's domestic campaign platform-as the Republican Senate, mainstream Democrats in the House, and the conservative Democrats in the House offered competing plans. When the frenzy was over, a tax bill with a revenue cost of $750 billion over a five-year period. became law.(2)Looking back, this was more than the federal government could afford. …