NYU Tax Policy Colloquium, week 14: Monica Prasad's "The Popular Origins of Neoliberalism in the Reagan Tax Cut of 1981"

Yesterday, in our final session for the semester, Monica Prasad presented the above paper.  While published in 2012, it's a current project in that she is planning to expand it into a book.

The paper studies the enactment of the Reagan ERTA tax cut of 1981, taking advantage of recently released Reagan Library materials that cover not just the early Reagan Administration but the proposal's formation during the period of the 1980 presidential campaign.  A central thesis of the paper is that this story, when properly understood, clashes to a degree with a common narrative regarding the rise of neoliberal policies more generally.

Suppose we define neoliberalism as a set of policies that took hold in the U.S. under Reagan (although in certain ways extended by Clinton), and in the U.K. under Thatcher, that involved pro-market retrenchment, relative to New Deal through 1960s-style policies, through such measures as privatization and deregulation of business activity, free trade, fiscal austerity, lower tax rates, and changing welfare benefits to place greater emphasis on work incentives.

In the 1990s (heyday of the "Washington Consensus"), such measures were lauded as the golden key to prosperity and growth.  In the post-2008 era, they have faced criticism as sources of rising high-end inequality and economic instability.

While the question of how much truth one ultimately assigns to each of these two views is independent from that of how neoliberal policies actually gained sway politically, the more negative view perhaps encourages looking for big business's fingerprints.  But for the 1981 individual tax cuts that were ERTA's centerpiece, the paper finds that business (the Chamber of Commerce et al) was not supportive.  Indeed, business leaders were skeptical about the individual tax cuts, due to concern both about their budgetary and macroeconomic effects, and about whether their large size would lead to a scale-back of the business tax cuts in ERTA that these leaders of course loved.  (This latter concern was prescient - the offsetting tax increases that the Reagan Administration successfully backed in 1982 and 1984 did indeed come from the business side of the ledger.)

One shouldn't necessarily expect all neoliberal policies to have the same genesis.  In addition, the political forces that produce them need not be the same as those that later sustain them, once they have contributed to the economic and social transformations of the last 35 years.  But the 1981 ERTA tax cuts are well worth looking at for the own sake.  In retrospect - and largely due to subsequent events - they have become the dominant tax policy act of the last fifty years.

The other candidate for this title is the Tax Reform Act of 1986.  But looking at modern tax politics, I would say that the dominant meme - although perhaps its day is finally close to passing - is that of the 1981 Act, as modified to incorporate the 1986 Act.  But this involves its having an accepted meaning that it didn't initially have, by reason in particular of the presidential elections in 1984 (Mondale advocates tax increase, loses in a landslide) and 1992 (Bush I backs off his "read my lips, no new taxes" pledge, and loses, supposedly for this reason, although actually 95% for other reasons).

So where are we now with the 1981 Act?  Initial point: at a minimum, it was not insane.  For example, marginal rates were quite high then (and if they should be  that high again, it's for different reasons - the rise of high-end inequality since that time).  And when revenue losses exceeded expectations - not just due to the local inapplicability of the Laffer Curve, but to the unexpectedly rapid decline in inflation - the Reagan Administration, being run by sane adults quite unlike any known Republicans in the leadership ranks since 1994, promptly got behind tax increases in 1982, 1983 (for Social Security), and 1984.

But once it was ratified as Saint Reagan on the Holy Mount, and once the actual Reagan Administration (with its support for multiple offsetting tax increases) was forgotten, it became this thing - this meme - that grotesquely distorts modern tax policy and needs to be buried forthwith with a stake through its heart.  We have a long-term fiscal gap and rising high-end inequality - so let's not continually try to repeat this Ur-moment with zero regard for the actual surrounding circumstances.

Its perverse and brain-dead grip on policymaking, especially on the Republican side (but with the Democrats generally having little to say against it) brings to mind a reverse Jimmy Stewart from Vertigo.  He has this searing memory that he can't put behind him, so he wants to relive it.  For policymakers, Saint Reagan on the Mount (1981 with a tincture of 1986) is apparently so thrilling a memory - as misremembered - that they, too, are doomed to just keep on trying to relive it.  The ultimate consequences may be as dire for the United States as they were for the Jimmy Stewart character in Vertigo - if, for example, Trump's gynormous (synonym for "yuuge") proposed tax cuts end up being enacted.

I call the dominant meme 1981, with just a tincture of 1986, because the main feature is reducing the rates, especially at the high end, and losing lots of revenue.  But the tincture of 1986 manifests via claims or gestures towards offsetting base-broadening.  In 2012, for example, Romney falsely claimed that he could make his tax cuts revenue-neutral and distribution-neutral through unspecified magic-asterisk offsets. And it's generally common practice these days for Republican presidential candidates to include some base-broadening, even if they fall far short of claiming revenue neutrality so that they can avoid being accused (as Romney was) of planning to raise taxes for the bottom 99%.

But here's one hopeful development from the 2016 presidential campaign (if that doesn't sound too oxymoronic).  It's true that all 17 Republican candidates proposed gigantic tax cuts.  And it's also true that the apparent winner was the one who proposed the largest tax cuts of all.  But no one cared - least of all Trump himself.  He pretty much never discussed his tax cuts on the stump.  They weren't a sales pitch in his campaign.  And the other candidates found that their tax cuts weren't an effective sales pitch, even just with the Republican primary electorate.

So maybe 1981's death grip will loosen at some point, although this depends on (a) the outcome of the election and (b) where the Republicans go next if Trump loses.

But whether or not the 1981 death grip loosens any time soon, there's been an interesting transformation as between 1981 and today.  As Prasad's article shows, among influential Republican insiders in 1981, support for the tax cuts was decidedly muted and mixed.  Jack Kemp had come forward as a policy entrepreneur, and state-level tax revolt events, such as Proposition 13, had caught Reagan (among other leading Republicans) flat-footed, yet intrigued by the political possibilities.

Reagan proposed the tax cuts that turned into ERTA partly just to keep Kemp on the sidelines, and to get his support. Then Reagan and his team stuck to it partly because political leaders pay a price if they are viewed as "flip-flopping." The other main reasons for the proposal, according to the sources Prasad finds, were (a) the public seemed to like tax cuts, so maybe it was a good way to try to win the election, and (b) frustration over 1970s stagflation created a widespread appetite for doing something, anything, differently somehow.

So the 1981 tax cuts had a measure of popular support, leading to their cautious and ginger embrace by insiders and elites.  But today it's the other way around - tax cuts are an elite / Washington insider cause, enforced on Republicans by Grover Norquist et al, and reflecting as well our political turn towards plutocracy.  It's not coming from the voters, although this is not to deny that they could potentially be sold a package of tiny tax cuts for them plus gigantic tax cuts for billionaires.  (This is the Bush 2000 model that all Republican candidates still follow, or at least pretend to follow.)

It's also not to deny that tax increases remain a hard sell.  Both President Obama and Hillary Clinton, for example, have consistently opposed them, other than for people at high income levels.  This presumably reflects their political read - and while it may be a timorous one, that's easy for me to say as I am not running for office.  (Sanders would be a test case, but I suspect the test wouldn't go well for him in the general election, or at least in a normal general election.  However, this may partly reflect his particular limitations and vulnerabilities.)

A final point about the 1981 tax cut that the article makes clear is that, politically inevitable though it may appear with hindsight today - given its having spawned multiple decades of slavish yet distorted imitation - in many ways it was the product of a set of accidents.  Even apart from the fortuity of Reagan's proposing what he did, suppose that either (a) Carter had sent one or two more helicopters into the Iranian desert, (b) Carter had prepared a snappy comeback for Reagan's famous debate line, "There you go again," or (c) Reagan hadn't been shot in March 1981.  It's conceivable that, whether for better or worse, in any of these scenarios modern tax history might look significantly different than it actually does.