Monica Prasad (Northwestern) presents Anti-Tax America: The Origins of Our National Obsession with Tax Cuts, 24 J. Pol'y Hist. 351 (2012), at Georgetown today as part of its Tax Law and Public Finance Workshop Series hosted by Lilian Faulhaber and Itai Grinberg:
The debt when Reagan entered office was just over $900 billion, not historically high in constant dollars or as a percent of GDP, but by the time Reagan left office it had almost tripled in nominal terms, and in percent of GDP it had gone from 33.4 percent to 51.9 percent. At the end of his term, the debt stood at $2.6 trillion, with a substantial portion of it contributed by Reagan's own policies: a mountain over 160 miles high in loose or tight bricks.
The irony is that the policy that accelerated the growth of that debt was the very policy Reagan was promoting in that first address, the Economic Recovery Tax Act of 1981 (ERTA). This tax cut remains the largest tax cut in American history. Of course, spending increases were also necessary to the creation of the new mountain of debt, but spending has increased many times over the course of the century. What was historically new was the policy of not raising taxes to match those spending increases.
Scholars disagree over the importance of the debt to the economy, but even more important for contemporary American politics, this tax cut turned out to be only the beginning of a decades-long push for tax cuts by Republican politicians that continues to today. This first tax cut taught Republicans that tax cuts could be popular—something that was not clear at the time, because for decades opinion polls had shown strong and consistent opposition to deficits. In demonstrating the electoral appeal of tax cuts even at the cost of deficits, and in eventually showing that deficits could be financed by foreign capital, the ERTA transformed the Republican Party from a party of fiscal rectitude into a party whose main domestic policy goal is cuts in taxes. This first tax cut remains a touchstone of both left and right, and many scholars see in it the rise of the era of the market in which we currently live. ...
Given its historical importance, the ERTA has not lacked for commentary, and as with a literary classic or a religious text, several rival schools of interpretation have arisen seeking to explain it. Most of this commentary has been based on media accounts of the events, which are themselves based on interviews with the key actors. Recently, the Ronald Reagan Presidential Library released documents pertaining to this time, allowing a fresh evaluation of these rival interpretations. Because Reagan arrived in office with a fully worked-out policy agenda in place, it is his prepresidential records that are most useful for a picture of the origins of the policy. 9 Th is new material affirms the arguments that some scholars, such as Elliot Brownlee and Eugene Steuerle, make about the importance of rising popular opposition to taxes caused by rising inflation. But this new material contradicts arguments that other scholars, particularly Kimberly Phillips-Fein and David Harvey, make about the importance of business interests to the origins of neoliberalism.
While intervening in this debate, I also bring to light several elements of the events that have been forgotten: most important, that even aft er the 1978 property tax revolts the course of the tax-cut proposals was uncertain in the Republican Party, partly because of the opposition of business to large tax cuts for individuals; and that the cuts stayed on the agenda, and eventually became policy, because in them Republicans found a solution that they could off er to the major problem of the time, stagflation. Reducing the size of government was certainly a goal, but tax cuts arrived on the agenda because of their popularity, and they persisted on the agenda despite business opposition because the Republican Party had settled on tax cuts as its main means of generating growth and fighting inflation, the most popular issues of the time. Th e origins of neoliberalism are not to be found in the disproportionate influence of business interests, but in the high unemployment of the 1970s and in how inflation interacted with a progressive tax structure to make tax cuts a winning political issue. Th e true story of the tax cuts shows a groping attempt by Republicans to respond to public opinion during a time of economic crisis—an attempt that is halting and tenuous, continuously frustrated by members of the Republicans’ own coalition, including business, and buffeted by quickly changing realities, but that nevertheless seemed by many Republicans to be their best bet at getting into power.