DOMESTIC POLICY AND PRESIDENTIAL INFLUENCE: THE REAGAN TAX CUTS

Matt White

April 20, 2015

Liberty University PPOG 624 – Presidential Leadership

Introduction

By proposing legislation, negotiating with Congress, and influencing public opinion, the President of the United States plays a clear role in domestic policymaking. Ronald Reagan set a model example of presidential legislative leadership in his support of the successful passing of the Economic Recovery Tax Act of 1981[1] (ERTA), commonly known as the “Reagan tax cuts.”

Presidential Role in Legislation

            Constitutionally, official legislative powers reside in the legislative and not in the executive branch. However, the Constitution lists among the formal executive powers the responsibility to inform Congress of the state of the union, to recommend measures to Congress deemed necessary and expedient, as well as to call Congress into emergency session and to veto unwise bills. The system grants the executive weak influence over legislation, though with no final say. However, the modern executive branch has evolved into one with significant legislative influence, with bureaucracies such as the Office of Management and Budget to evaluate bills to and from Congress.[2]

Though the president’s officially legislative power is minimal, all modern presidents campaign with a legislative agenda. The modern American public expects presidential candidates to campaign with a legislative agenda, and among other qualities, this agenda is in part why the public elects the winning candidate. While within the framework of the constitution the president cannot unilaterally enact legislation, the modern presidency has become one in which presidential success is judged in part by the president’s success in passing this agenda.[3] However, mere recommendations can fall on deaf congressional ears without assertive presidential leadership. In this, the president’s role in the legislative process becomes that of an advocate to Congress on behalf of the national constituency, representing the nation as a whole without the local congressional interests. As the following example shows, in the successful passing of major tax cuts as central to his campaign agenda, Ronald Reagan fit this model well as a leading advocate to Congress on behalf of the public.

Reagan’s Leadership

            Regan developed his stance against high taxes while he was an actor, when the marginal rates for the top income bracket were 82-91%. As his biographer quoted Reagan, “You could only make four pictures and then you were in the top bracket…so we all quit working after four pictures and went off to the country.”[4] His views against high taxes remained consistent throughout his career inside and outside of politics.

            The theory behind the Reagan tax cuts was based on the concept of the Laffer Curve. Laffer’s model theorized that at low initial tax rates, revenue would increase with higher taxes, but after exceeding an optimal tax rate, revenue would decrease. If people can only keep pennies on the dollar, there is less incentive to increase earnings. If tax rates are lowered, people are incentivized to earn more, and in doing so, they produce more goods, stimulating the economy. In this regard, Laffer argued that lower tax rates would help curb inflation, the primary economic concern at the time. [5] The specifics of ERTA originated with Senator Jack Kemp in 1978, who was convinced of Laffer’s argument, and who developed the tax-slashing Kemp-Roth Bill.[6] Reagan was convinced of Laffer’s philosophy of supply-side economics based on his personal experience and intuition. Early in the primary campaign season, Reagan adopted the Kemp-Roth bill and placed it at the top of his platform.[7]

            Reagan displayed leadership in overcoming opposition from within the Republican Party. The conventional Republican platform was primarily focused on reducing government spending and debt reduction, even if it came at the cost of higher taxes. Reagan shared the goal of reducing debt and government spending, but he thought this would come about as a consequence of increased revenue through tax reduction, contrary to the views of many fellow Republicans. In the primary campaign, candidate George H.W. Bush called supply-side “voodoo economics.” Senator Bob Dole was a prominent opponent.[8] Despite opposition from segments of his base, Reagan secured the nomination and the presidency without wavering on his tax stance.

            Reagan understood the importance of public support in securing the successful passage of legislation. Reagan showed leadership in directly appealing to the public through a television address on July 27^th, 1981. Reagan was able to clearly and effectively communicate his policy to the nation using illustrative mathematical charts and projections. Reagan made the logical argument that due to inflation, there was “bracket creep” as earners move into higher tax brackets. Not cutting taxes would result in a tax increase. “The plain truth is, our choice is not between two plans to reduce taxes; it’s between a tax cut or a tax increase.”[9] Reagan urged the public to call their congressmen in support of his bill, and the response was overwhelmingly in favor of Reagan.[10]

            Reagan showed leadership in overcoming resistance from the opposing party, as the tax measure had to pass a Congress controlled by Democrats.[11] In addition to his public appeals, Reagan directly addressed joint sessions of Congress to urge the passing of his budget plan, once just one month after his shooting.[12] When the final tally was counted, the Economic Recovery Tax Act of 1981 passed the House 238-195, with support of 48 Democrats and all but one Republican. The vote in the Senate was 89-11, with 19 of 20 Senators that were up for reelection voting in Reagan’s favor.[13]

Results

            The ERTA resulted in tax cuts across the board, to be phased in through 1984. Individual tax rates were cut by an average of 23%, including a reduction of the top bracket from 70% to 50%.[14] Individuals kept more of their earnings, and inflation, the primary economic woe for the general public, was curbed.[15] Inflation rates dropped from 13.5% in 1980, to 3.2% in 1985 and remained below 4.1% for the remainder of Reagan’s presidency.[16] The tax cuts were a good policy because of this. However, the cuts did not result in more government revenue as predicted, though spending increased, particularly with defense.[17] The deficit increased at a rate of 4% of GNP annually to 51.8% of GNP.[18] Alternately, Canto et al. showed that though revenue was smaller than expected, this could partially be blamed on the slow phasing in of the tax cuts over three years, in comparison with Kennedy’s immediate tax cuts.[19] The ERTA was a good policy, but it should have been effective immediately and coupled with vast spending reductions in order to fully realize Reagan’s economic platform. The results of the bill were imperfect because it was incomplete. Nonetheless, the results of Reagan’s leadership in influencing the successful passage of the legislation were remarkable.

Reagan’s Leadership Constitutionally and Philosophically

            Though many of the framers did not intend the president to play such an active role in the creation of legislation,[20] Reagan acted entirely within constitutional boundaries in the passage of the ERTA. Article II section 3 instructs that the president shall recommend to Congress “Measures as he shall judge necessary and expedient.”[21] The president does not create the law, but he can push for legislation that fall in line with his political platform. Article I section 1 clearly states that “All legislative Powers herein granted shall be vested in a Congress…”[22] and not the executive branch or any other institution. Reagan did not usurp congressional legislative duties by drafting an original bill and forcing a congressional vote. Rather, Reagan adopted a tax cut bill that originated with Senator’s Kemp and Roth in 1978. 

            Reagan was quite assertive in his push for the passage of the ERTA. In their philosophies of a powerful executive, the views of the founders were not homogenous. In The Federalist 70, Hamilton argued that “Energy in the Executive is a leading character in the definition of good government.”[23] Reagan was certainly energetic in his push for the ERTA, and in this, Reagan fit with the Hamiltonian executive model. The belief that all power in government originates from the people, however, was a unifying founding principle across the federalist spectrum. Hamilton attests in The Federalist 70 that a president’s “due dependence on the people” was a key for national security. Reagan faced an uphill battle in convincing a Democrat controlled Congress, as well as significant opposition from his own party, of the merits of the Kemp-Roth tax cuts. However, to get the final votes required, Reagan was successful in appealing to the public through television, and in this, Reagan’s assertive executive stance was founded on the fundamental American principle that true power lies with the citizens. In Romans, Paul instructs that all earthly governing authority is established not by the people, but by God.[24] However, this is reconciled by the natural law philosophy shared by the founders, which dictates that all men are born with inalienable God-given rights. Earthly power originates from God, but flows through the people.

On the issue of taxation, one can only speculate that the founders would be wholly against the surrender of significant income to the federal government. After all, taxation was one visible issue that sparked the Revolution, and though without colonial consent, the taxes imposed by the British were quite small. Economic philosopher Adam Smith noted of the prosperity of the colonies that “in consequence of the moderation of their taxes, a greater proportion of this produce belongs to themselves, which they may store up and employ in putting into motion still a greater quantity of labor.”[25] In this, the Reagan tax cuts were in line with the foundational economic philosophy. Biblically, we are told to “give back to Caesar what is Caesar’s and to God what is God’s.”[26] However, at some point, Caesar must decide what to claim as his own at the expense of the people and God’s earthly funds.

Conclusion

            Despite no final legislative authority, the President of the United States has the capability of influencing congressional vote and advocating on behalf of the public, the nationwide constituency, on the passage of legislation on the president’s agenda. In the role that he played in the passage of the Economic Recovery Tax Act of 1981, Ronald Reagan was a strong advocate and the key in the successful passing of major tax cuts. Ronald Reagan was focused on the issue, adopting the platform early in his candidacy, and made it clear to Congress that this was a top priority of his. Inflation was a major national concern, and Reagan intended to immediately remedy this through tax cuts. Reagan faced strong opposition from a Congress controlled by the opposing party, as well as major skepticism from within the GOP. Ultimately, to influence majority congressional vote, Reagan convincingly appealed to the public.

References

Bureau of Labor Statistics. “Inflation Calculator.” Accessed April 14, 2015. http://www.bls.gov/data/inflation_calculator.htm.

Cannon, Lou. President Reagan: The Role of a Lifetime. 1991. Reprint, New York: Public Affairs, 2000.

Canto, Victor A., Douglas H. Joines, and Robert I. Webb. “The Revenue Effects of the Kennedy and Reagan Tax Cuts: Some Time Series Estimates.” Journal of Business & Economic Statistics 4, no. 3 (July 1986): 281-288. Accessed April 14, 2015. http://www.jstor.org/stable/1391570.

Edwards, George C. III and Stephen J. Wayne. Presidential Leadership: Politics and Policy Making. 9^th ed. Stamford: Cengage Learning, 2014.

Hall, Joshua, and Jeremy Horpedahl. “Personally Prudent but Publicly Profligate: Reagan’s Generation and Budget Deficits.” Atlantic Economic Journal 40, no. 3 (September 2012): 349-350. Accessed April 14, 2015. http://goo.gl/USjvkc.

Hamilton, Alexander, James Madison, John Jay. The Federalist. Orig. pub. 1788, 1818. Project Gutenburg compilation, 1992. Accessed April 13, 2015. http://thomas.loc.gov/home/histdox/abt_fedpapers.html

Hayward, Steven F. Greatness: Reagan, Churchill & the Making of Extraordinary Leaders. New York: Three Rivers Press, 2005.

Hayward, Steven F. The Age of Reagan: The Conservative Counterrevolution 1980-1989. New York: Three Rivers Press, 2009.

Prasad, Monica. “The Popular Origins of Neoliberalism in the Reagan Tax Cut of 1981.” The Journal of Political History 24, no. 3 (July 2012): 351-386. Accessed April 8, 2015. http://goo.gl/rhBBG3.

Smith, Adam. The Wealth of Nations: Representative Selections. Ed. Bruce Mazlish. 1776. Reprint, Mineola: Dover Publications, Inc., 2002.