Contributed by Chriss Street. Specialist in corporate reorganizations and turnarounds, former Chairman of two NYSE listed companies. His latest book, The Third Way, describes how to achieve management excellence and financial reward by moving organizations from Conflict and Confrontation to Leadership and Cooperation. He lives in Newport Beach, CA.
Ronald Reagan understood that Congress is in the business of growing the size of government. Raising taxes to supposedly cut government deficits is the scam that politicians use to increase their ability to borrow more money to spend. As President Reagan famously said: “The problem is not that people are taxed too little, the problem is that government spends too much.” Reagan as a true conservative would have supported “starving the beast” by passing the “fiscal cliff deal” that the liberals will forever lament as the largest “permanent” tax cut ever passed in American history.
Reagan rode to victory in his 1980 Presidential campaign on the back of the 1978 California voter-approved Proposition 13. The initiative permanently cut the state’s property tax rate and required a two-thirds majority of both houses of the state’s legislature to pass for any future tax increase. The popular sentiment that drove Proposition 13 was that older Californians should not be priced out of their homes through higher taxes. The proposition’s popularity quickly became the “third rail” of California politics, an “untouchable subject” for politicians to try to rescind.
Milton Friedman served as Reagan’s key economic advisor during his Presidential campaign and for the next eight years in the Reagan Administration. Friedman understood that due to the politics of the budgetary process, any attempt to cut a particular program will provoke intense opposition from a minority and only indifference from the majority. Friedman thought it was unreasonable to expect politicians to be willing pay the high political costs involved in cutting spending. He argued that only after permanent tax cuts, like Proposition 13, will politicians have no alternative but to cut spending. He reasoned that a cut in taxes, even without accompanying spending cuts, should not be a matter of long-term concern for conservatives:
"There is an important point that needs to be stressed to those who regard themselves as ﬁscal conservatives. By concentrating on the wrong thing, the deﬁcit, instead of the right thing, total government spending, ﬁscal conservatives have been the unwitting handmaidens of the big spenders. The typical historical process is that the spenders put through laws which increase government spending. A deﬁcit emerges. The ﬁscal conservatives scratch their heads and say, “My God, that’s terrible; we have got to do something about that deﬁcit.” So they cooperate with the big spenders in getting taxes imposed. As soon as the new taxes are imposed and passed, the big spenders are off again, and there is another burst in government spending and another deﬁcit."
True fiscal conservatives should have been viscerally afraid of “falling off the fiscal cliff,” because expiration of the 2001 and 2003 Bush Tax Cuts would have essentially allowed liberals to bring back President Richard Nixon’s monstrous Tax Reform Act of 1969. After President Lyndon Baines Johnson launched his 1965 War on Poverty spending lollapalooza, the Federal debt rose 14% over the next five years. Appalled by the growing national debt, conservatives passed the largest tax increase since World War II. Besides raising tax rates dramatically, the Act created the Alternative Minimum Tax (AMT), which permanently eliminated tax exemptions and deductions as income rose. But rather than curtailing the debt, liberals leveraged the larger tax base over the next ten years to increase spending by 95% and the national debt by 127%.
When Reagan entered office, interest rates were at 20%, unemployment was headed to almost 11% and effective tax rates were headed higher as the AMT wiped out middle-class tax payers’ mortgage deduction and child exemptions as their wages rose due to inflation. When Reagan fought for his huge income tax cut, he was opposed by liberals and many conservative deficit hawks. But when he ran for reelection in 1984, the economy had added 5.7 million jobs and the new prosperity was actually shrinking deficits by generating more private sector profits and wages.
The “fiscal cliff deal” makes permanent $350 billion per year, or 82%, of the Bush tax cuts. More importantly for the future, Nixon’s AMT and other tax rates also now permanently indexed against any rise in inflation. There is a $60 billion increase on the top 1% highest earning taxpayers, but it is the other 99% of taxpayers who are going to be hammered with $165 billion of new payroll and Affordable Care Act (ACA) taxes that will be sucked out of their paychecks each week.
President Obama claimed in his weekly radio address that the “fiscal cliff deal” reduced the deficit by $737 billion over the next ten years; but in November he had demanded $1.6 trillion of tax increase and refused the Republicans’ initial offer of $800 billion.
Ronald Reagan was known as the “Great Communicator“, but his real nickname should have been the “Great Negotiator”. Whether it was movie moguls in Hollywood, liberals in Congress or communists in the Soviet Union; Ronald Reagan negotiated spectacularly favorable permanent deals. Reagan would have backed Boehner’s and McConnell’s effort to starve the beast, because he appreciated that passage of permanent tax cuts means that Congress have no alternative but to cut spending.
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