NYT: Those Reagan Deficits

Roundup: Talking About History

David E. Rosenbaum, in the NYT (June 10, 2004):

... In his 1980 campaign, Mr. Reagan promised to reduce taxes, increase military spending and balance the budget mostly by eliminating waste, fraud and abuse in the government.

The first two promises were achieved in his first term. In 1981, Congress approved a 25 percent reduction in income taxes and an increase of at least one-third in the military budget.

But while some government programs were eliminated and nonmilitry spending was reduced modestly, those steps were much too feeble to offset the lower revenues and additional military expenses.

The federal deficit grew to $208 billion in the 1983 fiscal year, Mr. Reagan's second budget year, from $79 billion in the 1981 fiscal year, the last year the government operated under a budget prepared by President Jimmy Carter. As a percentage of the national economy, the deficit in 1983 was 6 percent, the highest ever, up from 2.6 percent in 1981.

The large deficits were antithetical to Mr. Reagan's view of himself as a fiscal conservative, and he never seemed completely reconciled to them. He signed tax increases later in his first term that repealed more than one-third of the 1981 tax cuts. But the lesson the Republicans in power today took from the Reagan experience was that they could disregard deficits. President Bush's first treasury secretary, Paul H. O'Neill, reported in his book, "The Price of Loyalty," that at a crucial budget meeting, Vice President Dick Cheney brushed off a question about the deficit by saying, "Reagan proved deficits don't matter."

Representative Jim Nussle, Republican of Iowa, the chairman of the House Budget Committee, said he did not agree that deficits were unimportant. But he said the "basic playbook" on budget and taxes was written by Mr. Reagan, and "that is the playbook I follow today."

Another lesson the current administration took from the Reagan years is that it can be politically advantageous to publish budgets with numbers that are less than fully honest.

Under Mr. Reagan, said Robert D. Reischauer, the economist who was director of the Congressional Budget Office from 1987 to 1995, the Office of Management and Budget "ceased to be viewed as an objective estimator of budget numbers." That is also the case today, Mr. Reischauer said.

The budgets prepared by David A. Stockman, Mr. Reagan's first budget director, adopted what was called a "rosy scenario" - impossibly optimistic predictions about future growth, inflation and interest rates. They also included what was called the "magic asterisk" - a gimmick that allowed for the budgeting of unspecified, and never intended, spending cuts.

Both techniques allowed the budgets that were submitted by the White House to Congress in January or February to show lower deficits than what was probable.

Mr. Bush has taken a different tack, but the result has been the same: an unrealistic budget. The budget Mr. Bush submitted in February projected a deficit of $521 billion, perhaps $100 billion higher than what economists are now estimating. As the election approaches, the administration may be able to forecast a lower deficit than was assumed in February and proclaim that the deficit is being brought under control.

The administration's budget also does not take account of the cost of the wars in Iraq and Afghanistan.

But while the Reagan budget policies have survived into the Bush administration, one of the main aspects of his tax policy went by the boards long ago.

In 1985 and 1986, Mr. Reagan pushed through Congress a complete overhaul of the federal income tax system, the most sweeping changes in the tax code and one of the most important pieces of legislation since World War II.

The underlying principle of the measure was that tax rates should be set as low as possible and the tax base made as broad as possible by eliminating deductions, credits and other tax breaks.

With the enactment of the legislation, the top tax rate was lowered to 33 percent from 70 percent when Mr. Reagan took office. And scores of tax preferences were abolished, ranging from the deduction for state sales taxes paid by individuals to the investment tax credit for manufacturers to tax shelters for investors in commercial real estate.

The bill was heralded by economists and tax policy experts across the political spectrum.

But what the academic authorities loved, the politicians quickly spurned as soon as Mr. Reagan left office....

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