Economy & Budget

Lesson for ‘fiscal cliff’ negotiators: The Reagan-O’Neill 1982 tax hike

Lesson for ‘fiscal cliff’ negotiators: The Reagan-O’Neill 1982 tax hike

As President Obama (D) and House Speaker John Boehner (R) face this month’s showdown over the so-called “fiscal cliff,” there is much nostalgia in the air for the bygone days of the early 1980s. This was when – according to the mists of lore – another president (R) and another speaker (D) found a way to reach a grand compromise designed to solve the nation’s then-growing deficit problem. Perhaps it could be a model for today?

Surely both sides today might learn some important lessons from a closer look at how Ronald Reagan and Tip O’Neill navigated the political waters of the time to reach a “balanced” deal to include both tax increases and spending cuts.

It was the summer of 1982. Like today, the president’s party controlled the Senate, while the party in opposition controlled only the House. Like today, the overriding public concern was about rising deficits and debt. At the time, Reagan’s signature economic recovery program to cut tax rates across the board (passed in 1981) was still being implemented. But unemployment was reaching well over 10 percent and deficit projections were ballooning. Something had to be done.

Reagan and the Republicans wanted to cut spending. O’Neill and the Democrats were insisting on raising taxes and especially raising tax rates. It had all the makings of the same kind of stalemate that exists in Washington today.

After weeks of wrangling, O’Neill and the Democrats would not budge on their insistence that raising taxes had to be part of the final deal. To make it more palatable for Reagan, O’Neill offered a three-to-one ratio of spending cuts to tax increases. On that basis — that the deal, on paper, was designed to result in a net shrinking of government — Reagan and enough Republicans signed on, over the strong objections of many anti-tax conservatives in the Republican ranks.

Thus was concluded the Tax Equity and Fiscal Responsibility Act (TEFRA), signed into law in September 1982. In hindsight, Reagan came to see the deal as one of the biggest domestic errors of his presidency. The tax increases went into effect immediately but as Reagan wrote in his memoirs, “later the Democrats reneged on their pledge and we never got those cuts,” so there was no shrinking in the size of government, and no taming of the deficit.

A few of the more important lessons learned:

The O’Neill-Reagan Lovefest: The deal helped perpetuate a myth that Speaker O’Neill and President Reagan had transcended the kind of rancorous personal animosity that seems to characterize today’s overly polarized atmosphere in Washington. After this bipartisan ’82 deal and a subsequent ’83 deal on Social Security reform, O’Neill had no hesitation to let forth this blast during the ’84 campaign: “The evil is in the White House at the present time. And that evil is a man who has no care or concern for the working class of America and the future generations of America, and who likes to ride a horse. He’s cold. He’s mean. He’s got ice water for blood.”

Reducing the Deficit: Longtime Reagan policy adviser Ed Meese, who supported the ’82 TEFRA deal at the time it was passed, wrote years later: “Judged by the results, TEFRA was not only a mistake, it was an object lesson in how not to reduce the deficit.”

Reagan and Rates: While Reagan agreed to raise taxes in the TEFRA deal, including an assortment of excise taxes, fees, and business taxes, he adamantly refused throughout his two terms in office — to raise individual income tax rates. In 1985, when the clamor to raise rates resurfaced in the fight over tax reform, Reagan famously invoked Clint Eastwood: “I have my veto pen drawn and ready for any tax increase that Congress might even think of sending up. And I have only one thing to say to the tax increasers: ‘Go ahead, make my day.’ ”

Today, Boehner will see that there is precedent for a speaker holding firm to force a president of the other party to compromise. Similarly, Obama will see evidence that the Republicans’ anti-tax-increase mantra can be broken. But hopefully both should recognize that solving the problem at hand will require not just repeating history, but learning from it.

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