"You know, Paul, Reagan proved deficits don't matter," Vice President Dick Cheney famously told George W. Bush's first Treasury Secretary, Paul O'Neill. Cheney, who rarely allows facts to get in the way of a good ideology, was retailing a myth. Ronald Reagan is remembered for the massive tax cuts passed during his first year in office. But since deficits do matter and since Reagan's so-called supply-side cuts blasted an enormous hole in the budget the President had to come back in 1982 with the largest peacetime tax increase in American history: the Tax Equity and Fiscal Responsibility Act, which raised $37.5 billion, or 1% of gross domestic product (GDP), per year. He also signed a $3.3 billion gasoline-tax increase. The next year, he signed another whopping tax hike, designed to save Social Security.
A second prevailing myth of the Reagan Administration, quietly peddled by budget director David Stockman, went like this: O.K., supply-side economics is a phony, but we can use the growth of budget deficits as an argument for limiting the growth of government. That didn't work out so well either. The public demanded its entitlement programs deficits be damned and a strong defense, and loved having politicians who secured funding for a Yo-Yo Hall of Fame in their district. Deficits grew until the combined actions of George H.W. Bush and Bill Clinton caused the deficits to stop growing. How, you might ask, did they manage that? They raised taxes. Somehow the economy not only survived, it prospered.
But even successful tax increases are never remembered fondly. Cheney's mythology has prevailed. The rosy fantasy of Reagan's tax-cutting has been coupled with the dread toll of Democrats from Walter Mondale to John Kerry who got clobbered for hinting that they might want to, uh, raise revenues. An antitax fetishism has overwhelmed both parties. Along the way, despite the melodramatic rhetoric, the actual rate of federal taxation has wobbled a bit, from a high of 20.9% of GDP in 2000 to a recession-driven low of 17.7% last year, but averages out to just under 19% from 1980 to today. If the not-so-onerous Clinton tax rates are restored when the economy recovers, the federal Treasury would be enriched by nearly $300 billion per year.
Why does this matter now? Because we are in the midst of a debate over how to fund a health-care-reform plan and the idea of raising taxes, even just a little bit, to pay for it is causing heart failure among our legislators. They are looking for somewhere between $30 billion and $35 billion per year. If the bill isn't properly funded if working-class families don't receive large enough tax credits to help pay for their newly mandated health insurance, if they're forced to pay thousands of dollars in new out-of-pocket expenses Republicans will use "socialized" health care as a bludgeon against Democrats in 2010 and 2012. There is much talk in Washington these days about the debacle of Medicare catastrophic care, which charged senior citizens for additional services many were already paying for. It was passed in 1988, but rescinded after a public rebellion in 1989.
The only way to create health-care reform that will survive and be popular is to write a bill that doesn't stint on funding and promises to control future costs. The best way to do that is to end the $250 billion in subsidies the Federal Government pays to employees who receive corporate health-care benefits benefits that aren't taxed. The money would be better, and more fairly, spent giving people tax credits to pay for health care, according to their income. This would have the additional benefit of controlling insurance costs, since people are more likely to shop for the best deal if they're spending their own money rather than their employer's. The idea is a nonstarter, however, because organized labor has negotiated excellent health benefits for its members over the years and doesn't want to see them curbed. The unions are opposed to the next-best idea a tax on gold-plated health-care plans, which would raise an estimated $28.7 billion per year for similar reasons. It seems likely that union lobbyists will get that tax reduced, if not eliminated, in the next month's sausagemaking. And then what? Barack Obama's fate depends on the Democratic Party's willingness to face the revenue issue squarely.
It is a national scandal that we're nowhere close to having a reasonable discussion about taxes. A Reagan-size increase probably would be unwise right now, given the shaky economy. But the conversation will become unavoidable next year, when the Bush tax cuts expire. A restoration of the Clinton rates would go a long way toward paying down the Bush deficits and the assorted Bush-Obama federal bailouts and creating some breathing space if health reform costs more than expected. One hopes that Democrats, and fiscally responsible Republicans, will locate the backbone between now and then to do the right thing.