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Showdown at Gucci Gulch, by Jeffrey H. Birnbaum and Alan S. Murray

The Tax Reformers

Showdown At Gucci Gulch: Lawmakers, Lobbyists, and the Unlikely Triumph of Tax Reform.
by Jeffrey H. Birnbaum and Alan S. Murray.
Random House. 309 pp.$18.95.

Showdown at Gucci Gulch is an account of the passage of the Tax Reform Act of 1986, told by two young reporters in the Washington bureau of the Wall Street Journal who covered the story for nearly three years as it was unfolding. The book thus belongs to the genre of the bedtime story for Washingtonians—although, given the role Washington plays in our lives, it is important reading for normal Americans as well.

True to their Washington focus, Birnbaum and Murray begin their story of tax reform with its first legislative incarnation—the Fair Tax Act of 1982, sponsored by two liberal Democrats, Senator Bill Bradley and Representative Richard Gephardt. The theory behind this proposal was simple. When there are many deductions and other special tax breaks, the tax base effectively dwindles; thus, in order to raise sufficient revenue, the rates must be set high. If, on the other hand, the number of deductions is diminished, the base expands and rates can be lowered correspondingly. Now, the Reagan administration had cut the top rate for individuals from 70 to 50 percent. The Bradley-Gephardt bill, after scaling back such deductions as depreciation, capital gains, and mortgage interest, cut the top rate to 30 percent. (Gephardt, on Birnbaum and Murray’s showing, turned out to be only a “fair-weather friend” of his own initiative; when the trade deficit became an issue, he threw his energy into pushing for protectionism. Bradley, by contrast, was a good soldier for four long years.)

This activity among liberal Democrats drew a response from conservative Republicans. In the summer of 1983, the leading lights of the supply-side school of political economy held a meeting in Congressman Jack Kemp’s backyard. Irving Kristol suggested that the supply-siders simply range themselves behind the Bradley-Gephardt idea. Lewis Lehrman, who had just run a spirited but unsuccessful race against Mario Cuomo for the governorship of New York, insisted that for political reasons the supply-siders needed their own proposal. Lehrman prevailed, and in the spring of 1984, Kemp and Senator Robert Kasten co-sponsored a bill of their own.

Beginning in 1984, and continuing through the spring of 1985, the Treasury Department, at the prompting first of Donald Regan, then of James Baker, produced two more tax-reform plans. Regan’s, known as “Treasury I,” was “an academician’s tax system, elegant and clean,” in which deductions fell like bowling pins. (“We’ve already stuck it to the blind, elderly, and crippled,” one Treasury planner joked when tax-free allowances for ministers’ housing came up for discussion, “we might as well get the preachers too.”) When Baker took over the department at the start of Reagan’s second term, he made the Treasury plan, now known as the President’s, politically more acceptable by restoring many of the abandoned deductions.

The Republicans had acted out of fear that the Democrats might steal the issue. But now Dan Rostenkowski, the Democratic chairman of the House Ways and Means Committee, felt compelled to show that House Democrats were as reform-minded as the Reagan administration, and a House bill was finished in December 1985. The Senate, in turn, had to keep pace with its rivals in the House. The Finance Committee, chaired by Robert Packwood, constructed its own version of a reform plan, and passed it unanimously in May 1986. The House and Senate ironed out their differences over the summer, and the Tax Reform Act of 1986—with a top individual rate of 28 percent—became law in October.

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Birnbaum and Murray emphasize that of all the key players in this process, only Bradley and the supply-siders had a genuine intellectual interest in the issue. Regan, they write, “had no firm economic or political philosophy, outside of a businessman’s basic conservatism. He was not introspective, not given to theorizing, and never worried much about the consistency of his positions.” Baker “was a master at dealing with people and at orchestrating compromises. But he had little time for, or interest in, complex issues of government policy.” Rostenkowski was a Chicago machine politician—in his pocket he still carried Richard Daley’s money clip, given him by the mayor’s widow—who spoke in mangled clichés. Packwood was an eccentric liberal Republican best known for his support of Israel and of abortion; where taxes were concerned, he was a defender of the status quo. (“I sort of like the tax code the way it is,” he commented after the unveiling of Treasury I.)

These practical pols, Birnbaum and Murray argue, were simply swept along by an idea whose time had come. Tax reform had always failed in the past because the beneficiaries of the old system were strongly motivated to preserve it—the “Gucci Gulch” of the title refers to the gauntlet of well-shod lobbyists which forms in the halls whenever a congressional tax committee meets. But popular disgust with the system’s inequities had reached a critical stage. Thus, politicians “may not have wanted reform, but they were not about to be seen standing in its way either.”

As for why the public became fed up when it did, this is not exactly clear, but Birnbaum and Murray give credit to Ronald Reagan. “The President seldom took an active role in the two-year tax debate,” but “without his backing, tax reform could never have happened. . . . When he put his full weight and power behind an idea that tapped such a fundamental frustration of the American people, others in Washington could hardly ignore it.”

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What is missing from this account? Plenty, when one stops to think about it. Washington likes to see itself, if not at the center of national life, then certainly at the center of political life. But neither perception is true, and the Washington-only focus of this book makes the authors’ story politically incomprehensible. Ronald Reagan’s support for tax reform is plucked out of the context of his career, while his career is plucked out of the context of the tax revolt of the 1970′s.

Reagan’s last major act as Governor of California was a fight for Proposition 1, a tax-limitation amendment to the state constitution. Its failure made inevitable the far more draconian Proposition 13 of 1978, which sparked a wave of successful state tax-cutting referendums across the country, even in liberal Massachusetts. (Birnbaum and Murray mention Proposition 13 once, in their epilogue.) At the same time, the supply-siders were making the case for federal tax-rate cuts. Bradley’s opponent in his first run for the Senate was Jeffrey Bell, an early supply-side true believer. Birnbaum and Murray note the fact, but deny that Bell’s arguments had any effect on his opponent; Bradley, they claim, was already thinking of a broad-based, low-rate tax. If so, however, he kept it to himself.

Only by ignoring this crescendo of anti-tax activity can the authors preserve a second Washington assumption: that tax reform was a trans-ideological issue, a happy fusion of opposites. Naderite groups like Citizens for Tax Justice, Birnbaum and Murray note, had been harping on corporate tax breaks for years. But why, then, had their efforts been so unsuccessful until the right-wing tax revolt came along? Birnbaum and Murray quote, without fully understanding, a warning that Republican pollster Richard Wirthlin gave Baker early in 1984: “The public would be skeptical of any effort to ‘reform’ the tax system and would probably view it as a tax increase in disguise.” The public would have been right. Liberals are interested in spreading out the tax burden more evenly, but they are more interested in funding the programs they endorse. The average voter knows this. A tax-reform crusade composed of liberals would have gotten as far as Walter Mon-dale.

Birnbaum and Murray saddle themselves with a final Washington assumption: that tax reform has to be “revenue neutral.” Lawmakers could juggle rates and deductions as much as they liked, but the amount of money they would collect had to be the same as whatever had been raised under the old system. All the competing proposals and plans, except Kemp-Kasten, sought to reach this goal. But was it even possible? If a nation’s economic activity is a static quantity, then the revenues it generates can probably be rearranged as easily as building blocks. But if it is an ever-changing flow of effort and energy, how can such rigid calculations be made?

In practice, principles like “revenue neutrality” put politicians at the mercy of economic forecasters—with often comic results. At several points in this story, the major actors are seen sweating and straining to come up with some workable scheme, only to be told at the last minute that, due to new projections, or simple error, they are still several billion dollars short. The only one ever to lose his temper was Packwood, who, after one $17-billion surprise, criticized his forecasters on television. Birnbaum and Murray scold this loss of temper as “cruel and mindless.” I sympathize with Packwood. But even he, after his outburst, obediently returned to his labors. Thus do economists make cowards of us all.

If Birnbaum and Murray had looked around some of their assumptions, their book might have lost some of its single-minded concentration and energy, but it would have been richer for the effort.

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