Contemporary U.S. Tax Policy
By C. Eugene Steuerle
Urban Institute Press, 232 pp., $24

Murray Kempton (1994) once wrote: "Santayana missed the point when he said that those who forget history are condemned to repeat it. The problem rather more often comes not so much from those who forget the lessons of history as from those who misread them."

The truth of Kempton's observation does much to explain the importance and value of Eugene Steuerle's new book, Contemporary U.S. Tax Policy. Steuerle offers a thorough review of U.S. income tax history, in particular since 1980, on the view that a better understanding of the past will "increase the probability that future governmental reforms can be comprehensive enough to make the tax system significantly fairer, simpler, and more efficient" (Steuerle, 2004). His account is aimed mainly at general readers who are interested in tax policy. But experts, while they will be familiar with most of the book's history and issue summaries, will learn as well from Steuerle's efforts to correct misunderstandings of history. He criticizes, for example, the "myths" that President Clinton's 1993 tax increases were responsible for eliminating the budget deficit in the late 1990s, and that George W. Bush's tax cuts recreated large deficits in the years since 2001 (4).

In both of these cases, perhaps "myth" is a less apt term than "misplacement of emphasis." On the "Clinton budget myth," Steuerle notes the little-known fact that the 1990 tax increase under President George H.W. Bush was larger, as a percentage of GDP, than that of 1993, and that spending discipline and the economic boom of the late 1990s were central to the shift to surplus. On the "George W. Bush budget myth," blame is not so much shifted away from the President and his policies as it is broadened in focus to include the "wild legislative 'spending' spree" (4) of the last four years that has included not just newly needed defense and national security outlays, but also increased pork barrel spending and an unfunded $ 16.6 trillion Medicare prescription drug benefit. The "George W. Bush budget myth" would truly be a myth if the tax cuts had actually reduced the deficit through supply side macroeconomic effects, but no one even argues this. So "myth" is perhaps the wrong word.

Still, beyond the quibbles, Steuerle is doing a couple of fundamentally important things. One, a long-time priority of his that is vital to informed and coherent policymaking, is to encourage people to look at the budget as a whole--not just at taxes, and not just at spending. The point is not only that taxes and spending are inevitably inter-related, since under a budget constraint inflows and outlays must ultimately be equal, but also that the two are not coherent categories to begin with. Tax expenditures, for example, may be impossible to tell apart, other than formalistically, from direct spending, since the two can have identical allocative and distributional effects. This lack of a coherent distinction between "taxes" and "spending" is a point that often eludes Nobel-Prize-winning economists, such as Gary Becker in recent work that was based on blindly assuming that replacing direct spending with substantively identical tax preferences would make the government smaller even though, by definition, the actual policies in place would be unchanged (see Becker and Mulligan (1998)). And it certainly eludes Congressional Republicans who sign pledges against the enactment of net tax increases, including even those that, through base-broadening, might actually reduce the government's allocative interventions in the U.S. economy.

The book's second big contribution, getting back to Murray Kempton's (Kempton, 1994) point, is to help break down the partisan myths that people cling to, in one way or another, across the political spectrum, and that too often incline political leaders (and followers) to plant their feet in cement when compromise or adaptation is necessary. A good example pertains to the "riverboat gamble" tax cuts (as Senate Republican leader Howard Baker called them at the time) that President Reagan pushed through in 1981. Steuerle notes that both supporters and foes of these tax cuts exaggerated their size and novelty--overlooking, for example, how contemporaneous inflation affected their real value. As with the Clinton and George W. Bush budget myths (or misplacements of emphasis), a big part of Steuerle's point is to correct partisans' simplistic "lessons of history" that too often are rubber-stamped onto today's problems--like Vice President Cheney saying that "Reagan proved deficits don't matter" (Suskind, 2004, 291)--and that become ideological badges of honor, immune from realistic scrutiny.

For a case in point, consider the broader history of the Reagan administration. Yes, Reagan in 1981 pushed through a sizeable tax cut while also sharply increasing military spending at a time when the budget deficit was already considered large. But when he did so, individual income tax rates were as high as 70 percent, which nearly everyone today agrees is much too high, and high inflation was causing income tax burdens to fall on a lot of purely nominal income (at least for those who did not sufficiently debt-finance their investments). The George W. Bush administration has evidently taken 1981 to heart, without considering the broader historical circumstances that helped motivate it. And the Administration has completely overlooked the subsequent tax and budget history of the Reagan administration, detailed by Steuerle in his book, which mainly consists or the following episodes:

--In 1982, the enactment of a bipartisan deficit reduction package that included significant tax increases;

--In 1983, the enactment of a bipartisan Social Security retrenchment package that included both payroll tax increases and benefit cuts;

--In 1984, the enactment of another bipartisan deficit reduction package, again including significant tax increases;

--In 1986, the enactment of a bipartisan income tax reform package that broadened the income tax base while lowering rates; and

--In 1988, the enactment of a bipartisan Medicare reform package that offered a new benefit, catastrophic care, to seniors, but on a fully financed basis and without giving them a free gift at the expense of younger generations. While this enactment proved to be a political misstep and was repealed the next year, at least it showed the leaders of both parties working together and trying to be fiscally and generationally responsible in their entitlements policy.

To put it mildly, this actual history of the Reagan era has little in common with the era as remembered in current Republican mythology (and here the word "myth" really does fit). (1) Remembering the Reagan policies more accurately might help counter the temptation that many Republican leaders evidently feel to engage in a cartoonish reenactment of time Reagan years that in fact does not resemble them any more closely than Daffy Duck resembles a real duck.

Looking forward, everyone who has thought seriously about the long-term U.S. budget situation realizes that our current policies are unsustainable. The government's outlays are increasingly outpacing its inflows, and all the more so as baby-boomers near retirement while Medicare and Medicaid follow the unsustainable growth path of healthcare expenditure generally. It should also be clear that, short of one party dictatorship, the only politically imaginable way out of the expected future budget collapse is through a bipartisan bargain that pairs the two great unpalatables, tax increases and reductions, in projected entitlements spending.

Some of time prerequisites for a return to fiscal sanity lie beyond the power of any one book to provide. But by promoting a comprehensive view of the federal budget, and by insisting that recent history be viewed accurately and shorn of myth, Eugene Steuerle makes a major contribution to public policy debate.

In emphasizing these aspects at Steuerle's book, I risk giving too little weight to other valuable features. An example is his careful delineation of the various schools in tax policymaking, ranging from traditional Haig-Simons-style income tax reform to consumption tax advocacy to Keynesianism to capital formation. Steuerle convincingly shows the limits to each camp's vision and political influence over time. None of them has "won," and probably none of them ever will.

More alarmingly, Steuerle shows how all of the rival sources of principled tax policymaking have lost ground in recent years--predating the George W. Bush administration--to be replaced by ad hoc improvisation, the force of budgetary imperatives, and overwhelming interest group influence. He ends on a "note of optimism" (255) that I must confess I do not share, founded on the hope that tax simplification and the needed budget compromise will emerge in coming years, simply because the need for them will so evidently have grown so great. But if Steuerle's optimism does prove founded, then it will be in part because of books like this one, which offer a broader historical and normative perspective for understanding our current tax and budgetary problems.

(1) For a hilarious illustration at the extent to which many conservatives misremember the Reagan years in order to draw false lesson, for the present, see Wallison (2003), an op-ed by a prominent conservative published in the New York Times noting the "enormous pressure [on President Bush] to ... retreat from his tax cuts... Early in his first term, Mr. Reagan faced very similar pressures... [But] Reagan shrugged off advice [to raise taxes]... In retrospect, Ronald Reagan's stand on principle seems an easy choice, since he was re-elected in 1984 in a landslide. But in the dark days of 1082 it took unusual tough-mindedness... If George W. Bush is a traditional politician, he will bend to the harsh political winds. If he is truly like Mr. Reagan, he'll continue to do what his own instincts have so tar been telling him: stay the course." Wallison, although a Reagan biographer. is apparently unaware that Reagan actually did raise taxes in 1982, 1993, and 1984, rather than "staying the course." The effect is rather like citing Reagan for the proposition that people who start their adult lives as Democrats should never change parties.

References

Becker, Gary S., and Casey B. Mulligan. "Deadweight Costs and the Size of Government." NBER Working Paper No. 6789. Cambridge, MA: National Bureau of Economic Research, 1998.

Kempton, Murray. "In Bosnia and Rwanda, Lost Lessons of History," Newsday (June 1, 1994): 13.

Steuerle, C. Eugene. Contemporary U.S. Tax Policy. Washington, D.C.: Urban Institute Press, 2004.

Suskind, Ron. The Price of Loyalty: George W. Bush, the White House, and the Education of Paul O'Neill. New York: Simon & Schuster, 2004.

Wallison, Peter J. "Bush's Reagan Moment." New York Times (October 26, 2003): section 4, page 11.

Daniel Shaviro is a visting scholar at AEI.