Fool Me Thrice? Grand Bargains That Weren’t

In light of current discussions about the fiscal cliff and ongoing debates about what a good deficit-reduction package should look like, lawmakers can learn from some of the major “deficit reduction” deals over the past couple of decades.  Presidents Ronald Reagan and George H.W. Bush made deals that resulted in tax hikes, but the promised spending cuts never came to fruition.

Politicians should bear in mind that lower tax rates do not mean less tax revenue, but more spending usually means larger debt and deficits.  Heritage has explained that the budget does not drive the economy; rather, economic growth drives the budget.   Conservatives know what it takes for the economy to thrive, and President Reagan’s pro-growth approach produced policies that lawmakers should emulate today:

The right approach is the Reagan model of improving family budgets and business growth by cutting tax rates further, ending the recession, and allowing the growing economy to provide the tax revenues to balance the budget.”

Unfortunately, liberals can’t quite grasp these principles, and they think it’s foolish to cut spending ever. 

Some liberals have been so bold as to suggest that it was the tax hikes in President Reagan’s deficit reduction plans that helped the economy.  This couldn’t be farther from the truth.  Reagan successfully improved the economy by decreasing taxes several times throughout his time in office, and those close to him knew that he was committed to keeping taxes low as a means of allowing the economy to prosper.  Just take a look at what Craig Shirley, author of two books on Reagan, said of our 40th President:

“Reagan was ambivalent [about the 1982 tax increase he signed]. He’d only done the deal because he’d been promised by [House Speaker Tip] O’Neill that there would be $3 in cuts for every $1 raised. He never did it again because the cuts never came forth.”

Similarly James Miller III, who served as Reagan’s budget director from 1985 to 1988 said:

“Reagan would be advocating to take the government regulators off the throats of entrepreneurs, take the taxman out of the public’s pocket, and constrain the government’s avarice for spending the people’s money.”

Some liberal critics suggest that Reagan’s tax cuts caused higher deficits, and that he resolved those deficits by then imposing tax hikes again.  However, this is a mistaken analysis.  In fact, Reagan’s tax cuts helped “pull the economy out of the doldrums and ushered in the longest period of peacetime economic growth in American history.”

With that background in mind, we should look at a couple “deficit reduction” deals signed by Presidents Reagan and Bush that remind us that we should approach “Grand Bargains” with caution.

1982: This year, President Ronald Reagan compromised with liberals, but in a way, he also compromised his principles.  He was clearly an advocate for lower taxes and less government spending.  He got his tax rate cuts passed in 1981, but because they were phased in so gradually, “the economic pain they were designed to alleviate lingered well into 1982.”  Reagan’s former attorney general Edwin Meese and Heritage Action’s Mike Needham explain that in the 1982 deficit reduction agreement between President Reagan and Congress, “he agreed to a modest increase in business taxes (which he didn’t like) in exchange for spending cuts (which he wanted).  The higher taxes were enacted, but the spending cuts never arrived.”

What helped to save the day, though, was that individual income tax-rate reductions had been passed the year before, and remained intact.  Moreover, “Once the economy received an unambiguous tax cut in January 1983, income tax revenues climbed dramatically, increasing by more than 54 percent by 1989 (28 percent after adjusting for inflation).”  That, of course, was a result of economic growth, not burdensome taxation.

1990: President George W. Bush was convinced that the bipartisan deal he agreed to this year would result in $2 in spending cuts for every $1 in tax increases.  Yet, according to the Congressional Budget Office, the Democrats broke their promise to cut spending below the CBO baseline by $247 billion; and worse, they actually spend $23 billion above the CBO’s pre-budget deal spending baseline.  Heritage explains that if President Bush had kept Reagan’s policies in place, greater economic and budgetary losses could have been avoided.  In fact, “In 1989, the Congressional Budget Office projected that the budget deficit, which then was $152 billion, would continue to fall for the next five years assuming no change in Reagan’s policies.”

Let’s not be fooled by faulty liberal analyses that say tax hikes will fix our deficit problem.  They won’t.  And if past experience teaches us anything, lawmakers should be very cautious of accepting tax hikes in exchange for spending cuts.  Chances are they will never get the spending cuts they bargained for.  That is even truer when it comes to much-needed entitlement reform.

Lowering taxes and cutting spending are essential to improving the economy and should actually make lawmakers on both sides of the aisle happy.  Heritage’s Curtis Dubay explains:

The best way to raise tax revenue and lower the deficit is to spark rapid economic growth. As the president’s failed stimulus program has so painfully demonstrated, you can’t do that with a binge of public borrowing and spending. And you certainly can’t spark economic growth by raising taxes, especially in an already fragile recovery.”

Lawmakers would do well to heed the advice of conservatives and if that’s not enough, they can simply look to history to see what has worked and what has failed in improving the economy and reducing the deficit.  Fool me once, shame on you.  Fool me twice, shame on me.  Fool me thrice…well, let’s not get fooled again, okay?

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As we look for solutions to our #fiscal crisis today, we should remember what history has taught us.

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Beware of a "Grand Bargain" that results in tax hikes but fails to produce spending cuts.

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