The Day the Fog Cleared

The fog that enveloped Rancho del Cielo on the morning of August 13, 1981, was quite a fitting symbol for the occasion. President Ronald Reagan, seated at an outside desk before a throng of reporters, was about to sign one of the largest tax cuts in the history of the Republic, slashing rates by 25 percent over three years. For decades, the top marginal tax rate had fluctuated between 90 percent and 70 percent. Congress had voted to cut it dramatically. Many called it a radical solution that wouldn???t lead to the intended economic recovery envisioned by proponents.

The fact was, even some proponents weren???t sure what would happen. There were theories. But the nation was about to embark on a path that would either alleviate the economic ???malaise??? of the past decade or it wouldn???t. Yes, the thick fog that limited visibility on that August morning was appropriate for the occasion.

Of course President Reagan was anything but foggy on the matter. On July 27, two days before Congress was to vote on his economic recovery package, the president applied his own pressure (and put his administration on the line) in a nationally televised address to the nation.

???This is not the time for political fun and games,??? he said that night. ???This is the time for a new beginning. I ask you now to put aside any feelings of frustration or helplessness about our political institutions and join me in this dramatic but responsible plan to reduce the enormous burden of federal taxation on you and your family.???

Today we live in a world where the top marginal tax rate is 35 percent. Debates over whether to raise this are vicious, but no one seriously advocates a rate higher than 40 percent. All the bitter acrimony that accompanies the tax discussion is really a fight over a few percentage points. Contrast our 2012 reality with 1981. Reagan had somehow managed to convince Congress and the nation to move the tax needle by 20 percentage points. How on earth did he do it?

It helped that the nation was mired in the dangerous combination of negative economic growth and high inflation ??? the dreaded stagflation. After years of economic policies that closely hewed to the Keynesian model of high government spending to spur demand, Americans were ready for solutions that held real promise. Reagan knew he could count on the Republican-controlled Senate, but the Democratic House was a different story. Led by the intrepid Democrat Thomas ???Tip??? O???Neill, House Democrats weren???t about to let the newly inaugurated president overturn decades of liberal policy.

But Reagan had a bit of luck going for him ??? if we can call it that. Months earlier, on March 30, Reagan had narrowly survived an assassination attempt. In effect, the attempt gave Reagan a few more months of a presidential honeymoon, and the Democrats knew it. They passed his military build-up bill in the House by a wide margin, 354 to 63. Concerning taxes, they also knew that they???d had lost the argument over whether to cut taxes. O???Neill wanted to negotiate on how much.

The Speaker???s counter offer was more geared toward those making less than $50,000 a year and tied future cuts to the deficit. Reagan???s response? His televised address to the nation clarified to O???Neill and the House that negotiations were done. Reagan also flexed his political muscles, incessantly calling House Democrats and inviting them to the White House to win their vote. In the end, the House passed Reagan???s bill 238 to 195, with 48 Democrats voting with the president.

It was a spectacular victory for Reagan. Of course, the legislative victory paled in comparison to the economic recovery.  Over the eight years of the Reagan administration, 20 million new jobs were created; inflation dropped from 13.5 percent in 1980 to 4.1 percent in 1988; unemployment fell from 7.6 percent to 5.5 percent; the net worth of middle-income families grew annually by 27 percent; and the overall economy grew by 40 percent.

But all that was unknown on August 13, 1981, when President Reagan, blanketed in the mist, signed the single most important piece of economic legislation of the last 30 years. Before affixing his signature, Reagan thanked Congress for passing a bill that represented ???a turnaround of almost a half a century of a course this country’s been on??? and marked ???an end to the excessive growth in government bureaucracy, government spending, government taxing.???

Today, as the nation finds itself in a similarly anemic economic condition, the future appears as foggy as that day at Rancho del Cielo. Some say our problems are too big to solve.  We should look on this anniversary as a heartening sign that we were once able to do big things ??? we just need leadership that can see through the fog.

“John Heubusch is the Executive Director of the Ronald Reagan Presidential Foundation and Library.