Tax Reform Act of 1986 Term Paper

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Political Science

Touch of Class

Social Class and the Tax Reform Act of 1986

Taxation has long been a contentious issue among the different classes of American society. The 1960s witnessed the beginning of the end of the old industrial economy. The 1970s saw the remains of American heavy industry move from the Rustbelt of the Midwest and Northeast to the Sunbelt of the South.

Increasingly, the service sector came to dominate the national economy. Population shifts, changes in technology, and a more mobile workforce - each played its part in creating a climate that was ripe for change. In the 1980s, Ronald Reagan proposed his "Supply Side Economics." Cuts in capital gains taxes for the wealthy would provide a stimulus for the entire economy. Benefits accrued from the excess capital would "trickle down" to the masses. The idea was embraced by diehard conservatives, but viciously attacked by many other segments of American society. Democrats, unions, and even many Republicans lined up against the President's plan, while Big Business, white-collar investors, and venture capitalists joined together to push the proposals through. The battle was divided squarely along class lines.

In many ways, the social classes that faced off in the Reagan Era's war of the tax cut, were themselves created by the economic and social conditions and philosophies that had prevailed ever since the end of the Second World War. As the sole remaining power whose land and economy had not been devastated by the conflict, the United States was uniquely placed to assert itself on the world stage. American manufacturing far outclassed that of any other nation, with exports continually exceeding in value those of imports. The exigencies of the Cold War called for a massive military build-up, and enormous sums of money were sunk into the military. Such skyrocketing investment produced a lucrative windfall for defense contractors, and for a host of allied industries that grew up in response to the new developments in military technology. As well, Federal, State, and Local government invested heavily in the national infrastructure of roads and bridges, making possible the flight to suburbia and a boom in residential and commercial construction. The military, and when it was not so politic to act openly, the CIA, flexed newfound American muscle to ensure that American interests were predominant throughout the Free World and also in may of the former colonies and spheres of influence of the old pre-War empires. This meant American control of oil production and pricing. Cheap oil meant huge profits for industries that thrived on gas-guzzling machines and vehicles, and on the new technology of petroleum-based products such as plastics and polyester.

However, this American Eden could not last forever. The American landscape could only contain so many brand new highways, and so many new shopping centers, and sprawling housing tracts. Only so many cars could clog the roads of the countryside and the byways of suburbia. The debacle of Vietnam had as a side effect, the souring of the public on further military adventures. The inability of the military to simply march in and make things right for Americans gave Oil Producing and Exporting Countries the green light to quadruple prices; a serious blow to much of American industry. The military failings in Vietnam, and the lack of any Soviet invasion of Europe, and thus the lack of any further justification for uncontrolled military spending, resulted in moneys being diverted to social programs such as Medicare and Medicaid that reduced worker dependence on their employers. And of course, Europe and Japan did eventually rebuild, and their brand new factories and innovative methods turned American trade surpluses into trade deficits. The new military-industrial-oil aristocracy of the post-World War II years was suddenly imperiled.

A complete political and social realignment was in order. Unionized Northern factory workers, once the backbone of the American economy, watched as their jobs went South. The shift in population toward the Sunbelt created whole new classes of workers who had little in common with the New Deal attitudes of the Northern States and the Democratic Party. Southern laborers were happy to work for less, and without benefits, while meanwhile the service sector that grew up in places like Houston, Dallas, and Atlanta was imbued with traditional Southern values of family and religion. Reagan Republicans allied themselves with the Christian Right, and the burgeoning "Solid South" switched overnight from Democrat to Republican. Wealthy Wall Street investors, and the corporate bigwigs of the military-industrial-oil complex had little use for Democratic welfare programs.

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They too aligned themselves with Ronald Reagan. His planned tax cuts promised to return to them the financial power they had enjoyed in the days of cheap and outright, overt American dominance. As described in a 1984 report by the Brookings Institute, the theory was as follows:

Tax policy enters into the investment decision through its effect on the rental price term and thus the desired stock of capital. If the elasticity of substitution were as large as unity, the model would imply a very powerful role for government policy in the capital-formation process because monetary and tax policy could be used directly to alter the desired capital-output ratio through changes in the after-tax rental price of capital." (Brookings Institution, 1984)

In other words, decreasing taxes would change the rest of the investment equation, thereby freeing up more money for capital investment, and corporate growth and development.

But wealthy industrialist, arms manufacturers, and oil tycoons do not make up the majority of voters. The growing population of the warm areas of the South and West, coupled with the rapid rise of the Christian Right gave Reagan Republicans a huge and powerful new foundation of public support. Suddenly, politics was no longer a Northeastern preserve. With the reapportionment of congressional seats, and Ronald Reagan's landslide victory in the 1980 Presidential election, the liberal views of the Eastern elite gave way to Christian fundamentalism and all its attendant precepts. The evangelically-inclined populations of the South and West gave the new Republicans the edge they needed. Cuts in the Capital Gains taxes that appealed to industrialists, Wall Street investors, professionals (who also invest heavily), as well as many involved in the world of the new technologies could rely on Christian voters to push through the tax cuts. These voters would see tax reform as a sectional issue; one that suited their regions' emerging economy. They would also see the Reagan Republicans' apparent emphasis on self-reliance, and faith in private charity as qualities that matched their traditional ethics of work and family.

On the other hand however, many Northern intellectuals - college professors, artists, writers, etc. - saw the new tax plan as simply a scheme for the government to avoid its social responsibilities and funnel funds into the pockets of already wealthy political cronies. Northern blue-collar workers, minorities, recipients of State and Federal Aid, disabled workers, and many ethnic groups such as Jews, Irish, and Italians, who were traditionally aligned with organized labor, balked at the Supply Side ideal. They argued vehemently against the premise that giving to the rich would somehow result in benefits to middle and lower class Americans. Said Reagan's Budget Director, David Stockman,

None of us really understands what's going on with all these numbers... we were doing that whole budget-cutting exercise so frenetically. In other words, you were juggling details, pushing people, and going from one session to another, trying to cut housing programs here and rural electric there, and we were doing it so fast, we didn't know where we were ending up for sure...." (Ackerman, 1982)

It was statements like these that convinced opponents that the Reagan Administration's only concern was with gutting the social safety net and diverting funds elsewhere. They pointed to the fact that, in 1981, in the face of Reagan's first round of tax cuts, and increases in military spending, two million people had lost their jobs, and the stock market as well had shown no sign of rebounding. (Ackerman, 1982) All of these groups were at pains to point out that "Reaganomics" with all its tax breaks for the wealthy was an anti-human philosophy. Workers are reduced to dollars and cents, the greatest good for the greatest number of people, becomes a tale of jobs for everyone even at the price of declines in wages and standards of living.

The lower the wage level, the more labor employers will find it profitable to hire. So if wages are free to fluctuate -- if there are no union contracts, civil service rules, minimum wage laws or other interferences with the labor market -- wages will always reach a level at which everyone has a job. If there is a surplus of labor at today's wage rate, if the number of people wanting work exceeds the number employers can profitably hire, then tomorrow's wage rate will be a little lower. Employers will then find it profitable to mop up the surplus labor, and everyone will live happily ever after." (Ackerman,….....

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