President Carter

by Stuart E. Eizenstat

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  Against such tectonic changes, almost invisible at the time, it is not hard to understand why Phase 1 of our anti-inflation program was not working—strict but not draconian budgets combined with gentle persuasion of industry and labor for voluntary price and wage restraint.

  Chairmen of the congressional economic committees scorned our plan to expand the staff of the Council on Wage and Price Stability. We also looked again at budgetary belt-tightening to see if we could gain the support of the Democratic congressional leadership. At a meeting with the president, Mondale, the liberal champion inside the White House, warned: “They’ll strike at the least defensible programs, like liberal social programs.” In any event, he argued, federal spending was not a major cause of inflation—a position that put him at odds with the president, a committed budget balancer by instinct.81

  When it became clear to me that we could be inviting the Fed to undertake a sharp tightening of monetary policy, I called Schultze with the idea of declaring a “year of national austerity,” to put a cap on government programs and defer the minimum wage hike.82 That never went far.

  Through the summer we worked on a tougher anti-inflation program but came up with little new, even after calling in the country’s leading economists regardless of party. Carter wondered whether inflation, which had averaged 6 percent annually since 1969, had actually made people’s lives worse. He also pointed out that it would be hard to sell Congress on postponing a rise on the minimum wage “to give more profits to corporations.” The experts brushed aside his musings and reminded him that inflation threatened the stability of the dollar and our ability to manage economic crises, while Carter worried about the effects of tight policies on working people. He said, “We need to think of the guy that needs $2.70 per hour to live. I want to know what sacrifice business will make.” We closed this depressing session by discussing the dollar, which had been drifting down all year. Carter’s response was troubling: “I am not convinced it hurts if the dollar declines. I can only sell an anti-inflation program if the country sees it as calling for fair and mutual sacrifice.”83

  TO VOTE OR NOT TO VOTE, THAT IS THE QUESTION

  The president was damned and determined to tie a tax cut to robust reform of the disgraceful tax code. Mondale recommended postponing reform in favor of a straightforward tax cut to push it quickly through Congress and reduce uncertainty in the business community.84 At a meeting of business leaders,85 they asked Carter to delay tax reform because it would leave them in a state of suspended animation for months. What they wanted was a tax credit for new investment. The president would have done himself a favor to have listened to his liberal vice president, who was in rare agreement with the businessmen, but Blumenthal also favored at least a modest reform to accompany a cut. Inevitably the two became inextricably linked.

  Given what we knew as we came into office early in 1977, it is difficult to argue that we were mistaken in putting forward a stimulus plan for the stalled economy. But it is equally difficult to defend the second jolt that we proposed late in the same year, together with tax reform. Yet Carter had run on the slogan that the tax code was “a disgrace to the human race,” as it remains today. By the time tenacious interest groups tighten their grip on their special privileges, reform usually yields less revenue than its backers hope for—and therefore is less help in reducing budget deficits. Carter’s brave attempt did not succeed. The reason was best summed up by the aphorism of Senate Finance Committee chairman Russell Long: “Don’t tax you; don’t tax me; tax that man behind the tree.” Everyone theoretically favors closing loopholes in return for lower rates, until it is their own treasured loophole that is threatened.

  As Bob Ginsburg of my staff and I worked with Treasury to put Carter’s commitment to tax reform into concrete legislative terms for announcement late January 1978, three characteristics became evident. One was his staggering attention to detail. He rose at 5:00 a.m. to study the complex plan we sent him, even the most arcane tax provisions, rather than concentrate on the general principles and political strategies to pass the reforms, which should have been his primary focus.86

  A second characteristic was his populism. One loophole that particularly struck him was the deduction for “ordinary and necessary business expenses,” which had been broadened by use to include country-club dues and even football tickets. During a briefing with Blumenthal and the Treasury’s tax experts, Carter exclaimed: “Club dues are a rip-off of the average guy; most club dues are for self-gratification and not legitimate business; I want club dues eliminated entirely.”87 In his message to Congress on January 20, 1978, a year to the day after his inauguration, business deductions would be ended for theater and sporting tickets, yachts, hunting lodges, club dues, and first-class airplane tickets—and only half the cost of the infamous three-martini lunch would be tax deductible. He was particularly eloquent in declaring that the average taxpayer was subsidizing the privileged few who can routinely deduct these kinds of expenses, while the average worker had to pay out of his own pocket with after-tax dollars, for a “rare night on the town.”88 In 2016 Donald Trump’s advantage with working-class voters might have been reduced if the Democratic Party had voiced such views.

  The third characteristic was his stubbornness. A draft of the reform plan was leaked to the press, and predictably Blumenthal reported that House Ways and Means Committee chairman Al Ullman felt the proposals would stir up the aggrieved special-interest groups, imperiling the reelection of his members. But House members are up for reelection every two years, so Carter felt there would never be a better time for reform, and ignored Ullman’s advice for a straight tax cut with no tax reform.

  Bending to political reality, however, we did not try to close as many loopholes as Carter would have liked; but there were still enough to stir up a hornet’s nest, like curtailing a variety of tax shelters and paper losses that were used by high-income earners, and by strengthening the minimum tax to ensure that everyone paid something no matter how many preferences were claimed. Especially close to Carter’s heart was a repeal of the lower tax rate on capital gains, benefiting only those in the highest tax brackets on their investment profits.

  The fate of Carter’s package spoke volumes about how American democracy was captured then—and still is now—by highly organized special interests that keep their benefits through large donations to ensure that they hold both the ear and the votes of members of Congress. Only the president can appeal over their heads to the common good, and when Carter did so he was neither the first nor the last president to fail on the issue of fiscal fairness and tax justice.

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  Carter had been itching to veto the tax bill for weeks. On October 14 we had two meetings with the president, the first including Blumenthal, Schultze, and me. He told us: “I am hoping I can veto the tax bill, and use this as an example for my anti-inflation program. Tax reform is so screwed up, I am feeling better knowing I can veto the bill.” He explained that the economy was beginning to strengthen and no longer needed to be stimulated by another tax cut, and in any case he was disgusted that a Democratic Congress had eviscerated his tax reform proposals to favor the wealthy. At the second meeting I urged him at least to consult first with his advisers on the economic impact of the bill and consider the political implications of vetoing a Democratic tax bill. But in retrospect he was clearly right, and we were wrong.89

  The bill provided precious little reform, and a veto would have sent a strong message to the public and financial markets that the president was placing top priority on fighting inflation, and would not accept a dog of a bill simply because it was called tax reform: To mix metaphors, it was little more than a pig with lipstick. But Blumenthal, although sensitive to the inflation concerns, had negotiated the tax reform package, albeit with little to show for it, and felt invested in it, and Schultze felt a second tax cut was necessary to strengthen the recovery.90 Neither I nor his advisers were willing to take the politica
l risk of the president vetoing a Democratic bill to cut taxes, just before midterm elections.

  How did the tax reform bill become so lopsided? Enter Senator Russell Long, who had been in the wings all along, waiting for natural-gas deregulation to be resolved. He had killed the wellhead oil tax, a centerpiece of our energy package, and now his raid on the Treasury through tax cuts went into high gear, under the guise of tax reform. Long had not been consulted from the start on our tax and energy tax packages, although his Finance Committee would be decisive in what went to the Senate floor—or did not. It had been clear from the outset that Long would be the key man on all energy taxes, especially the tax on production by old oil wells, and on tax reform. Late in June, Ham and I urged the president to get to know Long better because we believed he would feel the need to reciprocate the president’s friendship. The president did reach out, but there was no reciprocity. As I noted in the margin of my pad, “JC just didn’t develop personal relationships,” but neither was Long prepared to give up his precious tax benefits for the oil and gas industry.91

  When Long and I discussed tax reform years later, it was as if he had been looking over my shoulder when I scribbled my note. He reflected in his usual rambling, but pointed and self-justifying style: “My impression is they just sent it [the bill] up there. My advice hadn’t been sought. My input’s not in it. That’s just fine. So I figured I could pretty well do whatever I blessed well pleased about it. If the president had started out by saying, ‘Now look, I want to recommend some changes in the tax laws, call it tax reform, call it anything you want to call it, and I just have in mind some things I want to suggest; there might be something that you’d like me to put in that I might be able to put in there that you’d like to see in it. Why don’t we talk about it?’ I’d have been willing to tell him what I honestly thought about it. If you’re going to send that bill up there, and you’re not gonna seek my advice, then it’s all right. It’s perfectly all right with me. But if you aren’t going to seek my advice, they’re not going to alter it one whit because of my views, one way or the other, and there’s not gonna be a bloody thing in there that I asked you to put in there, then I don’t know why I shouldn’t go ahead and be a totally free agent, with regard to that bill, when it gets there.”

  He felt if he was in the same party as the president “you ought to go the extra mile to help him, when you can, all things being equal, you ought to help him. But frankly, I don’t think Jimmy Carter looked at it that way. I’m not saying I’m right and he’s wrong. I’m just saying that I think he’d have been more effective and gotten his way more often, if he had done business that way.”92

  That was the transactional way Long did business, and he could work his will because he was in total command of his committee, and no senator was appointed to it without his approval. As the liberal New York Democrat Pat Moynihan once said to me with mock innocence, he had always wondered why no one won a berth on the Senate Finance Committee without agreeing to support the oil depletion allowance, a notorious tax break for the domestic oil producers.

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  Meanwhile the president began to waver on cutting taxes, fearing it would add to inflation. The bargain he had proposed of tax cuts together with tax reform had been undermined by Congress, which gave him little help on tax reform and a larger tax cut than he proposed. To rub salt in the wound, a Congress that was nearly two-thirds Democratic voted to support a Republican amendment to lower the capital gains tax on investments in stock and property for the wealthy, rather than restrict it as Carter proposed. It added new tax credits and exemptions for special interests.

  The only remnants of our tax reform proposal were an end to deductions for state and local gasoline taxes and for hunting lodges and other facilities when used for business entertainment, although country-club dues continued as deductible business costs. After thirty-four hours of continuous work by a House-Senate conference committee on October 15, Pete Stark, a California liberal Democrat who supported our original reform package, read his colleagues a bit of doggerel he had written in the early hours of the morning while watching major reforms being ground to dust out of public view: “The Speaker had sold all the liberals a bill, and Good Chairman Ullman had swallowed the pill. / With loopholes for dry holes and tax breaks for wine, the deeds of the lobbyists were almost a crime. / They took care of the heirs, and built up the shelters, but for the poor folks Russell [Long] gave us no helpers. / The rich will have Christmas with ill-gotten gains, while others pay taxes with annual pains. / But Scrooging the people is Washington’s credo, now what we need, Tiny Tim, is a veto!!”93

  Carter badly wanted to follow Stark’s rhyming appeal. It had been clear for weeks the president wanted a veto to send an anti-inflation message and block the evisceration of his reforms, which Congress not only gutted but turned on their head, favoring the wealthy even more. The Treasury’s top tax and congressional staff members Donald Lubick and Larry O’Brien called me to urge a veto because the legislation made the tax code even more unfair than it was before the president sent up his proposals.94 Thus began an internal tug of war that lasted for weeks. One of the most thoughtful members of the House, Rules Committee chairman Richard Bolling of Missouri, phoned me to say that he also was unhappy about the failure of tax reform but “it would be close to madness to veto the bill … [which] will hurt Democrats running for reelection. We couldn’t explain it to people who just want a cut in their taxes.” That same day the president called and asked if any of us wanted him to veto the tax bill. I told him no.95

  But the president would not let it go, and showed a prescience on inflation we would have done well to follow. In a meeting the next day with Mondale, Schultze, Jordan, and me, only five days before he planned another major anti-inflation address, he said again, “I am concerned [about] the tax cut; it will not help with fighting inflation.” He recognized that we had underestimated the growth of the economy and its impact on inflation. He also unloaded on our Economic Policy Group: “I am disgusted with the bickering in the EPG. I feel there is nothing in the speech, and we’ll be laughed at.”96

  Shortly afterward, when a broader group of outside economic advisers joined, his foresight was again evident as he told us the financial markets would be dissatisfied with the content of his anti-inflation speech and the dollar would drop. He felt boxed in, saying he was “depressed”: He could not cut defense spending while negotiating a Strategic Arms Limitation Treaty with Moscow, nor could he stop the inflation-indexed increases in such major programs as Medicare and Medicaid. He was ready to wield his veto pen on the tax cut,97 but Blumenthal and Schultze continued to believe the recovery would stall if he did,98 and his political and congressional aides, myself included, feared a veto of a popular tax cut just before the midterm election.

  Yielding to pressure even from within his own administration, which I was duty-bound to pass on to him in a decision memorandum from all agencies, as well as the entire White House staff, Carter signed the tax-cut bill without fanfare and with great personal regret on November 6, just before the midterm elections. As expected, we held our Democratic majority, but Carter called me up with the most searing criticism I received from him during our four years in the White House: “I have always depended on your advice, but you disappointed me on the tax bill.” I deserved the rebuke, as painful as it was.

  THE REPUBLICAN SUPPLY-SIDE REVOLUTION: A LAFFER

  While he was struggling over supporting the tax cut, we did not appreciate that we were on the cusp of the antitax revolution captured by Ronald Reagan that would turn the Republican party from budget balancers to advocates of tax-cut-driven supply-side economics to this very day. Out went the uncomfortable Phillips Curve tracking the relationship between unemployment and inflation, and in came the Laffer Curve. Out went the stingy economics of balanced budgets that were a mainstay of Republican presidents like Eisenhower and Ford, and in came supposedly self-financing supply-side tax cuts. This simple curve, deve
loped by the young conservative economist Arthur Laffer, could be drawn on a napkin to prove the argument that lower taxes would serve as an incentive to more work, more output, and higher government revenues to fully pay for the lost revenues from tax cuts. It would need two generations of rising deficits and a rising number of millionaires at the expense of middle-class taxpayers to demonstrate how false was this vulgarized Keynesianism. But the public did not see it that way.

  In June 1978 they had led the way in California by passing Proposition 13 in a statewide referendum that capped property taxes. Now the popular mood had swung away from closing tax loopholes to simply slashing taxes. One Democrat who sensed this oncoming wave was Representative Thomas Foley of Washington (who would later become Speaker). At a Democratic breakfast on June 28, he correctly warned everyone that the Proposition 13 victory would create a conservative mood in Congress, and spending and inflation would be major issues in the November elections.99

  This impulse was eventually embodied in the massive Kemp-Roth tax cut sponsored by Buffalo’s Republican congressman and former Buffalo Bills star quarterback Jack Kemp, and Republican senator William Roth of Delaware in 1981. It was Ronald Reagan’s signature economic accomplishment as president and continues to be the dominant economic thread in the twenty-first-century Republican Party—tax cuts do not lose revenues but spur so much growth they pay for themselves. But in fact tax cuts under Ronald Reagan and George W. Bush led to triple-digit budget deficits running into the hundreds of billions.