Just Taxes Blog by ITEP

A Surprising Idea from the Era of Reaganomics

A Surprising Idea from the Era of Reaganomics

October 27, 2021

Amy Hanauer
Amy Hanauer
Executive Director

President Reagan is lionized by many for cutting taxes and government. But the story is more complicated. Reagan knee-capped regulation and much domestic spending, and early in his administration he slashed taxes in ways that drastically reduced revenue. Yet he vastly expanded military spending, so his cuts were only to things he disliked.  

Less known is that he reversed many of his tax cuts with several laws enacted in 1982 and after. Major tax reform under Reagan happened again 35 years ago this month when he and Congress raised corporate taxes, providing a roadmap from which members of Congress should draw lessons now. 

Reagan’s tax increases after 1981 and his loophole-closing reform of 1986 fixed some problems created by his 1981 tax cuts. The 1986 reforms, while revenue-neutral overall, blocked enormous loopholes that allowed profitable corporations to pay single-digit tax rates or nothing at all. The Biden administration now seeks, as in 1986, to raise taxes on corporations and the wealthy. But Biden’s plan would improve on the 1986 bill by doing so in a way that boosts revenue for spending that can take on today’s challenges. 

Early Reagan administration policies necessitated subsequent reform. Reagan’s 1981 tax cuts lowered corporate rates and allowed corporations to slash or erase their tax obligations through permissive depreciation rules. This contributed to the share of federal revenue from the corporate income tax plunging from one-quarter in the 1950s to just 6.2 percent by 1983.  

The shrinking corporate tax inspired Citizens for Tax Justice (CTJ) to publish a pathbreaking 1984 report, which found that 128 of 250 profitable corporations paid no federal income tax in at least one of the first three years of the Reagan administration and 17 paid no tax in all three years combined. 

The findings empowered reformers who wanted the economy to do more for families and communities and less to further enrich the wealthy. The research “helped propel a tax overhaul,” the Wall Street Journal reported at the time.  

The tax-avoidance revelations alarmed even Reagan himself, according to Treasury Secretary Don Regan’s 1989 memoir. The deficit that Reagan vowed to eliminate in his campaign had quadrupled, due to both ballooning military spending and the hollowed-out tax code. Sens. Bill Bradley (D-NJ) and Bob Packwood (R-OR) worked with Secretary Regan on a tax bill that closed many of the very loopholes Reagan had helped create, making it the biggest corporate tax increase in history. Besides addressing corporate taxes, the law equalized rates on capital gains and other income, raised taxes on the wealthiest, and reduced taxes for poor and middle-income payers. 

Subsequently, presidents of both parties weakened corporate tax laws and allowed other tax breaks and reductions to metastasize, sometimes compelled by Congress, as under Presidents Clinton and Obama, and sometimes of their own volition, as under Presidents George W. Bush and Donald Trump (whose giveaways to the wealthy and corporations cost the American people $2 trillion over 10 years). Add an underfunded IRS and you get the debilitating problem we now have – rampant tax avoidance and insufficient resources to pay for things our communities need.  

My colleagues released two studies this year akin to the earlier report from Citizens for Tax Justice (now ITEP’s advocacy partner). The corporate names have changed but the fundamental story remains the same: 55 large profitable corporations paid no federal income tax in 2020, and 39 paid no taxes over the full three years of the Trump tax regime – up from the 17 that had so alarmed Reagan.  

The tax plan now being debated as part of the Build Back Better legislation tackles this. For the largest corporations, President Biden proposes a minimum 15 percent tax on the profits they report to shareholders and to increase taxes on profits earned overseas, which are now much lower than taxes on profits earned domestically. His very reasonable plan to raise corporate rates is in jeopardy because of opposition from all Senate Republicans and one Democrat, Kyrsten Sinema of Arizona. But the pieces still on the table remain significant.  

At the same time, the president’s plan confronts inequities in the personal income tax. His proposals are unilaterally opposed by Republicans in Congress, and it’s been challenging to get agreement from two key Democratic swing votes in the Senate. But most Democratic senators seem to be coalescing around a plan to tax unrealized capital gains of billionaires.  

All these ideas would make the tax code more equitable and raise revenue to expand early learning and affordable college, create jobs and tackle climate change. 

The president is in high-stakes negotiations with senators and House leadership to make sure that the Build Back Better bill raises needed revenues, closes tax loopholes and makes the tax code more equitable. The Billionaires Income Tax and the 15 percent minimum corporate tax provide some crucial fixes to our tax code and enable the more transformational investments that address America’s climate and inequality crises.  

In 1986, national leaders came together across parties to close corporate loopholes in important ways. Today, Democratic leaders are struggling to get every member of just one party on board to do something similar.  

Although his other policies hurt workers and increased inequality, Ronald Reagan was persuaded that an economy where the largest, most profitable corporations could dodge taxes wasn’t an economy that worked. This prompted him to reverse course on the most egregious corporate tax breaks to ensure corporations paid a fairer share. Today’s Republicans in Congress all oppose this approach, despite its popularity. Democrats in both houses should be able to come together to at least do what Reagan did: ensure that the biggest, most profitable corporations pay their fair share.