See also: Video: Reagan Called For An End To ‘Crazy’ Tax Loopholes That Let Millionaires Pay Less Than Bus Drivers (Think Progress)
We’re going to close the unproductive tax loopholes that have allowed some of the truly wealthy to avoid paying their fair share. In theory, some of those loopholes were understandable, but in practice they sometimes made it possible for millionaires to pay nothing, while a bus driver was paying 10 percent of his salary, and that’s crazy. It’s time we stopped it.
That was the president, making the case for why our tax code—riddled with unfair breaks, loopholes, and subsidies that disproportionately benefit the wealthy—requires fundamental reform that ensures the wealthy pay their fair share.
But it wasn’t President Barack Obama. It was President Ronald Reagan. In 1985.
By that year, as President Reagan began his second term, the tax code had become shot through with lobbyist-carved loopholes and was widely regarded as being stacked in favor of the powerful and against the middle-class. Sound familiar?
It should. Our current code is likewise weighed down with similar loopholes and special provisions that tilt heavily toward the wealthy. In fact, just last week, President Obama laid out several principles that Congress should use to fundamentally reform the current tax code.
One of those principles—in a clear echo of Ronald Reagan—was that no millionaire or billionaire should pay lower taxes as a share of their income than middle-class Americans. Obama named it the “Buffett Rule” after billionaire investor Warren Buffett, who has disclosed he pays a smaller percentage of his income in federal taxes than does his secretary.
Obama’s embrace of this common sense principle unleashed an unhinged tirade from conservative politicians and pundits, who in sound bite after sound bite labeled it “class warfare.” Grover Norquist, head of the extreme antitax movement, even went so far as to attack Buffett himself.
Surely, those crying “class warfare” would have said the same of Ronald Reagan after he told an Illinois crowd:
Just a few moments ago, I told some people inside the building here of a letter that I just received the day before yesterday. It’s a letter from a man out here in the country, an executive who’s earning in six figures — well above $100,000 a year. He wrote me in support of the tax plan because he said, “I am legally able to take advantage of the present tax code — nothing dishonest, doing what the law prescribes — and wind up paying a smaller salary than my secretary gets — or I mean, paying a smaller — I’m sorry, paying a smaller tax than my secretary pays.” And he wrote me the letter to tell me he’d like to come to Washington and testify before Congress as to how that’s possible for him to do and why it is wrong.
Far from being “class warfare,” the “Buffett Rule” is simply the modern-day equivalent of the very same fairness principle articulated by Reagan. It was even inspired by a similar story: a wealthy businessman who pays lower tax rates than his secretary. Those stories fly in the face of a fundamental fairness value—one that conservative leaders used to share.
The Tax Reform Act of 1986 that Reagan signed closed many loopholes and eliminated entire tax shelter industries. Critical to this was equalizing the tax rates on investment and wage income. Before 1986, capital gains income was taxed at less than half the rate of “ordinary” income, including wages and salaries. But the 1986 law removed this preference, meaning that wealthy investors would not pay lower income tax rates on their income from investments than middle-class families paid on their wages.
Fast forward 25 years. Once again, the tax code allows some extremely wealthy individuals to get away with paying lower tax rates than average Americans. The most significant reason is that in the intervening years, Congress has sharply lowered the tax rates on capital gains and dividends. Since President George W. Bush’s second round of tax cuts in 2003, capital gains have been taxed at 15 percent. That’s the lowest rate since the 1930s and almost half of the rate that Reagan signed into law in 1986. Dividends are also now taxed at 15 percent (they were taxed at the same rates as ordinary income for the entirety of Reagan’s presidency).
In calling for the “Buffett Rule,” Obama is merely calling for a return to basic fairness. He is echoing the very same call that Ronald Reagan made 25 years ago. Given the history, maybe we should be calling it the “Reagan Rule.”
Seth Hanlon is Director for Fiscal Reform and Michael Linden is Director for Tax and Budget Policy at the Center for American Progress. Thanks to John Craig for superb research assistance.
Managing Director, Economic Policy