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Reagan, Bush tax concessions haunt Republicans as they eye 'fiscal cliff'

History explains why Republicans are wary about agreeing to a bargain with President Barack Obama that would promise to curb the growth of federal spending.

With 18 days left until the U.S. goes over the proverbial fiscal cliff, Chuck Todd discusses the latest meetings between President Obama and leaders on Capitol Hill with Jim Manley, former spokesman for Senate Majority Leader Harry Reid, and Brad Dayspring, former deputy chief of staff for House Majority Leader Eric Cantor.

Republicans say that when they agree to tax increases in exchange for Democratic spending curbs, the tax increases occur, but the spending growth doesn’t get restrained.

Rep. Jeb Hensarling R-Texas, a member of the Simpson-Bowles fiscal commission in 2010, gave a clear statement of the Republican argument.

“If I believed that the increased revenue (resulting from increasing taxes) would actually be used for deficit reduction, you know, I might reluctantly come to the table in a global agreement,” Hensarling said in December of 2010. “But when I look at TEFRA (the Tax Equity and Fiscal Responsibility Act) in '82, when I look at Andrews Air Force Base in '90 (the fiscal negotiations between President George W. Bush and Democratic congressional leaders), it just seems to me that somehow the spending restraint never quite materializes and yet the increased revenues do, and it seems like the increased revenues simply chase more spending.”

Does the history bear the Republicans out on this? Let’s examine each of those episodes.

Anonymous / AP

FILE - In this Wednesday, March 22, 1984 picture, U.S. President Ronald Reagan addresses a session with House Republicans in Washington on Capitol Hill, appealing for support of a three-year $150 billion deficit reduction plan. Next to the podium are Vice President George Bush and Rep. Jack Kemp, R-N.Y., right.

1982 tax increase

In 1981, Reagan signed a tax cut bill into law. Known as Kemp-Roth after its two chief sponsors -- Rep. Jack Kemp, R-N.Y. and Sen. William Roth, R-Del. -- the law sliced the maximum income tax rate from 70 percent to 50 percent and the maximum capital gains tax rate from nearly 40 percent to 20 percent.

Reagan’s tax cut also indexed the tax brackets, the personal exemption and the standard deduction to the inflation rate, protecting taxpayers from being pushed into higher brackets due to increases in their nominal income.

Just a year later, Reagan agreed to a tax increase, partly due to fears of growing federal deficits. The deficit in Fiscal Year 1982 had been 4 percent of gross domestic product and in FY 1983 would be 6 percent of GDP.

The 1982 law increased excise taxes on cigarettes, telephone calls and airplane tickets, changed asset depreciation rules for businesses, and curbed certain tax breaks. One consolation for Reagan and his party was that the bill preserved the 1981 income tax rate cuts, despite Democrats’ attempts to undo or delay them.

In a televised address rallying support for the bill, Reagan told the nation that the deficit reduction package included $280 billion in spending cuts, which meant, he said, “$3 less in spending outlays for each $1 of increased revenue.

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But in the final three-year package that Reagan signed into law, the mixture was $98 billion in increased tax revenue and $17.5 billion in spending reductions.

It’s not clear why Reagan used the $280 billion figure, but contemporaneous accounts by the authoritative Congressional Quarterly put the agreed-to spending cuts at $17.5 billion.

Yet the “$3 in spending cuts to $1 in revenue increases” theme has become a fixture in Republican lore.

More important is what actually happened to spending and revenues in the three years that followed the accord: spending increased by 17 percent but declined as a percentage of gross domestic product, from 23.5 percent of GDP to 22.8 percent.

That happened because the economy during those years was growing its way out of what had been the most serious recession since World War II. Tax revenue increased over the same period by 22 percent, going from 17.5 percent of GDP to 17.7 percent of GDP.

In the vote on the 1982 deficit reduction package, 88 House Republicans and 12 conservative Democrats who’d voted for Reagan’s 1981 tax cut defected from Reagan. They included Kemp, Rep. Newt Gingrich of Georgia and Rep. Ron Paul of Texas.

“'Conservatives feel less and less they have a home,” lamented conservative activist Richard Viguerie after the vote. ''We feel impotent and beaten up on.”

So why Reagan did agree to the tax increases in 1982?

In his Aug. 20 address, Reagan said the tax increases would “when combined with our cuts in government spending, reduce interest rates and put more Americans back to work again.”

When Reagan spoke, interest rates were extraordinarily high: the yield on a 10-year Treasury security was over 13 percent, compared to the 20-year average at that point of about 7 percent. Today the yield on the 10-year Treasury is 1.7 percent.

Interest rates, Reagan said “should be lower now than they are, with the success we've had in reducing inflation. But part of the problem is psychological: a pessimism in the money markets that we won't stay the course and continue lowering the cost of government. The projected increase in budget deficits has added to that pessimism and fear.”

Economist Allen Sinai told the New York Times that Reagan “changed his (anti-tax) tune when he began to believe that big budget deficits, with a continued tight monetary policy, would mean high interest rates forever.” Interest rates did fall after 1982, not dramatically or quickly, but steadily for the rest of Reagan’s presidency.

1990 budget accord

When Republicans nominated George H.W. Bush to be their presidential candidate in 1988, he gave the party’s convention what was to become a famous pledge: “the Congress will push me to raise taxes, and I’ll say no, and they’ll push, and I’ll say no, and they’ll push again. And I’ll say to them: Read my lips, no new taxes!”

Two years later Democrats got Bush to break that promise and sign a five-year $146 billion tax increase into law. This had the desired effects, from the Democrats’ point of view, of splitting the Republican Party, undermining support for Bush and ultimately contributing to his defeat in the 1992 election.

In their accord, Bush and congressional leaders agreed to:

•       Increase the top income tax rate from 28 percent to 31 percent and limit the value of itemized deductions for higher-income people.

•       Raise Medicare payroll taxes

•       Impose and increase taxes on cars, boats, airplanes, gasoline, cigarettes, beer and other products.

What did Bush get in return? Democrats agreed to reduce entitlement spending by about $100 billion and discretionary spending by about $182 billion.

In the five years that followed the deal, federal spending increased by 18 percent, but declined as a percentage of GDP, from 21.2 percent to 20.2 percent, because, as in the mid-1980s, the economy was growing.

Bush’s agreement with Democrats did not fundamentally change the entitlement programs that were to drive future spending. And the 1990 tax increase was a prelude to another tax increase in 1993 after Bill Clinton defeated Bush in the 1992 election.