Tax Analysts®Tax Analysts®

Article Archive

August 2, 2012
Tax History: Tax Limitation Amendments in the Reagan Era
Joseph J. Thorndike

Full Text Published by Tax AnalystsTM

Income tax opponents have been trying to repeal the 16th Amendment since it was ratified in 1916. The effort has been intermittent -- less a single phenomenon than a series of similar campaigns united by a distaste for progressive taxes on individual incomes. But the influence of the campaigns has been profound.

Isaac Martin, a sociologist at the University of California, San Diego, has chronicled these campaigns in a series of important articles. Last week I relayed some of his findings on the repeal effort as it evolved between the late 1930s and the late 1950s. This week I explore his analysis of the 1970s and 1980s, when tax limitation amendments resurfaced after lying dormant for more than a decade. (Martin's article on the 1970s is a work in progress, and I am indebted to him for sharing it before publication.)

Martin -- one of the most important scholars of U.S. tax politics -- argues that the 1970s repeal campaign was driven by bracket creep. As inflation pushed average tax rates higher for many Americans, it also swelled the ranks of disgruntled taxpayers. But the movement was not simply a response to economic phenomena. It was carefully managed by a group of what Martin calls "movement entrepreneurs": experienced activists with a keen sense for political opportunity. This cadre marshaled support for tax limitation using a variety of techniques, but especially through policy crafting: the strategic design (and redesign) of proposals to help maximize support and minimize opposition.

Once again, Martin frames his analysis as a puzzle. How, in a democratic political process, can you successfully convince non-rich voters to support tax reforms that deliver most of their benefits to rich taxpayers?

Martin's answer to this question begins with the John Birch Society. Founded by candy maker Robert Welch in the late 1950s, the society was driven by a fear of Communists. Specifically, members were inclined to see Communists everywhere, including Washington. Memorably, Welch once described President Eisenhower as "a dedicated, conscious agent of the Communist conspiracy."

After the campaign to repeal and replace the 16th Amendment petered out in the late 1950s, many of its champions found a home among the Birchers. Eventually, Martin writes, support for income tax limitation or elimination became "a badge of subcultural belonging" among the Birchers, who were a politically marginal and widely ostracized group, even among conservatives.

Ultimately, however, it was not the Birchers who revived the campaign to repeal the 16th Amendment and curb the federal taxing power. It was the National Taxpayers Union (NTU). The organization was founded by James Dale Davidson, whom Martin describes as "a libertarian student activist who had nothing against peaceniks or nutniks." Davidson recruited an eclectic mix of antiwar liberals and fiscal conservatives to join his crusade against spending, uniting opponents of military spending with foes of all spending.

But the NTU was not an especially effective policy advocate. Martin writes that the group had no major legislative victories to call its own. "They hardly could have since the National Taxpayers Union did not actually lobby for anything," he says. They were an oppositional force with a negative agenda.

That changed in the mid-1970s when the NTU joined the campaign for a constitutional amendment to require a balanced federal budget. Notably, this was not a tax cutting campaign, because most versions of the amendment would have allowed lawmakers to use either spending cuts or tax increases to eliminate deficits. Indeed, opinion polls suggested that supporters of the amendment were even less likely than nonsupporters to support tax cuts, Martin writes. They were more interested in curbing red ink than lowering tax burdens.

But the balanced budget amendment drew sustenance from the same economic phenomenon that eventually powered the drive for tax cuts: inflation. In general, the amendment's supporters believed that government deficits were making inflation worse -- a resonant complaint in an era when inflation was running at record levels. Meanwhile, that same inflationary surge was pushing individual taxpayers into higher marginal tax brackets. The resulting increase in personal tax bills was about to fuel a major revolt against federal taxation.

Martin connects his story of the national tax limitation campaign to similar efforts at the state level, especially California's Proposition 13. Conservatives across the nation "interpreted the amendment of the California constitution as a sign that the American public was eager for tax cuts," Martin writes.

The NTU, for its part, quickly adopted Proposition 13 as the model for a national campaign to limit taxes. Tapping into its network of local activists, the organization built on its experience with the balanced budget amendment to advance the new campaign. NTU leaders explicitly linked their campaign to midcentury efforts to cap income taxes. "This amendment was originally introduced in Congress during the 1930s and came close to passage," wrote Davidson of the tax cap amendment that foundered in the late 1950s. "It was a good idea then, and it is a better idea now."

Other conservative organizations joined the drive for a tax limitation amendment, but unlike the NTU (which continued to stress the primary importance of a balanced budget amendment), they took immediate aim at tax burdens. In particular, they set about trying to make tax limitation "politically sexy."

At the federal level, this type of policy crafting led to a linkage between the balanced budget and tax limitation amendments, Martin writes. It was not the most obvious of combinations, since the fiscal conservatism of a balanced budget might plausibly lead to higher taxes (and was, in fact, explicitly linked to tax increases in some early versions of the amendment). But tax cut champions hoped to capitalize on the broad popularity of the balanced budget idea to advance their own agenda.

In something of a political masterstroke, the National Tax Limitation Committee (NTLC) managed to cement the linkage by simply redefining a balanced budget as a spending freeze. "Total outlays of the Government of the United States during any fiscal year shall not increase by a percentage greater than the percentage increase in the nominal gross national product during the last calendar year ending prior to the beginning of the fiscal year," read a new version of the amendment proposed by the group.

As Martin notes, this language bore no relation to the purpose for which many states had already sought a constitutional convention on budget balance. But bare assertion can sometimes sound convincing, and many disinterested observers accepted the NTLC interpretation. "The press characterized it as a more 'sophisticated' alternative to the NTU's proposal [for a balanced budget amendment], and reported that conservatives in Congress looked on it with more favor," Martin writes.

In fact, Martin insists, "the NTLC's proposal was not a more sophisticated version of the NTU's amendment: it was a different policy entirely, one that had less to do with shrinking the deficit than with limiting the progressivity of the income tax." If marginal tax rates were graduated according to income, then rising incomes would put more people into higher brackets, in turn boosting revenues at a faster pace than GNP. Assuming that policymakers were not willing to let revenues outstrip spending over the long term -- building up huge and permanent surpluses -- the new spending limit would force the elimination of graduated rates. "By fixing the federal budget as a share of GNP the amendment therefore required that the graduated feature of the income tax rate be abandoned," Martin notes.

The new tax language helped rally support for a balanced budget amendment. Opinion polls showed substantially more support for the revised amendment than the original balanced budget language advanced by the NTU. Surveys also showed that support for the NTLC amendment was linked to how people felt about their own taxes: The unhappier they were, the more strongly they supported the amendment.

As the 1980 presidential campaign came into view, candidates staked out positions on the amendment issue, and after Ronald Reagan's victory in the election, agitation continued to mount. But ultimately, Congress declined to advance any version of it.

Nonetheless, Martin insists that the amendment campaigns bore fruit, at least in terms of tax policy. "The mere threat of a constitutional amendment put substantial pressure on members of Congress," he concludes. "Even many of those who opposed the amendment felt that their best strategy was to embrace statutory limitations on tax and budget policy to show that the activists' goals could be achieved without a constitutional amendment."

The Reagan tax cut of 1981 was the most important result of the tax limitation campaigns. Of particular importance were the indexing provisions of the Economic Recovery Tax Act of 1981 (ERTA), according to Martin. "The indexing provision of ERTA was a response to the revival of the movement for constitutional tax limitation," he argues, adding:


    The indexation of income tax brackets, in short, was a response to a rich people's movement -- incubated in the southern California subculture of Birchers and fellow-travelers during the long decade of the 1960s, revived by the threat of inflation-induced tax increases, and channeled by movement entrepreneurs who crafted their policy proposals strategically to win allies and demobilize opponents.

Indeed. Martin's explanation of the origins of indexing is persuasive, especially on the level of high politics. (Insiders no doubt have their own recollections of how the provision made its way into law, but their accounts don't challenge Martin's broad political story.)

Indexing also helps explain why the amendment campaign eventually ran out of steam. It deprived the grass-roots movement of its life force: inflation-borne tax increases. As inflation began to subside, the movement began to decline. But indexing further reduced the potent political pressure to do something about rising tax bills.

Ultimately, Martin's explanatory framework for antitax politics proves extremely useful. Most immediately, it helps explain the particular tax limitation campaigns of the 1950s and 1970s. More broadly, however, it gives form and substance to vague and tired assertions about American political culture. The United States, we often hear, is a nation of tax resisters, imbued with a deep cultural aversion to big government and high taxes.

Well, perhaps. But political culture does not exist in a vacuum. Ideas about taxation (or anything else) don't float freely through the political process, independently shaping events. Rather, political culture is part of a larger dynamic -- one in which ideas interact with their environment. Martin helps explain the ebbs and flows of antitax ideology by linking them to economic phenomena, political institutions, and individual actors. That's no small feat, and a great contribution to our understanding of U.S. tax history.