5 - Reviving the old regime, 1986–2000

Summary

The shifts in national financial policy during the mid-1980s suggested that the United States had the political capacity to embrace a new fiscal regime—especially restructuring its income tax system in a fundamental way and perhaps even breaking what economist Eugene Steuerle has called “the yoke of prior commitments.” The tax increases of 1982 and 1984, the Social Security reforms of 1983, and the Tax Reform Act of 1986 (which accepted the principle that tax reductions should be offset by tax increases) all reflected the kind of political leadership and discipline that would be required to usher in a new fiscal regime.

Significant fiscal reform, however, stalled after the passage of the Tax Reform Act of 1986. In particular, fundamental reform of the tax system along the base-broadening lines chartered by the bipartisan architects of the 1986 legislation failed to advance. An essential reason was the continued, growing popular hostility to government. The antigovernment movement that gathered force during the late 1970s and the 1980s grew even stronger in the 1990s, finally capturing both houses of Congress in 1994. This movement, with its popular base in an increasingly alienated middle class, caused politicians to fear recommending the elimination of tax expenditures, such as the home mortgage deduction, that favored large segments of society, and instead to propose tax cuts that favored, or seemed to favor, the middle class. (Politicians who campaigned against government rarely attacked tax expenditures as a means of shrinking government programs.)