The Popular Origins of Neoliberalism in the Reagan Tax Cut of 1981

President Reagan was trying to explain the size of the national debt. The numbers were so large that he knew they would be meaningless to his television audience for that first major address of his presidency in 1981. Perhaps it would be possible to explain how thick a stack of dollar bills representing the national debt would be. "A tight pack of bills is based on the 'bricks' of money used by the Bureau of Engraving," a Treasury aide had discovered. "One 'brick' is sixteen inches deep. A loose pack of bills is based on a Bureau of Engraving count of 233 bills in a one inch pack." ¹ The speechwriters chose the tight count for the million and the loose count for the trillion: "A few weeks ago I called such a figure, a trillion dollars, incomprehensible," Reagan said, "and I've been trying ever since to think of a way to illustrate how big a trillion really is. And the best I could come up with is that if you had a stack of thousand-dollar bills in your hand only 4 inches high, you'd be a millionaire. A trillion dollars would be a stack of thousand-dollar bills 67 miles high." ²

The debt when Reagan entered office was just over $900 billion, not historically high in constant dollars or as a percent of GDP, but by the time Reagan left office it had almost tripled in nominal terms, and in percent of GDP it had gone from 33.4 percent to 51.9 percent. At the end of his term, the debt stood at $2.6 trillion, with a substantial portion of it contributed by Reagan's own policies: a mountain over 160 miles high in loose or tight bricks. ³

The irony is that the policy that accelerated the growth of that debt was the very policy Reagan was promoting in that first address, the Economic Recovery Tax Act of 1981 (ERTA). This tax cut remains the largest tax cut in American history. Of course, spending increases were also necessary to the creation of the new mountain of debt, but spending has increased many times over the course of the century. What was historically new was the policy of not raising taxes to match those spending increases. Scholars disagree over the importance of the debt to the economy, but even more important for contemporary American politics, this tax cut turned out to be only the beginning of a decades-long push for tax cuts by Republican politicians that continues to today. This first tax cut taught Republicans that tax cuts could be popular—something that was not clear at the time, because for decades opinion polls had shown strong and consistent opposition to deficits. ⁴ In demonstrating the electoral appeal of tax cuts even at the cost of deficits, and in eventually showing that deficits could be financed by foreign capital, the ERTA transformed the Republican Party from a party of fiscal rectitude into a party whose main domestic policy goal is cuts in taxes. This first tax cut remains a touchstone of both left and right, and many scholars see in it the rise of the era of the market in which we currently live.

Tax cuts are not the only neoliberal policy, but the ERTA can make a claim to being the most important instance of American neoliberalism. Unlike many other neoliberal policies, such as environmental deregulation, the individual tax rate cuts at the heart of the ERTA have not been reversed by later administrations, or subverted by action at other levels of government. ⁵ Instead, the popularity of ERTA has seen similar tax cuts repeated again and again. And unlike policies like welfare reform, lower tariffs, or even financial deregulation, tax cuts affect everything the state can do, by threatening state capacity itself. Even though its many tax breaks for special interests made it an imperfectly market-conforming tax policy, as the largest tax cut in American history and the fountainhead of the era of tax cuts that followed, the ERTA remains the...