Douglas Cohn: DeBlasio misses the key point on Reagan tax strategy

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WASHINGTON — The spread between the haves and have-nots in American society is greater now than at any time since the days of the Robber Barons early in the last century. The widening gap along with the shrinking middle class did not happen by chance, but is the inevitable result of government policies dating back to the Reagan administration in the 1980s.

President Reagan entered politics after a successful career in Hollywood and as a pitchman for General Electric, making quite a bit of money and chafing at how much he paid in taxes to the federal government. After he took office in 1981, he pushed through Congress a major tax cut that lowered the rates for everybody and took the top rate for wealthiest earners down to 28 percent. He managed this because he realized that most people do not care what other people pay; they care what they pay.

Reagan said he was borrowing a page from President Kennedy, who a generation before in 1963 had lowered the top rate and watched the economy take off, with more revenue coming into the Treasury, offsetting the reduction in rates. The difference, however, between what Kennedy and Reagan did is in the numbers. JFK brought the top rate down from 91 percent to 77 then 70 percent; Reagan dropped it to 28 percent, and the phenomenon known as “supply side economics” where lower taxes produce higher revenue never kicked in.

In Reagan’s second term, under the guise of tax reform, rates were modestly adjusted to make up for the revenue shortfall, but the battle has raged ever since over how to fund a government when people at the uppermost end of the income scale too often pay less than their fair share. The battle was joined politically in New York City last year when Democrat Bill deBlasio campaigned for mayor and won on a platform that called for universal preschool that would be paid for by placing a small surcharge on people with incomes over $500,000.

DeBlasio immediately ran into trouble with New York Gov. Andrew Cuomo, a fellow Democrat who’s running for reelection in November and like most politicians is allergic to the idea of raising taxes. DeBlasio can’t raise city taxes on his own; he needs the blessing of the New York legislature, which has a Republican Senate and a Democratic Assembly, and a tax increase is not going to happen.

After taking office with 70 percent approval ratings, deBlasio is now down in the 30s, a plunge that is breathtaking. It’s not only taxes, he’s made other mistakes, and if this were a prizefight, it would have been called. Fortunately it’s politics and deBlasio can recover if he redesigns his tax package in a way that takes into account human nature in addition to political reality.

People in New York City are already over-taxed with high city income and sales taxes in addition to state and federal income taxes, and if deBlasio coupled his surcharge on the rich with a lowering of the rates for everybody else, that would be a political winner. Maybe wealthy people would feel aggrieved at having to pony up more in taxes while everybody else gets a better deal. But the surcharge in deBlasio’s plan is only on the taxable income over half a million.

The man on the street doesn’t care what the wealthy pay; he or she hopes someday to be in that category. What they do care about is the money they pay, and that’s what Reagan understood, and deBlasio does not.