Joseph J. Thorndike is a contributing editor with Tax Analysts. E-mail: jthorndi@tax.org.
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The Democrats won big last month, prompting much speculation about realignment. Liberals are hoping that 2006 will turn out to be a watershed, an election that closes the door on one political era while it ushers in the next. Conservatives are hoping it's just a flash in the pan.
Conservatives have reason to be optimistic. Not every dramatic election turns out to be critical; it's hard to join the rarified ranks of realignment. Since the end of the Civil War, only three elections have been truly pivotal: 1896, 1932, and 1994. The first and last established durable Republican majorities and elected more than a few GOP presidents. The second gave rise to the New Deal order, the most resilient electoral regime in American history.
Sometimes electoral anomalies manage to interrupt a political regime, but not disrupt it. Such was the case in 1946, when Republicans seized control of Congress, ending 13 years of Democratic dominance. But they found themselves back in the minority just two years later.
The 1946 election -- and the 80th Congress that it produced -- holds special interest for any student of tax history. In the wake of World War II, Republicans made tax cuts the centerpiece of their successful campaign. And once in power, they made good on their promise to slash federal taxes. But if tax cuts helped the GOP win in 1946, they may have helped them lose in 1948, nipping realignment in the bud.
The Rush for Relief
As World War II drew to a close, American political leaders of almost every stripe agreed that taxes were too high. Even before the Japanese surrendered, lawmakers approved the Tax Adjustment Act, speeding refunds for eligible businesses. Just two months later, they granted more sweeping relief in the Revenue Act of 1945, which slashed tax liabilities for calendar year 1946 by some $5.9 billion, or roughly 13 percent of total federal revenue. The act repealed the corporate excess profits tax and reduced income tax rates for both individuals and businesses. Lawmakers left most excise taxes at their wartime peaks, but they agreed to postpone a scheduled increase in the Social Security payroll tax.
Contemporary observers regarded the 1945 act as a quick and dirty affair, designed to cut taxes swiftly while avoiding controversial issues. For instance, the law did not resolve long- standing questions about the taxation of corporate income. Tax experts had hoped to sort out, once and for all, whether profits should be taxed at both the entity and shareholder levels. Some even longed to revisit the notion of an undistributed profits tax, chiefly as a means to curtail tax avoidance. But as it happened, the generosity of the 1945 law pushed those issues to the bottom of the tax agenda. Having already handed out a range of pro-business tax cuts, lawmakers were loath to consider further reform.
For individuals, the 1945 act did not seem likely to preclude further relief. Carl Shoup, a leading tax expert, urged lawmakers to give special attention to taxes on the rich. Extremely high rates had encouraged a proliferation of loopholes, which in turn allowed lawmakers to sidestep nettlesome questions of distributional equity. It was a dangerous game, Shoup warned: "equity issues cannot be consistently ignored without shaking the morale of those who are disadvantaged and rotting the morale of those who are favored, with incalculable consequences for the long-term future of the whole tax system."
The Campaign for Cuts
The Revenue Act of 1945 was the largest single tax cut enacted between 1940 and 1968, according to a recent estimate by Jerry Tempalski of Treasury's Office of Tax Analysis. By comparison, the Revenue Act of 1948 was almost 30 percent smaller when measured as a share of gross domestic product.
When gauged by degree of controversy, however, the 1948 tax cut easily outstripped the 1945 law. In the three years between the two bills, bipartisan comity on tax reduction evaporated. Republicans reclaimed their heritage as inveterate tax cutters, and President Harry Truman pledged his troth to the ideal of a balanced budget.
It's not that Truman opposed further tax cuts in the wake of the 1945 law. Indeed, he considered the reductions almost inevitable, given the conversion from a wartime to a peacetime economy. But he differed fundamentally with many lawmakers on Capitol Hill when it came to the timing of cuts. Truman insisted that taxes should be cut after spending had been reduced, not before. As he later recalled in his memoirs, "There is nothing sacred about the pay- as-you-go idea so far as I am concerned except that it represents the soundest principle of financing that I know."
By spring 1946 Truman had staked out his position. Stressing the need to control inflation, he laid claim to the mantle of fiscal probity. "It is the aim of our fiscal policy to balance the budget for 1947 and to retire national debt in boom times such as these," he said when releasing his budget projections. "In our present fight against inflation, fiscal policy has a vital role to play. A continuation of our present policy, which is to maintain the existing tax structure for the present, and to avoid nonessential expenditures, is the best fiscal contribution we can make to economic stability." A projected deficit of $1.9 billion in fiscal 1947 bolstered Truman's argument.
Republicans tried to turn Truman's fiscal responsibility to their own advantage. By summer 1946 they had seized on the president's pledge to retain existing tax levels and made it a cornerstone of their campaign to win control of Congress. In July the ranking minority member of the House Ways and Means Committee, Rep. Harold Knutson, R-Minn., promised to cut income taxes by 20 percent if Republicans won control of the House. Congress could pay for it with a 50 percent reduction in spending, he said, and GOP appropriators backed him up. Sympathetic observers, including editorial writers at The Washington Post, considered both goals eminently reasonable.
If Truman was intimidated by those promises, he showed no sign of it in public. Indeed, just a few days after Republicans declared their intention to seek sweeping tax cuts, Truman warned that tax increases might be in the offing. Rising prices threatened to unleash an inflationary spiral, he told Congress in a special message. If spending restraint and other anti-inflation measures proved insufficient, then tax increases might be unavoidable. "Such a tax program would, I realize, be unpalatable at a time when we are doing our utmost to increase production," the president conceded, "but if it is the only alternative to the ravages of inflation, we would have no choice."
Democrats running for reelection were aghast. Senate Finance Committee Chair Walter George, D-Ga., dismissed Truman's suggestion. "I do not think the suggestion that taxes can be raised in this period is a realistic evaluation of our present position and I think the President and the Treasury Department must know that," he said.
The tax issue seemed tailor-made for the aspiring GOP majority. In polls conducted throughout the campaign, voters increasingly identified Republicans as the party of tax reduction. In both January and June, 36 percent of respondents said Republicans would do a better job of cutting taxes, as opposed to 31 percent who trusted Democrats to watch the purse strings. After Knutson introduced his proposal for across-the-board rate cuts, Republican support climbed to 42 percent and Democratic support fell to 24 percent.
Initially, many voters shared Truman's preference for balancing the budget. In a September poll by the Gallup organization, fully 71 percent preferred to cut debt before taxes. By October, however, Republicans had begun to change some minds, and a new poll found just 49 percent of respondents preferring debt reduction.
When voters went to the polls on November 5, they gave Republicans the victory they wanted, returning them to majority status for the first time in 13 years. As Truman's daughter later recalled: "My father awoke aboard his special train, en route to Washington and discovered that he had a bad cold and a Republican Congress." A leading member of Truman's own party, Sen. J. William Fulbright, D-Ark., urged the president to resign.
Democrats lost 111 seats in the House and 24 in the Senate. Truman's critics pinned the blame on the president's plummeting popularity. Labor unrest was probably the most pressing issue of the campaign, with Truman antagonizing organized labor by threatening to draft striking railroad workers into the army. Rising prices also fed popular discontent with the president.
Taxes also fueled the Republican victory. Truman had firmly established himself as a fiscal killjoy. Asked in late November who they trusted to ease their tax burden, 18 percent of respondents cast their lot with the president; 48 percent pinned their hopes on Gov. Thomas Dewey of New York, the leading contender for the 1948 Republican nomination.
Republican Reductions
Flush with victory, Republicans set about securing a tax cut in 1947. They insisted that revenue reductions were the only effective means of curtailing the size of government. "The president's real reason for retaining the taxes is obviously to have more money to spend," argued Sen. Robert Taft, R-Ohio. "The best reason to reduce taxes is to reduce our ideas of the number of dollars the government can properly spend in a year, and thereby reduce inflated ideas of the proper scope of bureaucratic authority."
Knutson, meanwhile, indulged a penchant for colorful hyperbole. Progressive taxation in the New Deal mode posed a threat to American society, he contended: "For years, we Republicans have been warning that short-haired women and long-haired men of alien minds in the administrative branch of government were trying to wreck the American way of life and install a hybrid oligarchy at Washington through confiscatory taxation."
Still, Truman held his ground, arguing that any tax cut would be inflationary and fiscally irresponsible. He found support from several critics of the GOP tax plan, who pointed out that Knutson's across-the-board cuts would benefit the rich more than the poor. At a time when Americans were still paying a host of regressive consumption taxes held over from the war, that sort of complaint had considerable resonance.
Republicans in the House revised their plan to give it a more progressive cast; reductions ranged from a high of 30 percent (on incomes under $1,000) down to 20 percent (for anyone making more than $1,400). The Senate went even further, scaling the cut back to 15 percent for high-income taxpayers. Liberals, eager to shift an even larger share of the tax relief toward the lower regions of the income tax scale, argued for an exemption increase. But Republicans prevailed and sent a rate cut bill to the president.
Truman vetoed the bill, insisting that it was "the wrong kind of tax reduction at the wrong time." He reiterated his inflation concerns and dismissed the notion that any sort of economic stimulus was necessary to ensure prosperity. It's better to pay down debt, he said.
The House sustained the veto, but only by two votes. The Republican majority in both Houses quickly agreed on a new bill. It was substantially identical to the vetoed legislation, albeit with a later effective date for the reductions. Once again Truman vetoed the bill, and this time the House overrode him. But now the Senate sustained the veto, if only barely.
In January 1948, against a backdrop of still-steep wartime taxes, officials projected a budget surplus of $6.8 billion. Knutson put together a new bill, featuring a more progressive distribution of benefits than his previous efforts. It would raise the individual exemption from $500 to $600 and add new exemptions for the elderly and blind. And even with all those bells and whistles, it was still projected to cost just $6.5 billion -- less than the expected surplus.
The House embraced the plan, with Ways and Means ranking minority member Robert L. Doughton, D-N.C., adding his crucial support. The bill passed the chamber by a 297-120 vote. In the Senate, the Finance Committee scaled back the rate cuts, and the bill sailed to passage on a vote of 78 to 11, with 30 Democrats joining the majority. Once again, Truman vetoed the tax cut, but this time, both houses of Congress overrode him.
1948 Campaign
As Truman and his GOP antagonists headed into a new campaign season, both tried to make hay of the tax struggle. Republicans called for still more cuts, underscoring their opposition to big government and high taxes. And they had reason to think that voters would respond well; in a July 1948 Roper poll, 69 percent of respondents rejected the suggestion that Congress had cut taxes too much. And fully 57 percent of those polled in March 1948 believed they were still paying too much.
But Republicans had not managed to identify themselves clearly as the party of tax reduction. In March 1948 only 37 percent of those polled thought Republicans would steer a different course on tax policy than Democrats; 33 percent said party differences were unclear. Broad Democratic support for the GOP tax bill had muddied the waters, diluting the GOP's leverage on the issue. And while almost 70 percent of those polled wanted additional tax cuts, they also insisted that future relief favor the poor over the rich. Those sentiments did not bode well for the Republican tax agenda, which still featured a preference for lower rates on upper-income taxpayers.
Perhaps most importantly, voters indicated a strong willingness to pay additional taxes for a strong military. Fully 72 percent were willing to pay more if the money would be used to send military aid to European countries threatened by the brewing Cold War. And 69 percent were even willing to pay new taxes in support of public diplomacy, as the United States set out to make its case against the Soviet Union with an aggressive public relations campaign.
Indeed, the 1948 election revealed a remarkable tolerance for high taxes, as long as spending was focused on things that people cared about. Americans had not embraced the Republican critique of big government. GOP efforts to scale back the New Deal state merely served to antagonize many voters. As historian William Leuchtenburg observed of the Republican majority in the 80th Congress, "they veered so sharply to the right that they alienated one segment of the electorate after another."
In fact, Truman later claimed that the 1946 election had been a godsend for him and his party. "The luckiest thing that ever happened to me was the Eightieth Congress," he recalled. It gave him a foil for his 1948 reelection bid, in which he branded the legislative majority as the "do-nothing Congress." He went on to defeat Dewey's bid for the White House, and Democrats won large majorities in both the House and Senate. So much for realignment.
The 1946 election seemed to breathe new life into the New Deal. By giving voters a taste of limited government, it seemed to give them an appreciation of big government. It was a lesson not lost on some Republicans, who quickly came to terms with the broad outlines of the New Deal revenue regime. While Republicans -- and many voters -- continued to express their distaste for heavy taxes, they just as regularly displayed a willingness to swallow hard and pay them.