May 30, 1985
Thank you, ladies and gentlemen, Governor Robb, Senator Trible, Mayor Walker, and distinguished members here of the Williamsburg Foundation, the officials of that organization, and you ladies and gentlemen.
It is very good to return to this city which is so closely associated with the birth of the American Republic. Boston is called the Cradle of Liberty, Philadelphia is where the Liberty Bell first rang, but Williamsburg, too, has an honored place in our history and our hearts. Because, as you have been told, here a practical plan for American self-government and a declaration which became the basis for the Bill of Rights of our Constitution were written, endorsed, and sent out to the world by the Virginia Legislature.
Here the arguments against unjust taxation rang out like a firebell in the night, and the chief arguer, Patrick Henry, gave our movement for independence the one thing it needed to become a revolution -- he gave it passion.
And here, through long hours of great debate in the capitol behind me, the people of the colony evolved irresistibly from British subjects to American patriots.
And so, I'm happy and honored to speak in Williamsburg today. For I, too, mean to speak of liberty and a practical plan to increase its measure in our country. I wish to speak also of the philosophical underpinnings of that plan, for whatever happens to it, I mean for it to be understood.
Two nights ago I unveiled our proposal to revolutionize the Federal tax code. I spoke of the system as it is now, and as we wish it to be. But just for a moment today I want to note how our modern tax system evolved from a modest attempt to raise modest revenues to the behemoth to which we are currently beholden.
The Federal income tax only began in 1913. At that time some strange things happened. When it was being debated in the Congress one man spoke prophetically -- or I should say, very honestly when he said, ``We don't need this tax for government's needs. We need it for government's wants.'' And he was pretty prophetic, but there was another man that was almost laughed out of public life and public office, a Senator who said, ``If we pass this amendment, we may very well see the day when the government could think it could take as much as 10 percent of a person's earnings.'' [Laughter] They thought that was a pretty ridiculous statement.
Well, this income tax was instituted because the Federal Government needed more money to operate because there was a widespread feeling that the rich ought to contribute to the system that made their riches possible. It was a system aimed almost exclusively at the wealthy, a class tax, as opposed to a mass tax.
The first tax rates were low. The 1913 income tax imposed a top personal rate of 6 percent. And you had to report an income of more than a half a million dollars a year to pay it. The poor and the middle class paid nothing. The personal exemption was $3,000. Now you know why they're called ``the good old days.'' [Laughter]
During the First World War tax rates were increased, but they were relaxed again during the 1920's. Right up until the eve of World War II, the Federal income tax was still a tax limited to the wealthy. It affected only 4 or 5 million people, and their taxes yielded, in all, less than 20 percent of the Nation's revenues.
But during and after the war a great change came -- tax rates were increased, exemptions were reduced, and inflation brought more people into the tax structure. Withholding was introduced for the first time, and suddenly just about every working American was paying the Federal income tax. And the tax suddenly was the largest single component of government revenues.
What followed, we know too well -- the tax system began to grow and grow, rates were pushed higher, more and more people found themselves paying more and more money. Ironies abounded. As the tax system grew bigger and more powerful, it also grew more incompetent. And as it demanded more to pay for programs to better our lives, it became more heartless.
Seventy-two years after its inception, what is our Federal tax system? It's a system that yields great amounts of revenue, yes, but even greater amounts of discontent, disorder, and disobedience. It's a system in which the top personal tax rate rose to 94 percent. And it only came down from those heights when a young man named John Kennedy decided some time back that while it's all right for the Federal Government to be your partner, it's not quite fair that he be your boss.
It's a system from which no full-time wage earner is exempt. Now, almost everyone, no matter what their circumstances or their special needs, must pay. In fact, so many pay so much that someone has figured out that it takes the average taxpayer until almost May every year before he starts working for himself. Up till then, he's working for the government.
It's a system that allows an exemption of barely over $1,000 a year for each child born into a family, an exemption so utterly out of touch with the realities of everyday life that it serves as a metaphor for exactly how ridiculous the entire structure is.
It's a system that increasingly treats our earnings as if they were the personal property of the Government, with decent citizens called before the Internal Revenue Service to answer for their income and expenditures and show their papers and their proof in a drama that is as common as it is demeaning. Wasn't there a line a couple of hundred years ago about being safe in your books and your records?
Well, it's a system so utterly complex and ultimately inexplicable that half the time the tax professionals themselves aren't sure what the rules are -- a system that even Albert Einstein is said to have admitted he couldn't begin to fathom. You know, it's said that his hair didn't look that way until after he experienced his first tax form. [Laughter]
It's a system that is antigrowth and antiproductive for it discourages the very virtues that make a man and woman valued contributors to society. You know this if you've ever worked overtime to pay for your child's braces. The money you earn is taxed at so high a rate as to render your extra efforts almost totally without point or profit.
It is, finally, a system whose most serious sin may be its most subtle for it seems so rigged, so unfair, that it corrupts otherwise honest people by encouraging them to cheat.
Thirty and forty years ago you didn't hear people brag at social get-togethers about how they got their tax bill down by exploiting this loophole and engineering that credit. But now you do. And it's not considered bad behavior. After all, goes this thinking, what's immoral about cheating a system that is itself a cheat? That isn't a sin, it's a duty.
Our Federal tax system is, in short, utterly impossible, utterly unjust, and completely counterproductive. It's earned a rebellion, and it's time we rebelled.
We must move and move now for all the reasons I've named and more. The current system just doesn't work anymore. The underground economy and the cult of cheating prove that this is so. What to do? Well, we took our first step toward a second American revolution in 1981 when we lowered tax rates for every individual in this country. This increased our economic freedom and sparked one of the greatest economic expansions in our nation's history.
But now is the time to take the second step, the historic step for America's tax plan. Now is the time to turn our tax system around once and for all and make it more just, more equitable, more comprehensible. Now is the time to create a tax system that will encourage and not penalize the creation of wealth and jobs. Now is the time, in short, to get the Federal Government off our backs and out of our way.
You're familiar with our plan. We propose to simplify the rate structure down to just three rates -- 15, 25, and 35 percent. We propose to increase the personal exemption by almost a hundred percent, from just over $1,000 to $2,000 for every taxpayer and dependent with a provision to increase it still more if inflation occurs. We propose to end unproductive tax shelters so that no one will be able to hide in the havens that privilege builds. But we will retain those few tax advantages that speak directly to how Americans live their lives and how the American economy operates. For instance, the mortgage interest deduction stays for the house that you own and live in, and along with that, no less than $5,000 in other interest expenses would still be deductible.
We propose to lower the top corporate income tax rate from the current 46 percent to 33 percent, and we've proposed a new minimum tax to deal with those corporations and individuals that have managed not to pay any tax at all.
Now, you might see the present tax structure as a hornet's nest. Our plan is an attempt to burn away the webs and the nest and let the Sun shine in to start new, start clean, and start over. Is this long overdue reform revolutionary? I believe it is, but we conservatives don't launch revolutions lightly. There must be a clear and compelling need, and the reform that's proposed must bear within it the promise to better the lives of all of our citizens, and the reform must be achievable.
Well, our tax reform plan of 1985 satisfies those requirements. Beyond that, it will go a long way towards satisfying America's hunger for justice, thirst for opportunity, and search for freedom. By lowering the highest tax rates on individuals and businesses, we encourage the growth of our economy. Lower tax rates, of course, increase the after tax wages for additional work. And so, people will be able to profit once again from working overtime or at a second job. Lower tax rates will also increase the aftertax return on savings and investment. And so, people will tend to save and invest more. This will provide the money the economy needs to build additional factories or buy more machinery.
These are not just economic facts. What I am speaking about is a profound public good. For when a society has high levels of economic growth, most everyone benefits, especially the poor. More jobs are created, there's more money to spend on medical care and education, the standard of living increases, and all of this enhances the quality of life.
By simplifying the rate structure itself and by eliminating the devices by which the powerful evade their responsibilities, we ensure that people in the same circumstances will pay the same levels of tax. We'll ensure that those now earning lower incomes will not find themselves paying a greater percentage of their income in taxes than those earning higher incomes. We'll ensure that from the hard streets of the cities to the soft green hills of the suburbs the people of America will pay their fair share and no more.
So, I believe the virtues of our proposal are clear. You'll know that your neighbor is paying roughly what you are, that no one will be able to rig the system to his benefit. You'll know that the tax rates themselves won't creep up and mug you just as you start to succeed in the world. And we'll all know that those least able to pay will pay little or nothing.
But what is the broader purpose of our tax proposal? Well, I'm glad to be standing in front of the House of Burgesses as I address that question. The members who spoke in this capital said no to taxes because they loved freedom. They argued, ``Why should the fruits of our labors go to the Crown across the sea?'' Well, in the same sense, we ask today: Why should the fruits of our labors go to that Capitol across the river?
You know, we have a saying among some of us there in Washington: We're going to stick to it. If I sound like I'm talking about government as something else, I am. When we who are now there start talking about government as ``we'' instead of ``they'' we've been there too long. [Laughter]
When you read our tax code you realize that somehow we got lost along the way. Somewhere along the line, we stopped understanding that people worked not for the government, but for themselves; that they get up every morning and go out into the world to earn their bread, not to support a government, but to support their families. We, the citizens of the United States, have got to get public law back in line with private imperatives.
I see all of you out here and I'm sure that most of you have a wallet in your pocket or your purse. Just think of what you have in that wallet, how you earned it, and what you want to spend it on. That's your money. That's your effort. That's your freedom there. The disposition of that money belongs, by rights, to you.
I want a tax system that keeps as much of that money in your wallet as possible. The primary reason is moral. It's your money, after all. But the secondary reason is practical. You'll do more for the economy with it, and you'll do more to benefit your fellow citizen with it than the government will.
Now, I'm going to be speaking a great deal about tax reform over the next few weeks and months. And I expect it to be challenging. It's a shrewd turn of the American people that, when you announce a plan to help them, they stand back and scrutinize it and approach with a question: Now, how are you going to hurt me this time? [Laughter] Well, this is not an unreasonable question. So many times the American people have been promised better and been delivered worse. But I tell you from the bottom of my being, this is a plan that's going to help our country by helping every individual in it.
Our tax proposal will not increase the deficit; it is revenue neutral. It is not a tax increase; in fact, it's designed to be the first step toward lower tax rates in the future. When you simplify a thing, make its lines clear and clean, you make it much less vulnerable to quiet mischief and selfish tinkering. So, if some Congress of the future gets it in its head to increase taxes -- to raise the lowest personal tax rate from 15 percent to something higher -- the public will immediately see what is happening and understand what is happening. And they will rise up and resist, and they will be heard.
In a way what I'm trying to say is an unclean, unsound structure is vulnerable to mischief. When the house is a mess and everything's chaos, you're not likely to notice when something is missing. But when the house is clean and designed with balance you tend to notice if somebody tries to cart off the furniture. [Laughter]
Our forefathers fought a revolution for two reasons: to give liberty to a naturally independent people and to secure, in the words of a Burgess who met here, ``. . . Prosperity in the Community and Security to Individuals.'' The idea of freedom impelled them; it intoxicated them. And it's freedom that impels us still.
History's not a static thing. History moves; it never stops. And the American Revolution continues as we continue to push back the barriers to freedom. We, like the patriots of yesterday, are struggling to increase the measure of liberty enjoyed by out fellow citizens. We're struggling, like them, for self-government -- self-government for the family, self-government for the individual and the small business and the corporation.
And so, we offer this tax proposal of 1985 in the name of growth and fairness. We offer it to ensure generations of economic power for the citizens of this free and vital nation. We're doing it in the name of our children, and we're doing it in the memory of those towering souls who walked these streets and met in this capitol and together wrested justice from the heart of oppression. We offer this plan in memory of the patriots who took a handful of demoralized little colonies and invented a nation. We're doing it to continue their work.
I ask for your help. Without it, nothing can be accomplished; but with it, everything is possible. And so, in the truest sense, this great effort -- America's tax plan -- is in your hands. And for that I'm truly thankful. And I can only urge: America, go for it!
Thank you. Thank you, and God bless you. And thank you for inviting me. It's been wonderful to be here.
Thank you very much.
Note: The President spoke at 10:36 a.m. at the Colonial Capitol Building. The Colonial Williamsburg Foundation sponsored the celebration.