In September two years ago I spent an hour with Anibal Cavaco Silva at his offices in Lisbon. The Prime Minister is young (forty-nine), urbane, slight of build, vaguely intense in manner, in the style of the academic rather than the politician. I was with him in part for social reasons (he had become a friend of our ambassador to Portugal, with whom I was visiting), in part for professional reasons (I am a journalist never entirely off duty). We talked about this and that—he had just returned from an official visit to Washington. But his attention was elsewhere.
He blurted it out halfway through the hour. "Do you realize," he said, "that the tax bill your country passed yesterday means that when 1988 rolls along [Cavaco Silva's English is idiomatic], your highest federal tax rate will be lower than our lowest tax rate?" I didn't quite know what was the appropriate response. I think I said something pleasant about Magellan. He pursued the point, as if engaging in a soliloquy. As a former academic, he is part of a culture trained to think of high incremental taxation as—well, as the correct thing. I reminisced that ten years earlier, when my son and I had toured Denmark, our professional guide had taken us by the Danish Parliament and said to us (in a burst of statistical hyperbole), "Here in Denmark we have the highest tax rate in all Europe! It is ninety-five percent at the highest level. And next year we hope to lift that to ninety-nine percent!" He told us this as he might have told us that in the preceding Olympics the Danes had won two gold medals and four silvers but that in the next Olympics they hoped to make that three golds and six silvers.
Cavaco Silva didn't pause to consider the economic impact of the Reagan tax revolution (it is appropriately called that, I think—that long march taken by the highest tax rate, from 70 percent when Ronald Reagan entered office to 28 percent in 1988). I didn't doubt that he would be giving much thought to the economic consequences of drastically lower marginal tax rates—but not this afternoon. Today he was the dumbfounded graduate of an academic culture that thought of high taxes as a mark of civilized political behavior. That an American President who two years earlier had captured the vote of forty-nine states should have won an overwhelming vote in a Democratic Congress in favor of so large a tax reduction was on the order of waking up during the sixties to discover that Lyndon Johnson had appointed Joan Baez Secretary of Defense, with instructions to end the Vietnam War.
The tax policies of the past decade, beginning with Congress's decision to lower the top capital-gains tax from 49 to 28 percent, add up to a revolution not merely in economic thought but in ethical thought as well. It has been something on the order of a transvaluation: a general understanding that economic prosperity, brought on by success at many levels, is a general tonic for the society as a whole, and that those who bring on a substantial rise in employment and productivity ought not to be thought of as public enemies. When President Jimmy Carter was told in 1978 that the Democratic-controlled Congress was determined to do something so drastic as to cut the tax on capital gains, he reacted as if all the Ten Commandments were being violated at high noon in the Rose Garden. He inveighed with great and holy wrath against this Rich Man's Relief Bill, as did The Boston Globe, The New York Times, and The Washington Post—the three leading daily journals of the Eastern Seaboard establishment.
In due course the Treasury Department released figures quite astonishing to opponents of the lower tax rate. Tax revenues from Americans declaring capital gains were not only higher than they had been at the confiscatory rate, they were very much higher. (By 1985, by which time the rate had been further reduced to 20 percent, the revenue from capital gains was four times larger than it had been at the 49 percent rate.) Already the lowered marginal rates on income have produced increased revenues for the federal government. The whole idea of supply-side economics was being vindicated at an empirical level, and this caused great distress to the egalitarians. Professor John Kenneth Gaibraith, who in calling himself a socialist makes one of the few noncontroversial statements of a talkative lifetime, spoke from deep in the bowels of the egalitarian ethos when he said in my presence at a public debate at Harvard (and he has written to the same effect) that the lowered rates deeply disturb an important ethic in America—namely, the shared satisfaction of the public in knowing that the affluent are being taxed, well, punitively. Cavaco Silva and Galbraith and the leftist intelligentsia worldwide have been hit by the full fury of a kind of cultural dislocation.
The amplitude of the revolution is evident in the reluctance (at this writing) of Michael Dukakis to endorse what the adamant left within his party have demanded: higher taxation of the affluent and of corporations. Jesse Jackson has clung to his insistence on higher taxation (and even he has proposed for individuals a maximum rate of only 38 percent), but Dukakis has satisfied himself to say only that in a situation of great stress he would not exclude this alternative.
But any reform, before it can be said fully to engage the acquiescence of a society, needs a period of consolidation. There was little residual resistance to the Reform Bills in Great Britain, after their meaning had coursed through the minds (and hearts) of the thinking class of Great Britain. No more could it be said that the survival of the civil-rights revolution in the United States is problematic. Any return to Jim Crow is as inconceivable as a return to slavery. And a reduced tax, together with the indexation of the tax, is a solid floor under representative government. F A. Hayek, in his seminal The Constitution of Liberty, wrote that the progressive income tax is "not only the chief source of irresponsibility of democratic action but the crucial issue on which the whole character of future society will depend." The history of this century emphasizes private property as the ultimate brake on omnipotent government. Socialism, it has been written, operates by making property perpetually insecure. The flight of capital from the Third World is a reflection not so much of better opportunities elsewhere as of better sanctuaries. The Reagan revolution appears to be spreading to other countries (the incremental rates of taxation in India, Canada, France, Japan, Sweden, and Australia have been lowered). If at the turn of the century it is said that the momentum of socialism has been stopped (its analytical pretensions are intellectually dead), it will be largely on account of the restabilization of property. The Reagan revolution is a challenge to the presumption incorporated in the Phillips curve that employment cannot substantially increase without generating inflation.
Other matters of public contention have by no means been settled in any way that might be called permanent. Caution is perhaps necessary here, in that no social change can be called permanent if the historical perspective is too long-range. (From such perspectives one questions the stability of the British monarchy, or of the Bill of Rights.) But there are what one might call unsettled questions before the house.