As the efforts of President Jimmy Carter to reduce tax expenditures stalled, presidential candidate Ronald Reagan and the Republican Party seized the issue of tax reform. They fanned public hostility to anything resembling new taxes, and stimulated popular enthusiasm for tax reductions. In 1981, when Reagan became president and the Republicans took control of the Senate, they set out to adopt Reagan's campaign platform. By 1986, they had produced the most significant changes in the income-tax system since World War II, but the overall results turned out to be very different from what President Reagan and his advisers had foreseen in 1981.

The Revolutionary Moment Won and Lost

When Ronald Reagan ran for the presidency in 1980, the heart of his tax platform was a populist call for across-the-board major tax cuts. Those cuts, along with indexing of the income tax for inflation, promised significant economic relief to middle- and working-class Americans. Reagan emphasized, in particular, that the deep cuts would directly offset the harsh impact of inflation on standards of living for all income-tax payers. Like Franklin D. Roosevelt in 1935, Reagan sought to use tax issues to build a new political coalition of workers and consumers.

During his campaign, however, Reagan never entertained any intention of pushing beyond rate cutting or indexing to reform the federal tax system in a fundamental way. A nonstarter was base-broadening reform, which he aggressively criticized. As early as 1975, he had expressed his skepticism about the concept of tax expenditures. In July 1979, he said that the term “tax expenditures” was “the new name government has for the share of our earnings it allows us to keep. You and I,” he said, “call them deductions.” “All told,” he concluded, “our rich…Uncle Sam has an eye on about $170 billion that we think is ours.” He was focused on the political fact that President Carter and other liberals supported “tax expenditure” reform because they were interested in closing tax loopholes for the rich in order to make the income tax more progressive and increase its revenue capacity.

Reagan's vague position on tax expenditures opened the way for corporate lobbyists to shape the agenda of his presidential campaign and to make his tax program more similar to those the Republicans had championed during the 1920s.