Interview With the Wall Street Journal

February 7, 1985

Tax Simplification

Q. Last night, you enthusiastically endorsed the tax simplification concept and said you've instructed the Treasury to fashion a final bill. The word from some parts of the business community is that one part of that deal has already been struck; namely, that you will change the Treasury proposals and continue favorable capital gains tax treatment and accelerated depreciation and in return that you would continue the present taxation of dividends. Is that the general direction you wish to head?

The President. Well, let me just say about that that I'm hard put to answer a specific question of that kind. We were faced with the two problems: the one of what we want, the tax reform; the other with the necessity of coming in with the budget. We have been long hours around that Cabinet table on the budget matter and, finally, have now submitted it. We have not yet begun that process on the tax program.

I think, as I've said before, I think that Treasury study was probably the finest and broadest study that's been made of the tax structure that I can ever remember. And I hesitate to give any opinion on any single thing until -- again, those of us who've sat around the table on the budget are going to sit around that same table now on the tax program and go at every facet of it. I think we recognize that in that study -- I don't think anyone has said, ``Why, buy this entirely as it is'' -- we recognize there are things in there that are options.

And so, I don't think that I could or should give an answer on a specific of that kind.

Q. Well, apart from the specifics, sir, it's been argued that venture capital has helped fuel the American economy in recent years.

The President. Yeah.

Q. I think you agree with that. Does it worry you that by eliminating the special treatment given to capital gains that that might kill the goose that's laying the golden eggs?

The President. Well, this is going to be a consideration. This is one of the things that -- --

Q. Is that a real word?

The President. Yes. And, so, I think that this'll be one of the points that will be very much discussed, because the whole aim of both of these things -- well, in addition to the tax reform being necessary to eliminate a lot of unfairness -- and the biggest unfairness of all is the complexity of the present tax system -- but, in addition to that, we're looking to these both as things necessary for economic growth. And, therefore, we're going to look at this tax proposal and at anything as to whether it could contribute to economic growth or whether it could set economic growth back.

Q. Is that a suggestion -- you'd like to keep the current capital gains tax treatment?

The President. No, you're getting me to -- [laughter] -- to give an opinion on it. No. [Laughter]

Q. Try us. [Laughter]

The President. What I'm saying is, we will be giving each of these things consideration on that basis that I just outlined.

Q. Well, let me ask another concept question, then. You said last night that the individual tax rates would be no higher than 35 percent, perhaps even lower. Well, the way the Treasury proposal lowers individual tax rates is by increasing corporate taxes by 37 percent. Again, as a concept, do you generally favor that approach of individual versus corporate taxes?

The President. Oh, wait a minute. The corporate tax is given a ceiling of lower than the -- --

Q. No, but overall corporate taxes would go up about 37 percent. Not the rates, but overall corporate taxes would go up about 37 percent under the Treasury proposal while individual taxes would come down. Is that a general approach that you endorse?

The President. I, as I say, I haven't even made an attempt to study that bill in detail that much to know that. I assume that that would mean things that would be taken away from them that are present deductions. No. I would have to be convinced of the need to do that, because I'm a believer that one day we must recognize that only people pay taxes. And someday I would hope that we could arrive at a tax structure that would recognize that you can't tax things; you only tax people.

Q. Well, you also said last night that this was not going to be a tax increase under any disguise. Let me turn that around and ask: If the bill is modified to meet the objections of some critics, whether it's from the business community or elsewhere, could it be that the bill would be a revenue loser? And would that be acceptable to you?

The President. Well, no. I think what we're talking about here is a tax reform, and you're striving for neutrality in this. Now, in that kind of a reform, I'm also sure that there are going to be some people, obviously, who are going to pay more tax than they're paying now.

But, then, you're talking about people who are unfairly not paying a share of the tax today. And if you -- the aim of this kind of a tax program, and I think this is true of all three of the proposals that are now before us -- the two that are up in the Congress now, plus this Treasury report -- I think it is true that one of the targets there is the large amount of tax that is not being paid, many times legally, by virtue of the complexities of the present tax laws, in which some who fairly should be paying a share are avoiding it. And with the simplification comes a straightening out of that kind of a problem.

Q. But you want your final bill to be revenue neutral?

The President. Yes. And if it is revenue neutral, it will end up actually providing more revenues from the simple reason that you will broaden the base of the economy.

Q. Let me try one more tax question, sir. You also spoke favorably about the notion of lowering rates and, as you just said, broadening the base by eliminating many exemptions. But right after you did that, you then called for two new exemptions; namely, enterprise zones and tuition tax credits. Doesn't that just encourage others to try to carve out their own special places for their own pet writeoffs and threaten to unravel that whole concept of lowering the base by broadening -- or lowering the rates by broadening the base?

The President. Well, if you're trying to make a tax program more fair, which is also part of this proposal -- take the issue you've raised of tuition tax credits. Here you have, I think, a very broad -- based on fairness in the country -- you've got people who are compelled to send their children to school under the law, because we believe that a democracy can only exist if you have a literate citizenry. And yet these people who, if they choose or feel they can get a better education for their children, choose a private or parochial school, independent school of some kind, they pay the full cost of sending their child to that school. But at the same time, they're paying the full cost that parents of children are paying -- they're paying that in taxes to support the public school system.

Now, if you stop and think what the additional cost to public schools would be if suddenly the independent schools closed and all those students were turned over to the educational market -- and it would not mean an increase in revenues for public education, because already they're getting the money from those parents -- you could see what a burden this would be.

Well, it seems to me that it's only fair that some parent -- as a matter of fact, the ultimate fairness would be educational vouchers. Does government properly support a school system, or does it provide the funds directly to the students to get an education? And there would be public schools available; there would be independent schools available. They could take that voucher and go where they want, and you put competition back into education.

Q. Mr. President, on the politics of tax simplification, the general idea doesn't seem to have a lot of support among the Senate Republican leadership, and the business community has its problems with some of the provisions. What can you do, personally, to turn around the opposition from these kinds of people who are normally in your corner on things?

The President. I'm -- at the beginning, you said at the beginning what -- --

Q. The Senate -- on tax simplification.

The President. Oh. Well, I think that there are some people, simply on the basis of what was revealed of the Treasury Department study, that read into it things they thought were inimical to their interests and immediately took off. But I think in many instances, when you sat down with those people and pointed out what the change in rates did, some of their hostility disappeared.

I think the most important thing that we're going to face is, once we have settled on and agreed on a package that we believe is fair and is the reform that is needed, is then to make sure there's no misunderstanding or lack of understanding of what it will actually mean to the taxpayer.

Basically, we found that the overwhelming majority of people were going to get a sizable decrease in taxes, based roughly on this setup, and that those that weren't were going to get an increase were people who, as I say, are not presently paying their fair share.

Federal Reserve System

Q. More generally on the economy, you've made it pretty clear that you believe that we're on the brink of a sustained economic boom. Are you worried that this might be cut short by the Federal Reserve? And would you like to have a greater say in Federal Reserve policy?

The President. Well, we try to work very closely, as closely as we can, with the Federal Reserve on this. And they know what it is that we feel is the sound policy. And so far, I must say, right now they're on target -- and that is we need a money supply that is commensurate to the growth in the economy and to continue that growth without inflation. And that provides two lines between which you must stay. And so far, as I say, right now they're right on target with that.

Q. You're comfortable right now. Were you comfortable back in July and August?

The President. I think there were some times when it fluctuated widely and when they got well below their target and all. But, as I say, we're trying to stay in close touch with them. And I think we've made it plain what we believe.

I also recognize that there are times the tools are not that accurate. There are times when it isn't an outright decision of theirs that sees the money supply fluctuating, and the fluctuations can be caused from other and outside forces. But I think we're pretty much in agreement on -- --

Nicaragua

Q. If we could shift to foreign policy for a moment. Your administration is obviously headed into a battle with Congress over the aid to the contra forces in Nicaragua. Last night, you said that aid was necessary to our own self-defense. What I keep wondering is, would you like to see the contras actually overthrow the Sandinista government? And, if not, what's the purpose of aiding them?

The President. The purpose of aiding them is to aid literally the people of Nicaragua, who are striving to get the government that the revolution promised them. If you'll recall during the revolution, the revolutionary forces appealed to the Organization of American States for help. And they asked the Organization if they would please try to persuade Somoza to step down and, thus, end the bloodshed. And, in return for this, they gave the Organization of American States the declaration of principles of what it was they were seeking in the revolution. And this was pure democracy. This was all the civil rights and human rights, freedom of speech, freedom of labor unions, freedom of religion, and all of these things.

Now, what happened we saw happen once before with Castro's coming to power in Cuba. He had other allies that wanted a democracy, and he never admitted to his true leanings until that revolution was over.

Well, what happened was the faction known as the Sandinistas took over. They ousted a number of other revolutionary leaders; some of them were exiled; some, I think, were done away with; some imprisoned.

But they have set up a totalitarian government. They've made it plain: Their allies are Cuba, the Soviet Union, the Communist bloc, even Mr. Qadhafi, and now Iran is getting into the picture. But they've set up a totalitarian government. They have betrayed the principles that the people of Nicaragua were fighting for. And what we think is that we should be on the side of those people who actually are only asking for the democracy that they'd fought a revolution to get.

Q. It sounds as though you are saying that the objective is an entirely new government in Nicaragua. Would that be fair to conclude?

The President. Well, when you answer a question that simply, though, and you come back, then, you see, you get into the thing -- well, are you talking about individuals or are you talking -- you're talking about the governmental form. Now, if that governmental form can come by way of the people who are presently in that government and who then will be willing to stand for elections at appropriate times, that's fine. But that's what it's really all about, is getting the revolution the people fought for.

Terrorism

Q. On a similar kind of question, Secretary Shultz has been giving speeches about the need to retaliate against terrorism. But, in fact, there hasn't been any U.S. retaliation for the attacks on our Embassies and our Marines, and five Americans right now are being held hostage -- --

The President. Yes.

Q. -- -- in Lebanon. Is your policy on using force against terrorism really any different from the Carter administration's?

The President. Well, I think you're putting some apples and oranges together there. The Carter situation was not dealing with unknown, hidden terrorists. They were dealing with a legitimate government, and not a very good government, but -- [laughter] -- at least it was the government of the nation. You knew who you were dealing with; you were dealing with a national entity.

The problem with terrorism so far and why, as I've said, much of the answer lies in what we're going forward with now, and that is better relationships with all the other democracies to where we'll make extradition easy, we'll exchange intelligence information. There are two ways you could deal with terrorism, and one of them is terrorism itself.

Suppose in revenge, just on the basis that you think some people of a certain group or sect or belief did this, and then you strike back and perform the same kind of brutal crimes against some of those people, without any knowledge or assurance that you're getting the people who perpetrated the first crime. Well, that's no way to fight, and we don't believe in that.

The thing is, you have to find an ability to locate the source, if possible; obviously, the best way is if you can infiltrate and then get some advanced information on when they're going to strike -- be prepared for them.

Our problem with the worst terrorist act -- the big one, of course, was our Marines in the Embassy, was nothing but some suspicion of a certain locale in Lebanon, and yet there was no way to sort that out or separate it out from a community of other people and no way to strike back without causing a lot of innocents to die.

And what we now, I think, are looking at is the possibility that some terrorists actually do have national support and backing. Then, with that established, then you can let that government know that there is going to be redress against that government if these acts continue.

U.S.-Soviet Negotiations on Nuclear and Space Arms

Q. On the broad question of arms control and the U.S.-Soviet relationship, you talk about arms control agreements with deep cuts and offensive weapons and extensive verification. When you do that -- aren't you really asking the Soviet Union to become an entirely different kind of country? And can we really expect that in our lifetimes?

The President. Well, I'm not going to be euphoric about this, but I do think that one of the things we have going for us at this time, that hasn't been present in much of our previous negotiations, is that we go to the table now in a situation in which you're not going there looking at the Soviets as if, ``Well, they're people just like us, and maybe if we talk sweetly enough, why they will be conned into being nice, too.'' No. The only way you're ever going to succeed in negotiations is if you can go there with a situation in which it is to their practical interest also, that their interests are served by coming to an agreement.

And I think the fact that we go there now with our own military buildup, with them seeing that the alternative to legitimate arms reduction could very well be an arms race with an industrial power that they know they cannot match; in other words, we're saying to them, ``We're not going to let you get a monopoly on power to the point that you can start winning by simple ultimatums -- threats of, `Surrender, or die' -- so make up your mind. You either join in a legitimate reduction in which both of us will reduce in such a way that neither one of us represents a threat to the other, or you face that kind of a race.''

It was all summed up in a cartoon. I know your paper doesn't have cartoons, but -- --

Q. Sort of -- [Laughter]

The President. Sort of -- all right. But a cartoon one day and it -- right back early on in our military rebuilding -- and it was two Russian generals, and one of them was saying to the other, ``I liked the arms race better when we were the only ones in it.'' And I think that's been the situation over a number of years.

Q. On the military buildup, one of the prominent things is the Strategic Defense Initiative. And would you continue to favor this, even if your own scientists concluded that it could never be leak-proof and that even a few missiles would always get through and destroy cities?

The President. Oh, I've never asked for 100 percent. That would be a fine goal, but you can have a most effective defensive weapon even if it isn't 100 percent, because what you would have is the knowledge that -- or that the other fellow would have the knowledge that if they launched a first strike, that it might be such that not enough of their missiles could get through, and in return we could launch the retaliatory strike.

Now, that isn't really the goal of the Strategic Defense Initiative. I tie that to what I think is the goal of these arms negotiations. The Soviet Union -- Chernenko and Gromyko both have publicly stated that they would like to see the elimination, ultimately, of nuclear weapons. All right, they've said it. That's what our goal is.

Now, if they really mean it, we can go to a table and sit down and start negotiating reductions, aiming toward the elimination of those weapons. If they don't mean it -- or either way -- I think that to go forward with this research on a strategic weapon is hand in hand with that goal, that ultimate goal. If you could have that kind of a defense in which they would have to say: ``Well, wait a minute. How many missiles would we have to build to get enough through on a first attack that we wouldn't be threatened with, then, the retaliation?'' And then they will see the value that this is what I mean by making nuclear weapons obsolete -- they'll see that this defensive weapon could be a contributing factor to eliminating such weapons.

If we come up with such a weapon, we're not going to stand there and say: ``Okay, now we've got you. We can launch the first attack.'' I don't think this country is ever in a position where it wants to do that. We don't start wars. We have no intention of starting one now. But what we would then be able to say to them is: ``Look, we're willing to join you. We'll do away with ours. You do away with yours. We've got this thing here now, this defensive weapon, and we're very willing to use this, not to enable us to fight you, but to simply do what we both want, and that is get rid of the weapons.''

Q. Mr. President, let me bring you back if I may -- --

Principal Deputy Press Secretary Speakes. You're about 10 minutes into your next appointment, so -- --

Farm Credit Programs

Q. Just a quick one. Leaving aside David Stockman's indelicate remarks about the military caring more about their pensions than the security, for which he's apologized, do you agree with the substance of his remarks that the system of military retirement benefits is bloated and the taxpayers shouldn't be bailing out farmers who took out bad loans?

The President. Well, right now, we're offering a program in which we're hopeful that we can salvage some of those farmers. The situation we're facing today with those farmers is one other people in other lines of work have faced, and it's the result of ending an era of building your business on expected inflation. And farmland, unfortunately, was one of those things that, in an inflationary world, zoomed in value. And then they borrowed on the basis of that as security. And when we were successful in bringing down inflation, one of the first things that happened was the nose-diving of that land.

Military Retirement Benefits

Q. How about the other part of his criticism -- the military pensions are bloated? Is he right?

The President. No. I have to think this is a little different than any other pension program you want to name -- the military. They go into a profession or a business -- profession is the word; I guess it should be used -- in which they know that, say, in a matter of a certain number of years, even though in any other line of activity they would be literally at their prime -- your business or mine or anything else -- but they know that the physical requirements are such that they're going to be out.

Now, there is that coupled with the sacrifice that is made by the military. I talked to a retired military man -- in this case he was an officer and reached high rank -- and he had retired, and then he had found other employment. But he told me that one of the reasons -- retiring was that in 31 years of his marriage -- they sat one night and totted it up -- 20 years of the 31, they had been separated from each other, that he, in the call of duty, for 20 of his 31 married years had not been -- he and his wife had not been together. He was out there in the world someplace. And you -- --

Q. That's worse than someone running for President.

The President. What?

Q. That's worse than someone running for President. [Laughter]

Sir, Larry Speakes would not forgive me if I didn't ask at least one question about the budget deficit before we leave.

The President. All right.

Mr. Speakes. The last one.

Budget Deficit

Q. Okay. I will. I knew you'd be mad if I didn't get that in, though.

You know, in fiscal years '83, '84, and '85 we'll have budget deficits of about $600 billion. At the same time, unemployment's coming down, inflation is staying around 4 percent, interest rates have actually come down a little bit. Could it be that maybe these budget deficits really don't matter?

The President. Yes, they come to a point where they matter. I've been saying that for about 30 years.

Q. I know. And yet you've run these -- --

The President. Yes.

Q. -- -- huge deficits, and you're doing so well.

The President. I think just one of the most wonderful things to see and to hear is to hear my own words coming back at me from over those years by a few Democrats right now, who suddenly have discovered deficits. And yet for 50 years, with the exception of about 4 years in that 50, they have controlled the Congress of the United States.

Q. But why don't they affect inflation and interest rates and unemployment now, if they're so bad?

Mr. Speakes. Last -- --

The President. No, what they can do is get to a point in which the total debt -- and remember, with all their moaning and crying, the national debt was about a trillion dollars when I came into office. And the first of those major big deficit increases occurred after I was in office. However, it was not my responsibility, because your first 8 months in office, you're on the other fellow's budget. I don't come into office and declare how much we can spend. The budget is there until the following October. In fact, when the bottom fell out of the economy in July of '81, not one facet of my economic program had been passed as yet. So, it couldn't have had anything to do with that deficit.

But what is happening now indicates the danger that over the 50 years, the situation keeps getting worse. And let me give you one. When we put into effect the War on Poverty, which started in the last half of the sixties and ran through the seventies -- and poverty won, because the rate of increase in people in poverty increased in spite of the War on Poverty and all those great programs -- but in the 15 years from 1965 to 1980, the budgets multiplied to 5 times what they were; the deficit went to 38 times what it had been.

So, you've got a built-in, structural deficit. And the President -- to call it the President's budget -- the President is responsible for submitting to the Congress what they have required in the programs they have legislated. And the Congress, in turn, when the President -- and this is the situation a President's in -- when the President submits and says, ``We can run this program for this amount of money,'' and it's less than what the Congress thinks you should, the Congress insists that you spend more money. And they even tell you that if at the end of the year there's any money left, you're going to have to spend it before the end of the year. This is a structural problem.

And, of course, it's multiplied, and it's gotten worse. And a large part of this had to do with the great fall into recession that occurred in '81 and through '82. And so, there's no question that we're going to be better off and there's not going to be inflation on the things that bother us if we get government back to where 43 States or so have it, and that is that you can't spend more than government takes in.

Q. Thank you.

Note: The interview began at 2:48 p.m. in the Oval Office at the White House.