Remarks to Local Business Leaders at a White House Briefing on Deficit Reduction

November 30, 1987

Welcome to the White House -- America's first public housing. [Laughter] You've heard this morning from Howard and Jim Baker and Jim Miller about our budget compromise with the Congress. I called for the budget negotiation and received daily reports from our negotiating team and gave instructions on what I felt was acceptable and what was not. And I'll do everything I can to see that the agreement is adhered to and fully implemented. During the talks, our team was sent back to the bargaining table twice for better deals: one time to get a billion dollars more from entitlement spending, another to get revenue increases down to the kind I called for in the budget that I had submitted last January.

Our instructors, our negotiators, I should say, were instructed that only an enforceable agreement was acceptable, and I'm sure that they've made that clear to you already. It's tough to come up here last and hope that you aren't repeating things that have already been said. [Laughter] I said I would not agree to something like we had a few years ago and that when the tax part was to come to my desk several weeks before the spending part, but the spending part was to have $3 in cuts -- spending cuts -- for every dollar of increased revenue.

So, I approved the taxes, and then the cuts in spending somehow got lost out there on Pennsylvania Avenue and never arrived. This time I'm taking the advice of that 19th century political sage, Finley Peter Dunne. He said: Trust everybody, but cut the cards. [Laughter] This time the tax and spending bills are to arrive close enough together for me to sign -- or veto -- them together. As I've said many times, the result of these negotiations is not a perfect deal, far from it. But it's an adequate deal, the best we could get, and it's a good first step. It's worth the support of everyone here and of those who've stood with me for so long in the Congress. And I say that for two very important, no, two absolutely crucial reasons: keeping our economy strong and keeping our national defenses strong.

First, the economy. The best thing about this deal is what it didn't do. It didn't touch marginal income tax rates, the very heart and soul of incentive economics. The second round of tax rate cuts will go into effect on January 1st, right on schedule. The top income tax rate will drop to 28 percent, and that's the lowest rate since 1931. Indexing, despite some attempts to do away with it, will remain. Taxes will stay lower and flatter, paving the way for strong, robust growth through 1988 and beyond.

And the fact is it's as clear as day to anyone who examines the figures that cuts in tax rates are not part of the deficit problem. They're part of the solution. And maybe some others here along with me can go back in memory to 1932. I can; I was looking for my first job -- the depths of the Great Depression. And the Congress at that time decided to increase the income tax rates. The bottom rate was 1.5 percent. They raised it to 9. The top rate was 25 percent. They raised it to 63 percent. And total revenues declined by 21 percent. So, our tax rate cuts haven't lowered revenues one bit. In fact, just as we predicted, cutting tax rates produced a healthy, expanding, vibrant economy that enlarged tax revenues. Since 1984, the first year that our tax cuts were really in effect, revenues have climbed roughly 18 percent, after inflation. And they're continuing to grow.

So, here's the bottom line on taxes in the budget deal: no rate manipulation, no tampering with indexing, no new broad-based taxes such as a sales tax or a new excise tax, no revenues other than the kind that we called for in our budget -- the one I submitted last January. And as I said, this agreement does not preclude me from vetoing a bad tax bill -- and I will. Now, I've heard some talk about all of this being a surrender. Well, I can't help thinking that if every surrender were like this one the British would still be camped at Yorktown.

Now for the second reason that makes this a good deal. We actually came out of this ahead on defense, with about $3.5 billion more in defense outlays than last year. No, that $3.5 billion is a lot less than we need, but it's better than the $16-billion cut in defense budget authority we would have had to suffer under sequestration. The difference between these two approaches means that we have to make far smaller cuts in our defense programs. It means a more stable operating budget with more flying days for our planes and more steaming days for our ships. We won't have to stretch out maintenance schedules as much. And that means a military that is better trained and more ready to do its duty, whether our duty calls halfway around the world or for right next door, as it did in Grenada.

The agreement also means that we can continue to modernize our military at a pace that makes sense. The difference here comes down to simple numbers. For example: more than 400 tactical missiles, 8 helicopters, 2 F - 15 fighters, $200 million worth of ammunition, and $300 million worth of spare parts, 1 attack submarine, 36 M - 1 tanks, 3 Trident II missiles, and 1 Peacekeeper missile. Well, with years of arms reduction negotiations about to bear fruit this is no time to be cutting the very systems that have given us bargaining leverage. If we're to give up something we ought to get something from the Soviets in return. And with negotiated missile reductions coming, we'll need even more urgently a strong conventional force to deter the Soviet Union's massive conventional strength. This agreement will preserve our national defense at this critical time.

But let me be clear about something. No one part of this agreement was enough to get me or the congressional leaders to go along. The total package is what we bought, and we'll all be watching closely over the next few weeks to see that the agreement is fully implemented. To put it most simply: So far as we at this end of Pennsylvania Avenue are concerned, it's all or nothing. A partially implemented deal is no deal. When Jim Wright, Bob Byrd, Bob Michel, and Bob Dole stood with me 10 days ago, we all pledged together to put the country on the right course toward a balanced budget. That pledge means no additional spending. It means no taxes that will harm the economy. It means we will not compromise our vital national security interests. That's the pledge we took, and that is the pledge that I trust we will maintain.

You know, there's a story about Britain's great Prime Minister, Benjamin Disraeli. Disraeli had a biting wit, which he often turned on his liberal rival, Gladstone. Liberal, of course, in those days, meant someone who opposed tariffs and trade restrictions and favored tax cuts. So, as you can see, some things have changed. [Laughter] In any case, Disraeli was once asked the difference between a misfortune and a calamity. And he replied, ``Well, if Gladstone fell into the Thames River, that would be a misfortune; and if anybody pulled him out, that would be a calamity.'' [Laughter]

So, to those who say that falling into this agreement was a misfortune, I only say: Now that we're in it, for anyone to pull us out would be a calamity. The entire world has been looking for a sign that, despite political differences, America is getting its fiscal house in order -- and has rightly taken the budget accord as that sign. From Britain to Japan, governments have hailed the agreement and said that lower interest rates would follow.

Last week the central banks of West Germany, the Netherlands, Belgium, and France did lower their rates. From the Germans, in particular, this was a welcome step toward economic policies that, like our own, stimulate growth. In today's world no nation is an island unto itself. Lower interest rates and more growth abroad help us here in America. Higher interest rates abroad helped drive our rates up; as they come down, ours can come down, too. And as other nations grow faster, our exports can expand even faster than they have and our trade imbalance can correct itself. Lower interest rates, more exports -- put them together, they mean more investment, more new businesses, more growth, and more jobs for all Americans. That's our stake in the way the other major industrial nations are responding to our budget accord.

Seven years ago, when I assumed this office, America was in the worst economic crisis since the Great Depression. Today we're in the longest peacetime economic expansion on record -- 59 months of uninterrupted growth. Just last week we learned that in the third quarter, the gross national product patched out at a hot rod speed of 4.1 percent a year. In recent months exports and business investment have been the tigers in our tank. Real business investment grew at an annual rate of 26 percent. Real exports rose at a 19-percent yearly pace.

All these economic numbers add up to something very simple: America is strong, stronger than the critics think. But then, for more than 200 years, when you've added things up that's the answer you've come up with. There is a power in America that has always seemed to surprise the critics and to carry our nation through, even when we in Washington stumbled. It's a power that comes not from government, but from towns and farms, from neighborhoods, schools, and churches all over America. It's the might and wisdom of a free people in a free land.

For several months, before the financial markets started falling and rising like leaves in the autumn wind, I was warning that after 4 years of economic growth, we in Washington faced a choice. In one direction, continuing the economics of growth -- low tax rates, less government spending, getting control of our deficit, open international trade. In the other direction, higher taxes, more spending, bigger deficits, protectionism -- and if all that happened, perhaps a depression.

With this budget package, Congress and the administration have joined hands and begun to lead Washington cautiously, very cautiously, in the direction of continued trust -- not in the Government's checkbook, but in the strength of the American people. So, today it's important for all of us, you and me, to join together. While it's only a first step, it's the right step at the right time because as guardians of that trust it's imperative that we act and act now. So help us keep Washington on the right path so the economics of growth can be our legacy to our children and their children and generations to come.

Thank you all for being here. Thank you for what I know you're going to do, and God bless all of you.

Note: The President spoke at 11:30 a.m. in the East Room at the White House. In his opening remarks, he referred to Howard H. Baker, Jr., Chief of Staff to the President; James A. Baker III, Secretary of the Treasury; and James C. Miller III, Director of the Office of Management and Budget.