Op-Ed: 40 Years Later, a Tax Lesson Still Not Learned

Harrisburg – Friday, August 13th marked the 40th anniversary of Ronald Reagan’s first tax cuts—arguably the most consequential and controversial economic policy paradigm shift of the past half-century.  For some of us, this historic event was important because of the tremendous economic value derived from the on-going effects of the Reagan tax cuts in America.  But for all of us there is a lesson to be remembered about the Reagan supply-side revolution.  Ultimately the effects of those tax cuts helped to bring greater economic strength to both developed, and developing nations!  An analysis by the Organization for Economic Cooperation and Development found that the average top income-tax rate among developed countries fell by a third, from 65% to 43%, after 25 years. Nearly every nation, from China to Costa Rica, imposes lower tax rates today than in the 1970s.

It seems a re-education of the effects of tax policies on national economic development is necessary. President Biden has proposed a sweeping tax-policy reversal that would raise many tax rates—such as the capital-gains and death-tax rates—to levels even higher than in the Jimmy Carter (who’s economic disaster Ronald Reagan had to fix) years.

The U.S. economy was a wreck when Reagan took office, due to the combination of tax rates that rose to as high as 70% on some types of income and an inflation rate that hit 14% in 1980. The “misery index” (inflation plus unemployment) closed in on 22%, as a new gloomy term appeared in the economic lexicon: “stagflation.”

Liberal economists glumly advised that the only way to break the back of inflation was to tolerate another decade of very high unemployment. Reagan dismissed the austerity model and carried the banner of supply-side optimism. Borrowing from the young Rep. Jack Kemp, economists Robert Mundell and Art Laffer (author of the Laffer curve), Reagan persuaded Americans that the remedy to the decade long malaise was to reduce the drag of regulatory and tax policy to encourage more work and production.

Lower tax rates, Reagan predicted, would reduce unemployment and help stabilize prices. This revolutionary concept wasn’t an easy sell even in the Republican Party. Many Republicans, including Sen. Barry Goldwater, had voted against the tax-rate cuts President John F. Kennedy advanced, and when Reagan proposed the idea, George H.W. Bush ridiculed it as “voodoo economics.” The Republican Senate leader, Howard Baker, called the policy a “riverboat gamble.”

Nonetheless, Congress worked with President Reagan and The Economic Recovery Tax Act of 1981 cut rates for every income group by at least a quarter and brought the top tax rate down from as high as 70% to 50%. The Tax Reform Act of 1986 further reduced it to 28%. The bet paid off!

Take-home pay rose for all income groups in the 1980s, and real median family income rose by nearly $8,000 (in today’s dollars) during the Reagan years. Real median family income climbed from $60,597 in 1981 to $68,299 in 1989, following steep declines during the Carter presidency. Tens of millions of Americans moved up the income scale in the 1980s; 86% of households in the poorest income quintile in 1980 had moved to a higher quintile by 1990.

Gross domestic product grew at an annual rate of 7.3% from 1981-89.

From 1980 to 1990 tax revenues almost doubled in nominal terms even though most rates fell by more than half. The share of taxes paid by the richest 1% rose from 19% to 26% under Reagan and has subsequently grown to 40%.

Reagan’s policies ushered in an unprecedented era of wealth creation. The Dow Jones Industrial Average before the Reagan tax cuts was at roughly 1000. Forty years later, it stands at 35000. The Federal Reserve Board calculates that the wealth of households in the U.S. has risen by nearly $100 trillion in real terms from 1980 to 2020.

Unfortunately, it seems Mr. Biden is intent on reversing these many years of progress, and would like to return to the wanton economic practices of Jimmy Carter and thus fuel higher taxes and ultimately, run away inflation.  He has proposed tax plans designed, he says, to soak the rich, but history has proven always fall onto the shoulders of the middle class.  As Reagan once said in a debate, “There you go again”.

 

CONTACT: Lidia Di Fiore  ldifiore@pasen.gov (215) 541-2388