Tuesday, many will be toasting Ronald Reagan, who would have turned 107 years young. Of course, the 40th president passed away back in 2004, yet to some of us, he’s an evergreen.
One of the reasons he rates so highly in our hearts is his handling of the economy. For example, in 1980, the year before he came into office, the inflation rate was 12.5 percent. By contrast, in 1989, the year that he left office, the inflation rate had been reduced by two-thirds, to 4.6 percent.
The Reagan story on economic growth holds similar good news: In 1980, the gross domestic product (GDP) of the nation was in decline. During the Gipper’s presidency, GDP growth averaged 3.5 percent; total economic output during his eight years in office rose by more than one-third.
So what exactly did Reagan do to help the economy? With the benefit of two decades of hindsight, one answer comes from former Sen. Connie Mack (R-Fla.), then chairman of the Joint Economic Committee.
As he wrote in 2000, “President Reagan’s most dramatic policy change was without a doubt his supply-side tax cut.” That would be, of course, the Economic Recovery Tax Act, which Reagan signed into law back on Aug. 13, 1981.
What was the context of that legislation? And what was its impact? For an answer, we might turn again to Sen. Mack, describing the policy status quo that Reagan inherited from his predecessor, Jimmy Carter:
“It seems almost inconceivable today that just two decades ago, marginal income tax rates were as high as 70 percent in the United States. It was little wonder that our country was in economic decline...These high tax rates not only discouraged additional work and investment at the margin, but also confiscated capital that could have been used for job creation by the private sector.”
Mack was correct to put his focus on Reagan’s reduction of tax rates, and we might also note that he actually cut tax rates twice, in 1981 and again in 1986. The result was that both individual and corporate tax rates were substantially lowered.
Reagan believed that lowering tax rates was the key to his economic success. It might have been convenient for some D.C. policymakers to think of the economy as a macroeconomic “aggregate” — as in, “aggregate demand” — and therefore, to ignore the specific variable of tax rates.
Yet in fact, the microeconomic reality is that economic actors aren’t aggregates. Instead, they are individual players, human and corporate, and as such, they each react to economic incentives — including the key variable of rates.
Reagan’s own life is a case in point. In his 1988 memoir, Reagan’s first treasury secretary, Donald Regan, recalled what it was like in the middle of the 20th century, when the top tax rate was 91 percent. That rate, we might note, had real bite: It affected Reagan and Regan alike, in Hollywood and Wall Street respectively.
Regan wrote, “As a movie actor in the 1950s, Ronald Reagan was in the same situation. Unwilling to work for nine cents on the dollar, he solved his dilemma by limiting himself to making two movies a year.”
In other words, Reagan chose to limit his economic output because it didn’t seem worth it to work for an after-tax pittance. And that was the story of the overall economy in those days: It was stifled by too-high tax rates.
As Regan also recalled of his time with Reagan: “We talked about the frustrations each of us had felt in being penalized for success. It had made us both determined to do something about punitive taxation if we were ever in a position to act.” Of course, that’s what President Reagan did — he acted to cut tax rates.
Indeed, it was much more than personal experience that motivated Reagan; he also had a growing body of scholarship on his side, namely, the nascent intellectual school of “supply-side economics.” While Reagan’s personally breezy style led critics to accuse him of being a lightweight, his immersion in tax policy was indeed heavy.
Just how deeply Reagan was immersed was revealed in a 2001 book, "Reagan, In His Own Hand: The Writings of Ronald Reagan that Reveal His Revolutionary Vision for America." That book unearthed Reagan’s personal writings on many subjects, including taxes and tax rates.
For instance, in a radio broadcast back on Nov. 28, 1978, Reagan quoted from a 1924 book, "Taxation: The People’s Business," written by Andrew Mellon, the tax-rate-cutting treasury secretary of that decade.
As Mellon observed, “The history of taxation shows that taxes which are inherently excessive are not paid.” We can observe that that’s the supply-side argument in a nutshell: Too-high tax rates defeat their own purpose, because people avoid the rate, causing economic activity to contract.
Thus revenues go down, not up. So by that logic, a reduction in rates can lead to an increase in economic growth and, ultimately, an increase in tax revenues.
As Reagan declared in another radio commentary, “Twice in this century, in the 1920s and in the early 60s, we cut taxes substantially, and the stimulant to the economy was substantial and immediate.”
In those days, Reagan was merely a private citizen, connecting the dots of a better economic policy for the future. As he also said on the airwaves in 1977, “Jack Kemp, a young congressman from New York who used to quarterback the Buffalo Bills, has introduced a job creation bill ... we should help him.”
As we all know, Reagan followed his own advice: He helped Kemp and America by getting elected president and enacting supply-side, tax-rate cuts.
The rest is not only history, but, even better, living history: Just last year, President TrumpDonald TrumpJudge rules Alaska governor unlawfully fired lawyer who criticized Trump Giuliani led fake electors plot: CNN Giuliani associate sentenced to a year in prison in campaign finance case MORE and the Congress paid tribute to Reagan by enacting yet another supply-side tax reduction.
Happy Birthday, Mr. President.
James P. Pinkerton served as a domestic policy aide in the White Houses of Presidents Ronald Reagan and George H.W. Bush. Since 2011, he has been the co-chair of the RATE Coalition, a group that advocates for a more competitive tax code.