Tax cuts lead to growth, and growth is good

ANALYSIS/OPINION:

President Joe Biden wants to pretend it’s federal spending and not tax cuts that cause the economy to grow. It’s how he’s justified his support for everything from the extension of unemployment bonus payments to infrastructure even though it’s outmoded thinking that’s plunged the United States into an ocean of debt.

Fortunately, there’s a way out:

1. Stop the new spending.

2. Bring future spending under control, which will help stabilize the dollar and put a check on inflation.

3. Cut marginal tax rates yet again for businesses, individuals, and families so people can keep more of what they earn, save it, and invest it.

That, along with additional deregulation, will generate rapid and sustainable growth in the U.S. economy. It’s no trick. Ronald Reagan showed us how, beginning 40 years ago today when he put his signature on legislation instituting a 25 percent income tax cut across the board that, by 1983, when it was fully in effect, started the long boom at the center of the political revolution that bears his name.

The success of the Reagan tax cuts in creating economic growth affirmed the effectiveness of the “Supply Side” approach that, at least for a while, shoved the Keynesian economic theories used to justify the expansion of the size and scope of government since the 1930s aside. The Keynes’ model relied in part on tax rates so high — one might even call them near-confiscatory – they discouraged work. This was something the 40th president could relate to personally: as a Hollywood movie star, he’d been subject to them.

By the end of the 1980s, the two major Reagan tax initiatives – the 1981 tax cut and the 1986 tax reform, doubled the amount of money coming into the government. Over time, more money came into the U.S. treasury because taxpayers – even the wealthiest 1 percent – were paying more even at lower rates because the economy was growing.

The Committee to Unleash Prosperity’s Dr. Arthur Laffer, whose eponymous curve illustrates how the incentive principle works when tax rates are reduced, likes to quote Reagan saying, “I knew my ideas were working when the media stopped calling it Reaganomics.”

Numbers he’s crunched show that to be true: “In 1981, the top 1 percent of income tax filers paid total income taxes equal to 1.5 percent of GDP. In 1989, the top 1 percent paid a full 2 percent of GDP in income taxes. From 1981 to 1989, the highest marginal income tax rate, which is the rate paid by the highest income earners, fell from 70 percent to 28 percent,” he wrote in a 2015 op-ed.

Lower rates generate more revenue over time. A simple proposition that once again will be shown over time to be true when we have more data about the Republican-passed 2017 Tax Cuts and Jobs Act. A new analysis of CBO data conducted by the non-partisan Tax Foundation found the changes in the tax code lowered the average federal tax rate for all filers, with the lowest earners again paying less than before while the highest earners are again paying more.

The liberals scoffed at this, claiming all it boiled down to the idea “Greed,” as Michael Douglas’s Gordon Gecko said in Wall Street, “is good.” The liberals were wrong, then and now. It’s growth that’s good. And, after 40 years, we can say with confidence, Reagan showed us the way to get more of it. Which, in turn, got us a period of sustained economic growth that lasted well beyond his time in the White House, produced what was at that time record job creation, stable money, tens of thousands of new business startups, and an era of prosperity that helped remake the world.