Friday marked the 40th anniversary of US president Ronald Reagan’s first tax cuts — arguably the most consequential and controversial economic policy paradigm shift of the past half-century.
The Reagan supply-side revolution went global. An analysis by the Organisation for Economic Co-operation and Development found that the unweighted average top marginal income-tax rate among developed countries fell by a third, from 65 per cent to 43 per cent, after 25 years. Nearly every nation, from China to Costa Rica, imposes lower tax rates today than in the 1970s.
Alas, the US needs to relearn the lessons of the Reagan tax cuts. US President Joe 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 years.
The US economy was a wreck when Reagan took office, due to the combination of tax rates that rose to as high as 70 per cent on some types of income and an inflation rate that hit 14 per cent in 1980. The “misery index” (inflation plus unemployment) closed in on 22 per cent, as a new gloomy term appeared in the economic lexicon: “stagflation”.
The Keynesian Democrats were out of ideas. The dean of liberal economists, Paul Samuelson, 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 congressman Jack Kemp, economists Robert Mundell and Arthur Laffer (one of the authors of this article) and these pages, 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 stabilise prices. This revolutionary concept wasn’t an easy sell even in the Republican Party. …
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 per cent to 50 per cent. The Tax Reform Act of 1986 further reduced it to 28 per cent. The bet paid off:
Take-home pay rose for all income groups in the 1980s, and real median family income rose by nearly $US8000 (in today’s dollars) during the Reagan years. Real median family income climbed from $US60,597 in 1981 to $US68,299 in 1989, following steep declines during the Carter presidency. …
The 30-year mortgage-interest rate fell substantially — from more than 18 per cent in 1981 to below 10 per cent at the end of Reagan’s presidency. Inflation fell from nearly 14 per cent in 1980 to less than 4 per cent by the late 1980s. The misery index fell in half.
Gross domestic product grew at an annual rate of 7.3 per cent 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 per cent rose from 19 per cent to 26 per cent under Reagan and has subsequently grown to 40 per cent.
Enter Biden the loser, restoring a failed past:
One of the most impressive repercussions of the Reagan tax cuts has been their staying power. …
No serious politician considered raising rates back to their historic highs.
Until now. Biden wants to erase 40 years of progress and return to That ’70s Show, with runaway welfare spending and soak-the-rich economic policies. If Reagan were alive, we think we know what he’d say: “Well, there they go again.”
Even Obama didn’t respect Biden.