Reaganomics turns 35 this week.
The most significant development in U.S. tax policy history was signed into law in 1981 and ushered in supply-sided economic revolution. Tax rates have never risen as high as they were when the Economic Recovery Tax Act was signed, yet, at the time, the act was met with nothing but severe doubt and cynicism.
In the current situation of stagnantly low economic growth, the time has never been better for a return to the principles the Economic Recovery Tax Act of 1981 - also known as the Kemp-Roth tax cuts - was built on.
President Ronald Reagan announces economic sanctions against the white-ruled government of South Africa in a nationally broadcast speech from the Oval Office in Washington Sept. 9, 1985. (AP Photo/J. Scott Applewhite)
The Economic Recovery Tax Act of 1981 was the culmination of a decade long battle by supply-side advocates, a revolutionary theory arguing that the only way to end stagflation of the 1970s - the phenomenon of increasing unemployment and increasing inflation - was by tightening the money supply, raising interest rates, and lowering taxes.
The act reduced income tax rates across the board by 25 percent, phased in over three years, including reducing the top tax rate from 70 percent to 50 percent. It rapidly reduced inflation, beating most predictions as to how quickly it would work, and became the building block for the Tax Reform Act of 1986 - the bill that would solidify Reagan’s economic legacy.
The first congressman to crusade on behalf of supply-side theory was former Congressman Jack Kemp (R-N.Y.). After being educated on the concept by Arthur Laffer and Jude Wanniski, Kemp found a cosponsor for a bill supporting such ideas in former Sen. William Roth (R-Del.). After years of advocating for supply-side policies, the Kemp-Roth supply-side economics bill was endorsed by then Presidential candidate Ronald Reagan, and adopted as part of his campaign platform in 1980.
While the final ERTA didn't contain everything Kemp wanted, especially with regard to the size of the cuts, it was a remarkable success. The U.S. went from the stagflation crisis of the 1970s to the longest peacetime period of economic growth in it’s history.
Between November 1982 and July 1990, the U.S. had a record 92 straight months without recession. Furthermore, tax revenues doubled between 1982 and 1990, despite critics of supply-side economics arguing the tax cuts would drastically reduce revenue. Under the tax cuts, the percentage of low income families declined as they moved further up the wage scale, and 6 million low wage workers were dropped from the tax rolls completely. In addition to this, 20 million jobs were created in the ensuing 10 years. Lastly, and perhaps most importantly given the common criticism of supply-side economics as being ‘tax cuts for the rich’, a higher percentage of tax revenue was paid for by the rich.
As is well known, the ERTA was built upon in Reagan’s second term with the Tax Reform Act of 1986, leading the tax system to resemble much more what Kemp originally had in mind. 15 tax brackets were reduced to 4 to eliminate bracket creep, the top rate was reduced from 50 percent to 28 percent, and a host of tax shelters were removed. With the ensuing success of the policies leading well into the 1990s (the early 1990s recession had an unrelated cause), the legacy of Ronald Reagan, Jack Kemp, and supply-side economics was secured.
So many years removed from its success, how can we learn from the Economic Recovery Tax Act given the economic situation of 2016?
Just ask current House Speaker Paul Ryan (R-Wis.). Speaker Ryan frequently cites Kemp as his mentor, having worked under him at Kemp’s think tank Empower America. As speaker, Ryan has looked to the principles advocated by Kemp and enacted under Reagan as a way to fix our own economy - his A Better Way agenda.
Photo by Win McNamee/Getty Images
A Better Way is made up of six issue areas currently in need of attention, one of which is tax reform. With how complex and broken the tax code is now - at 74,608 pages long - the plan itself is deep; yet key components on the surface are strikingly similar to what Kemp fought for and put forward in his bill.
Obama is the first president to never see 3 percent economic growth. The middle class is shrinking and wages are declining. Furthermore, national debt is becoming an ever-increasingly larger percentage of national GDP. While the 2016 economy faces a different type of economic situation to the stagflation of the 1970s, it can be fixed using similar policies.
Speaker Ryan’s proposal includes reducing the corporate tax rate from 35 percent - highest in the developed world - to 20 percent to encourage investment and keep the U.S. competitive. A Better Way also advocates for reducing the number of tax brackets from 7 to 3, with rates of 12 percent, 25 percent, and reducing the top rate from 39.8 percent to 33 percent. Also in the packet are a whole host of other tax credits to solve the other A Better Way issues of "poverty" and "the economy". The best way to understand all of these is to take a look at them as presented in the plan.
Naturally, critics of Ryan’s plan have characterized it as the same old "tax cuts for the rich." Isn't that exactly what people said about Kemp-Roth, the ERTA of 1981, and TRA of 1986? Yet looking at the results of these acts, the rich ended up paying a higher percentage of all tax revenue, and the economic growth created increased wages for all Americans. The proposed reduction in the corporate tax rate will reverse the trend of companies moving production out of the U.S., thus helping increase GDP and the percent of it that our national debt commands, while the reduction of income tax rates will encourage economic prosperity.
Jack Kemp’s crusade on behalf of supply-side economics in the 1970s paid off. America was rewarded with a decade of prosperity after suffering a decade of economic strife. America faces its own different yet similar economic trouble right now. Why not look to this generation’s Jack Kemp to fix it?
On this anniversary of the Economic Recovery Tax Act, we can be reminded of what a working solution to economic malaise looks like.
Paul Ryan is the "Jack Kemp" we need.
A Better Way is the solution.
Seb Rougemont is currently a Senior Political Science student at the University of Central Florida. Email: firstname.lastname@example.org
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