July 25, 2002
Twenty-five years ago this month, Congressman Jack Kemp of New York and Senator William Roth of Delaware first introduced a bill to dramatically cut income tax rates across the board. They argued, contrary to conventional wisdom, that chopping tax rates would lead to a great surge of productivity and growth and revive the country's listless, limping economy.
Congress and President Carter rejected their idea, and the economy worsened. By 1980, inflation was running at 13.5 percent, mortgage rates hit 20 percent, and unemployment was at a postwar high. When he ran against Gerald Ford in 1976, Carter excoriated him for a "misery index" -- inflation plus unemployment -- of 13. Four years later, the misery index had topped 20. America found itself, said Newsweek in January 1981, in "the most dangerous economic crisis since Franklin Roosevelt took office 48 years ago."
Fortunately, Ronald Reagan saw the promise in the Kemp-Roth proposal and made it a key plank in his campaign for the presidency. On Aug. 15, 1981, less than seven months after being sworn in, he signed Kemp-Roth into law. It was the cornerstone of what would prove the most successful economic policy in modern American history. It launched a boom that would last, save only a shallow eight-month turndown in 1991-92, until the end of the century.
The Reagan expansion vastly increased the nation's wealth. "In 1982 the Dow Jones hit a low point of 792," Stephen Moore, the economist and president of the Club for Growth, wrote last year. "When Reagan left office, the market had more than tripled in value. Then it tripled again over the next 10 years." Even after the selloff of recent weeks, the Dow today is worth 10 times what it was before Kemp-Roth-Reagan began to work its magic.
Of course it wasn't really magic. What Reagan understood, as Kemp and Roth had understood, is that human beings will work harder and invest more of their time and money if, at the margin, they are allowed to keep more of what they earn. Before Reagan entered the White House, the highest marginal tax rate on ordinary income was 50 percent; on "unearned" income (i.e., interest and dividends), 70 percent; on capital gains, 35 percent. All those rates fell to 28 percent during his tenure in office. And as they fell, incentives climbed: the incentive to work longer hours, to invest in a new business, to expand an existing one, to buy some stock, to develop a piece of real estate, or to just put money in the bank.
Reagan's conviction that tax cuts would stimulate the economy was derided by economists who predicted it would make inflation worse and do nothing to stimulate production. The first George Bush, before becoming Reagan's vice president, mocked Kemp-Roth as "voodoo economics." The mockery increased during the recession of 1992, which was brought on by the Federal Reserve's policy -- supported by Reagan -- of stifling inflation by restricting the money supply.
"The stench of failure hangs over Ronald Reagan's White House," The New York Times intoned in January 1983. "The economic nostrums he brought to office have not had the predicted effect. Only by recognizing his errors will he find better ideas."
He chose instead to stay the course, and within months, the economy had turned around for good.
The success of Reaganomics was obvious to the American people, who re-elected the Gipper in a landslide, then handily elected Bush in 1988. But that hasn't stopped Reagan's critics from continuing to wrinkle their noses at that "stench of failure." The Reagan tax cuts drained the Treasury and caused huge deficits, they say. Reaganomics was a boon for the greedy rich but hell on everyone else, they say.
Neither charge is true. Far from draining the Treasury, Reagan's policies sent federal revenues surging. The government's take doubled from $517 billion in 1980 to more than $1 trillion in 1990 -- an inflation-adjusted increase of 28 percent.
Unfortunately, spending climbed even faster. Congress routinely declared Reagan's budgets "dead on arrival" and insisted on spending more than he requested. While revenues climbed 28 percent, expenditures climbed 36 percent. Excessive spending, not lower tax rates, ballooned the deficit.
As for the question of who gained from Reaganomics, the record is just as clear. Some 18 million jobs were created under Reagan, and every segment of the population, from the richest quintile to the poorest, gained in income. The rich got richer -- but they also shouldered a significantly greater share of the tax burden. By the time Reagan left office, the top 1 percent of taxpayers, who were pocketing 14 percent of the nation's income, were paying 25 percent of all federal income taxes. When he came to office, they had been paying just 18 percent.
What worked in the 1980s would work today, when tax rates are again too high (the top rate is now 39 percent). Last year's tax cut, which slo-o-owly lowers rates a few percentage points over the course of a decade, then jacks them all back up overnight, will do little to stimulate the economy. But accelerate those cuts, deepen them, and make them permanent, and the economy would charge forward once more. Now as always, the key to enterprise and growth is incentive, and incentive was the very heart of Reaganomics. If you yearn to see the bulls back on Wall Street, you ought to be calling for another injection of Kemp-Roth. For turning a 97-pound weakling of an economy into Charles Atlas, there's nothing better.