February 2011

Ronald Reagan’s Common Sense

by Amy K. Frantz

This month we commemorate the 100th anniversary of the birth of President Ronald Reagan.  On February 6, 1911 Reagan was born in Illinois, and after a career in Hollywood and as the Governor of California, he would go on to serve as our nation’s 40th president.  Reagan is one of the most admired and acclaimed presidents in our nation, and part of what contributes to our continuing admiration were his efforts to reduce tax rates and the resulting economic growth that sprang from that policy change.

Reagan took office in 1981, and that same year he proposed and Congress adopted the Economic Recovery Tax Act that “featured a 25 percent reduction in individual tax brackets, phased in over 3 years, and indexed for inflation thereafter. This brought the top tax bracket down to 50 percent.”[1]  Later, in Reagan’s second term, “the Tax Reform Act of 1986…brought the top statutory tax rate down from 50 percent to 28 percent while the corporate tax rate was reduced from 50 percent to 35 percent. The number of tax brackets was reduced and the personal exemption and standard deduction amounts were increased and indexed for inflation.”[2]

Opponents of the tax cuts made some of the same arguments then that always seem to be trotted out when tax cut proposals surface: How will we be able to “afford” tax cuts? The “rich” won’t be paying their “fair share!”  Richard W. Rahn of the Cato Institute writes of the results of the tax cuts:

When Ronald Reagan took office, the top individual tax rate was 70 percent and by 1986 it was down to only 28 percent. All Americans received at least a 30 percent tax rate cut; yet federal tax revenues as a percent of GDP were almost unchanged during the Reagan presidency (from 18.9 percent in 1980 to 18.1 percent in 1988). What did change, however, was the rate of economic growth, which was more than 50 percent higher for the seven years after the Reagan tax cuts compared with the previous seven years.[3]

Mr. Reagan’s critics claimed the tax cuts would lead to more inflation and higher interest rates, while Mr. Reagan said tax cuts would lead to more economic growth and higher living standards. What happened? Inflation fell from 12.5 percent in 1980 to 3.9 percent in 1984, interest rates fell, and economic growth went from minus 0.2 percent in 1980 to plus 7.3 percent in 1984, and Mr. Reagan was re-elected in a landslide.[4]

Rapid economic growth, unlike government spending programs, proved to be the most effective way to reduce unemployment and poverty, and create opportunity for the disadvantaged.[5]

Ronald Reagan believed that tax cuts, rather than more government spending, was the key to promoting economic growth, allowing individuals, rather than government, to decide how to spend the money they had earned. In contrast, many of our leaders today believe government spending is necessary to stimulate the economy, and if that doesn’t work, it’s just because the government didn’t spend enough.

In the year following the passing of Ronald Reagan, Becky Norton Dunlop of The Heritage Foundation gave a tribute, “Remembering Ronald Reagan” at the National Taxpayers Union Annual Meeting. She said this of Reagan’s tax policies:

He insisted that if we reduced tax rates and allowed people to save or spend more of what they earned, ‘they’ll be more industrious,’ Reagan said, ‘they’ll have more incentive to work hard, and money they earn will add fuel to the great economic machine that energizes our national progress.’ Some people called this ‘supply side economics’ but Ronald Reagan simply called it ‘common sense.’[6]

Our elected officials today should use some of the Reagan “common sense” when debating tax policy and remember the positive impact on economic growth that resulted from the Reagan tax cuts of the 1980s.

Amy K. Frantz is Research Vice-President at Public Interest Institute.

The views expressed herein are those of the author and not necessarily those of Public Interest Institute or Tax Education Foundation.  They are brought to you in the interest of a better-informed citizenry.

[1] U.S. Department of the Treasury, Fact Sheets: Taxes, “History of the U.S. Tax System,” <https://ustreas.gov/education/fact-sheets/taxes/ustax.shtml> (January 24, 2011).

[2] Ibid.

[3] Richard W. Rahn, “Tax Cut Facts and Fantasies,” The Washington Times, April 4, 2003, <http://www.cato.org/pub_display.php?pub_id=3059> (January 14, 2011).

[4] Ibid.

[5] Ibid.

[6] Becky Norton Dunlop, “Remembering Ronald Reagan,” National Taxpayers Union Annual Meeting, June 18, 2005, <http://www.heritage.org/about/speeches/remembering-ronald-reagan> (January 14, 2011).