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Reflections


Tax Cuts Matter

by Ralph R. Reiland,
Professor of Free Enterprise at Robert Morris University
 

"At Eureka College, my major was economics," wrote Ronald Reagan in his autobiography, An American Life, "but I think my own experience with our tax laws in Hollywood probably taught me more about practical economic theory than I ever learned in the classroom or from an economist."

From firsthand experience, Reagan understood the links between work, taxes and incentives: "At the peak of my career at Warner Bros., I was in the 94 percent tax bracket; that meant that after a certain point, I received only six cents of each dollar I earned and that the government got the rest. The IRS took such a big chunk of my earnings that after a while I began asking myself whether it was worth it to keep on taking work."
Something was wrong with a system like that, asserted Reagan: "When you have to give up such a large percent of your income in taxes, the incentive to work goes down. You don't say, 'I've got to do more pictures.' You say 'I'm not gonna work for six cents on the dollar.' "

Reagan saw how confiscatory taxes at the top negatively impacted people in lower income groups: "If I decided to do one less picture, that meant other people at the studio in lower tax brackets wouldn't work as much either; the effect filtered down, and there were fewer jobs available. I remember one scene in the Knute Rockne picture that had only a farmer and a horse in it on location that created work for 70 people.

In August 1981, Reagan signed into law the Economic Recovery Tax Act, slashing marginal income-tax rates by 25 percent across the board over a three-year period. The highest marginal rate on unearned income dropped from 70 percent to 50 percent. The tax rate on capital gains fell from 28 percent to 20 percent.

By January 1983 the bulk of Reagan's tax reductions were in place. With higher incentives to work, invest and produce, the consequences were foreseeable. Between 1978 and 1982, the U.S. economy grew at a rate of only 0.9 percent in inflation-adjusted terms. From 1983 to 1986, this growth rate shot up to 4.8 percent. The national unemployment rate, 9.7 percent in 1982, was cut to 5.5 percent by 1988.

In the 1960s, Democratic President John F. Kennedy initiated similar pro-growth tax reduction policies and achieved comparable results.
When Kennedy took office as president in January 1961, the highest and lowest federal marginal personal income-tax rates were 91 percent and 20 percent. Kennedy's tax program cut those rates to 70 percent 14 percent.

Additionally, Kennedy cut the corporate income-tax rate, cut the tax rates on capital-gains, reduced taxes on dividends and balanced the federal budget.

"It is a paradoxical truth, Kennedy stated in 1963 at the Economics Club of New York, "that tax rates are too high today and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the tax rates."

Fueled by pro-growth tax cuts, GDP growth rate averaged 4.4 percent per year from 1960 through 1969, the highest growth rate per decade from 1950 to 2000. Correspondingly, the 5.5 percent U.S. unemployment rate in 1960 dropped to a full employment rate 3.5 percent by 1969.

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Ralph R. Reiland is an Associate Professor of Economics Emeritus at Robert Morris University in Pittsburgh, the co-owner of Amel's Restaurant, and a columnist with the Pittsburgh Tribune-Review.
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Ralph R. Reiland
Phone: 412-527-2199
Email: rrreiland@aol.com


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