40th Anniversary of Reagan’s Economic Recovery Tax Act
This week marks the 40th anniversary of the Economic Recovery Tax Act. President Ronald Reagan signed this groundbreaking tax legislation into law on August 13, 1981 from his beloved Rancho del Cielo, overlooking the beautiful hills outside of Santa Barbara, California. These pro-taxpayer reforms, also known as the Kemp-Roth tax cuts (named after Congressional champions Representative Jack Kemp of New York and Senator William Roth of Delaware) substantially reduced the top individual federal income tax rate from an uncompetitive 70% to 50%. The bill also reduced businesses taxes and indexed personal income tax brackets for inflation. More importantly, these tax cuts (with the 1986 tax cuts, which are collectively known as the “Reagan tax cuts”) permanently enhanced American competitiveness – and ushered in an era of unprecedented economic growth.
Your voices have been heard — millions of you, Democrats, Republicans, and Independents, from every profession, trade and line of work, and from every part of this land. You sent a message that you wanted a new beginning. You wanted to change one little, two little word — two letter word, I should say. It doesn’t sound like much, but it sure can make a difference changing… “control by government” to “control of government.”
– Ronald Reagan, 40th President of the United States
At the ALEC Annual Meeting in Salt Lake City, Utah last month, economic guru and Reagan economic advisor Dr. Arthur Laffer explained that the 1981 tax relief package did not simply create the Reagan economic boom of the 1980s, it started the transformational policy change that allowed for long term growth. According to Dr. Laffer, we saw a tripling in the net wealth of U.S. households and businesses from $20 trillion in 1981 to $60 trillion by 2007. Put another way, after adjusting for inflation, more wealth was created in this 25-year boom than in the previous 200 years of American history.
It is important to remember the 1981 Reagan tax cuts didn’t just change the course of federal tax policy; states also replicated this pro-growth success by reducing their own tax rates – and many continue to do so. All told, in the past eight years alone, nearly 40 states have significantly reduced their tax burdens. The case studies from these states exemplify how states can indeed be the “laboratories of democracy” as described by United States Supreme Court Justice Louis Brandeis.
In ALEC’s annual economic study, Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index, the co-authors (Jonathan Williams, Dr. Laffer and Stephen Moore) analyze how tax rates and economic competitiveness drive income, population and job growth across the states.
Consistent with the sizable majority of the academic research, (alongside a healthy dose of commonsense) Rich States, Poor States finds that tax policy is a key driver for economic competitiveness. People and businesses often seek out lower tax burdens across state lines. Rich States, Poor States data show states that keep taxes low, avoid job-killing over-regulation and follow prudent budget practices consistently and significantly outperform their highly taxed, over-regulated counterparts.
The key is having competitive tax rates and eliminating special preferences or carve-outs wherever possible. This avoids the temptation of government picking winners and losers in the tax code, and essentially driving up tax rates for everyone else.
Overall, the economic evidence clearly showcases the success of states that have followed the lead of Ronald Reagan and enacted pro-growth tax reforms that reduce burdensome tax rates, just like the 1981 tax cuts. The 50 “laboratories of democracy” give us numerous examples of this every year.
As we pause to reflect and celebrate the start of the Reagan tax cuts 40 years ago— we acknowledge that President Reagan’s work isn’t done. We all need to look to create fairer, and more pro-growth tax systems at the federal and state levels.
Ronald Reagan and Jack Kemp set a high bar for pro-growth tax reform, and it’s up to leaders across the states to continue to lead with a new wave of tax reforms that benefit all taxpayers.