This Sunday is an important anniversary in the history of tax
policy. On that day in 1977 -- 25 years ago -- then-Congressman Jack Kemp,
Republican of New York, and then-Senator William Roth, Republican of
Delaware, introduced what came to be called the Kemp-Roth tax bill. Enacted
into law just four years later, this legislation fundamentally altered
debate about economic policy in the United States that continues to the
The Kemp-Roth bill proposed cutting statutory tax rates by about
30 percent across the board. The bottom rate would be reduced from 14
percent to 10 percent, and the top rate from 70 percent to 50 percent. Both
of these rates had been unchanged since the Kennedy tax cut of the early
In the meantime, however, there had been massive inflation.
Between 1963 and 1977, the price level doubled, meaning that one needed
twice as much income in 1977 to live as well as in 1963. This had the effect
of raising the effective tax rate on most people. As workers got
cost-of-living raises, they got pushed up into higher and higher tax
brackets, as if their real income had increased.
According to the Treasury Department, the average federal income
tax rate on a family with the median income rose from 7.09 percent in 1965,
after the Kennedy tax cut was fully phased-in, to 10.42 percent in 1977,
when the Kemp-Roth bill was introduced. Over the same period, the marginal
tax rate -- the tax on each additional dollar earned -- went up from 17
percent to 22 percent. In other words, a worker with the median income went
from keeping 83 cents out of every $1 of pay increase to keeping just 78
Kemp and Roth thought that this sharp rise in tax rates was
largely responsible for the stagnation of the American economy in the 1970s.
They believed workers and entrepreneurs needed to keep more of their
earnings in order to stimulate growth, productivity and investment. They
also thought that high tax rates were exacerbating inflation by reducing the
supply of goods and services in the economy. Since inflation is too much
money chasing too few goods, anything that increased production was per se
At the time the Kemp-Roth bill was introduced, however, the
dominant view among economists was that budget deficits were the primary
cause of inflation. They favored tax increases, not tax cuts, and said that
passage of the Kemp-Roth bill would be dangerously inflationary. Kemp and
Roth responded that inflation resulted from the Federal Reserve creating too
much money, not deficits, and that a tight monetary policy, which they
supported, would reduce inflation regardless of how large the deficit was.
Such a view was absolute heresy in 1977. The Congressional
Budget Office, for example, believed that the money supply had nothing
whatsoever to do with inflation, and that cutting tax rates would add fuel
to it. CBO Director Alice Rivlin said that output would fall if tax rates
were cut, because workers could work less and still get the same after-tax
A commonly held view at the time was that it would either take
decades to bring inflation down to tolerable levels or another Great
Depression. Arthur Okun of the Brookings Institution reflected the views of
most economists when he said in 1977 that the economy would shrink by 10
percent for every 1 percent fall in the inflation rate.
To his credit, Ronald Reagan rejected the conventional view and
supported Kemp-Roth, making it his principal campaign issue in 1980. Jimmy
Carter, who endorsed the establishment's thinking, rejected tax cuts as
inflationary. He said that inflation was just due to a lot of bad luck --
oil price increases by Arab countries, bad harvests and the like. Carter
never once took responsibility for inflation's rise from 4.9 percent in
Gerald Ford's last year to 13.3 percent in 1979 and 12.5 percent in 1980.
Kemp-Roth was considered reckless even by Republicans -- George
H.W. Bush called it "voodoo economics," and Senate Majority Leader Howard
Baker, Republican of Tennessee, called it a "riverboat gamble." But Reagan
pressed ahead with a tight money policy at the Fed and a sharp reduction in
tax rates in 1981. And as he, Kemp and Roth knew would happen, the economy
not only recovered, but inflation collapsed to about 4 percent throughout
To this day, none of the economists who predicted hyperinflation
from the Reagan-Kemp-Roth tax cut have ever acknowledged the gross error of
their predictions. They just pretend that the whole thing never happened.
Yet the 180-degree turnaround in the American economy from the 1970s to the
1980s took place and cannot be denied. Without Jack Kemp and Bill Roth, it
might not have happened.