Twenty-five years ago, President Ronald Wilson Reagan shepherded a reluctant world media up the mountain to his beloved Rancho del Cielo to witness the enactment of a 25 percent across-the-board tax cut. This momentous policy change unleashed the entrepreneurial spirit and creativity of America that dwells within all of us.
President Reagan observed that his Economic Recovery Tax Act of 1981 “marks an end to the excessive growth in government bureaucracy, government spending, government taxing.” Indeed, it was a successful, principled new beginning for the “people of the United States who finally made it plain that they wanted a change.”
Tax relief revitalized an America that at the time was measuring its status by a “Misery Index,” calculating the combined rates of inflation, interest, and unemployment. The general “malaise” that was the Carter Administration was replaced by President Reagan’s optimism. Census Bureau statistics bear out the benefits of President Reagan’s tax relief, Americans prospered and their lives improved with lower inflation (from 13.5% in 1980 to 4.1% in 1988); lower interest rates (from 18% on a 30 year fixed mortgage in 1981 to 8% in 1987); and outstanding job growth (unemployment had peaked at near 10% in the recession of 1981-1982 and dropped to 5.5% in 1989 once the whole 25% tax cut took effect). The American people kept more of what they earned, saw investments increased, and in the process, enjoyed the creation of 17 million new jobs.
What economic object lessons can be learned from Ronald Reagan’s successful leadership for a more free, competitive, and prosperous America? Answer: The basic but incontrovertible principle that, with less taxation and less regulation, American enterprise flourishes. And while it is often wrongly argued that such policies deprive the federal government of needed revenues, under President Reagan’s tax policy the federal government tax revenue doubled from $500 billion to $1 trillion due to increased economic growth. Our American families, from Virginia Beach to Sioux City to Long Beach, prospered the most from these tax cuts; every income quintile gained income.
Americans should continue to look with skepticism on those who wish to raise taxes on some, purportedly, to help others. For example, a reversal of the 2001 and 2003 tax cuts would cause a $2,900 tax increase on the average Virginian tax return.
As this new majority in Congress begins ringing the false alarm for increasing taxes, let me offer some basic principles the American people should insist on to ensure our economy continues to prosper:
George Allen is the former governor and senator from Virginia and Chairman of the European Affairs Subcommittee of the Senate Foreign Relations Committee. He is currently the Reagan Ranch Presidential Scholar for Young America’s Foundation.
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