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:
- The burden of taxes should be low, fair and easy. Taxpayers should have a choice in paying their taxes to the federal government, either a flat percentage (of 17-20%) without deductions, or the option to use the current complicated system with deductions. This is the key in order to be competitive for investment and job opportunity.
- Do not tax Internet access. An 18% tax on monthly internet access bills would exacerbate the economic digital divide between low and middle income Americans, as well as limit the use of the Internet as an entrepreneurial tool.
- Encourage research and development. Congress should make the research and development tax credit permanent so that innovative enterprises can plan for the future here in the U.S.
- Eliminate the marriage tax. Families should not have taxes re-imposed through the return of the marriage penalty or a reduction in the children tax credit.
- Death should not be a taxable event. There should be no taxation without respiration in America. The death tax has been a disaster for family businesses and farmers and has caused more suburban sprawl as farms are sold for development.
- No increase in capital gains taxes. The capital gains tax on the sale of an asset or investment should not be increased, as it would unfairly harm investment in the United States. The current tax cut has helped investment increase 9% per quarter-more than double the growth rate of the economy. Extension of the lower rates will ensure this continued economic growth.
Just as in the 1980s, we hear the same tired and erroneous cackling from the Left as it attempts to stir imagined class warfare and envy. “The sky is falling” cries from the liberals are used to justify their own smug social engineering and overbearing government regulation. The net result of these policies, however, is increased taxation and artificial limits on success and productivity. The Left’s political jabs in the 1980’s were distortions of the truth then, and they have been proven wrong now. The facts are clear: Reaganomics did help create better jobs and more income for virtually all people of all income levels. President Reagan said, “The fact is, what they called ‘radical’ was really ‘right.’ What they call ‘dangerous’ was just ‘desperately needed.’”
Reagan also opined, “Common sense told us that when you put a big tax on something, the people will produce less of it. So, we cut the people’s tax rates, and the people produced more than ever before. The economy bloomed…” No truer prognostication has been spoken. With the recent landmark tax relief of 2001 and 2003, revenue is 15 % higher each year. The problem with the federal government is not that it does not tax American’s enough; it’s that the government is spending too much.
Ronald Reagan’s leadership made clear that the “Shining City on the Hill” is not paid for by higher taxation but by free-market enterprise. Fellow Americans we must unite for this proven vision of trusting free people to keep America the best place to live, learn, work and raise a family.
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.