Tax cuts are right for the 21st century

Jack Kemp
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Posted: Aug 08, 2006 12:01 AM

Twenty-five years ago, on Aug. 13, 1981, President Reagan signed what was called the largest tax cut in U.S. history. In actual point of fact, it was no larger then the Kennedy tax cuts of 1961-62. Both were designed to get America moving again, and both worked well as they lowered marginal tax rates about 25 percent across the board over three years.

In 1978, I had, along with my Senate colleague Bill Roth of Delaware, co-sponsored the Kemp-Roth Bill that advocated a 30 percent across-the-board tax rate cut. The top rate in the '70s was 70 percent, and the capital gains rate was 49 percent. I argued that lower tax rates on labor and capital would grow the economy and put an end to the Keynesian dilemma of simultaneous inflation coupled to recession.

What escaped the attention of both the conventional "left" and "right" was that tax rates at 70 percent on income and 49 percent on capital gains led to a slow growth or, even worse, a recession. Tax revenues were falling; thus a reduction in tax rates would lead to more revenues, not less. I quoted President Kennedy to candidate Reagan over lunch in 1979, and he took up the "cause" of supply-side economics and made it his signature issue in the primaries of 1980.

I went a step further and quoted Sen. Robert Kennedy to argue for enterprise zones in urban and rural pockets of poverty to unleash the power of private enterprise to wage a new war on poverty: "To ignore the potential contribution of private enterprise is to fight the war on poverty with a single platoon while great armies are left to stand aside."

Thanks to President Clinton and a GOP Congress in 1995, we finally got a mild version of the Enterprise Zones (Empowerment Zones). I had hoped, though, that they could be bolder and eliminate capital gains taxes on those people who would put their surplus capital at risk in the "green-lined" areas of America from the Gulf Coast of Louisiana and Mississippi to the still "de-facto" red-lined zones of the urban Northeast and south central Los Angeles. Any community would qualify that had a high level of unemployment, welfare and poverty.

Today tax rates are still too high on labor and capital and prohibitively higher still on those low-income men and women who want to leave welfare to take entry-level jobs. When a person leaves welfare, which is tax-free, to take an entry-level job, they lose welfare payment and face income and payroll taxes that push them, in some cases, over 100 percent tax at the margin. According to a study done by Christopher Jencks and Kathryn Edin in American Prospect magazine, a mother with two children who is employed at about $5 an hour would take home about 45 cents an hour less than if she were on welfare. She loses $4 a day after taking into account the loss of government benefits, taxes and such work-related expenses as transportation and child care.

President Bush has been stalwart in defending his efforts to make permanent the lower tax rates on capital gains dividends plus his attempts to put an end to the insidious tax on death. The trouble with the White House is that they keep calling this a policy of tax relief. That term implies tax revenue losses, when, in reality, we've seen three years of tax revenue growth. On average, tax revenues are up 15 percent a year for the last three years, with unemployment dropping from 5.5 percent to 4.7 percent.

No economic policy lasts forever, but with lower rates on all sources of income, economic growth has averaged more than 4.5 percent. Despite terrible conditions of war and instability with spiking oil prices, our economy is growing with inflation relatively low.

As one of the few legislators who was around in the '70s and '80s when controversy surrounded the Kemp-Roth Tax Rate Reduction Act signed into law 25 years ago by President Reagan, I leave you with the single greatest quote of President Kennedy 1961 that convinced me and President Reagan of the efficacy of lower tax rates:

"Our true choice is not between tax reduction, on the one hand, and the avoidance of large federal deficits on the other. It is increasingly clear that no matter what party is in power, so long as our national security needs keep rising, an economy hampered by restrictive tax rates will never produce enough jobs or enough profits. Surely the lesson of the last decade is that budget deficits are not caused by wild-eyed spenders but by slow economic growth and periodic recessions, and any new recession would break all deficit records. It is a paradoxical truth that tax rates are too high today and tax revenues are too low, and the soundest way to raise revenues in the long run is to cut rates now."