A gift for the Gipper

Posted: Feb 08, 2004 12:00 AM

Happy birthday, Mr. President -- that's President Ronald Reagan, who turned 93 on Friday. Fittingly, the lead economic story in The Wall Street Journal that day described how the communist government in China has decided to slash tax rates on both foreign and domestic businesses. What a perfect present for the Gipper.

"It's a lot like Reaganonics," Deputy Finance Minister Lou Jiwei said in the story. "We feel that only through simplifying things and lowering tax rates will revenue collection become more efficient." Sounds a lot like the Laffer Curve, doesn't it?

And Lou had more: "At the same time we also want to give fuller play to companies" rather than the government when it comes to investment in the economy.

This is right out of Ronald Reagan's supply-side playbook. (It's unlikely there are any textbooks on free-market communism lying around.) For a country whose goal is to become a major global economic power, China's supply-side tax reform certainly represents a major leap forward.

Two years ago, the former Soviet Union also took a page from Reagan's supply-side policy text when it instituted a 13 percent single-rate flat tax. Since then, Vladimir Putin's version of authoritarian, democratic, free-market economics has produced 6 percent growth and a stable ruble. Reaganesque thinking has also been spreading through the Baltics and the former Soviet Bloc territories. Many have instituted flat-tax systems, and those that haven't have progressed quickly toward slashing high marginal tax rates.

When Reagan moved to implement his tax-cutting policies in 1981, he was severely criticized for favoring the rich and decimating U.S. financial solvency. Democratic candidates on the campaign trail are echoing those very same criticisms today. But Reagan was unmoved by partisan attacks 20 years ago. He first lowered top marginal personal tax rates to 50 percent from 70 percent, making the rate reduction fully effective in 1983. He next lowered corporate tax rates to 34 percent from 48 percent. Then, in 1986, in a second tranche of tax reform, the Gipper reduced the personal rate for individual incomes all the way to 28 percent.

Since then the top rate -- which is also paid by small entrepreneurial businesses -- has had its ups and downs, moving as high as 40 percent under President Clinton and now resting at 35 percent under President George W. Bush. But even at 35 percent, an individual or a start-up company keeps 65 cents of each new dollar earned, compared to only 30 cents when Reagan took office in 1981. That represents a 116 percent incentive reward, which has served our economy very well.

If you look at the entire two-decade-long period of Reaganesque tax cutting, America's economic success rate is apparent to all. In inflation-adjusted terms, the American economy has increased $5.4 trillion, or 3.5 percent at an annual rate, in this time. New job creation has exploded by nearly 40 million, even with the passage of free-trade agreements with Canada and Mexico, a horde of new immigrants entering our borders and a spike of outsourcing to Asian countries like India. The Dow Jones, meanwhile, has increased by 9,400 points -- or 899 percent.

There's no question that our former communist adversaries in Russia and China have taken a careful look at America's economic miracle under tax-cutting Reaganomics. By implementing the Gipper's policies, these nations are greatly expanding economic freedom by empowering individuals to drive the gross domestic product. And they're doing this while disempowering government.

Ronald Regan knew far better than his critics that when people keep more of what they earn, they have new incentives to take risks, invest more and work longer hours. He knew from his days as a Hollywood actor that when it pays more to produce, people generate more work effort, and that when you tax something more (be it saving, investing or work), individuals supply less of it.

Most of all, perhaps, Reagan understood that economic success or failure revolves around individual decisions at the most grassroots level. He knew that the lure of more empowerment and more ownership brings greater dynamism and creativity to invent, innovate, take risks and produce. The Reagan way begins at the very basic level of individual freedom. It is that which determines the ultimate success or failure of an economy.

That this Reagan model is being put into place in formally dictatorial nations like China and Russia is utterly remarkable. But then again, history teaches that imitation is the sincerest form of flattery.

On his 93rd birthday, Ronald Reagan deserves enormous praise, and -- yes -- flattery, for making the economic world a better place to live.