In their debates, ads and speeches, the candidates for the Republican presidential nomination are vying for the label of most Reagan-esque.
On taxes, “I take the Reagan approach,” former senator Rick Santorum said at a recent Florida debate.
On the economy, “under Ronald Reagan, we had . . . the right laws, the right regulators, the right leadership,” former House speaker Newt Gingrich said in a debate before his South Carolina primary victory.
Judging from the candidates’ tax proposals, they seem to believe that the most Reagan-like candidate is the one with the biggest tax cut. But as the person who drafted the 1981 Reagan tax cut, I think Republicans misunderstand the premises upon which Reagan’s economic policies were based and why those policies can’t — and shouldn’t — be replicated today.
I was the staff economist for Rep. Jack Kemp (R-N.Y.) in 1977, and it was my job to draft what came to be the Kemp-Roth tax bill, which Reagan endorsed in 1980 and enacted the following year. Kemp and Sen. Bill Roth (R-Del.) proposed cutting tax rates across the board by about a third, lowering the top rate from 70 percent to 50 percent and reducing the bottom rate from 20 percent to 8 percent. (Though when the Reagan tax cut was enacted in 1981, the bottom rate was reduced to 11 percent.)
While our aim was to increase growth and employment, we were intent on doing so in a way that did not exacerbate inflation, which was the nation’s top problem.
After all, growth was not particularly sluggish in the late 1970s — the economy grew at 5.4 percent in 1976, 4.6 percent in 1977 and 5.6 percent in 1978. (We haven’t seen three consecutive years as good since.) But people didn’t feel very prosperous because inflation and unemployment were high. The unemployment rate was around 7 percent during those three years, and inflation accelerated, going from 4.9 percent in 1976 to an astonishing 13.3 percent in 1979.
We believed that inflation contributed to unemployment because when workers got cost-of-living pay increases, they were pushed into higher tax brackets. In turn, this required them to ask for bigger pay increases to try to maintain their after-tax income. This cycle increased the cost of employment for businesses and discouraged them from hiring more workers.
According to the Tax Policy Center, the total federal tax rate (including both the employer and employee share of the payroll tax) for a four-personfamily earning the median national income more than doubled between 1965 and 1979, from 11.5 percent to 23.1 percent. The marginal tax rate — the tax on each additional dollar earned — rose from 17 percent to more than 36 percent. This “tax wedge” — the difference between a business’s cost of employment and the employee’s after-tax reward — also explained why unemployment was high despite robust growth.
Keynesian economics, which was the dominant theory at the time, said that higher taxes would curb inflation by reducing people’s disposable income and spending, and that any tax cut would exacerbate inflation. Our thinking, by contrast, was that lower taxes would increase the incentive to work, save and invest; if that led to an increase in the supply of goods and services, then the impact would be anti-inflationary.
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