Presidential Reagan Library Debate: Time to Revisit Reagan’s Pro-growth Tax Policies

Lewis K. Uhler and Peter J. Ferrara National Tax Limitation Foundation
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As we fast approach the second Republican presidential candidate debate on September 16, we should use that venue – the Reagan Library – to drive the debate: Reagan’s enormously successful, pro-growth tax policies, and the principles of Reagan style tax reform. Front runner Donald Trump’s ruminations about a flat tax makes such review – for all candidates – all the more essential.

Reagan had it right intuitively and objectively. He recognized taxes are a penalty on work, effort, creativity, productivity, and economic expansion (growth). He understood that dynamic analysis — taking the economic growth effects of tax freedom into account — represents the real world, as people work harder, longer, and invest more when they get to keep more of the fruits of their own labor.

Reagan realized that excessive taxation is a modern form of slavery. His “tax ax” freed tax slaves in 1981 and human energy exploded, leading to the greatest quarter century of economic growth in U.S. history. That’s when low and middle income families prospered most.

The key principles for tax reform for booming economic growth in a free nation are:  

Simplicity – We must “sunset” the current lengthy, complex, loophole-ridden, tax code, with its high compliance costs for individuals, small businesses, and corporations, and replace it with a simple system that offers a “postcard” return for most taxpayers.

Constitutional Compliance The Constitution says in Article I, Section 8, “Congress shall have the power to lay and collect taxes.” The 16th Amendment ratified in 1913 echoes this in granting the power to impose income taxes, saying, “Congress shall have the power to lay and collect taxes on incomes.” Tax reform should include abolishing the IRS and establishing a new tax collection agency reporting to the tax writing committees of Congress, analogous to CBO reporting to the House and Senate Budget Committees.

Neutrality – The new, reformed tax code must focus on raising revenue with the least adverse impact on workers, families, businesses, and economic growth. That means no playing favorites with crony capitalist, corporate welfare handouts to special interests, such as “renewable energy” and electric cars.  

No Double Taxation – Income from whatever source should be taxed only once. We should abolish the capital gains and the death (federal estate and gift) taxes.

An insidious form of double taxation is the corporate income tax. Corporations don’t “pay” taxes, they collect them from employees in the form of lower wages and fewer jobs, from customers in the form of higher prices, and from owners/shareholders in the form of lower dividends or profits. Recent studies confirm that employees bear the lion’s share of every corporate tax dollar: 70 to 92 cents in reduced wages and salaries.

A recent Tax Foundation study confirmed that if the U.S. lowered its nearly 40 percent corporate rate to the 25 percent OECD average, the 20 percent U.K. rate, or the 15 percent Canadian rate, jobs, wages and economic growth would explode. But the wisest reform would be to abolish the corporate income tax entirely, moving the U.S. from the highest corporate tax rate among industrialized nations to the lowest. That would do the most for jobs, wages, investment from abroad, economic growth, and our nation’s wealth.

Tax Efficiency and Fairness – A low, flat rate tax, without special interest exceptions and carve outs, efficiently raises revenue with the least adverse effects on productivity. Flat rates are fair because they impose the same proportionally equal tax burden on all. If Warren Buffett earns a thousand times as much as his secretary, then he pays a thousand times as much as his secretary.

Flat rates are also fair because they are they are the most pro-growth, avoiding added penalties on those who are more productive. Economic growth would be increased even more if the flat tax is combined with immediate expensing, or a deduction, for capital investment. And low rates produce more revenue. The capital gains tax produced more revenue at 15 percent than at higher rates. Milton Friedman said if 10 percent is good enough for the church, it should be good enough for the tax collector.

Let us hope that the Reagan Library debate translates into Reagan style tax and regulatory reforms that restore American exceptionalism.

Lew Uhler is Founder and Chairman of the National Tax Limitation Committee, and National Tax Limitation Foundation (NTLF).  Peter Ferrara is a Senior Fellow for the Heartland Institute, and a Senior Policy Advisor on the Budget and Entitlement Reform for NTLF.  He served in the White House Office of Policy Development under President Reagan, and as Associate Deputy Attorney General of the United States under President George H.W. Bush.  He is the author of Power to the People: The New Road to Freedom and Prosperity for the Poor, Seniors and Those Most In Need of the World’s Best Health Care.