In 1981, President Reagan led the enactment of a 25% across the board cut in federal income tax rates, which bean counters scored as producing a 25% cut in federal income tax revenues. But starting in late 1982, the economy took off on a 25-year economic boom. Total federal revenues surged, doubling during the first 7 years of the boom alone.
Booming economic growth produces booming revenues. There was no need to adopt an offsetting tax increase to achieve elusive “revenue neutrality”. With the resulting economic growth, the tax changes were revenue positive, not immediately but over time as the economic boom builds. Including tax increases to achieve revenue neutrality is economically and politically counterproductive, threatening to short circuit both the boom and the tax cuts.
Economic growth is the dominant factor in determining revenue growth or decline, much more significant than tax rates. If the economy is declining, revenues will decline, regardless of the tax rates. If the economy is booming, revenues will boom, again regardless of the tax rates.
Today’s Democrats cannot understand this simple truth. But there was a time when tax cuts and economic growth were Democrat policies, as during the presidency of John F. Kennedy, when blue collar workers and their unions were the backbone of the Democrat Party.
President Kennedy proposed a pro-growth tax cut of 23% across the board, which would have been scored at the time as cutting federal income tax revenue by 23%. But Kennedy’s tax cut, passed by Democrat Congressional majorities after his assassination, produced the booming economic growth and surging revenues of the 1960s.
Earlier, in the 1920s, under Presidents Harding and Coolidge, Treasury Secretary Andrew Mellon led enactment of major tax rate cuts, bringing down the sky-high rates enacted during World War I. That produced the “Roaring 20s.” Federal revenues surged during that time.
Three times within 70 years big pro-growth tax cuts produced booming economic growth under both political parties. The same would result with a big pro-growth tax cut under President Trump today.
Replacing America’s hopelessly outdated 40% corporate tax rate (counting state corporate taxes on average) with Trump’s proposed 15% federal rate for both corporations and “pass-through” business forms (sole proprietorships, partnerships, Subchapter S corps, Limited Liability Corps or LLCs) would produce booming economic growth today, with millions of new jobs, rising wages, and ultimately rapidly growing federal revenues.
Kowtowing to the liberal left and big media institutions like The New York Times, The Washington Post, CNN, MSNBC with a big tax increase to achieve “revenue neutrality” would be like Lewis and Clark hiring Mr. Magoo to be their guide. The Democrats may not understand it, but lower tax rates restore incentives to save, invest, take risks, start new businesses, and expand existing ones. Those are the components of economic growth.
If after nearly a decade of President Obama’s third world, economic stagnation, Trump’s Republicans restore booming economic growth, as in the 1920s, 1960s, 1980s and beyond, Trump and his Republicans will all sweep to reelection. Republicans will have won the great economic debate of the 21st Century.
But if Democrats and their resistance movement manage to deny Trump and his Republicans the elements they need to restore booming growth – lower tax rates, deregulation, spending cuts to balance the budget and reduce the national debt, and stabilized monetary policy for a stable dollar – Republicans will be voted out of office. They will lose their Congressional majorities, the White House, and the judiciary, including the Supreme Court.
The stakes could not be higher, for President Trump, the Republicans, and America.
Uhler is Founder and Chairman of the National Tax Limitation Committee and National Tax Limitation Foundation (NTLF). He was a contemporary and collaborator with both Ronald Reagan and Milton Friedman in California and across the country. Ferrara is a Senior Fellow with the Heartland Institute and NTLF, and Principal and General Counsel for the Raddington Group, an international economic consulting firm. 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.