20th Anniversary of Reagan Tax Cut

Today marks the 20th anniversary of the Ronald Reagan tax cut. The bill Reagan signed into law that day was entitled the Economic Recovery Tax Act, also known as the Kemp-Roth bill after its two principal sponsors, U.S. Representative Jack Kemp and Senator Bill Roth.

Jack Kemp, now co-director of Empower America, released the following statement today commemorating this historic day:

“Twenty-years ago today, Ronald Reagan signed into law the Economic Recovery Tax Act (ERTA) slashing marginal income tax rates by 25% over three years and indexing them for inflation to make the lower rates permanent. It may be hard for some people to remember, but in 1980 when Bill Roth and I embarked on the drive to lower tax rates the top marginal income tax rate was 70% and the lowest was 20%. Following the experience of the Kennedy tax rate cuts of 1962 and 1963, the Kemp-Roth bill was designed to reduce tax rates by 30% across-the-board.

At the punishing level of taxation America faced prior to the Reagan tax cut, people had little incentive to work, save and invest. The economy was being asphyxiated for a lack of oxygen—capital and labor—that it needs to flourish. As a consequence, the country was mired in stagflation with simultaneously high unemployment and rising inflation. Consumer price inflation hit 13.5 percent, unemployment rose to 13.5 percent and the prime rate peaked at 21.5 percent. Most economists didn’t have a clue what to do. Ronald Reagan did, and implementation of his economic recovery plan began with enactment of his tax rate reductions on this date in 1981.

After the Reagan tax rate reductions unleashed the entrepreneurial spirits of the marketplace, the economy revived and grew at an average annual rate of 3.2 percent throughout the remainder of President Reagan’s term. Interest rates, inflation, and unemployment plummeted, and when all was said and done, we ended stagflation, started an eighteen-year expansion and rebuilt our national defense, not a bad return on investment.

Today, we again face economic problems caused by deflationary monetary policy and excessive tax rates and regulations. Although Congress just enacted President Bush’s tax rate reduction package, the largest tax cut since ERTA, the reductions are phased in over 10 years and tax rates, especially tax rates on capital investment, remain too high.

So it is fitting that while we celebrate the successes of the past, we learn from them with an eye toward the future. Therefore, I urge Congress before the end of this legislative session to reduce the capital gains tax rate, improve the depreciation treatment of plant and equipment investment, especially investments in technology, and eliminate the death tax immediately. Furthermore, I urge the Fed to recognize that deflation rather than inflation is the primary monetary impediment to renewed growth at this time and to give assurances that it would inject sufficient new liquidity into the economy to meet the rising demand for money that such tax changes would occasion.”