Key differences between Ronald Reagan’s era and ours would make mimicking the 40th president’s tax cuts a mistake.
It’s not 1981 anymore. That’s the message of an editorial in the conservative Weekly Standard, which warns Republicans not to design a tax reform patterned on the one that Ronald Reagan signed in his first year as president.
Mimicking the Reagan tax cuts is a temptation both because of Republicans’ enduring admiration for the 40th president and because his program has been the source of the economic ideas they have championed ever since his time in office.
But the Standard is right that times have changed. That doesn’t mean the Gipper’s basic disposition toward lower and less onerous taxes needs to be junked. It means that today’s Republicans (and Democrats!) need to grapple with four differences between our time and his.
First: The federal debt is much larger now, and looks to grow larger still. When Reagan took office, that debt stood at 31 percent of GDP. It’s now about 103 percent. The Baby Boomers were still entering the workforce then. Now that they are leaving it, the debt picture we can anticipate is much worse.
Reaganites would have preferred it if spending restraint had accompanied tax cuts, but they were willing to accept rising deficits rather than give up those tax cuts. That trade-off looks worse in our current fiscal position.
Second: The top individual income-tax rate is a lot lower than it was in 1981. Reagan inherited a tax code with a top rate of 70 percent. His tax legislation lowered it to 50 percent, and by the time he left office he brought it down to 28 percent. It is now roughly 40 percent.
Supply siders argue that reducing tax rates increases incentives to work, save and invest. But this logic is subject to diminishing returns. The 1981 bill raised the after-tax return on a dollar earned from 30 cents to 50 cents: a 67 percent increase. Cutting the top tax rate from 40 to 30 percent now would yield an increase of only 17 percent.
Another way of putting it is that today’s tax rates aren’t the obstacle to growth that the rates of the 1970s were. Bringing them down should not be as high a priority for today’s Republicans as it was for their predecessors.
Third: The payroll tax for Social Security and Medicare has grown in importance while the income tax has shrunk. In 1981, only 20 percent of households escaped paying the income tax. Now 44 percent do….