What Would Reagan Do? Push for Tax-Cut Permanency, Then for More Tax Cuts

This is the tenth in an occasional series of exclusive articles in which leading conservatives who worked with Ronald Reagan explain how they believe the principles of Reagan conservatism ought to be applied today and in the coming years. This week, Jack Kemp, who was a Republican U.S. representative from New York from 1971 to 1989 and worked with Reagan to cut taxes, addresses the GOP’s need to push for lower taxes.

In giving thought to what Ronald Reagan would do about tax and budget policy facing the new Congress, one must never forget the times in which he led our nation.

The year was 1981. He faced a divided government, an economy in recession with rising prices, and a falling dollar. It is hard now for citizens, many of whom were not even alive then, to remember what was happening in the mid-to-late 1970s, but I remember. I was a fifth-term member of Congress from Buffalo, N.Y., and the country had begun to experience what economists said was impossible: rising unemployment and accelerating inflation, which later came to be called "stagflation." My blue-collar district in Buffalo was particularly hard hit. (At one point, unemployment in Buffalo would come close to 20%.) Conventional economists were calling for a tax increase to dampen inflation by reducing consumer demand and for the Fed to use monetary policy to off-set the "fiscal drag" to prevent a recession. President Ford was prepared to go along with them. I’m no economist, but I knew this made no sense whatsoever.

In 1974, I read Jude Wanninski’s Wall Street Journal interview with Robert Mundell, then an unknown economics professor at the University of Ottawa in Canada. Professor Mundell explained that the origins of surging inflation went back to President Nixon’s devaluation of the dollar in 1971 and that the struggling economy was the result of the numerous misguided policies enacted since then to counteract the inflation.

Foreign policy under President Carter was equally ominous. All across the globe the Soviet Union was on offense from Africa to Asia to Latin America. The military had been weakened throughout the Carter presidency, and NATO was in shambles faced off against the Warsaw Pact nations who were deploying tactical nuclear weapons capable of reaching every capital in Europe.

Meeting those threats is now part of history, as Ronald Reagan, Pope John Paul II and Margaret Thatcher were all coming to office in the space of two and a half years. The Cold War was over by the end of the Reagan presidency, and without a shot being fired, as Mrs. Thatcher said.

Radical Supply-Sider

One would have to ignore the facts if we didn’t give credit to Reagan’s military build up and his radical "supply-side" tax cuts of 1981 and 1982 to get our economy "moving again."

He cut tax rates by 25% across the board, he defended and supported Federal Reserve Board Chairman Paul Volker’s tightened money tax policy, thus strengthening the dollar while wringing inflation out of the economy. These steps along with lowering the trade and regulatory barriers helped the U.S. economy grow well over 4.5% while unemployment dropped below 5% for the first time in a decade.

As the economy grew, revenues increased and the wealth of our nation began to produce the jobs that took unemployment from more than 6.5% down to 4.5% with price stability, something the Keynesian economists (and some conservatives as well) said couldn’t happen.

As we fast forward and look out on the challenges ahead, we can hear in our minds Ronald Reagan saying to Americans, and the world, "You ain’t seen nothing yet." Ronald Reagan would not only defend the Bush tax rate cuts, he’d have more in store for us. He’d not only support making them permanent, but in my opinion, he’d offer up a tax reform agenda that would cut the tax rate to 20% or 25%, lower payroll taxes on working families and allow workers to put half their payroll tax into IRAs so as to get a much better rate of return. Reagan believed in zero capital gains taxes on those who’d put their surplus capital at risk in enterprise zones (a.k.a. empowerment zones) throughout urban America to create more jobs for people of color and those living in or close to poverty.

He’d absolutely cut the rate of growth in government spending, plus eliminate the duplicity of government programs. Reagan would rebuild our military to levels where we could pacify and ultimately achieve victory in Baghdad and Kabul while never sacrificing our democratic ally Israel on the platter of appeasement.

Meet the Political Challenges

Finally, Reagan would not flinch in meeting the political challenge of a "left-leaning" Democratic majority and a "paralyzed" Republican minority in the Congress.

He would tell us that it is possible to reduce the debt burden, fix Social Security and cut tax rates, all at the same time. Anyone who doesn’t believe it, doesn’t comprehend the hypothesis put forth by President Kennedy in 1961 and confirmed by Ronald Reagan. "The purpose of cutting taxes now is," Kennedy said, "to achieve a more prosperous, expanding economy," and "the soundest way to raise the revenues in the long run is to cut the rates now."

Kennedy’s tax cuts in ’61 and ’62 led to a balanced budget in 1964-65, as Reaganomics in the early ’80s led to 25 years of wealth creation for America.

It’s time for Republicans to get back to the Reagan Agenda for the 21st Century.