As briefly mentioned in a post below, people – a lot of them who seemed to be classical liberal stirrers like yours truly – gathered in the sun-lit gardens in front of the US Embassy, Grosvenor Square, to witness the unveiling of a statue of Ronald Reagan. I like this editorial in CityAM by Allister Heath, who signs off with these two paragraphs. His comment about JF Kennedy is very much on point:
“In fact, Reagan wasn’t even that original. The best exposition of how tax cuts can reinvigorate an economy remains Democratic president John F Kennedy’s spectacular 1964 reforms, which reduced the top rate from 94 per cent to 70 per cent (Kennedy was assassinated in 1963, of course, but his tax cuts were agreed prior to his death). Two years later, the federal tax haul was 11 per cent higher than forecast: more people made more money and their taxable efforts more than compensated for the reduced tax rate. Kennedy had been proved spectacularly right when he had argued that “an economy hampered by restrictive tax rates will never produce enough revenues to balance our budget just as it will never produce enough jobs or enough profits… In short, it is a paradoxical truth that tax rates are too high today and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now.”
“In 1981, Reagan reduced the top rate of income tax to 50 per cent. In 1986, he cut it again to 28 per cent. Of course, this benefited the richest disproportionately – but they nevertheless ended up shouldering a greater tax burden and paying for a greater proportion of public spending. The share of tax raised from the best-paid 1 per cent jumped from 19 per cent in 1980 to 25.6 per cent in 1990. The moral: to squeeze more tax out of the rich, lower the top tax thresholds. We learnt that in Britain starting in 1979 – but with top earners now taxed at 52 per cent and millions paying 42 per cent, the lessons have been forgotten again. Britain needs to discover its very own Ronald Reagan, a hopeful, optimistic, pro-individual liberty, pro-growth politician with an uncanny ability to communicate. Any takers?”
Well said. In a spirit of fairness, though, I link to an interview with Reagan’s former budget director, David Stockman, who is a fierce critic of the deficits (he also strikes me as somewhat embittered). I am not sure if his call for tax rises in the absence of any serious spending cuts is going to find any welcoming audience. I also think Stockman is far too dismissive of the fact that because of the Reagan supply-side tax cuts, revenues boomed.
As Heath says, hero-worship is something any genuine liberal should avoid. The list of heroes in public affairs is, as far as I can judge, short. Reagan is one of them.
Well it’s been obvious to me for donkey’s years that “squeezing the rich ’till the pips squeak” (Wilson?) is prompted more by malice and deranged popularism than anything else.
The thing about this tax trick, though, is that I doubt very seriously that it’s a linear function. Probably there’s a lower threshold below which lowering marginal tax rates further either brings no benefits at all or else actually decreases revenue. Beyond this point, shrinking government HAS to be achieved with spending cuts. I would imagine that in the US we’re more or less at that point, at least for income taxes (I think corporate taxes could still come down with some windfall). Maybe there is some more room in the UK, where income taxes are higher. But in either country, Reagan encomiums make me nervous in the present climate. Thatcher and Reagan were brave and necessary for their time, but things are different now. I would prefer taxes sort of went to the sideline as an issue and there was more talk of spending cuts, budget restructuring, etc. Tax cuts that lead to more debt spending are really just accounting tricks, and are merely a stealthier way of growing government.
Joshua, I kind of see your point: the focus has to be on spending cuts. Agree 100 per cent. But then again, it is pretty clear to me that the UK’s new, upper income tax band of 50 per cent, for example, which when other things are taken into account, translates into a marginal bite of 63 per cent, is bringing in less, not more revenue.
The supply-side argument has lost none of its force with the passing of time.
Slate covered this issue recently (I post because I found it an interesting take, not because I’m for – or against – the conclusions drawn): http://www.slate.com/id/2297513/
The Brits have treated us far better, lately than we have treated them. Remember, my friends, the Zero that occupies the White House is not the United States, merely a sad aberration.
And we hope you’ll let us have the bust of Winston back in time.
The Brits have treated us far better, lately than we have treated them. Remember, my friends, the Zero that occupies the White House is not the United States, merely a sad aberration.
And we hope you’ll let us have the bust of Winston back in time.
Joshua, in theory you’re right, that at some point cutting marginal tax rates pushes us onto the left side of the Laffer Curve and aggregate tax revenues will fall. As a practical matter, however, no modern nation is ever on the left of that inflection point. That’s why tax cuts always result in increased revenues. It’s also why anyone who talks about “increasing taxes” is either grossly ignorant or (more likely) being completely disingenuous.
It’s always instructive to ask such people what they desire to achieve by “raising taxes”. If it’s simply increasing governmental revenues, when the Laffer Curve is explained and the undeniable historical fact that decreasing marginal rates always results in increased revenues is pointed out, an honest person will concede that cutting rates makes sense. However, most tax-hike advocates will reveal their true colors and eventually concede that they’re more interested in income redistribution (some perverted notion of “equality”) than in actually increasing revenues. Because tax hikes never produce the promised revenues, notwithstanding the worthless “static” models politicians love to use.
Of course, increasing revenues via rate reductions is ultimately a utilitarian argument, not a libertarian one. As libertarians we should be in favor of reduced revenues and less government. But at this point I’ll take what I can get as a means of allowing us to keep a higher percentage of our earnings.
Getting back to the topic of the London Reagan statue, I find it interesting that, as far as I can tell, the only statues of Ronald Reagan in the entire United States are the ones in the US Capitol (Statuary Hall)) and in the Reagan Library. You now have one in London, and one was recently unveiled in Hungary (of all places!), but that’s all. Apparently there’s a (somewhat controversial) movement afoot to build one in Newport Beach (CA), but as far as I can tell that’s it. Curious. One might think that we weren’t very proud of him.
I wonder how long it will take before there are myriad statues of Barack Obama scattered about the country. After all, there’s already been one erected in Indonesia (sadly, since removed), and although I suppose you can’t really count this you just know they’re coming!
In all likelihood it’s not a function at all. That is, whatever the relationship between tax rates and tax revenue is, it probably allows more than one level of tax revenue for any given rate. The economy is a complex dynamical system, and probably chaotic, so it’s unlikely to have many behaviours that can be described by functions, as such. (A consideration Keynsians would do well to take more seriously.)
Yes there is a point at which cutting the top rate will mean less (rather than more) revenue – even over a period of years.
In the United States this point is most likely about 25%.
Oddly enough even Karl Marx (not known as a wildly conservative person) thought that taxes over this rate would not really lead to more revenue (not over the long term) – he just supported higher rates as a way of confisctaing the wealth of the Capitalists (which is why high graduated taxes are one of the points of the Communist Manifesto of 1848 – there is no pretense that rates over 25% will produce more long term revenue).
Modern leftists are not so honest on this point.
Cutting spending…….
Yes Reagan’s greatest failure – his failure to do so.
Nor was it just a failure as President – so it is not an “age” or “military” thing. Reagan failed to defeat the State Legislature in California as well.
I can think of three possible runners in the present Republican race that have a better record (overall) than) Reagan as State Governors.
Tim Pawlenty, Gary Johnson and (if he runs) Rick Perry.
Whether any of these three has the “Reagan touch” (the ability to inspire the voters) is another matter.