Art Laffer, the economist and adviser to President Ronald Reagan, says the ultimate lesson of Reaganomics was that the right policies can create jobs — exactly what the economy needs now. Amid stagflation, high unemployment, and an oil shock, Reagan took the highly criticized position that tax cuts were the answer. He slashed the top income tax rate to 50 percent from 70 percent and the lowest rate to 11 percent from 14 percent.
Simultaneously, Federal Reserve Chairman Paul Volcker embarked on a tight-money policy designed to rein in inflation, moving the inflation rate from a staggering 13.5 percent in 1981 down to 3.2 percent just two years later.
“What the Reagan Revolution did was to move America toward lower, flatter tax rates, sound money, freer trade, and less regulation,” Laffer writes in The Wall Street Journal. “The key to Reaganomics was to change people's behavior with respect to working, investing, and producing.”
Eventually, the higher tax rate on non-wage income (like investments) fell to 28 percent from 70 percent. Corporate tax rates fell, too.
“Changing tax rates changed behavior, and changed behavior affected tax revenues. Reagan understood that lowering tax rates led to static revenue losses,” Laffer writes. “But he also understood that lowering tax rates also increased taxable income, whether by increasing output or by causing less use of tax shelters and less tax cheating.”
The result: 21 million jobs created between December 1982 and June 1990, Laffer writes.
“The true lesson to be learned from the Reagan presidency is that good economics isn't Republican or Democrat, right-wing or left-wing, liberal or conservative. It's simply good economics,” Laffer writes.
In a speech to the U.S. Chamber of Commerce, President Barack Obama said he wants to cut the top corporate tax rate to 28 percent from 35 percent but also close “loopholes” enjoyed by many industries to keep the cuts “revenue neutral.”
"You know how it goes: because of various loopholes and carve-outs that have built up over the years, some industries pay an average rate that is four or five times higher than others. Companies are taxed heavily for making investments with equity; yet the tax code actually pays companies to invest using leverage," Obama told a chamber audience.
"As a result, too many businesses end up making decisions based on what their tax director says instead of what their engineer designs or what their factory produces. This puts our entire economy at a disadvantage. That's why I want to lower the corporate rate and eliminate these loopholes to pay for it, so that it doesn't add a dime to our deficit. And I am asking for your help in this fight," he said.
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