Trump’s tough task: Matching Reagan’s tax leadership
By making tax reform one of the policy pillars of his first year in office, President Trump has made at least one move that aligns himself with the standard- bearer of conservatism, Ronald Reagan.
Trump has laid out a plan that advances President Reagan’s vision for strong economic growth through lower taxes, but what remains to be seen is whether he has the political will and skill to accomplish what Reagan so spectacularly did.
Action item No. 1 for Reagan’s administration was doing everything within his power to stoke the economy. “Stay the course,” he reminded Americans weary of double- digit inflation, soaring interest rates and high unemployment.
Just 16 days after entering the White House, Reagan sent a bill to Congress calling for an across- the- board 30 percent tax cut over three years. Days later, he unveiled a plan to cut billions in federal spending called “America’s New Beginning: A Program for Economic Recovery.” That was February 1981. He toiled behind the scenes with a singular resolve to garner support for the Economic Recovery Tax Act of 1981.
No meeting to lobby members of Congress on both sides of the aisle was too small. At the time, I worked for a freshman congressman from Oregon. I vividly remember fielding the president’s call, quickly handing the phone over to my nervous, newly elected boss. His vote for the tax plan was secure, but Reagan called him anyway to make absolutely sure his votes were in hand. The tax cut bill became reality just six months after its introduction.
By the time Reagan left office, the top personal income tax rate had fallen from 70 percent to 28 percent. Reagan’s reforms also addressed the tax code’s complexity. When he took office, there were 16 different tax rates. By the time he left office, there were just three.
But in Washington, no change is permanent, and the power struggle between supporters of limited government and supporters of big government has fueled a tug of war over tax policy. Slowly but surely, complexity and costs have crept back into the tax system. As it stands today in the early months of the Trump presidency, there are seven tax brackets with the highest federal rate being 39.6 percent.
Enter Donald Trump, who, 250 days into his administration unveiled his “Unified Framework for Fixing Our Broken Tax Code.” Described as “simple, fair, and easy to understand,” the president characterized his plan as “revolutionary change.” Trump’s stated goals include reducing the number of tax brackets to three and reducing the top rate to 35 percent, simplifying the tax filing form to one page, and lowering the corporate rate to a more competi- tive 20 percent.
Reagan’s experience bears out Trump’s claim that a simpler tax system with lower rates leads to economic growth. When Reagan entered office, annual gross domestic product growth was 2.59 percent. By 1983, it had boomed to 4.6 percent, then to 7.3 percent in 1984 and so on during what became known as the “Seven Fat Years.”
By contrast, in the eight years of 2009 through 2016 under President Obama, the highest level of annual growth in real GDP was 2.6 percent in 2015.
Though the differences between Presidents Reagan and Trump are numerous, two things they seem to share are an abiding faith in the genius of the American marketplace and an understanding of the impact low taxes have on growing the economy.
What remains to be seen is whether Trump has the same political skill as Reagan to accomplish major tax reform. Reagan forged a bipartisan coalition in 1981, fusing the conservative Republican philosophy of lowering tax rates with Democrats’ priorities to close tax loopholes, and eliminate shelters and deductions for the wealthy. Trump’s outreach to Democrats to avert a government shutdown may signal his willingness to make a deal, but the devil is in the details.
A recent national survey conducted for the Reagan Foundation by McLaughlin and Associates suggests the American people are ready to line up behind the president on tax reform. By a margin of 57 percent to 28 percent, they favor his plan. He has the opportunity to build an even more convincing majority to get behind his approach. By a margin of 2 to 1, voters agree that his tax plan will drive the kind of expansion in the economy Reagan was able to produce. Twenty- one percent of Americans are still unsure but ready to be convinced.
Those of us who served in the Reagan Revolution know that tax revenues are critical to closing the deficit. Entitlement spending, now representing the lion’s share of federal spending, is out of control. Congress could eliminate all domestic federal spending outside of defense and still not put a dent in the deficit and federal debt. Given the lack of congressional will to cut spending, only a roaring economy is capable of driving substantial tax receipts that will help to keep the federal deficit in check.
President Reagan proved this in the 1980s. It’s up to President Trump to prove it again for a new generation.
Just 16 days after entering the White House, Reagan sent a bill to Congress calling for an across- the- board 30% tax cut over three years.