When the White House and Congress release their new tax reform guidelines on Wednesday, they will likely talk a lot about middle-class tax cuts, business tax relief, and a simpler, fairer tax code. These are all popular and useful goals. But the media will not be talking about these goals when the tax reform plan is unveiled.
Instead, the media pundits will focus almost exclusively on the winners and losers of tax reform, with special attention paid to those whose deductions and exemptions are capped or repealed to pay for lower rates for everyone. Stories about the negative impact of tax reform on this sector or that industry will far outnumber stories about the potential overall benefits of reform.
That is why it is so important for the proponents of tax reform to follow the lead of Presidents Ronald Reagan and John F. Kennedy in emphasizing the most important benefit of tax reform — higher economic growth for everyone.
Reagan and Kennedy proposed the last two major tax reform plans enacted into law — Reagan 31 years ago in 1986, and Kennedy 22 years before that in 1964. Both presidents campaigned on restoring economic growth, and sold their plans as a way to get the economy moving again. Both of their plans worked, leading to two of the longest and largest economic expansions in our history.
When Reagan announced his tax reform plan, he said it would ensure “an American future of strong economic growth.” Reagan argued the tax system pf the time impeded economic growth, and said his tax plan would open “the way to a generation of growth.” Reagan was right. His tax reduction and reform plan unleashed seven years of growth averaging 4.4 percent a year from 1983-1989. In the 20 years following enactment of tax reform in 1986, the economy grew at an average annual rate of 3.2 percent.
Reagan modeled his tax plan after the Kennedy plan, which he knew had worked to expand the economy. After years of sluggish growth in the late 1950s, Kennedy was determined to get the economy moving again. When he announced his tax plan, he said the “most urgent task facing our nation” was to “step up the growth and vigor” of the economy. Kennedy said his tax plan was needed because the “heavy drag of federal income taxes” was the “largest single barrier to a higher rate of economic growth.”
Kennedy was right. After his plan was enacted in 1964, the economy grew by an average annual rate of 5.5 percent over the next five years. In the 15 years from 1965-1979, the economy grew at an average rate of 3.7 percent a year.
After years of sluggish economic growth, now is the time for a tax reform plan along the lines of the Reagan and Kennedy plans. Over the last 10 years, economic growth has averaged only 2 percent a year, the slowest 10-year growth rate in our nation’s history. Under current policies, CBO says we are doomed to another 10 years of 2 percent growth.
As Treasury Secretary Steve Mnuchin recently noted, the difference between sluggish 2 percent growth and a return to 3 percent (or higher) growth is trillions of dollars into the economy. According to House Ways and Means Committee Chairman Kevin Brady, an economy growing at 3 percent will create millions of jobs and increase the incomes of families by thousands of dollars a year.
Tax reform is hard, which is why it has happened only twice in the last half century. But Presidents Kennedy and Reagan showed that focusing on increasing economic growth for everyone, not arguing about winners and losers, is the best way to sell and pass tax reform. And history has shown that a Reagan-Kennedy-style tax reform plan can produce years of 3 percent or higher economic growth.
Bruce Thompson is a consultant in Washington. He was Assistant Secretary of the Treasury for Legislative Affairs during the Reagan administration.
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