America Should Learn From Past Success

February 19, 2014

Whether expanding regulations, the tax code, the Federal Reserve or the surveillance state, the federal government has been growing, as most clearly evidenced by our spending. Last year, the United States spent 55 percent more money than it did in 1999, while economic growth only increased 30 percent. Today, government spending sits at $6.4 trillion per year, says Brian Domitrovic, chairman of the history department at Sam Houston State University.

The problem is more than merely the growth itself. As the government continues to expand, fewer and fewer Americans can remember a time in which the U.S. government was not such a Leviathan, and those who can are getting older every year.

Americans must slow the massive growth of government as we did in the Reagan era. Even though government was still quite large after Reagan's major reforms, it was nothing like the government that we have today.

  • From 1983 to 1999, the federal government grew by 33 percent.
  • At the same time, the economy grew by 78 percent.
  • This is a far cry from today, where our government grows much faster than the economy.

The major source of economic success of the 1980s and 1990s came from the 1981 Kemp-Roth tax cut, which brought income tax rates down by 23 percent on average, lowered the capital gains tax rate by 29 percent and reduced taxes for businesses. The years before the Kemp-Roth tax cut were marked by stagflation.

  • From 1979 to 1981, inflation sat above 10 percent each year, while growth was only 1.2 percent each year.
  • And when inflation dropped to 6 percent in 1982, growth was at -1.9 percent.

But Kemp-Roth stimulated the economy and led to growth, which meant that the Federal Reserve did not have to meddle to stimulate the economy instead.

  • With lower tax rates, businesses did not spend their time focusing on finding loopholes to save money.
  • 40 million new jobs were created in the 18 years after 1981.
  • Unemployment dropped from 11 percent to 4 percent over the same period.
  • Inflation dropped from a 12-year, 8 percent average down to 3 percent.

Today, we are facing the same problems that America had in the 1970s. We should take inspiration from the Reagan years and bring back tax cuts and shrink the size of government.

Source: Brian Domitrovic, "Tax Revolt! It's Time to Learn from Past Success," Cato Institute, January/February 2014.

 

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