Cutting Marginal Tax Rates
April 18, 2003
The best way to promote economic growth is to further reduce marginal income tax rates, says former Treasury Secretary James A. Baker III. He points to the success of President Reagan's tax-rate reductions in the 1980s.
In 1980, the government claimed 70 cents out of every dollar of income at the top rate. That rate was cut to 50 percent in 1981. Then in 1986, President Reagan cut that rate to 28 percent as part of comprehensive tax reform. In November 1982, the economy began to boom:
- Gross Domestic Product growth for 1984 was 7.3 percent -- the highest since 1951, which has not been matched since.
- There followed 21 years of growth with only seven down-quarters -- three in 1990-1991, one in the first quarter of 1993, and three more in 2001.
Marginal tax-rate reductions promote growth because people work harder and invest more freely when they get to keep more of their money.
When President George W. Bush was sworn in, he inherited a weak economy and a top marginal rate close to 40 percent. He won legislation to reduce marginal rates, but the reductions were phased in over five years.
The president wants to accelerate all the planned rate reductions to January 1, 2003. The single most important thing we could do now to promote economic growth is to accelerate the rate reductions, says Baker.
Baker notes that "...the paradoxical lesson of the '80s is that when marginal rates are too high, cutting them is -- thanks to the resulting economic growth -- a win-win policy for both taxpayers and the treasury. This is not voodoo economics; it's hard, cold reality."
Source: James A. Baker III, "A 'Reformed Drunk' on Tax Relief," Wall Street Journal, April 18, 2003.
For WSJ text
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