A few weeks ago marked the silver anniversary of one of the most pivotal events in American economic and foreign policy history. It was twenty-five years ago on August 13th that Ronald Reagan signed into law the Kemp/Roth tax cuts, also known as the Economic Recovery Act of 1981 – legislation which helped set in motion the events which shaped the world in which we live today.
The bill reduced American income tax rates by approximately one-third across the board, and unleashed the pent up power of an economy besieged by double digit inflation, double digit interest rates and double digit unemployment.
The result was an economy that grew at phenomenal rates, created tens of millions of jobs, raised personal incomes and more than doubled overall revenues to the US Treasury, (something liberals and most economists said couldn’t happen). In addition, investment and entrepreneurship blossomed, helping to foster the technology boom that has impacted just about every aspect of our lives.
It was a simple economics lesson that provided demonstrable proof that taxes have a dynamic impact on human behavior. As Larry Kudlow put it recently, "Economic behavior responds significantly to the incentive power of low tax rates that raise the after-tax return on work, investment and risk taking”. In other words, people work harder and are more productive when they can keep more of the wealth that they create.
While the economic benefits alone make the Reagan tax cuts worthy of memorializing, the resulting economic growth and strength made it possible to overwhelm the Soviet Union in the Cold War. The fact that tax revenues dramatically increased made it possible for the US to finance a military buildup that forced the Soviets to spend themselves into oblivion in a vain attempt to keep pace.
The rapid growth in technological innovations made it possible to overwhelm the Soviets with the mere potential of what we could produce and bring to bear militarily. This, as well as the funding that such technology required, effectively ended the Soviet participation in the arms race, and ultimately the Soviet Union itself.