Passing Down Prosperity Starts With Tax Reform

In the recent tax reform arguments, Rep. Nancy Pelosi, D-Calif., made the claim that tax cuts never pay for themselves, "never have." This was immediately countered by articles in multiple articles that in the two tax reforms in the last 50 years under presidents John F. Kennedy, and Ronald Reagan, the tax cuts did pay for themselves.

These articles are based on real results but none of them have laid out the numbers — the why behind the results. In this article, I’ll show the numbers using the Ronald Reagan’s Tax Reform Act of 1986 as the most recent and most relevant example.

Prior to the Tax Reform Act of 1986, the U.S. was stuck in a cycle of what is often referred to as stagflation — a stagnant economy plus runaway inflation in the cost of living — the double whammy for the average person; increased cost of living and businesses without the growth to fund higher wages. Many economic experts of the time had given up on the U.S. ever having a healthy, growing economy.

Ronald Reagan believed that what was needed was to unleash the energy of the American people from the constraints of excessive taxation. Through this tax reduction he proved that a tax policy based on stimulating business growth benefits everyone — reducing inflation, reducing unemployment, and increasing federal tax revenues all while letting people keep more of their hard earned money.

Figure 1 shows a plot of the historical data of year by year federal receipts (tax revenues) vs federal outlays (spending) from the U.S. Office of Management and Budget (OMB). In the first year following the tax cuts there is a decrease in receipts but receipts start matching outlay increases by year 3. Tax revenues were on track to exceed outlays until the military build-up in 1990 for Desert Storm 1.

Even with those increased outlays the growing economy resulted in a budget surplus starting in 1997 with increased growth through 2000. The economy was booming with near zero unemployment, rising wages, and new business starts that continue to lead the global economy today.

Overhype of .com businesses and the terrorist strikes in New York resulted in an economic down-turn in 2001, but it is unquestionable that the tax cuts resulted in the first budget surpluses seen since the 1960s.

So now let’s look at the numbers behind these results. Figure 2 shows the mathematical effect of increased economic growth on tax revenues. This is not politics or conjecture, just math. In the first year federal revenue naturally takes a hit and results in an increased deficit for that year. But this deficit is rapidly paid for with the tax revenues on a larger gross domestic product stimulated by the additonal funds available for the businesses to invest.

The big gain in tax revenues are in the following years; catching up to current federal tax revenues in year three and exceeding the revenue of an economy killing tax increase in year 6. After year 6, tax receipts are generating annual surpluses — just as we had in 1998 through 2000 as a result of the Tax Reform Act of 1986.

Figure 2. Revenues from reduced tax rates catch up with current revenues by year 3, pay for themselves by year 6, and then generate budget surpluses paying down the national debt without cutting benefits. 

The options are simple, stay on our course of overspending, running budget deficits every year, and adding to the already huge federal debt — or bite the bullet today with a tax reduction aimed at incentivizing U.S. business growth.

As shown in figure 2, the growth stimulated by the tax rate reduction pays for itself in 3 to 5 years and after 6 years is on a trajectory to provide the next generation a vibrant and growing work environment.

What should be the legacy of our generation — passing down to our children an ever increasing national debt or passing on a vibrant economy generating federal budget surpluses?

David Bryant had a first career as a U.S. Navy fighter pilot, test pilot, and aircraft carrier commanding officer followed by extensive experience in both large and small production companies. He has graduate degrees or equivalents in physics, aeronautical engineering, international relations, and nuclear engineering rounded out with an Executive MBA from the University of Washington. He is board member of the Theodore Roosevelt Association and active in politics in the other Washington. He strongly believes in Theodore Roosevelt’s oft quoted approach to foreign policy, "Speak softly and carry a big stick."To read more of his reports — Click Here Now.