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Tags: gdp | reagan | mundell

To Fight Inflation Let's Start by Cutting Taxes

governmental and inflation squeeze on our money

(R. Gino Santa Maria/Shutterfree, LLC/Dreamstime.com)

Ira Stoll By Thursday, 21 July 2022 12:51 PM EDT Current | Bio | Archive

The best cure for the 9.1% inflation and negative growth afflicting the American economy would be tax cuts.

That prescription is a departure from the dominant economic view, which holds that cutting taxes would make inflation worse by giving consumers more money to spend, driving prices even higher.

The experience of the Reagan tax cuts, though, shows that this prevailing view was wrong. The 1980s combination of tax cuts and tight monetary policy defeated inflation and produced an economic boom.

Hardly anyone now remembers or understands this, but the Reagan tax cuts were born as a way to combat inflation.

The story started at a May 1974 conference on "The Phenomenon of Worldwide Inflation."

The meeting was sponsored by the American Enterprise Institute for Public Policy Research and the Hoover Institution on War, Revolution and Peace.

That was the first encounter between economist Robert Mundell and Jude Wanniski, who was on the staff of the editorial page of The Wall Street Journal. The Journal published Wanniski’s interview with Mundell on Dec. 11, 1974 under the headline "It’s Time to Cut Taxes."

Wanniski wrote that Mundell "believes that tight money should be used to combat the inflation, while expansive fiscal policies — preferably through lower taxes — can be used to combat the recession in a way that also works against inflation."

In August of 1979, Martin Anderson, who had also attended the 1974 conference, wrote "Policy Memorandum No. 1" for presidential candidate Reagan.

It began, "By a wide margin the most important issue in the minds of voters today is inflation." Anderson’s recommended cure?

"Reduce the rate of growth of federal expenditures" and "simultaneously stimulate the economy so as to increase revenues in such a way that the private share grows proportionally more than the government share."

As the memo put it, "speed up economic growth . . . reduce federal tax rates."

Reagan’s key tax officials articulated this to the American public at the time. Norman Ture, under secretary of Treasury for tax and economic affairs, spoke on Oct. 13, 1981, to the Commonwealth Club of California. Ture expressed "the Administration's confidence that recently enacted tax reductions will not enhance but will reduce inflationary pressure."

As Reagan put it in his 1990 memoir, "An American Life," "I believed that if we cut tax rates and reduced the proportion of our national wealth that was taken by Washington, the economy would receive a stimulus that would bring down inflation, unemployment, and interest rates."

It worked as planned, unleashing what the editor of the Wall Street Journal, Robert Bartley, later called "The Seven Fat Years" of prosperity.

Even fans of Reaganomics sometimes caution that cutting individual income taxes now, when the top marginal rate is at 37%, would be less effective than it was at the start of the Reagan administration, when the top marginal rate was 70%.

Daniel Clifton of Strategas Partners, though, contends that in the second quarter of 2022, federal tax revenues as a percent of GDP hit the highest level since 1960. That leaves ample room to adjust the balance toward allowing people to keep more of what they earn.

The usual gang of critics will mock the suggestion of tax cuts as a cure for inflation, pointing out that the pro-tax-cut crowd pushes the same medicine also at times when there’s a risk of deflation. Truth is, there’s hardly ever a bad time for a tax cut. At best, the cyclical case for them is accompanied by a moral argument.

As Reagan put it, "Are you entitled to the fruits of your own labor or does government have some presumptive right to spend and spend and spend?"

From a political perspective, calling for tax cuts now would move the pro-growth camp from playing defense to playing offense.

Instead of merely hoping to fend off Biden’s proposed tax increases, Republicans could be forcing the Democrats to explain why they are opposed to tax cuts.

There are parallels to foreign policy, where, instead of setting an ambitious, bold, offensive goal of freeing Russia and China, Republicans lately have been meekly content to play defense, trying to prevent Moscow and Beijing from expanding further into Ukraine or seizing Taiwan.

Tight monetary policy by the Federal Reserve alone won’t conquer stagflation. Getting soaring prices under control will require tax cuts, too — and also politicians who can, like Reagan, communicate the case for them to the American people.

Ira Stoll is the author of "Samuel Adams: A Life," and "JFK, Conservative." Read Ira Stoll's Reports — More Here.

© 2022 Newsmax. All rights reserved.


Ira-Stoll
To Fight Inflation Let’s Start by Cutting Taxes
gdp, reagan, mundell
755
2022-51-21
Thursday, 21 July 2022 12:51 PM
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