President Ronald Reagan signed the Economic Recovery Tax Act of 1981 38 years ago this week at Rancho del Cielo, his ranch in the mountains outside of Santa Barbara, California. The bipartisan legislation was the largest tax cut in the history of the United States of America at the time.
Rancho del Cielo is currently owned and operated by Young America’s Foundation. Students and supporters can visit the ranch and stand where Reagan signed the Economic Recovery Tax Act of 1981. The actual table on which he signed the legislation is in the Reagan Ranch Education Center.
Amazingly, the items in the very simple ranch house, including his hats and boots, are just as the Reagans left them. A reminder that the president lived through the Great Depression, he tied together two twin bed frames and put a mattress on top. Still not long enough for his frame, the president put a wooden stool at the end of the bed for his feet. Each of these items is still there today.
In the kitchen, one can see the appliances from General Electric. Prior to becoming president, Reagan was a spokesman for GE. Part of his compensation was the appliances which still sit in the ranch house kitchen.
In many ways, Ronald Reagan was an ordinary man. But this ordinary man did extraordinary things for our nation and for the world.
The tax cuts he signed in 1981 and in 1986 led to economic growth well into the 1990s. The centerpiece of the Economic Recovery Tax Act was a 25 percent reduction in the marginal tax rates for individuals, which was phased in over three years and then indexed for inflation. Other important provisions included expanding eligibility for Individual Retirement Accounts (IRAs), a reduction in the capital gains tax and making it easier to establish Employee Stock Ownership Plans (ESOPs).
Overall, the intent of the tax cuts was to encourage growth in the economy. The indexing of the tax brackets was done to counter high inflation, which was a major problem before President Reagan’s time in office.
Economist Arthur Laffer, a member of the faculties at the University of Chicago, the University of Southern California and Pepperdine University, was a driving force for the Reagan tax cuts. I was just with Mr. Laffer in Nashville last week. He is just as dynamic as ever and just as committed to economic growth for all Americans.
Mr. Laffer notes that as a result of the tax cuts in the 1980s, the top 10 percent were paying 57.2 percent of the total income taxes by 1988. That is up from 48 percent in 1981. At the same time, the bottom 50 percent saw their share of total income taxes drop from 7.5 percent to 5.7 percent. Similarly, the middle class (incomes in the 50th to 95th percentile) saw a drop in their share from 57.5 percent in 1981 to 48.7 percent.
Further evidence that the Laffer Curve works. Although, I have another way of explaining it:
I love shopping at Kohl’s Department Stores. Usually, I go there to buy a new Packers, Brewers or Bucks shirt. Years ago, I learned to wait until the item is on sale before I make the purchase. It seems like almost everything is on sale at Kohl’s.
So I grab a shirt that originally was priced at $19.99 but is now marked down to $9.99. Then I take my 15, 20 or even 30 percent off coupon to the cashier. Finally, my wife, Tonette, reaches into her purse and pulls out some Kohl’s Cash.
Next thing you know, they’re paying me to buy that shirt.
Well, not really. But it feels like it.
So how does a major retailer like Kohl’s make money? Volume.
They could keep the price high on that shirt, and a few people might buy it. Or they can lower the price enough that people like me buy it. And that increases the volume of their sales.
The same is true with taxes.
Higher tax rates generally mean fewer people participate and rise in the economy. Lower those rates to reasonable levels and more people participate and grow in the economy. More people prospering economically means plenty of revenue for the essential services of government.
I call that the Kohl’s Curve. It is the modern-day version of the Laffer Curve.
The tax cuts passed by a Republican Congress and signed by President Donald J. Trump have had a similarly positive impact on our nation’s economy. The alternative is to go back to the high taxes, runaway inflation and generally poor economy that was in place before President Reagan — when Jimmy Carter was in office and the nation was in a malaise.
We don’t want to go backward. We want to go forward.
• Scott Walker was the 45th governor of Wisconsin. You can contact him at email@example.com or follow him @ScottWalker.