The Ripon Forum

Volume 42, No. 1

Feb - March 2008

Taxes and the Reagan Revolution

By on November 17, 2015

A Q&A with Jack Kemp

Jack Kemp has spent most of his adult life in the public spotlight, first in the sporting arena as an All-Pro quarterback in the AFL and NFL, then in the political arena as a Congressman, Cabinet Secretary, and candidate for Vice President of the United States. Kemp’s career is filled with many achievements.

One of the most significant occurred when he persuaded Ronald Reagan to make tax cuts the centerpiece of his economic plan for President in 1980. The success of that plan changed the face of the tax debate, convincing a generation of lawmakers that keeping taxes low was not just smart politics, but smart policy that fueled economic growth.

The Forum spoke recently with Secretary Kemp about the state of the tax debate in the U.S. today, the role tax cuts played in making the Reagan Presidency a success, and whether the issue of taxes is still relevant as America prepares to elect a new President later this year.

RF: To put things into historical perspective, could you talk about the political and economic climate in the late 1970s when the issue of tax cuts first became part of the national debate. What was the mood of the country at the time?

JK: I was in the Congress from Buffalo, New York since 1971, and we had suffered through the wage and price controls and the inflation and recession of the Nixon years. We never really got out of it under Gerald Ford, a dear friend of mine. We go into the mid-‘70s, and I had been toying with tax policy as a way of encouraging job creation in the country and obviously in my district of Buffalo, which was a heavy industry district, heavily unionized.

Nixon had taken us off the gold standard in 1972. We went out of the Bretton Woods Agreement, which de-linked the dollar to an ounce of gold. Taxes were quite high particularly in New York State. So we had the combination of both inflation and unemployment, of slow growth with a weakening dollar. The political climate was mixed because there were rumblings of Ronald Reagan [running] to Ford’s right. I had been, as I said, flirting/toying with a job creation piece of legislation. I happened to be reading a speech by John F. Kennedy at the New York Economic Club in November of ‘62, I believe, and I came across a paragraph in which he said it’s paradoxically true that high tax rates cause low tax revenues. The best way to get more revenue is to bring down the rates and expand the economy.

Well, that appealed to me, because I had been frustrated by the Ford White House and the Congressional Budget Office, who always scored any reduction of tax rates in a static analysis. All it did was hurt revenue. And I read this statement, and I noticed going back into the history books, that the budget of the United States came into balance in 1964-65, before the Vietnam War got out of control for Johnson. So I told my staff, “Please go get me an exact duplicate of the Kennedy tax cut.” And it came out to be the Kemp-Roth 30% over three years tax rate reduction that was criticized heavily by both Republicans and Democrats. But I poured my political efforts into and sold it to Reagan in ‘79. He was the only national Republican leader to support it.

I was called “the witch doctor” by Baker, “a snake oil salesman” by another Republican, and George Bush called it “voodoo economics.” But it was the beginning of the first attempt by the Republican Party since Coolidge to bring down the high tax rates that at that time were 70% on ordinary income and 49% percent on capital gains, which Bill Steiger reduced to 28%, literally all by himself, with my help. But he advanced that idea in ’79 or early ’80, so that was the beginning of what we called supply side economics.

RF: These days, the virtue of lower taxes is an accepted political reality. Back then, that wasn’t the case. How much of what you had to do involved simple education — making sure people understood that the status quo was unacceptable, and that higher tax rates were holding the economy and American workers back?

JK: It was tough. It was as tough in my own party as it was in the other party. Because it was not Republican orthodoxy. The Republican Party en masse voted against the Kennedy tax cuts of ’61 and ‘62. Barry Goldwater, the champion of conservatism, voted against the Kennedy tax cuts. Howard Baker’s father voted against them. The Republican orthodoxy was balance the budget first and then cut tax rates. Well, we never balanced the budget because we never could get the economy growing enough, so convincing the Republican Party was difficult at the national level.

Then-Congressman Kemp watching President Reagan sign the tax reform bill of 1986

Then-Congressman Kemp watching President Reagan sign the tax reform bill of 1986

[Reagan] understood the steep progressivity of our code and how anti-work it was, how anti-investment it was…

It was easier for me in the House where I had built up a lot of friends and allies by pushing pro-growth economic issues for almost five straight years and building kind of a, for lack of a better word, a progressive conservatism —conservative values but progressive ideas on tax policy and inner city economic development that I called enterprise zones.

RF: You mentioned Ronald Reagan earlier. You are credited with convincing him to make tax cuts the central part of his economic platform for President in 1980. Could you talk a little bit about how that came about?

JK: I worked for him in the off-season. I gave a speech to the AFL-CIO convention of longshoremen, I think in ‘79, in Bal Harbor, Florida; and got a huge ovation from Puerto Rican and African American and Latino longshoremen.

Teddy Gleason, the longshoremen’s president from New York, was a good friend of mine. He was a Catholic Democrat who liked me because I played professional football. And I was talking about jobs and lower tax rates on labor and capital. I’ve never talked about capital formation that I didn’t talk about labor. And just as a parenthetical point, if you look at the New York state income tax in the 1970’s, it went up to 14% and the federal income tax was 70%. Very few people paid it obviously, but it was 70%. And we’d had all that inflation in the mid-’70s, so working men and women, longshoremen who made good wages — $40,000, $50,000, $55,000 — they had been inflated into high brackets, where half of their income almost, after taxes, was removed from their purchasing power.

They were a ready constituency, and I went down to Bal Harbor and sold them on this idea, quoted Kennedy obviously. Reagan read about it in Human Events, and he called me out to California to brief him. He supported it, and he said, “Jack, I remember when the top income tax rate was 91%.” He understood the steep progressivity of our code and how anti-work it was, how anti-investment it was, and, when it intersected with inflation, how it pushed normal wages up into tax brackets that were always reserved for the Mellons and the Rockefellers but never the blue collar working folks of New York or California or wherever. Reagan understood it, then adopted and ran on it. The rest is history.

RF: Let’s flash forward to this year’s election: some people believe that the tax cut issue has lost its effectiveness, and that the message of letting people keep more of what they earn just doesn’t resonate with voters like it used to. Do you agree with that?

JK: No, I really don’t. I read David Frum, I read David Brooks in the New York Times. They both use that argument. But the issue was never leaving money in people’s pockets. The money — the issue of leaving money in people’s pockets — was never used by Reagan or by me.

What we were doing was shifting the incentives by lowering the marginal tax rates and increasing the after-tax income for work, savings, and investment. All of this was done at the margin where people make their decisions. Yes, you got to keep more after-tax income. But it also shifted working and investing decisions by creating a greater incentive at the margin to put your money at risk or into extra work. So it was sold by Kennedy almost as a Keynesian demand-side solution to the stagnation of the early ‘60s. Reagan used it as an incentive to increase the reward for work, savings, investment, and entrepreneurship.

In the current dilemma of what to do, I believe tax reform is back at the top of the Republican agenda, with simplification. But in the meantime, during this slowdown, we have the highest corporate income tax rate in the world other than Japan; it’s 35% and it should come down to, I don’t know, 20-25%. I think the income tax rate is too high at the top. We’ve indexed income tax rates; we’ve never indexed capital gains rates.

So I think it’s very much alive, particularly in the tax reform movement, and something that should be at the forefront of any Republican presidential campaign.

RF: Following on to those comments, what do you see as the greatest challenge our nation faces today with regard to its tax policy?

JK: First of all, our rates are too high both on personal and corporate income. The double taxation on dividends is counterproductive. The bigger challenge is reforming the tax code in such a way that you answer the static analyses that are done by the opponents — by the Joint Committee on Taxation, the Joint Budget Committee.

Those are real hurdles, and whoever is the candidate — I’m supporting McCain — is going to really have to understand the issue and sell it to the American people based upon a dynamic analysis of what it could achieve for the American economy.

Capitalism works great at the top of the ladder; it’s not working well enough down the rungs of the ladder because we haven’t made more opportunities for workers to participate in this great investor/ownership democracy of ours.

RF: Finally, let me ask you a question that goes beyond tax policy. Throughout your career, you have always been very attuned to Reagan Democrats – those hardworking, blue collar Americans who grew up admiring Franklin Roosevelt but voted for Ronald Reagan because they believed he understood their concerns and would make a difference in their lives. Have Republicans lost Reagan Democrats and, if so, how do they go about winning them back?

JK: I don’t agree with those who say that the Reagan Coalition is over. It’s certainly undergoing some changes. I don’t think you can appeal to them simply the same way Ronnie Reagan did on defense and taxes. I think we’ve got to be more, uh, compassionate if you will. You’ve got to approach people from the standpoint that they want the same things for their family that we want for our families: good education, a chance at the American Dream, upward mobility.

I don’t agree with those who say that the Reagan Coalition is over. It’s certainly undergoing some changes.

One way I’ve done it or tried to do it is to appeal to their desire to own a home. I think we have to appeal to their desire to take part in what Bush called the ownership society. I don’t think he really sold it very well, unfortunately. I think it’s a great idea. I was debating John Edwards on poverty and he kept saying he liked Jack Kemp, and the trouble with Kemp and the Republican Party is they represent investors and Democrats represent workers. And I said, “Wait a minute John. Workers and investors are not two separate people. They’re the same people at different stages of their life. A worker in the office is an investor. A worker who has a 401k or a Roth IRA is an investor. A worker who’s got a pension is an investor.” The “investor class,” as Larry Kudlow likes to talk about, is up to over 60% of the American people. So we should appeal to their desire to democratize capitalism.

Capitalism works great at the top of the ladder; it’s not working well enough down the rungs of the ladder because we haven’t made more opportunities for workers to participate in this great investor/ownership democracy of ours. RF

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