Is it too soon to say “We told you so”?
For years—for decades—tax reformers have been arguing that:
- People respond rationally to changes in tax policy.
- Beneficiaries of tax cuts include workers, consumers and investors.
- Tax cuts can stimulate real economic growth.
- High US taxes drive jobs and investment overseas.
- Lower taxes would bring foreign capital to the US.
- Economic stimulus through tax policy is superior to government spending and fiscal policy.
These arguments were the basis of the Reagan tax cuts in 1981 and 1982, and of the 1986 comprehensive tax reform. And they worked, resulting in “The Seven Fat Years,” as described by former Wall Street Journal editorial page editor Robert Bartley.
Unfortunately, the lessons of the Seven Fat Years didn’t last. Barack Obama was elected based on his explicit promise to undo Reagan-style limited government and supply-side policies and replace them with bigger government and Keynesian economic stimulus. It didn’t work, as we knew it wouldn’t.
But Trump has reembraced the Reagan approach, and it’s working again. Companies are announcing unplanned bonuses, pay increases, and increased contributions to retirement plans. They’re announcing new or expanded plans for domestic investment. Electrical utilities are passing along their tax savings to their customers in the form of lower rates. These announcements are being cataloged in a persistent blog entry at the website of Americans for Tax Reform, which includes positive announcements from 304 companies at the time of this writing.
The next thing to start looking for will be announcements of foreign companies making new investments in the US, and even mergers where the newly merged entity will be based in the US rather than overseas.
Even today’s news of 200,000 new jobs created in January is undoubtedly at least partially related to tax reform, with unemployment at its lowest rate in 17 years, and wage growth at its highest rate since 2009.
To be sure, other factors play a role. We think the recent economic improvement has also been caused by:
- Relief from the fear of Obama\Clinton regulatory policies;
- Pent-up demand and risk-taking on the sidelines during eight years of Obama;
- Removal of regulations under the Trump administration; and
- Anticipation of tax reform and further deregulation.
Now that the Trump administration’s historic tax reform is actual law, there is every reason to expect continued good economic news and higher rates of economic growth.
The Reagan tax cuts taught us an important economic lesson—a lesson that was forgotten during the Obama administration. The question now is: How long will this lesson last?