from The WSJ, Phil Gramm and Michael Salon, Reagan Cut Taxes, Revenue Boomed:
As inflation plummeted from the CBO’s projected average annual rate of 8.3% for 1982-86 to an average of 3.8%, revenue compared with projections tumbled $22 billion in 1982 and $70.4 billion in 1983 solely because of reduced inflation and bracket creep. The Joint Committee on Taxation’s static cost estimate of the Reagan tax cuts was $37.6 billion in 1982 and $92.7 billion in 1983. In other words, the collapse of inflation and bracket creep and the double-dip recession caused revenue losses more than twice as big as the projected static cost of the Reagan tax cuts.
When Reagan left office, real federal revenue was more than 19% higher than it was the day of his first inauguration. A major recession had been overcome, inflation had been broken, the tax code had been indexed to eliminate bracket creep, and the largest tax cut of the postwar era had been implemented. The Reagan tax cuts and the boom they created stand as the most successful policy initiative and recovery of the postwar era—the polar opposite of Mr. Obama’s program and economy.
It is a little technical to isolate the drop in revenue from the reduction in inflation and bracket creep from the lowering of the rate, but it is an important distinction, It highlights the challenge of accurately understanding the dynamics of changes in tax rates and their impact.
But the conditions today are different. We are not following the stagnation of the 70’s, we are lowering from a much lower number- even if it was increased under Obama. We are challenged with a larger deficit and regulatory environment. We must look at all friction costs and taxes are only one of them.
I agree that taxes should come down, but there is more that is needed. One much needed element is permanence. Improvements in the tax code and friction costs will have little impact if businesses and individual have no faith that the laws will remain valid through partisan changes.