Britain needs its own Ronald Reagan

Allister Heath
HERO-WORSHIP is always a mistake. No statesman is perfect: all make mistakes. But Ronald Reagan – of whom a statue was unveiled in Grosvenor Square yesterday – was one of the few major figures of the 20th century to leave their country in a hugely better state than they inherited it. He helped America regain its confidence, transformed its economy from the appalling basket-case he inherited from Jimmy Carter and played a central role in defeating communism.

Reagan’s soundbites were brilliant; they still have much resonance in today’s Britain, where the economy is shackled by Kafkaesque burdens and an increasingly defeatist, declinist mindset. As he once put it, “government’s view of the economy can be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidise it.” Tragically, despite the coalition’s best efforts, this remains true in the UK today.

Reagan realised that cutting taxes is a way of liberating the economy, incentivising entrepreneurs and risk-takers and stimulating growth. He also realised that reducing marginal rates on labour and capital can often partly pay for themselves – and in some cases, especially but not only when rates are crippling, can actually bring in more revenue, even in the short-term. By contrast to this “dynamic”, supply-side approach to tax, the “static” approach remains the orthodoxy in benighted Westminster: even under the coalition, the rule of thumb remains that every £1 foregone by HMRC is £1 less than can be spent by politicians and that the only way tax cuts can stimulate is by boosting consumer spending.

In fact, Reagan wasn’t even that original. The best exposition of how tax cuts can reinvigorate an economy remains Democratic president John F Kennedy’s spectacular 1964 reforms, which reduced the top rate from 94 per cent to 70 per cent (Kennedy was assassinated in 1963, of course, but his tax cuts were agreed prior to his death). Two years later, the federal tax haul was 11 per cent higher than forecast: more people made more money and their taxable efforts more than compensated for the reduced tax rate. Kennedy had been proved spectacularly right when he had argued that “an economy hampered by restrictive tax rates will never produce enough revenues to balance our budget just as it will never produce enough jobs or enough profits… In short, it is a paradoxical truth that tax rates are too high today and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now.”

In 1981, Reagan reduced the top rate of income tax to 50 per cent. In 1986, he cut it again to 28 per cent. Of course, this benefited the richest disproportionately – but they nevertheless ended up shouldering a greater tax burden and paying for a greater proportion of public spending. The share of tax raised from the best-paid 1 per cent jumped from 19 per cent in 1980 to 25.6 per cent in 1990. The moral: to squeeze more tax out of the rich, lower the top tax thresholds. We learnt that in Britain starting in 1979 – but with top earners now taxed at 52 per cent and millions paying 42 per cent, the lessons have been forgotten again. Britain needs to discover its very own Ronald Reagan, a hopeful, optimistic, pro-individual liberty, pro-growth politician with an uncanny ability to communicate. Any takers?
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