Now that the jobs report is behind us, investors can look ahead to corporate earnings and the tax drama.  When it comes to major tax cuts, I’m confused why the GOP can’t articulate the benefits of lower taxes. History shows that lower taxes improve the economy, which in turn creates more money in government coffers. 

I understand the notion that less is more as it seems counterintuitive. However, in this case, we are talking about folks keeping more of the money they earn. Democrats argue lower taxes means less money to fund the government. Initially, that’s true for a short period of time; as more money circulates in society, those government tax coffers swell. 

Exhibit A. The Reagan Tax Cuts

President Reagan came into office with sky-high corporate and individual tax rates.  At the end of his second term, both were substantially lower, and the federal government was taking in substantially more money. 

Corporate rates declined (six percentage points), and revenue to the government increased by $107 billion or 37%.

 

US Treasury Receipts Corporate	Top Tax Rate	Revenue Billion USD
1981	46%	$286
1987	40%	$393

 

The top individual tax rate declined 42 percentage points that resulted in revenue to the government, which increased by $23 billion or 38%.

US Treasury Receipts Individual	Top tax Rate	Revenue Billion USD
1981	70%	$61
1987	28%	$84

 

The bottom line is less turned out to be a lot more when it came down to folks keeping more of their hard-earned money. 

Lower taxes resulted in higher revenue.

Measuring Reaganomics

The two best ways to measure the impact of any economic policy are the gross domestic product (GDP) and jobs.

GDP

The GDP under Reagan’s tax cuts began to kick-in big time in 1983. The GDP surged to 4.6% that year, and 7.3% in 1984.  From 1983 to 1989, the GDP growth averaged 4.4% per year.

Employment Growth

In September 1983, job creation under Ronald Reagan is legendary-1,150,000 jobs!  That would be an amazing achievement now with 255 million people in the civilian noninstitutional population back then -there were only 155 million in the job pool.

By the way, the employment-population ratio soared under Reagan. When he left office, it was at an all-time high point:

• Jan 1981: 59.1
• Jan 1990: 63.2

Note that the 60.6 employment-population ratios when President Obama came into office (59.9 when he left).

Conclusion

I find it strange when people disparage the Reagan tax cuts and economic results. This is the time to drop the knee-jerk political opposition and embrace efforts that would add fuel to an economy that’s already taking off.

Calendar

This week, the market will shift gears to the next round of earnings releases. Earnings move stocks. Last  time, even great results and strong guidance were greeted more often than not with selling. While that can be frustrating, it is also cathartic in the sense of shaking out weaker hands.

It’s all about results from the big banks this week:

• (C) Citigroup
• (JPM) JP Morgan Chase & Co.
• (BAC) Bank of America
• (WFC) Wells Fargo
• (PNC) PNC Financial Services

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