Bizzyblog notes:

US Tax Revenues Up 9.7% through four months, Deficit Down 57%; US Media Outlets Mostly Ignore the News.

Treasury Report

The Wall Street Journal celebrates the twenty fifth anniversary of Ronald Reagan signing the Economic Recovery Tax Act by noting the significance of the impact of Reagonomics on the US and World economies and the breadth of his philosophy’s current acceptance. Russia today has a 13% flat tax.

Twenty-five years ago this weekend, Ronald Reagan signed the Economic Recovery Tax Act. The bill cut personal income tax rates by 25% across the board, indexed tax brackets for inflation and reduced the corporate income tax rate. The anniversary is worth commemorating as a seminal moment that continues to influence policy for the better in the U.S., and around the globe.

The achievement of Reaganomics can only be fully understood by recalling the miserable state of affairs a quarter-century ago. Newsweek summarized the national mood when it wrote in 1981 that Reagan “inherits the most dangerous economic crisis since Franklin Roosevelt took office 48 years ago.”

That was no exaggeration. The economy was enduring a cycle of rising inflation with growing levels of unemployment. Remember 20% mortgage interest rates? Terms like “stagflation” and “misery index” entered the popular vocabulary, and declinists of various kinds were in the saddle. The perception of American economic weakness encouraged the Soviet empire to ever bolder adventures, as reflected by Soviet tanks in Kabul and Communists on the march in Nicaragua and Africa.

The reigning Keynesian policy consensus had no answer for this predicament, and so a new group of economic ideas came to the fore. Actually, they were old, classical economic ideas that were rediscovered via the likes of Milton Friedman and the Chicago School, Arthur Laffer, Robert Mundell, and such policy activists in Washington as Norman Ture and Jack Kemp, among others. These humble columns under our late editor, Robert Bartley, led the parade.

For every policy goal, you need a policy lever, Mr. Mundell likes to say. Monetary restraint was needed to break inflation, while cuts in marginal tax rates would restore the incentives to save and invest. With Paul Volcker at the Federal Reserve and Reagan at the White House, those two levers became the essence of the “supply-side” policy mix.

The results have been better than even some of its supporters hoped. The Dow Jones Industrial Average first broke 1,000 in 1972, but a decade later it was barely above 800 — one of the worst and most enduring bear markets in history. In the 25 years since Reaganomics, however, the Dow has climbed to about 11,000, accounting for an increase in national wealth on the order of $25 trillion. To match that increase in percentage terms, the Dow would have to rise to some 150,000 in the next quarter century. American living standards have risen steadily, and U.S. businesses have created entire industries that didn’t exist a generation ago…

Adherents of Rubinomics — after Clinton Treasury Secretary Robert Rubin — are still not converts, arguing that tax increases are virtuous if they reduce the deficit. We’ve addressed that argument many times and will again. But even the Rubinites haven’t dared to repeal indexing for inflation (which pushed taxpayers via “bracket creep” into ever-higher tax rates), and even the most ardent liberals don’t propose to return to the top pre-Reagan income tax rate of 70%. They also now understand that, at some point along the Laffer Curve, high rates begin to yield less tax revenue. The bipartisan consensus in favor of sound money has also held.

Thus today, the top marginal personal and corporate tax rates are 35%, compared with 70% and 48% in 1981. In the late 1970s the tax on dividends was 70% and the capital gains rate was 50%; now they’re both 15%. These reductions have increased the rate of return on capital, and hence some $3 trillion more was invested by foreigners in the U.S. between 1981 and 2005 than was invested by Americans abroad. One result: 40 million new jobs, more than the rest of the industrialized world combined.

The rest of the world, meanwhile, has followed the Gipper down the tax-cut curve. Daniel Mitchell of the Heritage Foundation finds that the average personal income tax rate in the industrialized world is now 43%, versus 67% in 1980. The average top corporate tax rate has fallen to 29% from 48%. This decline in global tax rates has been the economic counterpart to the fall of the Berlin Wall. Most of Eastern Europe has adopted flat tax rates of 25% or lower, and the Russians now have a flat income tax of 13%. In Old Europe, Ireland’s corporate and personal income tax rate cuts have helped generate the swiftest economic growth in the EU.

Not bad for a President dismissed as a dreamy former actor. In his 1989 farewell address, Reagan said that “People say that I was a great communicator. It would be more accurate to say that I communicated great ideas.” He was right, and a remarkable global prosperity has followed in his wake. The challenge for current and future political leaders is not to forget it.

The San Francisco Chronicle reports some eye-opening statistics from a study by the National Association of Homebuilders of the distribution of federal tax benefits for homeownership.

Homeowners in a single congressional district in California, the 14th District in Silicon Valley, took more in mortgage interest write-offs than all the residents of six states combined. Homeowners in the 14th — which covers most of San Mateo and Santa Cruz counties, plus part of Santa Clara County — claimed $3.2 billion in mortgage interest deductions during the year covered by the study, compared with $2.9 billion by all the residents of Vermont, Wyoming, West Virginia, Alabama and North and South Dakota. The average deduction in the 14th District was $35,000, compared with an average of $9,500 for homeowners nationwide.

— Residents of a single congressional district on Long Island wrote off more in real estate property tax deductions than all the homeowners from seven states combined. Owners in New York’s Third District took $1.25 billion in deductions — more than the $1.2 billion total claimed during the same period in Hawaii, Wyoming, Arkansas, Delaware, the District of Columbia and North and South Dakota.

— The average New Jersey homeowner claimed $6,005 in real estate tax write-offs — more than five times the average deduction by residents of Hawaii ($1,126). New Yorkers claimed an average $5,181 in property tax deductions, followed by the residents of New Hampshire ($4,830), Illinois ($4,129) and Vermont ($3,845).

— The average California homeowner wrote off $14,217 in mortgage interest deductions, while the average homeowner in Oklahoma wrote off $5,710. Washington, D.C., homeowners took an average $11,759 in mortgage interest deductions, while the average homeowner in North Carolina got $6,808.

Higher federal deductions mirror the impact of liberal governments. Home prices (and mortgage deductions) are far higher where new development is intensely regulated and curtailed, and liberal states and municipalities impose (naturally) the highest real estate taxes resulting in the largest local tax deductions.

Thus, the cost of bad government in San Francisco, Manhattan, and the District of Columbia is shared with residents of low regulation, low tax red states.

The irrationality of a tax-subsidy-created insurance system which typically gives you free (or at least low cost) health care when you are employed and prosperous, and which then shifts drastically-increased insurance costs to you as soon as you are out of work, is a nasty problem which perennially provides democrats with talking points and opportunities to try seducing the public into supporting its vision of a government-supplied free lunch.

Miraculously, this country actually had enough intelligence to reject HillaryCare once, but neither Hillary nor socialized medicine schemes are going away anytime soon. Today’s lead Journal editorial identifies the actual problems and points out precisely the correct solutions.

the President wants to fix defects in the market for health care. This is an area where he can do a great deal of good at little cost to the Treasury. And it’s high time. The inefficiencies of the current system are a drag on wage growth that’s being felt now even by the United Auto Workers union. And health care costs may partly explain why many Americans don’t feel as good as they might about the current economic expansion.

Longer term, it’s also increasingly obvious that the U.S. is approaching a tipping point where the reforms needed to preserve an innovative, market-based health system may become politically impossible. That’s because almost half of our health-care dollars are already spent by government. Do nothing and the inevitable growth of Medicare alone will lead us far down the path toward government-rationed health care a la Europe or Canada.

Even the half of our national health-care spending that remains a “private” responsibility bears little resemblance to an efficient market. That’s because the vast majority of Americans with private insurance get it from their employers, a relic of World War II when companies adapted to wage and price controls by offering insurance as a benefit to attract the best employees.

A tax exemption for employer health spending was later codified and will be worth about $126 billion this year. This enormous subsidy has created a system of overgenerous employer-provided plans that give individuals little incentive to pay attention to costs. It’s also unfair to people who aren’t lucky enough to get insurance from their employers, and therefore must pay for it with after-tax dollars.

So the first principle of reform must be to equalize the tax treatment of individually purchased and employer-provided insurance. Health Savings Accounts, which were part of the 2003 Medicare bill, are already a step in the right direction, since they mate a high-deductible insurance policy with a tax-free savings account to help pay pre-deductible expenses. Mr. Bush is usefully going further by asking for the premiums on the HSA insurance policy to be tax-free as well.

Equally important is creating a national market for individual insurance. Right now employers large enough to “self insure” can do so mostly as they see fit. But individuals and small businesses who want to buy insurance are at the mercy of state regulators where they live or operate. In overregulated states like New York and New Jersey, residents can pay 10 times as much for insurance as they would in neighboring states, and might not even be able to buy the high-deductible insurance necessary for an HSA. Individually purchased insurance also isn’t portable across state lines, contributing needless anxiety to normal life decisions like moving or switching jobs.

The Founders put the Commerce Clause in the Constitution precisely so Congress could act against internal restraints on trade such as today’s 50-state insurance market. We hope Mr. Bush endorses and fights for the bill from Representative John Shadegg of Arizona that would let individuals buy insurance from vendors in any state, no matter where they live.

The overall goal here is to move from the inefficiency and insecurity of the employer-dependent system to one where all workers have portable, individually owned insurance. A good analogy is portable 401k retirement plans, which are more appropriate to the mobile nature of the modern economy than traditional pensions. They are also more secure, as the increasing number of defined-benefit pension plans in default (United Airlines) amply demonstrates.

Achieving this won’t be easy, especially given the ideological stake that so many politicians have in a government-run system. They like the leverage of determining payment rates to hospitals and doctors, not to mention being able to take credit with voters for providing more benefits. But there is no free lunch in health care, any more than there is in any other part of the U.S. economy.

Health care is either going to be allocated by prices or by government, which in the latter case means price controls and waiting lines. Though it represents one-sixth of the U.S. economy, health care is the one industry in which the purchasers actually have no idea what anything costs. An individual market for health insurance would allow more freedom of choice while making consumers more cost conscious.

Market-based health-care reform could be a big political winner for Mr. Bush and the GOP. Americans have shown themselves averse to rationing via brute force, both in their rejection of HillaryCare and in the backlash against HMOs. And while the opponents have skillfully played on fears, consumer-driven plans — which let individuals “ration” care for themselves — have proven popular when they’ve been offered. Just last week the insurance industry announced that enrollment in HSAs had tripled in 10 months to three million people.

That’s a small part of the entire market, but an important start. Policy inertia on health care will inevitably lead to more government and Canadian or British-style waiting lists. But there’s still a chance to change course. Republicans in Congress should join Mr. Bush in seizing it.