How the Kemp-Roth Tax Cut Went From a Backbench Bill to a Party's Creed

The most consequential tax bill of the late twentieth century failed. It was introduced in 1977, it never passed, and it was written by two members of the minority party. Four years later its central idea was the law of the land.

That is not a paradox. It is a strategy, and it is the most useful thing a congressional minority can learn. This post tells the story of the Kemp-Roth bill in order, defines the terms you need to follow the argument, gives the critics their best case, and draws the lesson. We will take the pieces in the following order: the problem, the bill, the argument, the objections, the votes, the law and the lesson.

Define the terms

Three terms do the work in this story, so let me define them before we use them.

A marginal tax rate is the rate on the next dollar you earn. If you are in a bracket that taxes income above $30,000 at 30 percent, your marginal rate is 30 percent even if your average rate across your whole income is lower. Marginal rates matter for behavior, because they set the reward for earning, saving or investing one more dollar.

An average tax rate is total tax divided by total income. It tells you what share of your income you pay. It says nothing about what your next dollar yields.

Bracket creep is what happens when brackets are fixed in dollar terms and inflation raises everyone's dollar income. A worker whose pay rises just enough to keep pace with prices is no better off in real terms, yet he is pushed toward a higher bracket and pays a higher marginal rate. Congress never votes on that tax increase, which is its chief political merit from the point of view of Congress. It simply happens, like weather, except that weather does not send an annual statement.

Here is a hypothetical, labelled as such, with the arithmetic shown. Picture a worker whose bracket structure taxes income up to $30,000 at 25 percent and everything above that at 30 percent. Inflation runs at 10 percent, and his raise is exactly 10 percent, so he moves from $30,000 to $33,000. His purchasing power has not changed. But $3,000 of his income now falls into the higher bracket, and the extra five percentage points on those $3,000 is $150 of additional tax, for no increase in real income. Multiply that by tens of millions of earners and a decade of double-digit inflation, and you have the tax environment of the 1970s.

The problem the bill was written to solve

In the 1970s, the federal income tax had a top marginal rate of 70 percent on the highest bracket of unearned income, and the middle of the income distribution was moving into brackets that the law's drafters had once expected only the well-to-do to reach. Inflation did that. Prices rose, nominal incomes rose, and families found that each raise lost more of its value to the government than the last.

At the same time, the economy was not producing. Inflation and unemployment rose together, which the standard postwar theories said could not happen, and the word for it was stagflation. The question was whether a different set of policies would work better, and a small number of economists and legislators thought they had one.

The Constitution supplies the starting point. Article I, Section 7 says that "All Bills for raising Revenue shall originate in the House of Representatives; but the Senate may propose or concur with Amendments as on other Bills." The Founders wanted the body closest to the people to hold the pen on taxes. In 1977 a member of that body, a former professional quarterback from Buffalo named Jack Kemp, used the pen.

The bill

In 1977, Representative Jack Kemp, a Republican from New York, and Senator William Roth, a Republican from Delaware, introduced a bill to cut individual income tax rates across the board by about 30 percent over three years. The design had three features worth noticing.

1. It cut rates, not only the dollar amount of tax. The target was the marginal rate, because that was the rate that governed incentives at the margin.
2. It cut rates for everyone. Every bracket came down, which made the case as one about the structure of the code, not about favoring a group.
3. It was phased in. Rates would come down in stages over three years, which made the policy predictable and limited the shock to the budget.

The intellectual case was supply-side economics, which holds that tax policy affects not only demand but the willingness to produce. Arthur Laffer and Jude Wanniski popularized it, and the Wall Street Journal's editorial page carried it. The reasoning in the simplest form is that if you tax work, saving and investment at a high marginal rate, you get less of them. The thing the economists proposed was to lower the rate on the margin, accept a smaller share of each dollar and hope to collect a share of a larger pie.

There is precedent for the idea, and it came from a Democrat. In the early 1960s, President Kennedy proposed cutting rates across the board, arguing that high rates restrained growth, and the Revenue Act of 1964, passed after his death, brought the top rate down from 91 percent to 70 percent. Kemp and Roth were not proposing something alien to American tradition. They were proposing to finish what the earlier cut had started.

The strongest case against it

A point-by-point post has to steelman the opposition, and the critics of Kemp-Roth were serious people. Their best argument went like this:

Tax cuts are not free. If the government collects less revenue per dollar and does not cut spending to match, deficits will grow. Supply-side promises that growth will make up the difference are optimistic, and the empirical evidence that cutting rates raises total revenue is weak at ordinary rates. Meanwhile inflation is the real problem, and a large tax cut risks adding demand to an economy that already has too much money chasing too few goods. Finally, a 30 percent cut weighs more heavily in dollars toward upper-income earners, who pay more tax in the first place.

George H.W. Bush, running against Ronald Reagan in the 1980 Republican primaries, called the whole approach "voodoo economics," a phrase that has outlived the campaign. I will give the critics credit on one count: they were right that deficits grew in the 1980s, and anyone who tells you otherwise is not paying attention. The tax cut was not the only cause. Spending was not restrained as promised, and a deep recession in 1981-82 cut revenue. But the critics were right that the arithmetic mattered.

Now the rebuttal, in numbered points.

1. The claim was never that every cut pays for itself. The serious version of the argument was that rates were high enough that cutting them would recover a meaningful share of the revenue through growth, and that the right comparison was the tax system as it stood, with its distortions, against the tax system as it might be. The strongest form of the case does not require that the cut be self-financing. It requires that the economy be better with the lower rates than with the higher.
2. Bracket creep was already a tax increase. The 1970s system raised people's tax burden every year without a vote. A rate cut that offset it was not a gift; it was a return of something that inflation had taken. The 1981 law's indexing, discussed below, took that argument furthest.
3. Incentives are about the margin. A person deciding whether to take a second job, expand a business or invest in a new plant is looking at what he keeps from the next dollar. A 70 percent top rate means keeping 30 cents. A 50 percent rate means keeping 50. That difference changes decisions.
4. The distributional objection mixes two questions. An across-the-board rate cut gives the largest dollar cuts to those who pay the most tax. That is arithmetic. The question is whether the cut was fair relative to what each group paid, and in percentage terms an across-the-board cut treats each bracket alike.

You may find some of those answers more persuasive than others. I do. What I think nobody can deny is that Kemp and Roth put a clear argument on the table and made the other side answer it.

The losing votes of the late 1970s

Here is where the story gets interesting for anyone who serves in a minority. In the late 1970s, Democrats controlled both chambers and the White House, and Kemp-Roth had no chance of passing. The bill never became law in those years. That is the normal fate of a minority's central proposal.

But look at what the bill did while it was losing. First, it gave Republicans a single, clear, memorable idea to rally around, which a party that had been divided over the proper response to the economy had lacked. Second, it forced Democrats to choose a response, and some of them moved. In 1978, Congress passed the Revenue Act, which included a capital-gains tax cut that grew out of an amendment by Representative William Steiger of Wisconsin, a Republican, and which the Carter administration opposed. A Democratic Congress had cut a tax on the strength of a minority amendment. A losing idea was still moving the center.

Third, and most important, the bill gave candidates something to run on. By the end of the decade, the Republican National Committee and the party's leading candidates had embraced the across-the-board rate cut, and when the party met in Detroit in July 1980, its platform endorsed the Kemp-Roth approach. Reagan made the cut a centerpiece of his campaign. The bill had never become law. By the time the voters were choosing a president, it had become the party's creed.

This is the lesson I keep returning to. A minority cannot pass a bill. It can force votes, and a vote is a way of putting every member on the record about an idea. If the idea is popular with the public, the vote is a campaign issue. If the idea is sound, over time the other side moves toward it. A minority that picks the right idea and keeps forcing the vote is playing a long game, and the long game can be won. For a related view of how a minority uses the tools of the House, see 218 Signatures, How a Discharge Petition Pries a Bill Loose From the Speaker, and for the broader pattern, The Ideas Came First, How Magazines and Think Tanks Built the 1980 Landslide.

The 1981 law

Reagan won in November 1980, Republicans took the Senate, and the House remained under Democratic control, with a bloc of conservative Southern Democrats who were willing to vote with the administration. In the summer of 1981, with the president making his case on national television, Congress passed the Economic Recovery Tax Act. President Reagan signed it on August 13, 1981.

The law's central feature was a phased cut in individual income tax rates: 5 percent in the first stage, beginning in the fall of 1981, then 10 percent in July 1982 and another 10 percent in July 1983. How big was that in total? If you simply add the stages, you get 25 percent. But each stage cuts the rate that remains after the previous one, so the arithmetic compounds, and the working is as follows. After the first cut, a taxpayer pays 95 percent of the old rate, or 0.95. After the second, he pays 90 percent of that, 0.95 times 0.90, or 0.855. After the third, he pays 90 percent of that again, 0.855 times 0.90, or 0.7695. That means the total reduction was about 23 percent, which is the figure most economists use. The original Kemp-Roth proposal's 30 percent was larger, and the law as passed was smaller, but both were across-the-board rate cuts.

Other features mattered at least as much as the headline number. The top marginal rate fell from 70 percent to 50 percent. The law created a system of accelerated cost recovery, which let businesses write off investments faster. It expanded individual retirement accounts. And it provided for the indexing of tax brackets to inflation beginning in 1985, which ended bracket creep for good. I would argue the indexing was the most durable reform of all. Without it, every inflationary episode would restore the silent tax increase that had driven the revolt in the first place.

The deficit critics were not silenced. In 1982 Congress passed a significant tax increase, the Tax Equity and Fiscal Responsibility Act, to recover some of the revenue the 1981 law had given up. A fair account has to include that, because it shows that the cut was neither perfect nor permanent, and that the political process adjusted it. That is how a representative system is supposed to work: a policy is tried, its costs become visible and the legislature trims it.

What the lesson is for a minority

Let me close the loop with a list of rules a minority can draw from Kemp-Roth.

1. Pick one idea you believe is right and say it in one sentence. "Cut every rate by the same percentage over three years" can be understood in the time it takes to ride an elevator.
2. Put it in a bill and make the other side vote on it. A text is a target and a standard. It can be debated, amended and improved, and a vote puts every member on the record.
3. Expect to lose, and keep going. The fate of the 1977 bill was not the measure of the idea. The measure was whether it was reshaping the argument, and it was.
4. Give the idea to candidates. An idea that stays in a bill dies in committee. An idea that becomes a campaign platform can reach the voters who will elect a new majority.
5. When the day comes, be ready with the details. The 1981 law came together quickly because the bill had been drafted, debated and refined for four years.
6. Be honest about the costs. The critics were right that spending had to be restrained, and the movement that wins a tax cut owes the voters a plan for the other half of the ledger.

I would not suggest that every losing vote is a good strategy. Some bills deserve to lose. What I am saying is that a minority has a choice about which votes to force, and the votes worth forcing are the ones where the right idea, stated plainly, will eventually find its majority. For the full comparison of how the right has come back from the minority, see Five Conservative Comebacks Side by Side, and the Ingredient They All Shared, and for what a majority can and cannot do with the numbers, The Numbers That Run Congress, From 218 to 60 to 290 to 38 and Back.

A word on the spending side

I said I would be honest about the costs, and the plain fact is that the tax side of the 1980s agenda was easier to pass than the spending side. A tax cut is a gift each taxpayer can feel; a spending cut takes something away from a specific constituency that will fight for it. Washington has a gift for renaming a spending increase "a reduction in the rate of growth," and the voters have learned to read the fine print. Conservatives who want to learn from 1981 should learn that lesson as well. If you want smaller government, cutting the revenue is half the work, and the other half is a Congress that will vote against specific programs. For one way the House can do that through the power of the purse, read None of the Funds, How Appropriations Riders Let Congress Say No to an Agency.

The case in brief

1. The Kemp-Roth bill of 1977 proposed an across-the-board cut in marginal income tax rates of about 30 percent over three years, and it never passed a Democratic Congress.
2. The argument behind it was that high marginal rates and bracket creep, a tax increase no one voted on, reduced the reward for work, saving and investment.
3. The critics were right that deficits matter, and the deficits of the 1980s show that a tax cut needs a plan for spending, but their case did not answer the incentive argument.
4. By 1980 the bill's idea had become the party's platform, and in 1981 the Economic Recovery Tax Act enacted phased rate cuts of about 23 percent compounded, a 50 percent top rate and bracket indexing starting in 1985.
5. A minority wins by choosing the right idea, forcing the vote and staying with it until the idea reaches a majority.

What you can do: find a bill your representative has voted against that you support, and write a letter that states its central idea in a single sentence, so your member knows the idea has a constituency.