How Did Capitalism Create So Much Wealth?

While we may have agreement as to the goals and results of our economic system—to create wealth and prosperity for all—we seem to have less agreement on the means and causes by which wealth is created. How do the US and other nations create wealth? Recently, the dramatic reduction in marginal tax rates seems to have created increasing rate of wealth creation as did major deregulations and a broad expansion of trade.

Reduction of Taxes on Capital

After decades of top marginal tax rates in percentiles from the 70s into the 90s, President Reagan signed the Economic Recovery Tax Act of 1981. The top marginal rate was reduced from 70 to 50 percent, and by the time Reagan left office, it was down to 28 percent. During Reagan’s two terms, the top corporate tax rate was reduced from 34 to 28 percent, individual tax brackets were indexed for inflation, and—although there were some tax increases—the devastatingly high top marginal tax rates that preceded Reagan were gone. Nor have they come back—at least not yet.

In spite of President Bush the elder and President Clinton raising some taxes too much, but lowered others; and it now doesn’t appear smart to anyone that we should return to the levels that had prevailed prior to Reagan. The current President Bush lowered taxes dramatically—not so well in 2001, but then very effectively in 2003. The effect was to lower marginal tax rates, phase out the death tax, offer marriage penalty relief, and lower taxes on capital gains and dividends.

Deregulation

Major deregulation also enabled 25 years of strong growth. Interestingly enough, this deregulation began when President Carter signed the Airline Deregulation Act of 1978 that lifted price and route controls, the controls that had forced higher prices and fewer choices for consumers. Without these controls, airlines offered deals to fill otherwise half-empty planes and choose more efficient routes. The airline industry struggled for many reasons in subsequent years but consumers have been the big winners in terms of increased safety, more choices, and lower prices. Deregulation is responsible for ten to 18 percent lower fares, saving travelers $5-$10 billion a year.

Major deregulation also occurred in 1980 when Carter signed the Motor Carrier Act that deregulated an industry that had been closely controlled by the government since 1935. The deregulation put a stop to governmental requirements dictating what products truckers could transport and what routes they could travel.

The government required a motor carrier with authority to travel from Cleveland to Buffalo who purchased another carrier’s right to go from Buffalo to Pittsburgh to ship goods from Cleveland to Pittsburgh via Buffalo adding 272 miles to the trip. As a result of easing these regulations, prices for truckload-size shipments fell 25 percent by 1982; efficiency gains and cost savings helped make possible the “just-in-time” inventory system that has transformed retailing, lowered consumer costs, and, arguably, diminished the economy’s susceptibility to recessions.

President Reagan eased or eliminated price controls on oil and natural gas, cable television, long-distance telephone service, interstate bus service, and ocean shipping. In addition, banks were allowed to invest in a broader set of assets, and the scope of antitrust laws was reduced.

Free Trade

Recently, economic freedom has expanded in the form of freer international trade. In 1993, NAFTA eliminated a majority of tariffs on products traded among the U.S., Canada, and Mexico, and phased out others. In 2004, CAFTA eliminated tariffs immediately on more than 80 percent of U.S exports of consumer and industrial goods to Central America and phased out the rest over ten years. Since 1985, we’ve had bilateral or multilateral trade agreements with 16 countries. International trade is freer today than it has been at any time in the last 100 years.