George Gilder: Trump is Reagan's True Heir
Few predicted the complete dominance of tax rates over all other economic policies. Yet that is what the decades since Reagan have proved.
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NOTE: My friend George Gilder was Ronald Reagan’s most-quoted living author and one of the principal fathers of the Supply-Side Economics that powered the Reagan boom and ended — for almost half a century now — the postwar every-two-and-a-half-year cycle of recession and “recovery”. His Information Theory of Economics is transformative. He is absolutely a free-trader. So this short essay is significant. — RDM
by George Gilder and Richard Vigilante
July 22, 2025
We are confirmed free traders. Trade flows are information. In our information theory of the economy, nothing is more important than letting information flow undistorted.
Still, we are not especially worried about Trump’s tariff threats because on net, he is doing the economy far more good than bad. The big economics lesson of the past 40 years has been the decisiveness of tax policy.
Few of us free market-types predicted the complete dominance of tax rates over all other economic policies. Yet that is what the decades since Reagan have proved.
Contrary to orthodox predictions, Reagan’s tax cuts, and the preceding capital gains tax cuts, ended the inflationary era launched by Nixon. The capital gains tax cut more than doubled the after-tax, after-inflation return on the U.S. stock market. Boosting net investment returns lifted demand for dollars, because investors drive the marginal, discretionary demand for dollars. When fewer dollars are demanded than supplied, we get inflation. When demand meets or beats supply, inflation subsides.
The dramatic increase in the real, after-tax return on investment helped to power four decades of a robust and resilient economy with recessions markedly shorter and less frequent from 1983 on compared to the previous 40 years. (1983 was when the rest of the Reagan tax reforms took effect).
Both the personal income tax rate cuts and the capital gains tax cuts contributed to enhancing after-tax returns on investment. Still, the impact of capital gains taxes on return on investment (ROI) was more direct and profound. It highlighted a lesson Trump appeared to have absorbed: the importance of discretionary spenders and investors to the economy.
Trump’s 2017 corporate tax cuts worked so powerfully for the same reason. They powered an astonishing surge in employment and a drop in unemployment unmatched for half a century. That’s because they were focused on taxpayers who could more easily alter their behavior in response to incentives compared to consumers subject to personal income taxes who have less wiggle room.
Finance departments of modern corporations spend most of their days and nights striving to reduce their firm’s average tax rate. There is even a learning curve: accountants get better at tax avoidance over time.
Many, even most tax, avoidance measures are manifested in investment decisions. Reducing the business impact of taxes by lowering rates can dramatically improve capital allocation. Tax cuts boost profits and cash flow and encourage expansion. Trump’s 2017 tax reform led directly to massive boosts in average corporate earnings. Even corrected for inflation, 2018, 2020, and 2021 each set new record highs for S&P earnings. Earnings in 2021 were almost 60% higher than the previous record, set, as it happens, in 2017.
Welcome then is the news that the OBBB creates new opportunities to avoid the capital gains tax altogether for certain investments: startups and businesses opening in opportunity zones. Arguably the administration should not have bothered with the targeting: prejudicing capital allocation is rarely a good idea. On the other hand, the elevated risk of startups is one of the best arguments we know that cap gains tax rates should be zero.
Meanwhile, at every inflection point so far, the Trump tariffs have proved more of a negotiating tool than settled policy. Despite the very low average tariff rates imposed by the U.S. we have long imposed significant “strategic” tariffs on politically powerful industries and had the same imposed on us from abroad. Free trade has always been something of a myth. That will continue to be true.
Tariffs have not outweighed the beneficial impacts of tax policy for decades and they are unlikely to do so under Trump. His preservation of the tax cuts in the One Big, Beautiful Bill (OBBB) will prove far more important than anything he might do on the tariff front.
The combination of meaningful tax rate reductions, deregulation, especially in the energy sector, and the growing economic power of AI points to good news for investors for years to come. Take advantage.
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