“The last president we had was Ronald Reagan that said we’re going to dramatically cut tax rates. And guess what? More revenue came in, but tens of millions of jobs were created.”
–Sen. Rand Paul (R-Ky.), interview with Sean Hannity of Fox News, April 7, 2015
Rand Paul’s quote is emblematic of some of the mythology that has sprung up around Reagan’s tax policies — specifically what he did and its impact. Economists will forever debate the impact, and Paul is certainly entitled to his opinion that Reagan’s tax cuts led to a booming economy.
But certainly his numbers can be checked. First, did the tax cuts lead to more revenue? And were tens of millions of jobs created?
When Ronald Reagan became president in 1981, individual tax rates were as high as 70 percent. His first tax cut, the Economic Recovery Tax Act of 1981, slashed the top rate to 50 percent—and then a 1986 tax overhaul brought the top rate down to 28 percent. Those were certainly dramatic changes, though as we shall see, Reagan also raised taxes repeatedly.
The jobs part of our query is easy to answer. As readers know, The Fact Checker frowns on attributing job gains to a single president; the business cycle, the Congress, the Federal Reserve and the ingenuity of private enterprise are all important factors. But with that caveat in mind, let’s look at job creation during presidential terms.
There were 90.9 million jobs at the start of Reagan’s presidency — and 106.9 million at the end, according to the Labor Department. That’s a gain of 16 million jobs, or 2 million per year in office. Bill Clinton can maybe claim “tens of millions” with the 23.1 million jobs created during his time in office, but not Reagan.
Under Clinton, 2.9 million jobs a year were created. Ironically, Reagan actually trails Jimmy Carter on the presidential list of most jobs created per year, even though he defeated Carter on charges of mishandling the economy. About 2.6 million jobs a year were created in Carter’s single term.
Okay, maybe Paul was engaged in some hyperbole on the jobs front. What about the notion that “more revenue came in”? Paul spokesman Sergio Gore first directed us to an article in The Daily Signal by Stephen Moore of The Heritage Foundation, who is an unofficial adviser to Paul.
“Contrary to the claims of voodoo, the government’s budget numbers show that tax receipts expanded from $517 billion in 1980 to $909 billion in 1988 — close to a 75 percent change (25 percent after inflation),” Moore wrote.
We checked the historical records of the White House budget office, and those numbers are right. But it’s devoid of important context.
First of all, revenues as a percentage of gross domestic product (GDP), which is the best way to compare across years, dropped from 19.1 percent in 1981 to a low of 16.9 percent in 1984, before rebounding slightly to 17.8 percent in 1989. One reason the deficit soared during Reagan’s term is because spending went up as a share of the economy and revenues went down.
But we can get even more specific about the impact of the 1981 cut in rates. A Treasury Department study on the impact of tax bills since 1940, first released in 2006 and later updated, found that the 1981 tax cut reduced revenues by $208 billion in its first four years. (These figures are rendered in constant 2012 dollars.) The tax reform act of 1986, which was designed to be revenue neutral, reduced revenues by less than $1 billion four years after enactment.
But Reagan’s tax increases in 1982, 1983, 1984 and 1987 boosted revenue by $137 billion. Overall, that’s a revenue loss from Reagan’s various tax bills, but it also shows that Moore is crediting to Reagan’s tax cuts revenues generated by Reagan’s tax increases.
Moore, in an interview, acknowledged that “certainly there were tax increases” but he insisted that the cut in tax rates generated “huge revenue gains.” He said that the “tax increases were small, compared to the tax cut, which was huge.” In particular, he said that the wealthy started paying more in taxes, and he said the booming economy resulted in increased tax revenues.
That’s actually not readily apparent from the data. Certainly, the share of taxes paid by the top 1 percent went from 17.9 percent in 1981 to 25.2 percent in 1989, for an increase of 41 percent, according to IRS data. But the income share of the top 1 percent increased even more dramatically, from 8.3 percent to 14.2 percent—a gain of 71 percent. So a lot of the increase in taxes came from a more dramatic increase in wealth.
Moore directed us to a paper he co-wrote in 1996 while at the Cato Institute, which offered a defense of the Reagan economic record. As we said, that’s for economic historians to sort out. But the paper says it was “an enduring myth” that Reagan officials believed tax cuts would pay for themselves. “This was nonsense from day one, because the credible evidence overwhelmingly indicates that revenue feedbacks from tax cuts is 35 cents per dollar, at most,” the paper says, noting that “the Reagan administration never assumed that the tax cuts would pay for themselves.”
Bruce Bartlett, a former Treasury Department official who helped craft the 1981 tax cut as a congressional aide at the time, in a 2011 article for Tax Notes reproduced the Reagan administration and Congressional Budget Office scores of the Reagan tax plan. Both predicted revenues would fall as a result of the tax cut. But both turned out to be off the mark about extent of the fiscal impact because the 1981-1982 recession turned out to be deeper than expected and inflation fell more rapidly than expected. That steep decline in revenues is a major reason why Reagan boosted taxes just one year after his tax cut.
Bartlett wrote that he considers the 1981 tax cut to be a success because “it not only didn’t raise inflation, as almost all economists thought it would, but it also helped the economy transition from high inflation to low inflation at a remarkably low economic cost.” But he said it clearly resulted in less revenue.
Moore “is trying to attribute to the tax cut all of the normal cyclical rise in GDP growth after the 1981-82 recession,” Bartlett said in an e-mail. “Furthermore, he is attributing to the tax cut the effects of the sharp cut in interest rates by the Fed and the big increase in federal spending for defense. I don’t know if anyone has ever done a proper accounting of the relative impact of all these effects, but I would say that the 1981 tax cut was the least of them.”
Interestingly, Moore in his article said “nearly 40 million jobs were created between 1982 and 2000,” which could be where Paul came up with his “tens of millions of jobs” language. But that time period also includes the Clinton years—and Clinton of course reversed some of the Reagan tax cuts and increased the top tax rate to 39.5 percent. Nevertheless, the economy boomed as well.
The Pinocchio Test
It’s always hard to make judgments on economic issues, as the impact of various policies can be vigorously debated. We have no opinion on whether the 1981 Reagan tax cut was good or bad for the economy, except that it seems rather simplistic to attribute every good thing that happened to a single event. As Bartlett noted, Federal Reserve policy and the stimulus from increased government spending were also important factors.
In his remarks, Paul falls into the trap of suggesting the Reagan tax cuts paid for themselves—and then some. Reagan never claimed that would be the case—and the Treasury Department in 2006 confirmed that tax cuts reduced revenue. Moreover, Reagan repeatedly boosted taxes during his term as president, in part to make up for lost revenue from his original tax cut.
One could certainly believe that cutting tax rates—and simplifying the tax code–were important steps to set to stage for later economic growth, which of course brings in higher tax revenues. But the tax cut itself was a money-loser for the government–and it was not the sole reason for “tens of millions” of jobs. We cannot quite say Paul committed a Four-Pinocchio violation, but it’s close.
(For an alternative look at this data, Alan Reynolds of the Cato Institute wrote a rebuttal awarding The Fact Checker Three Pinocchios. We direct his attention to Chapter 4, page 4, which shows Reagan’s own 1990 budget, his last one, as concluding that the 1981 tax cut lowered revenues. This estimate was made in 1988, meaning it incorporated whatever growth occurred in the 1980s.)
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