Reagan cut taxes significantly. According to the Bureau of Economic Analysis the top tax rate fell from 70 percent (for those earning $108,000+) to 28 percent (for anyone with an income of $18,500 or more). Reagan also cut the corporate tax rate from 46 percent to 40 percent.
Sure. But my entire point here is that the Reagan packages represented a FLATTENING of the tax code. He dropped marginal rates, but the amount of money people PAID in taxes did not change substantially. The EFFECTIVE RATES did not move in any significant way.
Anecdotally, I remember this well; my first professional job began in the middle of 1980, in a big-city sales office of a large technology company. So, I was surrounded by salespeople who weren’t 1%ers, but were certainly earning in the top 10%, and some in the top 5%. (I, of course, wasn’t earning anywhere near what they were earning, at that time.)
What I remember most about the in-office discussion after Reagan’s first tax package took effect. The statement I most often heard was “Hey, I though we were going to get a tax cut if we voted for this guy. I didn’t get any kind of cut!”
How’s that? Well, the Reagan tax packages removed the legal tax shelters those guys were using to lower their AGI’s. You could “invest” $2,000, which got you legal ownership over part of an oil well, or maybe the hindquarters of a Brahma bull, and voila! $10,000 of AGI reduction would appear on your tax returns. So, instead of being in the 70% bracket and ending up paying 21% effective after all your financial engineering, you were in the 28% bracket paying 21.5%, WITHOUT the financial engineering. The “cut” was not in the taxes you paid to the government; the “cut” was the fact that you no longer had to give a lawyer 2 grand to get that tax deduction to lower your AGI.
This matters in major way when it comes to the Reagan discussion, people people change their consumer behavior based on additional money in their pockets, not some esoteric marginal rate that they never have to pay. The point is that the Reagan tax package might have been SOLD on “trickle down” or supply side economic ideas, but it never BEHAVED that way.
So, although what you’re saying is the generally accepted left-learning narrative on what occurred taxwise during the Reagan years, the data shows that it never played out in practice that way. To repeat what I believe is the key chart here:
In a real, supply side tax cut, the red and blue lines would ALSO have shown the same decrease, on a percentage basis, as the marginal rate bars. They do not. Ergo, supply side economics was never implemented in the Reagan years according to plan (or its historical reputation).
It is also relevant to note that the Reagan tax cuts turned America from a creditor nation into a debtor nation. The US government has had to borrow every year since to make up the tax loss. That result was no better expressed than in the headline: Reagan Policies Gave Green Light to Red Ink
Sorry, I AGAIN have to quibble with this. Two more charts, here, the first shows nominal dollar tax receipts under Reagan against outlays, year over year:
So, yes, tax receipts under Reagan did decline slightly year over year from 82–83, but his is typical behavior for a year that contains quarters when the economy is in recession. GDP was -1.9% in 1982, so taking that decline in reciepts and attributing that to Reagan’s tax plan is political cherrypicking, in my view. But, that aside, tax receipts then took off afterwards, rising 50% from the time relative to the time he entered office to when he left. If I just eyeball the table for that 50% number……that’s by far the best of any president in subsequent years:
Reagan: 617B in receipts, grew to 991B.
Bush I: 1.032B in receipts, grew to 1.154B.
Clinton: 1.258B in receipts, grew to 1.991B (38% increase)*
Bush II: 1.853B in receipts, grew to 2.105B (12% increase)*
Obama: 2.162B in receipts, grew to 3.643B (41% increase)
- * Both Clinton and Bush II had better years in terms of receipts than the year they “turned over the reins”, in that both presidencies ended in a period of recession. However, neither approaches the 50% revenue growth that Reagan enjoyed.
And…here’s the second relevant chart:
So, putting all that together:
- It is NOT CORRECT to say that Reagan turned the US from a “creditor to a debtor” nation. The US had been running deficits since a surplus in 1969, and had been running deficits, albeit small ones, most years since WW2.
- However, it IS CORRECT to say that under Reagan, deficits moved into a new “orbit”, if you will. However, that is NOT because of declining tax receipts due to his tax packages; it is due to overbudgeting and subsequent overspending, mostly due to his conviction that a military buildup would cause the Soviets to respond with one of their own, and that such would break their economy (that’s an entirely different debate.)
- Also, the US has been a debtor nation since it’s inception. We borrowed heavily to fund the Revolutionary War, and except for a few years in the 1830’s where we *almost* saw black ink, we have always carried rather large aggregate debt loads. You can find the data on that on TreasuryDirect.gov.
That is why I specifically said the Reagan tax cuts kickstarted the inequality. Corporate tax cuts had stated before. As Adam Carasso, Senior Tax and Economic Adviser at the Senate Finance Committee points out, “The secular decline in corporate income tax revenues as a share of the total is due largely to the lowering of corporate tax rates every few years since the 1970s”.
You’ll have to help me out here. I see no indication in the data that the Reagan package “kickstarted” inequality as a direct consequence of lower tax rates. Inequality rose, by my read, because all that money that used to be plowed into “investments” which had no return other than the lowering of AGI and the individual’s tax burden suddenly went looking for other things to do; what it found was the stock market, real estate, and the first phase of Silicon Valley venture capital startups (Pyramid Technologies, Sun Microsystems, Silicon Graphics, etc.)
So, yes, the rich got richer, but it wasn’t due to having lower tax rates (they didn’t) but because it freed up capital that previously was tied up in useless endeavours.
And yes, there are more causes of income inequality than merely tax cuts. Automation is the great job killer and more serious thought has to be given to assisting those who will lose any form of jobs with dignity from the source.
I quite agree. At age 63, I am glad that this will be somebody else’s problem to solve, but I have deliberately steered my remaining daughter (who is 18 — I was very fortunate to be a late-age mother) to study in fields where she is unlikely to be automated out of a job (she intends to pursue veterinary medicine).
Tax cuts may escalate automation. When Carrier got his big tax cut to keep some of the jobs in the US, it agreed to invest $16 million in its Indiana plant. However, as the president of Carrier said, that would all go into automation and hence huge job loss. So, is the money saved by corporate tax cuts likely to go to job creation or to automation?
We’re well into crystal ball territory now, with questions like that. Time will tell. The larger question, in my mind, is that with the lower tax rates and some deregulation, did I just enable an innovative, high tech air conditioning company to come to market by lowering their entry barrier?
I hope so.