Why Not Repeat Reagan’s Tax Cuts? (FREE)

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November 7, 2017

Why doesn’t the Trump Administration just repeat Ronald Reagan’s 1981 tax cuts? The Gipper proposed a 33% tax cut on practically all taxes. He negotiated with Tip O’Neill, the Democratic speaker of the House of Representatives, and settled for 29%. The top rate dropped to 50% from 70% of income, with lower incomes given similar cuts.

Reagan made one mistake: Most of the tax cuts were delayed until 1983, supposedly to grab more from taxpayers for a year to “pay” for the tax cuts. But all that did was delay economic investment for a year, as companies and persons waited for the lower rates to kick in, bringing back the Carter-era recession and malaise. When the full force of the tax cuts kicked in, 1983 enjoyed economic growth of a whopping 7%, followed by nearly as high growth the rest of the Reagan presidency.

With Republicans now controlling both houses of Congress, Trump could get through a 33% cut. Keep it simple: cut everything the same amount. That way, when Democrats claim, “The tax cuts are just for the rich,” Trump could reply, “Every taxpayer will pay a third less. Everybody.”

Instead, Trump’s economists, with input from the GOP Congress, have devised a complicated system that, according to the conservative Heritage Foundation, would “Revitalize U.S. Economy, Give Significant Tax Relief”: “The proposed plan would vastly simplify the tax code by eliminating a host of unnecessary and inefficient provisions designed to benefit special interests. The proposed plan would vastly simplify the tax code by eliminating a host of unnecessary and inefficient provisions designed to benefit special interests.”

Maybe they’re right. But, even though I’ve reviewed dozens of tax proposals over the years, I’m still not sure if it will help the taxpayer who matters most: me. I live in California, which might get hit with higher taxes because our state government gouges us more than any other, and some state tax deductions might be cut for federal tax forms. Although California’s congressional delegation might be able to mitigate that.

Sure, state voters (not I, of course) are foolish to keep electing tax-insane Democrats. But we’re still Americans and don’t need to pay higher taxes for anything, as Reagan understood.

A Wharton study found the Trump Plan would “explode” the deficit. I’m dubious about that. If the Trump Plan turns out to be quite good, then it would have a “supply side” effect of boosting the economy so much higher revenues would roll in as the tax base is expanded, thus making up for the “lost revenue.”

Reagan’s increased deficits often are cited by those arguing against supply-side economics. But a couple things must be said about that. Reagan was doing two things: Reviving the U.S. economy and playing out the endgame of the Cold War with the Soviet Union. Older Americans will remember how Soviet socialism, right up until its demise in 1991, was held up as a more “fair” alternative that was almost as productive as free markets. The famous Samuelson economics textbook, at the time the most used on campuses, predicted the Soviets would catch up with us economically through 14 editions right up until 1989, when the Berlin Wall fell. That’s why socialist Bernie Sanders honeymooned in the Soviet paradise.

The Reagan Boom, along with contemporaneous market reforms in the UK, Germany and other countries, crushed that Soviet economic delusion. At the same time, Reagan greatly increased U.S. military spending to force the Soviets’ military machine to keep pace – which it couldn’t, effectively bankrupting the workers’ utopia. After Mikhail Gorbachev became Soviet boss in 1985, he worked with Reagan to wind down the Cold War without getting us all nuked. Arms agreements let Reagan ease back military spending, sharply reducing the deficits, to $150 billion a year, as Reagan’s term ended in 1989.

His successor, George H.W. Bush, then broke his infamous “Read my lips!!! No new tax increases!!!” campaign promise and in 1990 increased taxes to “reduce” the deficit – instead doubling it to nearly $300 billion a year. That crashed the economy and voters booted him from office in favor of Bill Clinton.

Here are the deficit numbers for those years. Fiscal years begin on Oct. 1:

Jimmy Carter

  • FY 1981 - $79 billion.

Ronald Reagan (first budget signed in 1981):

  • FY 1982 - $128 billion.
  • FY 1983 - $208 billion.
  • FY 1984 - $185 billion.
  • FY 1985 - $212 billion.
  • FY 1986 - $221 billion.
  • FY 1987 - $150 billion (accounting for inflation and economic growth, that’s basically back to the Carter level).
  • FY 1988 - $155 billion.
  • FY 1989 - $153 billion.

George H.W. Bush

  • FY 1990 - $221 billion; Bush tax increase imposed.
  • FY 1991 - $269 billion.
  • FY 1992 - $290 billion (nearly double last Reagan deficit).
  • FY 1993 - $255 billion.

John Seiler

John Seiler

1 Response

  1. Andrew G Van Sant says:

    I have the 1976 10th edition of Samuelson in my personal library. It is from a post-graduate course that I took after leaving active duty in 1976. I used an earlier version at the Naval Academy in the late 60s.