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NATIONAL CENTER FOR POLICY ANALYSIS
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Myths About Reagan's Tax Cuts
Daily Policy Digest

Federal Spending & The Budget / Growth of Government Spending

Monday, February 04, 2002
It is a myth, says Bruce Bartlett, that Ronald Reagan ever said or thought that his tax cut would actually raise revenue. Or that the "Laffer Curve" proposed that.

  • The Laffer curve shows, quite correctly, that no revenue is collected at a zero tax rate or at a 100 percent rate.
  • Obviously there is a point in between at which federal revenue is maximized, and if tax rates are above this point, in theory a rate cut will increase revenue.
  • More importantly, the curve shows that there are always two tax rates that will raise the same revenue: a high rate on a tax base shrunk by slow growth, tax evasion and tax avoidance; and a low rate on a larger base in which growth is higher because of greater incentives for work, saving and investment.
But U.S. taxes have never been so high that there would be no loss of revenue with an across-the-board rate cut.

And the Reagan Administration never claimed that the 1981 tax cut would pay for itself. Every revenue estimate ever put out by the Treasury Department or Office of Management and Budget showed large revenue losses in line with independent analyses (see figure).

Budget deficits in the 1980s were larger than projected for two reasons:

  • First, spending rose more rapidly than expected.
  • Second, inflation fell more rapidly than expected -- from 12.5 percent in 1980 to 3.8 percent in 1982 through 1985 -- reducing tax revenues from estimates because people were no longer pushed up into higher tax brackets.
Within a few years, at least a third of the revenue loss due to the Reagan tax cuts was recouped from the larger tax base, according to careful academic studies.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, February 4, 2002.

For text
http://www.ncpa.org/edo/bb/2002/bb020402.html

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