The Case For An Across The Board Tax Rate Reduction

Policy Backgrounders | Taxes

No. 140
Wednesday, September 25, 1996
by Bruce Bartlett

Lessons from the Reagan Years

"The Reagan tax rate cuts had nothing to do with the budget deficits during the 1980s; instead, spending exploded."

Opponents of a tax cut now contend that Dole is repeating the mistakes of the Reagan administration in the 1980s, when cutting taxes led to economic disaster. However, when asked for evidence that the American people suffered from Reagan's tax cut, critics have none to offer except the increase in the federal budget deficits during the 1980s. In fact, the Reagan tax rate cut had nothing whatsoever to do with the increase in deficits in the 1980s. On average, federal receipts as a share of GDP were higher in the 1980s than in the 1970s - 19.0 percent of GDP versus 18.5 percent. What caused the deficit is that spending exploded. Although Reagan was often attacked for "slashing" the budget, outlays as a share of GDP actually rose from 20.6 percent of GDP in the 1970s to 23.1 percent in the 1980s.

On every other score, the 1980s were a smashing economic success. The country entered the decade with the annual inflation rate at 12.5 percent and the prime interest rate at 21 percent. Real income of the median family had fallen by $3,000 between 1973 and 1981. The sharp but brief 1981-82 recession effectively broke the back of inflation, setting the stage for the longest peacetime economic expansion in our nation's history - 92 months of continuous real growth.

  • From 1982 to 1989, real growth averaged 3.9 percent per year.
  • Real median family income increased by $4,564, or 12 percent, between 1982 and 1989.
  • By contrast, real family income has fallen by $2,108, or 5.2 percent, in the 1990s.

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