NCPA - National Center for Policy Analysis

Spending, Not Tax Cut Responsible For Reagan Deficits

May 27, 1996

Those opposed to a potential 15 percent across-the-board tax cut emanating from the camp of Republican Presidential candidate Bob Dole say he should stick with balancing the budget. Then they cite the Reagan tax cuts as evidence that tax cuts are budget busters.

But the Reagan tax cuts had nothing to do with the increase in federal budget deficits during the 1980s, many economists contend.

  • On average, federal receipts as a share of gross domestic product were higher in the 1980s than in the 1970s -- 19 percent of GDP versus 18.5 percent, respectively.
  • But federal spending as a share of GDP actually rose from 20.6 percent of GDP in the 1970s to 23.1 percent in the 1980s.
  • Inflation, which had risen to double-digit levels during the Carter administration, virtually disappeared by 1986.
  • 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.

While real growth averaged 3.9 percent per year in the 1982-89 period, it has crept at a snail's pace in the 1990s -- just 1.6 percent per year.

The American people were better off during the low-tax l980s than they are in the high-tax 1990s.

  • Real median family income increased by $4,564 during the 1982-89 period -- an increase of 12.6 percent.
  • But it has fallen by $2,108 during the 1990s -- a decline of 5.2 percent.

Although the budget deficit has been reduced in the 1990s, increasing real incomes is vastly more important. And if a future Dole tax cut stimulates the economy, as tax cuts almost always do, the nation can have deficit reduction coupled with a renewed increase in household wealth.

Source: Bruce Bartlett (National Center for Policy Analysis), "Devious Designs of the Tax Cut Naysayers," Washington Times, May 27, 1996.

 

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