NCPA - National Center for Policy Analysis

Growth From Reagan Tax Cuts

August 12, 1996

Tax cuts do not create federal deficits; greater government spending does. That is the message tax-cut supporters must hammer home, according to political analysts and economists. Otherwise this truth will be drowned out in the media in a deluge of confusion.

Politicians are expected to repeat the mantra, "Reagan tax cuts were responsible for declining revenues and soaring deficits in the 1980s," but no such thing occurred, according to budget analysts.

  • Receipts from individual income taxes rose to $446 billion in fiscal 1989 -- President Reagan's last budget -- from $286 billion in fiscal 1981, the year Reagan began to slash personal tax rates -- a 56 percent increase.
  • Annualized, tax receipts grew faster than that period's 4 percent inflation.
  • During the same period, federal spending rose from $678 billion to $1.143 trillion -- a 69 percent increase.

From 1981 to 1983, personal income tax receipts rose 1 percent -- while spending surged 19 percent. This was during a bad recession. After the recession, the Reagan tax cuts worked and revenues soared.

  • From 1984 to 1989, growth in personal tax receipts outstripped growth in spending, 50 percent to 34 percent.
  • And the deficit fell from 5 percent of gross domestic product to 2.9 percent.
  • After 1989, the deficit ballooned again as revenues dried up following an increase in tax rates.
  • From 1989 to 1993, personal tax receipts rose just 14 percent, while spending rose 23 percent

Then there is the evidence of the beneficial economic effects of President Kennedy's tax cuts.

  • In 1964, the economy grew by 5.8 percent -- followed by 6.4 percent growth the following two years.
  • The increasing tax revenues following from the surging economy led to a balanced budget by 1969 -- the last time that the government was able to balance its books.

But either sloppy thinking or purposeful confusion perpetuates the myth that tax cuts produce higher federal deficits.

Source: Editorial, "The Supply-Side Deficit Myth," Investor's Business Daily; and Donald Lambro, "Unstrung Tax-Cut Lamenters," Washington Times, August 12, 1996.


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