The Daily Hatch

 Celebrate President Ronald Reagan’s 100th Birthday

Gene Lyons in his article ”The futility of reasoning with crazy,” April 27, 2011 makes this simple straight forward statement:

Also contrary to Republican mythology, the infamous Bush tax cuts did anything but increase revenue, as tax cuts never do. As Fiscal Times columnist Bruce Bartlett shows, federal revenues dropped from 20.6 percent of GDP in 2000 to 18.5 percent in 2007.

Liberals like Max Brantley and Gene Lyons really do believe that if taxes are raised on the rich you will get more revenues, and if they are lowered then you get lower revenues. I am going to blow up that theory today.

I am starting a new series  that breaks down Lyon’s claims and take a look at the cold hard facts and I noticed that today Max Brantley jumped on board with Lyons when he wrote:

She (Ruth Marcus) proceeds to correct Boehner on any number of factual mistakes, including the notion that economic growth doesn’t follow tax increases. See Bill Clinton, for one. And what about the idea that tax increases would increase the debt?

“A tax hike would wreak havoc not only on our economy’s ability to create private-sector jobs, but also on our ability to tackle the national debt.”

During the early 1980s, taxes were cut and public debt ballooned, from 26 percent of GDP in 1980 to 40 percent by 1986. In 1993, taxes were increased (and spending cut); debt as a share of the economy fell, from 49 percent to 33 percent. In 2001 and 2003, taxes were cut. By the time President Obama took office, debt had climbed to 40 percent of GDP.

William Niskanen and Stephen Moore of the Cato Institute wrote the paper “Supply-Side Tax Cuts and the Truth about the Reagan Economic Record,” Oct 22, 1996 and here is a portion of that paper:

Fable 2: The Reagan Tax Cuts “Caused” the Budget Deficit to Explode in the 1980s

Fifteen years ago, marginal tax rates and the progressivity of the tax system were dramatically reduced. Some suggested that these policies would so spur economic growth that tax revenue would actually increase. The outcome ofthat experiment is now a matter of record: not only did this response not occur, but the national debt quadrupled in the span of a dozen years.[25]

This is the most common and overly simplistic interpretation of the budgetary events of the 1980s. Further, it isfactually untrue that the Reagan tax cuts were a major cause of the budget deficits of the 1980s and the “quadrupling”of the debt. (In the 1980s the real debt doubled; it did not quadruple.) Real federal revenues grew at a faster pace afterthe Reagan tax cuts than after the Bush and Clinton tax hikes. From 1982 to 1989, they expanded by 24.1 percent.Over a comparable seven-year period, 1990-97, a period that accounts for both the Bush and the Clinton tax increases,real federal revenues will have grown by 19.3 percent (see Table 5). The lesson of the 1980s and 1990s is consistentwith the supply-side theory that there are behavioral and investment responses to changes in tax rates.

As a share of GDP, federal revenues fell from 20.2 percent in 1981 (the peak year for taxes as ashare of GDP in the post-World War II period) to a low of 18.0 percent of GDP in 1984, and rose back up to 19.2percent by 1989. This would suggest that the Reagan tax cuts were a small contributing factor to the increase in thebudget deficit over the course of the 1980s. From 1950 to 1995, federal receipts have averaged 18.4 percent of GDP.Hence, throughout most of the Reagan years and clearly by the end, taxes as a share of national output weresubstantially above the postwar average.

If the Reagan tax cut was not the major contributing factor to the increasing deficit in the 1980s, what was? Therewere two primary explanations: (1) a large and sustained defense build-up; and (2) the unexpected rapid decline ininflation and the recession in the early 1980s.

The Defense Buildup and the Deficit. Table 6 shows that the cumulative increase in defense spending from 1981 to1989 ($806 billion) was larger than the entire cumulative increase in the budget deficit ($779 billion) in those years.That is, if defense spending had been held to the rate of inflation from 1981 to 1989, the total real deficit would havefallen in the 1980s rather than risen. It is also true that the decline in the military budget accounts for almost the entirefall in the deficit from 1988 to 1996.