Sunday, July 10, 2011

Reaganomics fact vs fiction

On 8 of the 10 key economic variables examined, the American economy performed better during the Reagan years than during the pre- and post-Reagan years.

Fable: The Reagan Tax Cuts "Caused" the Budget Deficit to Explode in the 1980s

Real federal revenues grew at a faster pace after the 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 consistent with the supply-side theory that there are behavioral and investment responses to changes in tax rates.  Federal revenues fell from 20.2 percent in 1981 (the peak year for taxes as a share 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 19.2 percent by 1989. This would suggest that the Reagan tax cuts were a small contributing factor to the increase in the budget 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 were substantially above the postwar average.

Reasons for the deficit: (1) a large and sustained defense build-up; and (2) the unexpected rapid decline in inflation and the recession in the early 1980s.

Fable: Reaganomics made the rich get richer and the poor get poorer

From 1981 to 1989, every income quintile--from the richest to the poorest--gained income according to the Census Bureau economic data (see Figure 11).[50] The reason the wealthiest Americans saw their share of total income rise is that they gained income at a faster pace than did the middle class and the poor. But Reaganomics did create a rising tide that lifted nearly all boats.

By 1989 there were 5.9 million more Americans whose salaries exceeded $50,000 a year than there were in 1981 (adjusting for inflation). Similarly, there were 2.5 million more Americans earning more than $75,000 a year, an 83 percent increase. And the number of Americans earning less than $10,000 a year fell by 3.4 million workers.

Source: Cato Institute Analysis of the Reagan Era.

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