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Tuesday, February 05, 2008

Kinsley on Reagan's Tax Cuts

Michael Kinsley disputes the Reagan Record on taxes in this Slate column. He writes:


But the biggest fairy tale about Reagan is the most central one: about taxes and spending....When Reagan took office in 1981, federal receipts (taxes) were $517 billion and outlays (spending) were $591 billion, for a deficit of $73 billion. When he left office in 1989, taxes were $999 billion and spending was $1.14 trillion, for a deficit of $153 billion. As a share of the economy (the fairest measure), Reagan did cut taxes, from 19.6 percent to 18.4 percent, and he cut spending from 22.2 percent to 21.2 percent, increasing the deficit from 2.6 percent to 2.8 percent....[T]hese numbers hardly constitute a "revolution."

This analysis is strikingly similar to one I wrote up a few years ago (though I can't locate the article at the moment). I had talked about the popular tax rate cuts, and explained that Reagan also did things that raised taxes (such as reducing "loopholes" etc. such as in 1986). At the time, I honestly thought the fairest measure--as Kinsley says above--was to look at how much the feds took as a percentage of GDP. After all, tax receipts were a useless measure, because of the Laffer Curve: A legitimate tax cut could nonetheless lead to higher receipts to the Treasury.

But then after my article ran, a former colleague emailed me and pointed out that the supply-siders had predicted, before the Reagan tax cuts went into effect, that the share of GDP being taxed could go up. The reason is that across-the-board rate cuts spur income creation, but particularly in the highest brackets. If this income is taxed at a higher rate than the previous % of GDP going to taxes, then obviously the effect will be to raise the % of GDP going to taxes.

If you're having trouble seeing it, just exaggerate the numbers. Suppose originally the government taxes incomes under $10,000 at 20%, but incomes over $10,000 at 100%. Clearly the % of GDP going to taxes is 20%, since nobody is going to work and report income over $10k and give it all to the government.

Now the government cuts tax rates in half across the board, so that people making under $10k pay 10%, while those making above that pay 50%. It is entirely possible that in a large economy, this unambiguous tax cut would yield a higher fraction of GDP going to the government.

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