The liberal newspaper ignores the greatly positive effects of Reagan’s and Trump’s tax cuts.
The New York Times has seemingly launched a campaign against tax reform. A recent front-page story headlined “Tax Overhaul Would Aid the Wealthiest” was followed the next day with the nearly identical headline “Trump’s Plan Shifts Trillions to Wealthiest” — as if the effects of the president’s tax-reform framework on economic growth, global competitiveness, and simplification were secondary to the horror that some upper-income families and large employers may share in the benefits.
Continuing this campaign, Times economics columnist Neil Irwin recently argued that the long-established link between lower tax rates and economic growth has been vastly overstated. Even his title, “Article of Faith,” implies that tax cutters eschew reason. Yet Irwin himself avoided the facts when he breezily asserted that “George W. Bush’s 2001 and 2003 tax cuts were followed by years of disappointing growth.” In reality, the 2003 supply-side tax cuts were immediately followed by a tripling of the economic growth rate, millions of new jobs, and a 34 percent stock-market expansion over three years. This economic revitalization has been largely forgotten because it was followed by a deep, housing-led recession that even pro-growth tax policy could not prevent.
After these clumsy attacks on the tax policies of Presidents Trump and Bush, the Times has now turned its guns on President Reagan. Steven Rattner, a former New York Times reporter and current contributing op-ed writer, blames President Reagan’s “damaging” tax cuts for what he essentially describes as a period of debt-ridden economic ruin.
Rattner begins by bizarrely claiming that the 1981 tax cuts “immediately made a bad economy worse” and “help[ed] elevate interest rates over 20 percent, which in turn contributed to the double-dip recession that ensued.”
Any student of modern economic history understands that the double-dip recessions that covered most of the period from January 1980 through November 1982 primarily resulted from the Federal Reserve’s decision to sharply raise interest rates and thereby choke off the economy-crushing inflation of the late 1970s.
But don’t take my word for it. A January 1981 article announcing the Federal Reserve’s intention to continue maintaining high interest rates at the expense of economic growth appeared in the New York Times by none other than Steven Rattner himself.
Rather than push up interest rates and hurt the economy, the 1981 tax cuts cushioned the effects of the Federal Reserve’s tightening and encouraged a supply-side surge that produced sustained economic growth without increasing interest rates or inflation.
When the deep recession finally ran its course in late 1982, it was followed by a seven-year economic boom that saw the economy expand by 36 percent and inflation-adjusted median family income rise by 12 percent, along with the creation of 19 million net jobs (the equivalent of 25 million jobs in today’s larger working-age population). By comparison, in the seven years following the 2007–09 recession, the economy expanded by just 16 percent, median income rose by less than 3 percent (over six reported years), and only 11.6 million net jobs were created. Had this recent “recovery” matched the Reagan recovery, the current GDP would be $3 trillion larger.
Next, Rattner blames the tax cuts for the bloated 1980s budget deficits. He is correct that these tax cuts did not fully pay for themselves, and that subsequent tax increases returned some of the lost revenue.
At the same time, though, much of the decrease in taxes simply reversed the tax increases caused by “bracket creep” (as steep inflation pushed people into higher tax brackets), which had socked taxpayers and increased federal revenues 32 percent faster than inflation between 1976 and 1981. Returning taxes to a sustainable level for families requires no apology.
And yet, the tax cuts did not drive the budget deficits. President Reagan gradually cut the longstanding 70 percent top tax bracket to 28 percent — and individual income-tax revenues still came in higher in the 1980s (8.2 percent of GDP) than in the high-tax 1970s (7.9 percent). Total revenues from all federal taxes averaged 17.8 percent of GDP in the 1980s, versus 17.4 percent in the 1970s.
Instead, the 1980s deficits resulted from the expansion of federal spending by 2 percent of GDP over 1970s levels. Much of this new spending was President Reagan’s defense buildup — which, to the extent that it helped bankrupt the Soviet Union, saved money in the long run.
“In short, attacking President Reagan’s record on tax cuts, budgets, and the economy is a fool’s errand.”
President Reagan inherited a defense budget of 4.8 percent of GDP. Over the next 20 years, the defense-spending rollercoaster peaked at 6.0 percent of GDP under Reagan and then ended at 2.9 percent after the Soviet Union collapsed, for an average level of 4.5 percent of GDP. By contributing to the Soviet collapse, the defense buildup eventually paid for itself — a wise investment indeed.
In short, attacking President Reagan’s record on tax cuts, budgets, and the economy is a fool’s errand.
But Rattner’s baffling assertions do not stop there. He writes that today’s 4.5 percent unemployment rate leaves little room for new jobs and growth. Of course, if the unemployment rate included the 4 to 6 million Americans (mostly working-age males) who have given up seeking work, it would be closer to 7 or 8 percent. That offers a lot of potential for job growth.
Rattner mentions the upcoming return of trillion-dollar deficits in the context of scaling back tax-relief proposals without even acknowledging that the Congressional Budget Office projects that the entire coming deficit surge will result from escalating spending that outpaces historic revenue growth. Runaway spending is the problem, not tax cuts. He proposes taxing capital gains “closer to the top rate of 39.6 percent on earned income” despite the broad consensus that this high rate would actually lose revenue — not to mention that, historically, the correlation between capital-gains tax rates and revenues has been negative.
Rattner correctly states that income-tax cuts typically do not pay for themselves, but that does not mean they cannot produce healthy economic growth, create jobs, raise incomes, and even offset a portion of their cost. If he wants to argue that tax cuts today will bring results similar to those of the Reagan tax cuts, Americans should respond by asking: Where do I sign up?
This piece originally appeared on National Review Online
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Brian M. Riedl is a senior fellow at the Manhattan Institute. Follow him on Twitter here.
This piece originally appeared in National Review Online