PolitiFact Rhode Island has an item up about congressional candidate and state Rep. John Loughlin’s statement about President Reagan’s 1981 tax cut and the nation’s subsequent economic growth, judging the statement “barely true.”
PolitiFact does a decent job, but the explanation of tax policy during the Reagan years is a bit more muddled than it needs to be.
Luckily, Bruce Bartlett – the dissident Republican economist who served as a senior policy analyst in the Reagan White House – recently reproduced this handy chart showing all the tax cuts and tax increases Reagan signed into law during his two terms from 1981 to 1989. (The information came from the first President Bush’s 1990 budget.)
Basically, by 1988 the 15 tax laws signed by Reagan had reduced federal taxes by $275.3 billion on the one hand and raised them by $132.7 billion on the other – so combined, Reagan cut taxes by a net $142.6 billion.
In practice, that undid 46% of the original 1981 tax cut to which Loughlin referred. Still, a $142.6 billion reduction in federal taxation was nothing to sneeze it, regardless of how it stacked up compared with Reagan’s initial program. Among other things, the 1981 law lowered the top marginal income tax rate from 70% to 50%.
Later, PolitiFact notes that the country fell into a deep recession “immediately after the 1981 [tax] cuts.”
True, but that’s a bit like saying the country went to war in Afghanistan after a series of shark attacks – it’s not factually incorrect, but it leaves out a key piece of information. In this case, Federal Reserve Chairman Paul Volcker raised interest rates to a jaw-dropping 20% in June 1981 (compared with less than 0.25% currently), plunging the country into a painful recession that lasted from July 1981 to November 1982. After Volcker lowered rates again, the U.S. economy grew for almost eight straight years. (In fairness, PolitiFact alludes to this later on.)
Here’s a chart showing the annual percentage change in U.S. GDP from the start of the Eisenhower administration, in 1953, through the end of the first Bush administration, in early 1993. You can see Volcker’s monetary policy helped cause the sharpest contraction in GDP, and then one of the strongest rebounds, seen during the Cold War era:
Also, the chart shows economic growth was quite strong and sustained (though not “exponential”) after the other reduction mentioned by Loughlin, the Kennedy/Johnson tax cut enacted in 1964, though once again correlation does not mean causation. (Notably, Loughlin’s ad does not mention the tax cuts he might actually vote on if elected to Congress in November – the two rounds signed into law by the second President Bush in 2001 and 2003 that are soon to expire.)
(image credits: Ronald Reagan Presidential Library, St. Louis Fed)