David Stockman, who was Ronald Reagan’s budget director, told a reporter that the real purpose of the Reagan administration’s tax reductions was to choke off revenue for the welfare state. Or, in the words of Grover Norquist, the president of Americans for Tax Reform, to “starve the beast.”
This didn’t happen. Bill Clinton, a tax raiser, did a better job of holding down spending than tax cutters such as Ronald Reagan and George W. Bush. It’s not hard to see why. When are you and I most likely to be careful about what we spend – when we’re putting our expenses on a credit card or when we’re paying out of pocket.
Whatever the intent of the intent of the Reagan tax program, its result was to enable Republicans to replace Democrats in the role of Santa Claus. In earlier eras, Democrats proposed popular spending programs while Republicans grumbled about whether they were affordable. Since Reagan, Republicans have been proposing tax cuts and leaving the Democrats to grumble about whether they were affordable.
Click on What people forget about Reagan for an CNN Money article about the Reagan administration’s record on taxing and spending, which is the source for the above graph.
The most far-fetched argument in favor of the Reagan tax cuts was made by an economist named Arthur Laffer. He said that, under certain circumstances, lowering taxes could result in an increase in revenue. He pointed out that if the marginal income tax rate is zero, the government will receive no revenues, and if the marginal income tax rate is 100 percent, the government also will receive no revenues because nobody will bother earn income if it will all be taxed away.
So somewhere between 100 percent and zero percent there is an optimum tax rate, as he indicated on the famous Laffer Curve. This is irrefutable, because Laffer wisely did not put any numbers on the curve. So far as what the Laffer Curve tells you, the optimum rate could be 50 percent, it could be 70 percent, it could be 00.1 percent, it could be 99.9 percent. The theory gives no guidance.
Even if you believe in the Laffer Curve as a guide to policy, you have to accept that, at some point, taxes are reduced to what they ought to be. Even if a particular tax cut should stimulate economic activity to the point at which it pays for itself, an additional tax cut could take you below the optimum point. Even if a cut in the top tax rate from 95 percent to 70 percent pays for itself, this proves nothing about what a cut from 39.6 percent to 36 percent would do.
Other advocates of supply-side tax cuts made a more plausible argument. They admitted that of course cutting taxes without cutting spending would create or increase the government’s budget deficit. But they said this didn’t matter if the overall economy was growing faster than the deficit. It would be like an individual whose credit card balance is 5 percent higher than the year before, but whose income is 10 percent higher. In this circumstance, deficits don’t matter.
The supply-siders’ emphasis on economic growth as a factor in budgets was their truest and most important insight. If you have good economic growth and a full-employment high-wage economy, then bringing budgets into balance is easy. The issue is how you bring about economic growth.
My view of taxes is that they should be as low as possible, but no lower.
Taxes should be high enough to cover the non-emergency expenses of government in a normal year. You should not continuously cut income taxes, which fall most heavily on the rich, while increasing residential property taxes, payroll taxes and sales taxes, which fall most heavily on the middle class, working people and the poor.
Increases in spending should be offset by increases in taxes or decreases in other spending. Reductions in taxes should be justified by reductions in spending or increases in other taxes. Cutting taxes without cutting spending, when the government budget is in deficit, is irresponsible.
[2/15/11] Click on The Reagan Years for a menu of links to statistical information compiled by Steve Kangas on the Reagan era’s economic policies.
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