HOW DID REAGAN'S POLICIES AFFECT ECONOMIC GROWTH?
Despite the steep recession in
1982--brought on by tight money policies that were instituted to
squeeze out the historic inflation level of the late 1970s--by
1983, the Reagan policies of reducing taxes, spending, regulation,
and inflation were in place. The result was unprecedented economic
growth:
-
This economic boom lasted 92 months
without a recession, from November 1982 to July 1990, the longest
period of sustained growth during peacetime and the second-longest
period of sustained growth in U.S. history. The growth in the
economy lasted more than twice as long as the average period of
expansions since World War II.
-
The American economy grew by about
one-third in real inflation-adjusted terms. This was the equivalent
of adding the entire economy of East and West Germany or two-thirds
of Japan's economy to the U.S. economy.
- From 1950 to 1973, real economic growth in
the U.S. economy averaged 3.6 percent per year. From 1973 to 1982,
it averaged only 1.6 percent. The Reagan economic boom restored the
more usual growth rate as the economy averaged 3.5 percent in real
growth from the beginning of 1983 to the end of 1990.
HOW DID REAGAN'S POLICIES AFFECT THE
FEDERAL TAX BURDEN?
Perhaps the greatest myth concerning the
1980s is that Ronald Reagan slashed taxes so dramatically for the
rich that they no longer have paid their fair share. The flaw in
this myth is that it mixes tax rates with taxes actually
paid and ignores the real trend of taxation:
-
In 1991, after the Reagan rate cuts were
well in place, the top 1 percent of taxpayers in income paid 25
percent of all income taxes; the top 5 percent paid 43 percent; and
the bottom 50 percent paid only 5 percent. To suggest that this
distribution is unfair because it is too easy on upper-income
groups is nothing less than absurd.
-
The proportion of total income taxes paid
by the top 1 percent rose sharply under President Reagan, from 18
percent in 1981 to 28 percent in 1988.
-
Average effective income tax rates were
cut even more for lower-income groups than for higher-income
groups. While the average effective tax rate for the top 1 percent
fell by 30 percent between 1980 and 1992, and by 35 percent for the
top 20 percent of income earners, it fell by 44 percent for the
second-highest quintile, 46 percent for the middle quintile, 64
percent for the second-lowest quintile, and 263 percent for the
bottom quintile.
- These reductions for the lowest-income
groups were so large because President Reagan doubled the personal
exemption, increased the standard deduction, and tripled the earned
income tax credit (EITC), which provides net cash for single-parent
families with children at the lowest income levels. These changes
eliminated income tax liability altogether for over 4 million
lower-income families.
Critics often add in the Social Security
payroll tax and argue that the total federal tax burden shifted
more to lower-income groups and away from upper-income groups; but
President Reagan's changes were in the income tax, not in the
Social Security payroll tax. The payroll tax was imposed by
proponents of big government over the past 50 years, and it is
they, not Ronald Reagan, who should be held accountable for its
distributional effects.
Nevertheless, even if one counts the
Social Security payroll tax, the share of total federal taxes
increased between 1980 and 1989 for the following groups:
-
For the top 1 percent of taxpayers, from
12.9 percent in 1980 to 15.4 percent in 1989;
-
For the top 5 percent of taxpayers, from
27.3 percent in 1980 to 30.4 percent in 1989; and
- For the top 20 percent of taxpayers, from
56.1 percent in 1980 to 58.6 percent in 1989.
On
the other hand, the share of total federal taxes, if one includes
the Social Security payroll tax, declined for four groups:
-
For the second-highest 20 percent of
taxpayers, from 22.2 percent in 1980 to 20.8 percent in 1989;
-
For the middle 20 percent of taxpayers,
from 13.2 percent in 1980 to 12.5 percent in 1989;
-
For the second-lowest 20 percent of
taxpayers, from 6.9 percent in 1980 to 6.4 percent in 1989; and
- For the lowest 20 percent of taxpayers,
from 1.6 percent in 1980 to 1.5 percent in 1989.
CONCLUSION
No
matter how advocates of big government try to rewrite history,
Ronald Reagan's record of fiscal responsibility continues to stand
as the most successful economic policy of the 20th century. His tax
reforms triggered an economic expansion that continues to this day.
His investments in national security ended the Cold War and made
possible the subsequent defense spending reductions that are
largely responsible for the current federal surpluses. His efforts
to restrain the expansion of federal government helped to limit the
growth of domestic spending.
If
Reagan's critics had been willing to work with him to limit
domestic spending even further and to control the growth of
entitlements, the budget would have been balanced five to ten years
sooner and without the massive tax increase imposed in 1993. Today,
Members of Congress from across the political spectrum should stand
on the evidence and defend the Reagan record.
To
the extent that President Bush's proposals mirror those of Ronald
Reagan, his plan should be a welcome strategy to lower the tax
burden on Americans and to make the system more responsible. If the
advocates of big government in Congress cooperate with President
Bush rather than merely continuing to fund obsolete, wasteful, and
redundant programs, there is no limit to the prosperity that
Americans can generate.
Peter Sperry is the
Grover M. Hermann Fellow in Federal Budgetary Affairs in the Thomas
A. Roe Institute for Economic Policy Studies at The Heritage
Foundation.