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How Reagan's Tax Cuts Fared


The tax bill speeding through Congress is being sold - by its advocates, at least - as so good for the economy that it's going to boost growth and offset any losses from those cuts. Those of you who were around in the 1980s might be feeling a sense of deja vu, especially when you hear this.


RONALD REAGAN: We presented a complete program of reduction in tax rates. Again, our purpose was to provide incentive for the individual, incentives for business to encourage production and hiring of the unemployed and to free up money for investment.

MARTIN: That, of course, the voice of President Ronald Reagan speaking there in a televised address back in 1981, shortly before signing those very tax cuts into law. We wanted to talk about what kind of impact those tax cuts actually had, so we called our regular economic commentator David Wessel. He is director of the Hutchins Center at the Brookings Institution.

Good morning, David.

DAVID WESSEL: Good morning.

MARTIN: Just like President Donald Trump, one of Reagan's first moves in the White House was a big tax cut, the one in 1981. And there was supposed to be no loss in tax revenues because of all the economic growth these cuts were going to bring about. So David, how deep were those tax cuts, and did they blow up the deficit?

WESSEL: Well, when Reagan arrived here in 1981, things were very different. Inflation was nearly 10 percent. The Fed had pushed up interest rates. The debt was much smaller as a share of the economy. The Reagan tax cut was huge. The top tax rate was 70 percent. He cut it to 50 percent. Now, most people in the Reagan administration didn't really think it would pay for itself, and it didn't. It blew up the deficit. They were counting on some spending cuts that never quite materialized to avoid that. And so they - it didn't pay for itself.

MARTIN: Yeah. So the spending cuts never materialized, as you note, and the deficit increased. And then what happened?

WESSEL: Well, it quickly became clear from the deficit projections that they had a problem. So what they did is raise taxes. With Reagan's signature, Congress undid a good chunk of the 1981 tax cut. It raised taxes a lot in '82, '83, '84 and '87. So what the history of the '80s tells us is if tax cuts are too big - if they overpromise what they're going to do, they seem to lead to tax increases.

MARTIN: But wasn't there a big economic boom in the '80s? That was like a great time, right?

WESSEL: Well, what the '80s tell us is you can't look at taxes in isolation. I mean, the Fed's war on inflation pushed interest rates to nearly 20 percent. It's hard to believe. We had a really deep recession. Unemployment rose above 10 percent. And then the Fed cut interest rates. The economy took off. The tax cuts definitely helped but so did the spending increases on defense and highways that Ronald Reagan approved.

MARTIN: Yeah. So current Republicans in Congress have compared the tax bill of today - of 2017 - to the Tax Reform Act of 1986. What do you think? Is that a fair comparison?

WESSEL: It really isn't. This is very different. That tax reform was preceded by a couple of years of really hard and public groundwork by the experts. It was bipartisan. And importantly, it was designed to improve the tax code but to raise just as much money as the then-existing tax code did - no more and no less.

It did clean up the tax code. It didn't produce all the growth that people had hoped for, though. It didn't have all the effects. It's a reminder that, at times like this, we focus on how important taxes are to the economy, but there are so many other things going on that they sometimes swamp the effect of these reforms or tax cuts.

MARTIN: David Wessel, director of the Hutchins Center at Brookings. Thanks so much.

WESSEL: You're welcome.