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Monday, July 25, 2005

Details One, Devil Zero

Because a minor comments box riot broke out over the weekend, I've spent more time than any sane human would staring at government receipts numbers. Several charges were made in re: the Reagan era tax cuts (specifically ERTA, passed in 1981 and effective with the 1982 fiscal budget, although Reagan also oversaw another major tax restructuring, TRA, in 1986) with regard to the effect on tax revenues, budget deficits, and total debt:

Claim: Tax revenue decreased after ERTA and did not reach 1980 levels again until 1994.

Evidence: I have looked at every variant of revenue I can find, and I see no indication that this is true. I can't even divine where such a claim could have originated. It's not true for total receipts, on-budget receipts, individual or corporate income tax receipts....if the person who made this claim could clarify the source I'll look further, otherwise this one's tagged false. Total receipts did fall from the 1981 FY maximum of $1.077 trillion (constant 2000 dollars) to $1.037 tn in FY 1982 and were lower yet ($0.962 tn) in FY 1983. Thereafter, however, they began rising again, and exceeded the FY 1981 level in 1985, when the government collected $1.083 tn. Moreover, while the major effects of ERTA should have been reflected in individual income tax receipts, there was never a decline in that series (although there was a decline in corporate income tax receipts in 1982 and 1983).

Claim: The national debt quadrupled under Reagan.

Evidence: I can't get this figure out of the historical data, even if I measure gross debt in current dollars. Using FY 1981 as the base year (this is the last budget prepared by the Carter administration) gross debt during Reagan's two terms increased by 161% in current dollars but just barely doubled, increasing by 102%, in constant dollars.

Claim: Reagan's tax cuts caused the deficit, and the national debt, to soar. This refutes the claims of the supply siders, who swore that the tax cuts would "pay for themselves."

Evidence: The deficit, and consequently the national debt, did increase substantially under Reagan. But to blame this on tax cuts is rather like saying that if my husband gets a $5000 bonus and I go out and buy $10000 worth of furniture the next day, that our budgetary shortfall the next month was caused by his employer. The one did follow the other, certainly. It may even be the case that the windfall motivated me to go furniture shopping, and things just got out of hand. But it would be stupid to suggest that everything would be far better next year if his boss just didn't give him a bonus. It would be better still if he got the bonus, but his wife restrained her impulses. And I think that pretty much sums up Reagan and the Democratically controlled Congress with which he was saddled. It's true that Reagan didn't spend any political capital trying to rein in spending. He thought it more important to increase defense spending and end the Cold War once and for all. In hindsight, he was right. To continue my lame analogy, it's like I didn't run a $5000 deficit buying furniture, but hiring an exterminator to get rid of the termites that are eating the joists.

All the numbers I have used are available as tables in Bush's last budget. Or if you prefer to do your own spreadsheets, zipped Excel files are available from the GPO website.


Hunter Baker said...

Kathy, do the federal receipts from beginning of term to end of term and I think you get a 4% real increase in revenue averaged out annually. Or don't do it and take my word.

James F. Elliott said...

U.S. government statistics on the debt, where I got my info:

For a to-the-penny daily tally:

Click on the 1950-2000 link, you will see what I was talking about:

James F. Elliott said...

I also went here:

and here:

Like I said, I'm no economist.

Kathy Hutchins said...

I see your numbers, but I don't see anything there that suggests a quadrupling of the debt under Reagan either. The numbers are slightly different from the ones from GPO; they're close enough that I suspect there's some different way of dealing with accrued interest or something. The larger discrepancies in earlier years are due to different reporting periods, yours is calendar year and the GPO is fiscal year.

You don't have to be a trained economist to look at, and substantially understand, national income accounts. it is important to convert to constant dollars, though.

James F. Elliott said...

Um, it was under 1 trillion when Carter was President, and was over 4 trillion by the end of Bush I.

The only way I can tell that your numbers work is if the dollar fell in value to almost 1/4 of it's pre-Reagan worth.

James F. Elliott said...

Hm, constant dollars you say?

According to this analysis, there was a loss of $88 billion in revenue in constant dollars:

Hunter Baker said...

What's this Bush I stuff? You said a quadrupling of debt under Reagan. By adding Bush you're giving us federal income with a recession added in and four more years of spending growth. That ain't right, podna.

James F. Elliott said...

Isn't a declining currency value a nation's way of declaring bankruptcy? Pretty sure I have that right.

Anyways, I will not dispute that supply-side economics makes the nation as an aggregate whole wealthier. My focus, rather, is on equality (for example, the lion's share of revenue currently comes from payroll and salary-taxes; ie. taxes on the people who can least afford them). Also, government is much poorer.

The argument comes down to one of ideology and misperception. The president is not hired to run the nation, he's hired to run government. Bottom line, he shouldn't be beggaring the entity he's been hired to helm. That's like when corporations have crappy fiscal years and fire their CEOs but still give them the golden parachute. WTF?

The real problem in economics is that it is closely related to political ideology (that's why it was called "political economy" in more honest days). People who think government should be beggared will naturally gravitate to the system y'all hold so dear. Of course, the single most demonstrably false and idiotic statement ever made exemplifying this ideology was George W. Bush's "Government's job isn't to create wealth, it's to give the opportunity for wealth creation" in justifying his boneheaded tax cuts.

James F. Elliott said...

Hunter, I then misspoke in my original post and this whole debacle is largely my fault. Bush I continued the Reaganomics trend, so I lumped him in with Reagan. My apologies. I should have been typing "Reaganomics."

Hunter Baker said...

No, Bush didn't continue the Reaganomics trend, which is the great conservative complaint against him. He did the opposite by raising taxes significantly!!! You gotta be a tax cutter to be involved in Reaganomics.

James F. Elliott said...

I think the one thing we can all agree on is that my choosing to argue economics with trained economists is among the more boneheaded ideas I've had.

Hunter Baker said...

The world of economics is fraught with misinformation when translated through politics. Just about all you can do is sit down and carefully read through the data on your own. I was forced to do a careful review of thirty years worth of federal tax and spending data as a college student. The prof. was wily because he knew that if you performed that review, you'd come to certain conclusions with zero help from him.

KeithM, Indy said...

I'll preface this by saying I am a computer programmer, and well versed in reading spreadsheets. But, this isn't that hard or need that much "schooling" to figure out.

Look at tax revenues during the Reagan years and you will see them increase.

Look at the government spending during the same time period and you will note that the rate of growth in spending exceeds the rate in revenue growth.

So which "caused" the deficit?

Some would like to think that if the tax rates had only stayed the same, then tax revenues would have been greater. Except, that the economy does respond to the tax rates, often increasing economic activity in real, positive ways when tax rates go down.

So when the economic growth rate is going down, tax revenue is going down with them, and increasing the tax rate, drags it down further (since tax rates don't have a net positive impact on the overall economy.)

Correct me if I'm wrong but this is the basis of the supply side economics argument.

Tom Van Dyke said...

Buried in the demagoguing of "tax cuts for the rich" has been that the actual amount of the cuts has been $80-100B a year, far less than the $400B or so deficit.

For the cuts to have their desired economic effect of growing the economy (or preventing a Carter-era-type slide), they should pay or nearly pay for themselves, which they apparently have.

I'm not trained in economics either, but am I missing something?

James F. Elliott said...

It's kind of a jump from the $80-100 billion/year tax cuts and the unexpected $100 million in revenue the article cites to saying they pay for themselves, dude.

Just in case you missed it (which you did), that was "billion" with a "b" followed by "million" with an "m". One of these things is not like the other, one of these things is not quite the same...

Anonymous said...

It is clear from the other numbers in the article that the word "million" there is a typo. It should be billion. The deficit was estimated in February to be $427 billion for the year and will instead be less than $350 billion, the article says.

James F. Elliott said...

If supply-side is truly correct, Reagan-era tax receipts as percentage of GDP (which eliminates any confoundings of inflation and takes in to account a booming economy) should be much lower, yes?

No. Take Carter's four years: The average was 18.4%. Reagan's 8-year average: 18.2%. That's so anemic as to be worthless.

Tax receipts under Carter averaged growth at 14.8 percent per year, for a total increase of 73.5% during his tenure. Under Reagan, the total tax receipt growth in his 8 years totaled 75.8%, or 7.3% a year. Half of Carter's growth.

Does this refute supply-side? No. What it does do is make the case that other factors played huge roles that supply-side fanatics have willfully set aside. Factor in things like the business cycle, Volcker's control of inflation, and the fact that post-1982 Reagan in fact increased taxes (including a 1983 payroll-tax increase and the "deficit reduction" actions that "closed tax loopholes") and it's not at all clear that tax cuts, the heart of supply-side "voodoo," made all that big a difference.

Tom Van Dyke said...

Shame on me for not taking out my fine-tooth comb on the Newspaper of Record. You'd think I'd know by now.

Thanks, Anon. The point stands.

James F. Elliott said...

Oh, and using constant (2000) dollars, Carter averaged 6.5% growth in tax revenue, Reagan 2.7%.

Kathy Hutchins said...

According to this analysis, there was a loss of $88 billion in revenue in constant dollars

That author is making a different point; one that probably should be addressed, but you have to understand that here you are leaving the wide straight path of Numbers We Know and skipping off into the Dark Scary Woods of Estimates and Assumptions. He's comparing the tax revenues actually collected in each of the Reagan years with what was actually collected in 1981, and claiming a cumulative deficit of 88 bn. He can only do this by assuming that in the absence of any tax cut, revenues would have stayed at least as high as they were in 1981. He actually claims this is a conservative assumption, since 1981 was the beginning of the recovery phase. But how does he know there would have been a recovery in the absence of the tax cuts? Once you start assuming things, you have to assume everything. It gets worrisome very quickly.

The approach Hunter and I used really lines up better as a response to the anti-supply-siders, because they always want to calculate the revenue effects of tax cuts statically --that the cuts will have no effect on economic behavior, and so the lost revenue will continue in perpetuity. Just looking at the actual revenue history contradicts that.

Hunter Baker said...

Kathy, that's the thing I've never understood. Why do government estimates (and lib estimates) always assume tax cuts will reduce revenue? Has the point not been substantially proven that it is (at a minimum) not always so? AND WHERE ARE DOC ZYCHER AND ALAN REYNOLDS WHEN WE NEED THEM?

Kathy Hutchins said...

Kathy, that's the thing I've never understood. Why do government estimates (and lib estimates) always assume tax cuts will reduce revenue?

At least they're consistent -- they also always assume that you can raise taxes without discouraging the taxed behavior. Beats me why they do it, as it requires ignoring the central tenet of economics, that people react to changes in a rational manner.