S&P Downgrades USA's Credit Outlook

Did Reagan's tax cuts increase receipts, or did an economic revival -- coming out of a recession after he took over office -- increase receipts?

As I said earlier, effective tax rates never change substantially, because politicians only have a certain band to play with before populist uprisings. It's all rhetoric. Under Carter tax rates were higher, and the top tax rate sounded insane. But no one actually paid those rates, because there were more loopholes in the code. Reagan came in and won a populist game of lowering taxes, but at the same time they lowered marginal rates, they cut the number of loopholes. The net effect was not much different, in terms of tax revenues.

Total receipts increased under Reagan, but that had little to do with tax cuts. It had to do with the fact that the economy was robust, so there was more to tax. And the economy wasn't more robust because of anything Reagan did. It was business cycles.

To put it into the perspective of more recent times, tax receipts declined significantly from 2008 to 2009 and stayed at the lower levels in 2010. It had nothing to do with tax policy. It had everything to do with a recession that took hold. When there is less income being made, all things being equal, tax receipts go down. Under Reagan, we came out of a recession, so tax receipts went up. It really had little to do with his tax policy, because effective tax rates were not much different under Reagan than they were under Carter, despite how they each sold it.

 

No, there really isn't a chicken and egg, unless you want to ignore the actual evidence.

Effective tax rates, despite the rhetoric from the political parties have remained within a narrow band, in terms of the overall rate of taxation, and despite what people actually believe, they have remained within a narrow band in terms of what any given income level pays -- smaller differences than people realize. I am not talking about the rhetoric everyone gets stuck on. I am talking about the EFFECTIVE tax rate, not the marginal rates. If you have high tax rates, but a zillion exceptions/deductions, your effective tax rate is not going to be much different than if you have low tax rates, but few exceptions/deductions. And all that has really differed throughout my lifetime is how they have tinkered with that formula -- rates vs. loopholes. The end result has been effective tax rates that have remained within a very narrow band.

Get used to the fact that Reagan's "tax cuts" were marginal at best, when you look at what they meant in terms of EFFECTIVE tax rates.

Which leaves us with the actual truth: Tax receipts correlate closely with how well the economy is doing. It's not something you have to guess at. You can go back to any year, look at how much the economy grew or contracted and compare tax receipts to other years. And the correlation is spot on.

No chicken, no egg on this.

 

Our debt levels, under Reagan, when everyone started being concerned about deficits were nothing compared to our debt levels the last 10 years or so. We were never in any real danger.

National debt as a percentage of GDP, while Reagan was president averaged around 45 percent or so. National Debt as a percentage of GDP today is close to 85 percent and growing.