Tax Cuts and Deficits

TAX CUTS AND DEFICITS….This isn’t the biggest issue in the world at the moment, but it’s worth taking a second to talk about the federal deficit. Specifically, about why nobody seems to be all that upset about it.

There are several reasons for this, but one of them is a sort of bipartisan conspiracy of silence about Ronald Reagan. Dick Cheney famously said that “Reagan proved deficits don’t matter,” and regardless of whether he actually said this or not (he denies it), it represents a fairly hardy piece of folk wisdom. After all, Reagan slashed taxes and we eventually grew our way out of the deficits he created, right? So why can’t Bush do the same?

The answer, of course, is that Reagan didn’t grow his way out of the deficits caused by his 1981 tax cut. As the chart on the right shows (adapted from this Treasury report), he raised taxes twice in 1982, and then raised them again in 1983, 1984, 1985, 1986, and 1987. But even with those seven tax increases and several years of strong growth, he still didn’t get rid of his deficit.

It took an eighth tax hike from George Bush Sr. in 1989, a ninth in 1990, a tenth from Bill Clinton in 1993, and then another economic boom to erase the deficit. Sure, a strong economy helped, but without all those tax increases the deficit would never have disappeared.

So why don’t more people understand this? I think it’s because no one wants them to. Republicans don’t like to talk about this because it ruins the conservative foundational myth of Reagan the tax cutter as well as the policy myth of tax cuts as the engine of economic growth. They prefer to preserve the mythology.

Democrats, for their part, like to portray Reagan as an inflexible and simpleminded ideologue, and admitting that he raised taxes several times doesn’t fit their myth. What’s more, they’re scared silly about even mentioning tax increases these days. So they don’t.

The end result is that very few voters understand that the Reagan deficit eventually went away only after ten major tax increases that were cumulatively bigger than the famous 1981 tax cut. And because people don’t understand that, they figure that maybe Bush can grow his way out of the deficits he’s created. After all, Reagan did it.