One of the favorite liberal myths of the 1980s is that Ronald Reagan and his advisers played an elaborate trick on the American people. They got a huge tax cut passed in 1981 by convincing Congress, the press, and the American people that it would lose no revenue. Supposedly, there would be so much additional work, saving, and investment from the lower tax rates that the tax cut would pay for itself, resulting in no increase in the budget deficit.
The large budget deficits of the 1980s, therefore, are sufficient proof that anything to do with “supply-side economics” is per se hokum, mumbo jumbo, and balderdash. That is why liberals are working overtime to paint George W. Bush’s tax plan as a replay of Reaganomics.
Interestingly, the Bush administration is making the supply-side argument much more loudly than the Reagan team ever did. In a January 7 speech, President Bush said his proposal would increase growth enough to raise federal revenue: “That growth will bring the added benefit of higher revenues for the government — revenues that will keep tax rates low, while fulfilling key obligations and protecting programs such as Medicare and Social Security.”
A few days later, Vice President Cheney echoed this view in a speech before the U.S. Chamber of Commerce. Said Cheney, “The president’s growth package will reduce the tax burden on the American people by $98 billion this year, $670 billion over the next 10 years. But the actual impact on the deficit will be considerably smaller than the static projections, because the president’s package will generate new growth, it will expand the tax base, and thus increase tax revenue to the federal government ultimately.”
Lastly, White House Press Secretary Ari Fleischer had this to say on January 8: “The entire package the president does believe will lead to growth, which will over time grow the economy, create additional revenues for the federal government, and pay for itself.”
These statements are vastly stronger than anything anyone in the Reagan administration had to say on the subject. In fact, no one in the Reagan administration ever said that the 1981 tax cut would pay for itself. This is just a canard that is assumed to be true because it has been repeated so often. Every official statement ever made by President Reagan or any of his staff made clear that the tax cut would lose large revenues, and administration budget documents projected large revenue losses that were almost identical to Congressional Budget Office estimates.
Even if Reagan had tried to convince people that his tax cut would not lose revenue, it is hardly plausible to believe that a Democratic Congress and a hostile media would have allowed him to get away with it. One may believe that the 1981 tax cut was bad policy, but the idea that anyone was tricked or deluded about its revenue effect is simply absurd.
The same is true today. Notwithstanding the statements quoted earlier, the Bush administration has always said that its tax plan will lose large revenues. The Treasury Department says it will reduce revenues by $1.5 trillion between 2003 and 2013. Congress’s Joint Committee on Taxation has made an independent estimate that is almost identical.
However, the Council of Economic Advisers has said that the tax plan will raise economic growth and reduce unemployment. It estimates that a larger economy and increased employment will offset about half of the estimated revenue loss by 2007. The gross revenue loss is estimated at $359 billion, but the net loss will only be $166 billion, according to a CEA study. But in its 2003 economic report, the CEA goes on to caution that higher growth from any significant tax cut is never likely to be so great “that lost tax revenue is completely recovered by the higher level of economic activity.”
Despite these facts, Bush administration critics, such as the Center on Budget and Policy Priorities and Spinsanity, continue to claim that it is somehow deceiving the American people about the revenue effect of its tax plan. The plain and simple truth is that it will lose large revenues, just not as much as standard budget estimates predict because they assume no change in economic growth. But in a $10 trillion economy, even a very small increase in growth will expand the tax base and offset some of the projected revenue loss.
Contrary to popular belief, this is not a controversial proposition. As then-Minority Leader Dick Gephardt (D., Mo.) said on Meet the Press last year, “The purpose of tax cuts . . . is to get the economy to grow. If you can get the economy to grow, you will start having more money coming into the government.”