In honor of the 100th anniversary of President Reagan’s birth this year, lets take a look at the effect of his tax cuts for the top marginal rate. When we looked at the course of the past 80 years as a set, it looks as if there isn’t a particularly clear correlation between top marginal tax rates and GDP growth. But what if we weren’t looking close enough? After all, the last few decades seemed to have a noticeable symmetry.
Where should we look? For President Reagan, whose tax cuts came into play around 1982, we should see those rates working their magic on the economy by two years later in 1984. The rates would continue any effect after President Reagan left office, so lets keep looking up through 1992.
Inspiring, don’t you think? Apparently that GDP growth going down in about the same slope that top marginal tax rates were going down must have been what they meant by “trickle-down.”
Of course, that might not be entirely fair. We should probably look at the President’s entire term and see what happened in case we can credit the tax cuts immediately with a big initial boost that gradually faded.
As seen in the chart of 1980 to 1992, there is indeed a big spike in GDP growth immediately after the tax cuts begin. Yet that conflicts with what we see in the rest of the chart. Why would lowering taxes correspond with expansion in one section of the chart and contraction in another? In this case, we need additional data: the Fed rate. The Fed ramped up interest rates brutally high for the early 80s in order to tame massive inflation. The Fed rate had been slowly ratcheted up over 1978 and 1979. The rate for 1979 started at 10% and went up to almost 14%. For 1980, the rate averaged 13%. For 1981, the rate averaged over 16%. The prime interest rate even ventured into the 20s in 1982. These high rates did tame the inflation, but in doing so they brought on the recession of 1981-1982 because they made it much harder to borrow to invest for growth. Naturally, when the brutal interest rates were eased back down in 1982, there was some pent up thirst for financing just waiting for lower interest rates.
What can we draw from 1980 through 1992 as far as taxes and GDP? If these years are indicative of anything, it is that under relatively normal interest rates lowering the top marginal tax rate appears to come with a corresponding drop in GDP. Whereas during a period of extreme high interest rates, there appears to be no correlation between top marginal tax rates and GDP because of the growth-blocking effect of extremely high interest rates.
For the Gipper, unfortunately, that top marginal tax cut play doesn’t seem to have been a win.
Article from:
http://thoughtstate.blogspot.com/2011/02/reagan-tax-cuts-and-gdp.html
Reagan doubled the taxes on working people and cut in half the taxes on rich people. Soc Sec taxes went from 3% to 6% ( most rich people don’t pay Soc Sec taxes), Capital Gains taxes went from 28% to 15%( most poor people will only pay capital gains once to twice in their life, rich people usually pay them every year). So to me, if you work for a living – Ronald Reagan was no friend or yours. Especially when you think about – he introduced “Trickle Down Economics ” which set working people back about a generation. Speaking of generation – the next one coming along is definetly going to have a lower standard of living – thanks to Reagan Voo Doo economics and the Republicans strangle hold on this country – holding the country hostage – for the rich people’s interests.
You DO know that Reagan RAISED taxes, right? It was the only way to counter his BALLOONING of the country’s budget deficit…
http://money.cnn.com/2010/09/08/news/economy/reagan_years_taxes/index.htm
Gary, while Reagan did approve a number of tax increase measures — as the CNN article you linked shows in its graphic — tax revenue under Reagan was roughly on par with the 40 year average. …only a tenth of a percent higher a portion of GDP. That’s not much of a difference.
However, Reagan *did* preside over a decrease in the top marginal tax rate. That’s what this article discusses. And that top marginal tax rate is the rate on the folks that the Republicans keep saying we need to give more money so they’ll supposedly create jobs. Of course, it’s only natural that they’d invest that extra money from tax cuts in a high yield investment. So they probably do create jobs in foreign countries, since developing markets are among the higher yield investments. Sadly, that does do the American middle class much good and it is terrible for domestic business.
Typo. That last line should be: Sadly, that doesn’t do the American middle class much good and it is terrible for domestic business.
you do know that obama is a socialist don’t you ?
You do realize that you’re using that word “socialist” incorrectly and likely because you watch too much tv, don’t you?
Really? By any reasonable measure, he’s less of a socialist than the Gipper. See http://thoughtstate.blogspot.com/2012/02/socialist-presidents-who-comes-closer.html
I’m getting a “Page Not Found” error when I click on the charts.
I noticed that too. Sorry about that. It seems the charts didn’t copy into AddictingInfo.org perfectly. You can view the charts somewhat larger in the version at http://thoughtstate.blogspot.com/2011/02/reagan-tax-cuts-and-gdp.html.
Here is an interesting analysis of the change in the marginal tax rate during the first two years of an administration on the GDP grow in the subsequent 6 years of the administration. As you saw with Reagan, lowering the top marginal tax rate leads to lower GDP growth.
Jerry, that is indeed an interesting analysis. Although it seems that what that author was saying was not exactly that it was a direct causation … but rather more a marker for other factors. Still, quite an intriguing observation.