| |
| Few issues in American politics are as misunderstood
as the national deficit and debt. On one hand, supply-siders claim that
the debt is insignificant; on the other, Ross Perot claims that it's a
national disaster. The numbers say it's neither: |
| Federal Deficit and Debt (Nominal dollars, in
millions)1
Debt as a percentage
Year Deficit
Debt of that year's GDP
1979 -$40,183
-$828,923 34%
1980 -73,835
-908,503 34
1981 -78,976
-994,298 34
1982 -127,989 -1,136,798
36
1983 -207,818 -1,371,164
41
1984 -185,388 -1,564,110
42
1985 -212,334 -1,816,974
46
1986 -221,245 -2,120,082
50
1987 -149,769 -2,345,578
53
1988 -155,187 -2,600,760
54
1989 -152,481 -2,867,538
55
1990 -221,384 -3,206,207
59
1991 -269,521 -3,598,303
63
1992 -290,403 -4,001,941
67 |
|
Deficit Facts
-
If the United States raised its tax rates to the level of
Germany's, it could not only wipe out the deficit, but eliminate poverty
in America.
-
If Reagan and Bush had balanced all of their budgets, they
would have left America only 3 percent richer by the time Bush left office.
-
America has run far larger debts than this (as a percentage
of the GDP) since World War II.
-
Almost all mainstream economists believe that, until now,
the U.S. debt has been a minor problem requiring no immediate action. But
they also point out that when the Baby Boomers start retiring in 2010,
a worsened debt will combine with our Social Security problems to form
a major financial crisis.
|
| One of the central tenets of supply-side theory is that
tax cuts actually increase overall tax collections. There is something
faintly foolish about this assertion -- it's like claiming that you can
make trees grow taller by cutting them down. But the supply-siders have
their own statistics to quote. "During the Reagan tax-cut era," Rush Limbaugh
writes, "IRS collections actually nearly doubled... from $550 billion [sic]
to about $991 billion."2 This supply-side deception is as common
as it is deplorable; it uses nominal dollars instead of constant dollars,
which account for inflation. Here are the total tax collections expressed
in both: |
| Tax Collections (billions)3
Year Nominal Constant
(87 dollars)
1980 $517.1 728.1
1981 599.3
766.6
1982 617.8
738.2
1983 600.6
684.3
1984 666.6
730.4
1985 734.1
776.6
1986 769.1
790.0
1987 854.1
854.1
1988 909.0
877.3
1989 990.7
916.2
1990 1031.3 914.1
1991 1054.3 894.7
1992 1090.5 895.1 |
|
| This chart raises two points. First, it allows you to
see that real tax collections actually declined in the two years following
Reagan's 1981 tax cuts. (In fact, it took until 1985 to recover the 1981
level.) This is exactly the opposite of what supply-siders had predicted.
They excuse it by noting that the 1981 cuts were phased in over three years,
delaying entrepreneurial investment. But, according to their theory, accumulating
tax cuts should have resulted in accumulating -- not declining -- tax collections. |
| Second, contrary to what Rush implies, real tax collections
did not "double" between 1981 and 1989; they grew only 20 percent. This
reflects the normal growth that our economy has experienced for centuries,
as both our population and productivity have grown. The real question is
not whether the tax collections grew, but whether they grew faster than
normal under Reaganomics. They did not. The following chart shows the average
annual growth of real tax collections under the last 10 presidents. As
you can see, Reagan ties for 6th and 7th place: |
| Average Real Annual Growth of Tax Collections
by President4
Average
President Annual
Growth
Roosevelt 121.3%
Truman
3.7%
Eisenhower 2.4%
Kennedy
4.8%
Johnson
6.9%
Nixon
0.3%
Ford
6.4%
Carter
3.0%
Reagan
2.4%
Bush
-0.0% |
|
| Of course, the above figures are for total tax
collections; many people would prefer to see the figures on income
tax collections, since that is where most of the tax cuts occurred. Unfortunately,
these figures show an even lengthier drop in tax collections. The following
charts are for both types of income tax collections: individual and corporate.
They show a loss of at least $88 billion dollars (in constant 1987 dollars).
How do we arrive at that figure? Remember that our tax collections have
grown virtually every year since World War II, due to the almost constant
growth of our economy (and with it, the tax base). However, after Reagan's
income tax cuts took effect in 1982, real income tax collections took a
long fall, despite the fact our economy continued to grow. For the moment,
let's ignore the fact that tax collections could have been expected to
grow after 1981. Let's simply use 1981 as a baseline, multiplying it 8
times, and compare that to what was really collected over the next 8 years. |
| Individual Income Taxes (millions)5
Year Current
Constant (87 dollars)
1981 $285,917
$367,692
1982 297,744
356,366
1983 288,938
332,033
1984 298,415
328,470
1985 334,531
354,677
1986 348,959
359,307
1987 392,557
392,557
1988 401,181
387,128
1989 445,690
411,533
-----------------------------
82-89 total:
2,922,691
1981 (times 8) -2,941,536
-----------------------------
Net 8-year loss
-18,845 |
|
| Corporate Income Taxes (millions)
Year Current
Constant (87 dollars)
1981 $61,137
$78,623
1982 49,207
58,991
1983 37,022
42,544
1984 56,893
62,623
1985 61,331
65,024
1986 63,143
65,015
1987 83,926
83,926
1988 94,508
91,224
1989 103,291
98,092
------------------------------
82-89 total:
567,439
1981 (times 8)
-628,984
------------------------------
Net 8-year loss
-69,545 |
. |
| Keep in mind that this does not even count the growth
that was expected to occur since 1981. And, because the economy grows in
the long run, income tax collections were bound to eclipse 1981 eventually;
this is why the chart shows an ultimate rise in collections. But the fact
that collections took a six-year dive refutes the supply-side claim that
tax cuts increase tax collections. |
| Supply-siders like to blame the growing deficits of the
80s on runaway government spending, not tax cuts. However, the falling
growth of tax collections in the above charts suggest that tax cuts indeed
contributed to the deficit. And how much did runaway spending contribute?
Actually, there is a surprise here, one that runs contrary to popular perception.
Federal spending under Reagan actually grew more slowly than under Nixon,
Ford and Carter! |
| Average Real Annual Growth of Federal Spending
by President6
Average Annual Growth:
President
Before servicing debt After servicing debt
Nixon
4.2%
4.2%
Ford
3.3
3.1
Carter
3.4
2.6
Reagan (82-87)
1.8
1.1
Reagan (82-89)
2.0
1.3
Bush
1.0
1.2
Clinton
1.0
0.4 |
|
| So where did the deficit come from? A much clearer picture
emerges when you consider federal taxes collected as a share of the GDP: |
Federal Budgets, 1972-1993
(All numbers are a percentage of the Gross Domestic
Productfor fiscal year)7
Tax Total
Human
Year Receipts
Spending Resources Defense
1972-81
(average) 18.7%
21.1 11.0
5.5
1982-93
(average) 18.7
23.1 12.0
5.8
Carter
1978 18.6
21.3 11.3
4.9
1979 19.0
20.7 11.0
4.8
1980 19.5
22.3 11.8
5.1
1981 20.2
22.9 12.2
5.3
Reagan
1982 19.8
23.9 12.5
5.9
1983 18.1
24.4 12.9
6.3
1984 18.1
23.1 11.7
6.2
1985 18.5
23.9 11.9
6.4
1986 18.3
23.5 11.4
6.5
1987 19.1
22.5 11.3
6.3
1988 18.9
22.1 11.1
6.0
1989 19.2
22.1 11.0
5.9
Bush
1990 18.9
22.9 11.3
5.5
1991 18.6
23.3 12.1
4.8
1992 18.4
23.3 13.0
5.0
1993 18.4
22.5 13.2
4.6 |
|
| As far as general tax collections go, nothing happened!
Relative tax collections remained the same in the 80s as in the 70s. The
real story is how this tax burden was shifted. If general tax rates remained
the same, but the top rate fell from 70 to 28 percent, then by mathematical
force the lower classes must have made up the difference. |
| But back to the accusation that runaway spending primarily
caused the deficit. This is wide open to debate, but, for argument's sake,
let's suppose it's true. When conservatives then blame House Democrats
for declaring each of Reagan's budgets "Dead On Arrival" before going on
their own spending spree, liberals have several strong refutations: |
-
If Congress had passed Reagan's budgets exactly as proposed,
the national debt would have been $29.4 billion worse.8
-
Many Republicans forget that they controlled the Senate from
January 1981 to January 1987. Both the Senate and the House vote twice
on each budget, once on the original budget bill, and again after the conference
committee has hammered out a compromise. Therefore, the Senate is an equal
player in the budget process.
-
Reagan could have vetoed any budget unacceptable to him.
He did not.
-
Not all of Reagan's budgets were declared DOA; Congress actually
passed his first one. The first one was critical because it contained his
famous, three-year supply-side tax cuts, and established a new direction
for tax policy.
|
| Along with the national debt grew our trade deficit.
MIT professor Lester Thurow made the famous quote that "the epitaph of
the Reagan presidency will be: 'When Ronald Reagan became President, the
United States was the largest creditor nation. When he left the
presidency, we were the world's largest debtor nation.'"9 |
| U.S. Merchandise Trade Deficit and Current Account
Deficit, 1981-198810
Trade deficit
Current Account Deficit
Year ($ Billions)
($ Billions)
1981 -34.6
+8.2
1982 -38.4
-7.0
1983 -64.2
-44.3
1984 -122.4
-104.2
1985 -133.6
-112.7
1986 -155.5
-133.2
1987 -170.3
-143.7
1988 -137.1
-126.5 |
|
|
Footnotes
|
1 U.S. Office of Management and Budget,
Historical
Tables, annual.
2 Rush Limbaugh, See, I Told You So
(New York: Simon & Schuster, 1994), p. 129.
3 Internal Revenue Service.
4 Special thanks to Steve Casburn, an econometrician
from Ohio State University, for deriving this chart. Revenue figures from
Budget for FY 1987, Historical Tables. Inflation figures from U.S.
Bureau of Labor Statistics, CPI-U.
5 Original data from U.S. Office of Management
and Budget, Historical Tables, BUDGET of the US Government, FY 1996. Dollar
conversions made from tables located there.
6 Budget for FY1997, Historical Tables;
U.S. Bureau of Labor Statistics, CPU-U. Chart derived by Steve Casburn.
7 U.S. Office of Management and Budget,
Budget
of the United States Government, annual
8 House Appropriations Committee, Regular,
Annual, Supplemental, and Deficiency Appropriations Bills: Comparison of
Administration Budget Requests and Appropriations Enacted, Sep. 30,
1994.
9 Lester Thurow, "When the Lending Stops,"
New
Perspectives Quarterly, Fall 1987, p. 14.
10 U.S. Department of Commerce |