One Percent Takers — Budgets and Deficits

Budgets and Deficits

by Steve Kangas
 
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, while others claim 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

Combined individual and corporate income tax loss: $88 billion.

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 Product for 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 (More)
  • 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

___________________
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

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