Was Ronald Reagan Really the Patron Saint of Tax Cuts?

It’s time to dispel another myth about the modern folk legend Ronald Reagan. I hate to be the bearer of bad news, but Reagan was not the patron saint of tax cuts. Contrary to popular belief, Reagan actually raised many taxes. In fact, he presided over the largest tax hike in modern American history. But don’t take my word for it. Listen to what Jerry Tempalski, tax analyst for the U.S. Department of Treasury, has to say:

“TEFRA was the biggest tax increase of the period [1968-2006] measured in constant dollars and as a percentage of GDP.”

Now, I’m sure some of you are asking yourselves: What the hell is TEFRA? Well, we’ll get to that in a moment. First, allow me to bask in the irony and point out that this information will continue to challenge assumptions. Because throughout the course of this article, I’ll also illustrate many other tax increases under Reagan.

And for those of you still convinced that Reaganomics saved the day, how do you explain the tax hikes Reagan enacted throughout the 1980's? I thought tax increases were supposed to kill the economy?

The following table represents the net effects of major legislation enacted during the Reagan Administration on the receipts. This table is from the Reagan’s own Budget of the United States Government report for the fiscal year of 1989.




Source: Office of Management and Budget, Budget of the United States Government, Fiscal Year 1989 (Washington: U.S. Government Printing Office, 1989), p. 4-4.

Clearly, the Economic Recovery Tax Act of 1981 had the greatest negative impact on the receipts because this Act was Reagan's huge tax cut package. However, the Tax Reform Act of 1986 was his historic Act that most people are familiar with. This was the legislation that had the largest role in flattening the progressive income tax brackets. But notice all the other legislation that had positive net impact on receipts? This was due mostly to tax hikes and expansions of the taxable bases. Let’s take a closer look:

1. Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA)

According to the U.S. Department of Treasury, this was the largest tax increase between 1968-2006.

*Increased airport and airway trust fund taxes
*Increased cigarette excise taxes
*Increased telephone excise taxes
*Increase of Federal unemployment taxes and taxable base
*Extension of social security hospital insurance taxes to Federal employees
*Instituted 10% withholding on dividends and interest paid to individuals


2. Highway Revenue Act of 1982

The highlight of this legislation is the tax on gasoline and diesel fuel went from 4 to 9 cents per gallon.

3. Social Security Amendments of 1983

* Accelerated scheduled increases in Social Security payroll tax rate
* Instituted taxation of some Social Security benefits
* Raised self-employed OASDHI rate to combined employee-employer rate, with SECA credit
* Extended mandatory Social Security coverage to non-profit and new federal employees

(Yup, that's right... Reagan expanded Social Security entitlements.)




Source: Office of Management and Budget, Budget of the United States Government, Fiscal Year 1989 (Washington: U.S. Government Printing Office, 1989), p. 4-20.

For more info, check out:
http://www.ssa.gov/history/1983amend.html

4. Railroad Retirement Revenue Act of 1983

* Increased railroad retirement payroll taxes and railroad unemployment insurance taxes.
* Taxed railroad retirement pension plan benefits.

5. Deficit Reduction Act of 1984

*Increased distilled spirits excise tax
*Extended telephone excise tax.
*Restrictions on leasing. Reduced benefits from tax-exempt leasing and postponed effective data of liberalized finance leasing rules.
*Increased depreciable life of structures from 15 to 18 years.

6. Tax Reform Act of 1986

Most notably, this legislation consolidated the earned income tax structure. However, in doing so, Reagan proceeded to raise the taxes on the lowest income brackets while simultaneously decreasing the marginal rates of the top brackets quite substantially.




Source: http://www.taxfoundation.org/files/federalindividualratehistory-200901021.pdf


7. Consolidated Omnibus Budget Reconciliation Act of 1985

*Permanently extended 16 cents per pack cigarette excise tax.
*Enacted new excise tax on smokeless tobacco.
*Increased excise tax on coal production.
*Extended Medicare coverage to new state and local employees (This wasn't a tax hike, I just wanted to point out an expansion of entitlements.)

8. Superfund Amendments and Reauthorization Act of 1986

*Enacted excise tax of 8.2 cents per barrel on domestic crude oil and 11.7 cents per barrel on imported petroleum products.
*Enacted new broad-based tax on all corporations equal to 0.12 percent of alternative minimum taxable income in excess of $2 million.
*Enacted a 0.1 cent per gallon excise tax on gasoline, diesel fuels and other special motor fuels to finance cleanup of wastes from leaking underground petroleum storage tanks.

9. Continuing Resolution for 1987 (and 1988)

*Increased Internal Revenue Service funding for staffing and equipment.

Although, this isn’t necessarily a tax hike, it is still an interesting development in tax legislation that generated additional revenue.

“Increase in Internal Revenue Service (IRS) Funding – Funds were provided to the IRS for additional examiners; additional staff to handle appeals and litigation related to tax shelters; an automated examination system; and a system to match information documents supplied by third parties against taxpayer returns. These increases in staffing and equipment will help IRS ensure the smooth implementation of tax reform, improve tax law enforcement, and reduce the gap between taxes owed and taxes paid.”

Source: Office of Management and Budget, Budget of the United States Government, Fiscal Year 1989 (Washington: U.S. Government Printing Office, 1989), p. 4-12.


10. Omnibus Budget Reconciliation Act of 1987

There is a lot of information in this one, but here are some highlights:

* Extended telephone excise tax
* Eliminated ESOP estate tax deduction loophole
*Occupational taxes imposed on the producers and manufacturers of alcohol, tobacco, and firearms products
*Increased taxes on the dealers of alcohol and firearms


Many other corporate tax loopholes and such were plugged up in this legislation. For more information check out:
Office of Management and Budget, Budget of the United States Government, Fiscal Year 1989 (Washington: U.S. Government Printing Office, 1987), p. 4-5.

11. Medicare Catastrophic Coverage Act of 1988

* Passed new supplemental premium tax on all persons eligible for Medicare. Premium rate was 15 percent of individual income tax liability in excess of $150, increased to 28 percent in 1993. Premium limited to $800 in 1989, raised to $1,050 in 1993, with future premium cap dependent on medical care costs after 1993.
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Now don't get me wrong, I'm not demonizing Reagan for raising taxes. I'm simply pointing out that Reagan wasn't the patron saint of tax cuts that conservatives are led to believe (or claim). In fact, there was a time when Republicans actually did what was necessary to rein in the deficit. Although Reagan never technically balanced the budget, quite the opposite actually, he at least tried. These days the GOP and the teabaggers would have crucified him.

I’d also like to take a moment to discuss the Laffer Curve. This is an interesting model because it essentially illustrates a theoretical equilibrium of the tax rate that will generate the most revenue for the government. The premise of the model basically states that if the government taxes firms and labor 0%, the government will not collect any money. Conversely, if the government has a tax rate of 100%, they will not generate any revenue because there would be no incentive for productivity. Therefore, a happy medium needs to be reached somewhere in between that maximizes revenue and incentive to earn. Makes sense, right?



This is the model that Reagan used to justify lowering the tax rates to (unsuccessfully) appease budgetary critics. Essentially, this model suggests that at a certain point taxes are too high and need to be cut. The cuts will then create incentive to earn and ultimately more tax revenue will be collected because of increased productivity. In other words, tax cuts pay for themselves. However, the assumptions of this model have yet to prove themselves because tax cuts have never been empirically shown to increase revenue for the government. In fact, in 1989, the net effect of Reagan's tax cuts were -$568B (ERTA + Tax Reform Act of 1986). Obviously, something went horribly wrong somewhere in the logic. But in all fairness, the model doesn't actually provide equilibrium rates. It is left up for the politicians to decide.

I would also like to point out that by broadening the tax base, closing corporate loopholes, and taxing various areas in service, we could then lower everybody’s rates and spread the risk of massive revenue loss due to a recession and widespread unemployment.

This is what Reagan was trying to accomplish and I agree that the government is too heavily leveraged in personal income and payroll taxes. But these concepts are lost in the minds of pundits, politicians, and consequently the populace. I miss the days when the Chamber of Commerce ran the GOP. The GOP should be taking cues from Frum and not Fox.

In the end, I know that this information makes conservatives squirm. How could their beloved Reagan possibly raise taxes? Most will probably just ignore these data and continue living in bliss. Others will try to justify and rationalize it. Perhaps arguing that it was never really Reagan who raised the taxes and subsequently claim it was congress. Well, by that rational, Reagan never lowered the taxes to begin with and the whole basis that defines his presidency is inaccurate. The truth is, the president sets the tone for the country through actions and words. Not to mention, signs the legislation into law.


Sources:

Office of Management and Budget, Budget of the United States Government, Fiscal Year 1989 (Washington: U.S. Government Printing Office, 1987)

Office of Management and Budget, Budget of the United States Government, Fiscal Year 1984 (Washington: U.S. Government Printing Office, 1984)


http://fraser.stlouisfed.org/publications/usbudget/

http://www.taxpolicycenter.org/legislation/1980.cfm#Highway1982

http://www.taxfoundation.org/files/federalindividualratehistory-200901021.pdf

Was it Reaganonomics or Monetary Policy?

This blog post is for those of you who are blinded by ideology and all the glory that is Reagan. However, my goal here isn’t to rant about Reagan’s quantifiable destruction to the economy (I’ll save that for another day). My goal is to show all of you a brief glimpse of the Great Inflation during the 1970s and the shift of monetary policy reasoning that manifested as a result. In other words, I’m here to show you what Reagan cannot take credit for. Believe it or not, Reagan's tax cuts were not responsible for the upswing in the economy during 1980s. Therefore, I will challenge some of your assumptions by illustrating the profound influence monetary policy has on shaping our economy. Unfortunately, this is an area often overlooked in the political arena.

Still interested? Well buckle up and enjoy the ride. However, I must warn you that this trip might be a little wonkish…


When G. William Miller was appointed Fed Chairman in 1979, the economy was suffering from OPEC coordinated oil price shocks throughout the 1970's. These sustained high prices began reducing aggregate production possibilities because of all the markets directly and indirectly influenced by crude oil (e.g. plastics, transportation, shipping, heating, etc). Moreover, the increasing price of crude oil also began compounding inflation (i.e. typical inflation + oil price inflation) and raising the expected rate of inflation.

However, Miller believed that this reduction in production was an indicator that there was a negative shock to aggregate demand. In other words, he believed the economy was going to into a recession. Therefore, he lowered the real interest rate and increased the supply of money to bring production back to what he thought was potential output. This is what the Fed would typically do in a recession.

The truth is, there was no aggregate demand shock and lowering the real interest rate boosted production beyond potential output. As a result, firms raised their prices beyond the original rate of inflation to ease the pressure and to keep up with “expected” inflation.

Moreover, up until this point, conventional wisdom (and Miller’s main strategy) stated that there was a permanent trade-off between unemployment and inflation. The short-run models based on the Phillips Curve during this time period were incorrect. The models reflected the belief that output could be permanently held above potential and unemployment could be held permanently low by pegging the inflation rate around 5%. However, this was proving to be counter intuitive because firms began “expecting” the increases and adjusted accordingly.

While we know now that there IS a trade-off between unemployment and inflation, it is not permanent. Milton Friedman and Edmund Phelps adjusted the Phillips Curve to reflect changes in inflation and to show that keeping output above potential is inherently doomed to fail.




In 1979, after Miller’s short term as Fed Chairman, Volcker aggressively used Friedman and Phelps’ newly adjusted model and “forced” the country to go into a recession and ultimately bring down inflation. To do this, Volcker raised the real interest rate which created unemployment. Once inflation was brought down to a manageable level, the real interest rate was lowered and employment began to rise. The economy was once again soaring. In effect, modern monetary policy was born.

This lesson in inflation not only caused a major downswing during the Carter administration, but it also created a major upswing during the Reagan Administration.

Contrary to popular belief, Reaganonomics or Trickle-Down economics was not responsible for the upswing in the economy. Let's take a closer look.




This graph shows the timeline of when Reagan’s infamous Economic Recovery Tax Act was enacted and when Volcker expanded the money supply after inflation was brought under control.

During 1981, Reagan slashed taxes under the premise that bourgeois entrepreneurs would then take their money and invest it in production. In effect, the rich would then shower us with their extra money in the form of jobs and higher wages.

However, there was actually a sharp decline in the rate of personal investment in 1981 and again in 1982. At the end of 1982, Volcker expanded the money supply. Shortly afterwards, there was a sharp increase in the rate of personal investment and job growth. Who was responsible Reagan or monetary policy?

Some make the argument that this occurrence was actually a lag effect from Reagan’s tax cut. That’s fine. But then could somebody please explain to me why there was an aggregate decline in the rate of investment during the entire Reagan Administration?




Source: http://research.stlouisfed.org/fred2/graph/?chart_type=line&s[1][id]=GPDI&s[1][transformation]=pch (percent changes of GDPI annual sum)
*The aggregate data was downloaded and analyzed in Microsoft Excel.

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Update
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My GDPI trend-line does not show a decline in gross investment. This is a graph of percent changes and illustrates something much different. I used percent changes to show how investment has moved over time. While gross investment was still increasing, it was doing so at a decreasing rate. In other words, private investment rates were higher in the 1970's before Reagan's tax cuts.
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For those of you who I haven't lost by now, I leave a final illustration of my point. The following graph shows another timeline of the Economic Recovery Tax Act of 1981 and when Volcker expanded the money supply. Except this time it is in relation to GDP growth and the unemployment rate.



The graph clearly illustrates an immediate reduction in unemployment with a concurrent increase in GDP growth after Volcker loosened monetary policy by dropping the real interest rate and increasing the supply of money.

In the end, it is fairly obvious to see that Volcker manufactured the upswing in the economy that defined Reagan’s presidency. On a theoretical plane, I can see how people could believe that tax cuts for the rich will create jobs. However, Reaganomics simply doesn’t pass the test of empirical observation.

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Update
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I would also like to quickly mention another concept correlated to investment: savings.



Clearly, the rate of savings and investment went down under Reagan. Where exactly did all the money go that was supposedly "freed up" from the tax cuts for investment? I just report, you decide!

Are We Witnessing the Decline of America?

Are we witnessing the decline of America?

This is a very serious question that seems to beg itself when people like Charlie Sheen take the spotlight and bask in idiocy. Now don’t get me wrong, I enjoy the lowbrow entertainment of Two and a Half Men. The problem here isn’t Sheen. The problem is us. We enable people like him to flood our lives with rants and mindless entertainment.

We, as a society, place this sort of mass entertainment on a pedestal. Somehow, actors and professional sports players have become glorified to epic proportions. They are idolized and paid exorbitant amounts of money. Meanwhile, a large portion of the country shows indifference towards areas like education.

Currently, Fox News is on a warpath of demonizing public school teachers. It’s no secret that the right-wing loves to bust up unions every chance they get. In my opinion, teachers should get paid much, much more. The stipulation being that their performance needs to be held to a higher standard. Why don’t we want the best and brightest teaching our kids? Not simply those who are willing to work the cheapest. But I won’t lecture on supply and demand and I’m beginning to digress.

The mass entertainment industry is corrosive to our society. Americans have been slowly moving towards a state of stagnant activity. It is no secret that obesity rates are high and participation in activities beyond watching television is low. TV is America’s favorite pastime, whether it’s sports, movies, reality shows, or cheesy sitcoms.

This isn’t the first time in history where mass entertainment has dumbed down the masses either. Mass entertainment during the Roman Empire eventually led to its decline. Rome was once a great nation with a peculiar work ethic. In the early days of Rome, each person had a civic duty to defend and expand the empire. Originally, leisure and entertainment were viewed as utilitarian and didn’t serve much of a purpose beyond recuperating. In other words, relaxation wasn’t an end in itself, it served a purpose: rest up and expand the empire.

As time went on, politicians running for Rome’s senate became fiercely competitive. They had an incentive to become senators because they would have access to Rome’s vast wealth. To gain favor with voters, the politicians began staging “games.” Gladiators were created to appease voters and subsequent arenas were constructed as viewing spectacles. Eventually, the famous Coliseum was built and the grandeur of the games skyrocketed.

Historians also argue that the Roman politicians created the games to keep the masses occupied during a time of mass unemployment and underemployment. They were afraid of an uprising due to the huge socio-economic gap between the elite politicians and everybody else. Therefore, mass leisure and mindless entertainment were used to divert attention away from the poor conditions.

Either way, the games in Rome became an integral part of society. Generation after generation remained reliant and fixated on this mindless mass entertainment. As time progressed, the games also had to become more and more extravagant to keep the attention of viewers (sound familiar?). It worked, the masses stayed preoccupied.

Eventually, Roman citizens became overly lazy and didn’t have the ability to handle the excessive leisure lifestyle. They shifted from a proactive society with minimal recreation to a spectator society of couch potatoes. Towards the end of the empire, they became so lazy that most of their army was outsourced to mercenaries. This set the stage for the ultimate decline of Rome.

In the end, Rome should have been more like Greece. The Greeks took a much different approach to recreation. To the Greeks, leisure was an end in itself and had no other purpose. They created the Olympics and philosophy in the name of recreation (that’s right, philosophy was a pastime, not a burden). Intelligence was revered and the body was a temple. They valued intellectual pursuits and physical fitness greatly. The Greeks were artisans, poets, mathematicians and scientists, but also warriors. They were well rounded and their contributions to humanity and culture live on today.

(It is fair to note that the origins of Rome were in fact influenced greatly by Greek culture. However, they obviously lost their way.)

Now let me put Rome’s fall into perspective by explaining a little conventional economic wisdom. In the field of macroeconomics, we have various growth models that attempt to explain the rate at which an economy grows. Factors such as labor, capital supply, inputs, etc are generally considered. In a famous model, the Romer Model of Growth, another concept is added: ideas.

The concept of ideas is based on the age old adage of “working smarter, not harder.” However, ideas do not stop simply with production efficiency. Creative minds spur innovation in all areas. As a result, the Romer growth model illustrates that ideas grow an economy faster than just simply brute labor.

This is where Rome went wrong. They stopped valuing ideas and grew lethargic. They were the first great society of couch potatoes hooked on mindless mass entertainment. The rest is history.

The concept of ideas can then be transferred to present day America. We live during a time when America primarily manufactures big ticket items (e.g. space equipment, aircraft, defense technology, etc) and is overly reliant on services that are becoming outsourced at alarming speeds. In other words, we need all the ideas we can get to stay competitive.

However, that is not to say all ideas are good. The idea of busting up teachers unions is bad. These are the people who are laying the fertile ground from which the seeds of creativity are to sprout. In what world is it a good idea to demonize these people? In the aggregate, if education was more highly valued, this would not even be a topic.

With the comparison of the Greek and Roman empires put into perspective, it is not hard to identify the direction America is heading. Like Rome, America too has become a spectator society. We watch television, we watch sports, we watch movies, etc etc etc. Americans collectively do not value intellectual pursuits as a form of entertainment. As such, our ideas are becoming less dynamic and less involved. This has set the stage for the Republican party to launch a full fledged attack on the bargaining rights of teachers. Why is marginalizing education acceptable in this day and age? Why does this topic even compete for news coverage with Charlie Sheen? American life as we know it is not sustainable with this sort of mentality.

Here are some fun facts to part with:

• According to the A.C. Nielsen Co., the average American watches more than 4 hours of TV each day (or 28 hours/week, or 2 months of nonstop TV-watching per year). In a 65-year life, that person will have spent 9 years glued to the tube. (For even more frightening stats visit: http://www.csun.edu/science/health/docs/tv&health.html)

• 18.93 %, or 785,682, Wisconsin adults, age 16 and older are not enrolled in school and do not have a high school diploma. (http://www.wisconsinliteracy.org/literacy_facts.php) (And this is ground zero for the demonizing of public school teachers!!!!!)

• 42% of adults between the ages of 25 and 67 have, at most, a high school education (U.S. Census 2000).

• The 2003 National Assessment of Adult Literacy (NAAL) estimates that 30 million adults in the U.S. –14% of the country’s adult population – have only the most minimal ability to read and write in English. (That’s almost the entire population of Canada)

• 63.1% of adults in the U.S. were either overweight or obese in 2009. (http://www.webmd.com/diet/news/20100210/percentage-of-overweight-obese-americans-swells) (That’s roughly196 million Americans)

• 111 million people watched the 2011 Super Bowl. (The Nielsen Co) (That’s about as many people in all of Mexico!!!)

• In 2009, the United States ranked 30th in Math, 23rd in Science, and 17th in Reading out of 65 of the world’s most industrialized nations (http://www.oecd.org/dataoecd/54/12/46643496.pdf)

The decline in America is here and it is certainly quantifiable. Ironically, the expression “ending like a Greek tragedy” would apply here, but in bad taste. Because, we should take the Greek approach and treat intellectual pursuits and physical fitness as a form of recreation. The phrase “fall like Rome” seems more fitting of the state of America. And the bigger they are, the harder they fall (I’m just full of clichés today)!

What do you do in your free time?