The much-heralded 1981 tax cut was more than offset by two tax increases that year. One was "bracket creep," by which just inflation wafted people into higher tax brackets, so that with the same real income (in terms of purchasing power) people found themselves paying a higher proportion of their income in taxes, even though the official tax rate went down. The other was the usual whopping increase in Social Security taxes which, however, don’t count, in the perverse semantics of our time, as "taxes"; they are only "insurance premiums." In the ensuing years the Reagan Administration has constantly raised taxes – to punish us for the fake tax cut of 1981 – beginning in 1982 with the largest single tax increase in American history, costing taxpayers $100 billion...
The bottom line is that tax revenues have gone up an enormous amount under the eight years of Reagan; the only positive thing we can say for them is that revenues as percentage of the gross national product are up only slightly since 1980. The result: the monstrous deficit, now apparently permanently fixed somewhere around $200 billion, and the accompanying tripling of the total federal debt in the eight blessed years of the Reagan Era. Is that what the highly touted "Reagan Revolution" amounts to, then? A tripling of the national debt?
Now it appears that Reagan's son agrees with the Rothbard analysis. Michael Reagan blames it on the Democrats, but on the outcome Michael and Rothbard pretty much see things the same. Michael tweeted today:
Don’t let the liberals fool you! My dad was promised $3 in spending cuts for every dollar of new taxes. He died waiting for the $3 in cuts!
The one thing that always amazes me is how few economists understand the tax code now or before. From what I have read of Rothbard on Reagan, I think he understands the thing more then most I have read. Here he is talking about the first Reagan tax code change but not the big one, TRA86.
ReplyDeleteThe funniest display of ignorance so far is Reich's solution to our economy -- high tax rates like the pre-Reagan '53 code. I was a tax consultant for the largest CPA firm at the time of Reagan and I can tell you that nothing would favor the wealthiest American's more then returning to that old tax code. Sure it had high rates which were great at keeping middle class people out of the ranks of the wealthy and making it appear that those were the rates that the wealthy were actually paying.
In reality, the old tax code that Reich seems to love so much and sees as the root cause of our most prosperous times (in his mind), was so full of ways to avoid income taxes, provided you had accumulated wealth to start with, that you would be considered to have a bad tax advisor if your effective tax rate was more then 20%. The pre-Reagan (TRA86) tax code allowed you to take advantage of things like 20 to 1 tax shelters, where every dollar you invest you get back $20 of sheltering. Of course you had to have the money to invest and you had to have the net-worth to be a limited partner in the partnership that would take on massive amounts of debt to make the sheltering work.
The people that benefited most under Reagan's TRA86 tax code were professionals (time billers) and corporate executives. What Reagan also did was shift a large amount of the burden from the middle class onto the top 10%. Clinton and Bush 2 took it even further by dumping more then half of all American's off the tax rolls, and separating them from the cost of their government.
Where people like Reich really go wrong is that they ignore the part of the old tax code that made most people pay something and squarely put most of the burden on the middle class for paying most of the income taxes. If nothing else this kept government spending in check since there was no where else to turn for more money. Reich no doubt understands that this fact does not fit nicely into his Marxist view on taxation.
The final aspect that people ignore about the pre-TRA86 code and today is that there was a massive amount of fraud taking place at all levels, but especially in the small and medium business area. It was not uncommon in Restaurants to find two cash registers, one for cash and the other credit card. The same was true for other cash oriented businesses. Also, 1099 reporting was rarely followed until Reagan changed that in 1981 making the penalty for not filing go from $1 per return to $50 and then adding withholding penalties if you could not prove the person was a US taxpayer. You cannot look at the old code and ignore the fraud aspect. Fraud and non-compliance were huge pre-tra86.
When asked who benefited and who lost with the Reagan tax code, it really depends on each your occupation, wealth and income status. If you were very wealthy and used tax shelters, you lost in a big way. If your income was mostly in the form of capital gains, you lost. If you were a professional billing time, you won. If you were the average guy in the street you gained some or broke even even considering the SS/MC increases. The Biggest winner overall was probably the corporate executive who before TRA 86 was pretty clamped down paycheck wise thanks to the very high tax brackets. Back then it was more common to give your execs expense accounts, cars, use of the jet and vacation home in Palm Beach. It made no sense paying someone a $1m to only have 2/3 of it taken by income taxes.
According to Paul Craig Roberts, from his book on his time at Treasury during the Reagan years, there was an "agreement" with Volcker for a reduction in the "Growth of the Money Supply" that was supposed to occur over a 3 year time frame. Volcker gave the entire package in SIX MONTHS!
ReplyDeleteAccording to PCR, this GUARANTEED huge deficits and a deep recession (VERY interesting interplay between Supply Side, Demand Side and as we see, Austrian Theory).
As the years roll by, Volcker is now seen as the "Stern Father and Protector", saving America when it was his policy that caused the problem!
CW
PS: RW, I believe this is referenced in the Friedman/Feldstein DVD I sent you. Did you ever get the DVD to work?