Tax Cuts Do Not Equal Increased Revenue

The figures presented here come from the bipartisan Congressional Budget Office (CBO); Office of Management and Budget (OMB). The issue being discussed is the relationship between tax cuts, deficits, and revenue.
The benchmark that will be used is a percentage of the gross domestic product (GDP). This allows one to compare relevant figures, such as revenue and spending, in relation to the overall growth of the economy and allows for apples to apples comparisons. Since Reagan lowered taxes and Clinton raised them on the top 2%, I will use these two Presidents to illustrate my points


The claim was made that Reagan tax cuts almost doubled federal revenue over the following decade. When Reagan took office in 1980, individual tax revenue stood at 9% of GDP. That fell to 8% by 1988 when he left office. Corporate tax revenue fell from 2.4% of GDP to 1.9% during the same period. Total revenues for the government fell from 19% to 18.2% of GDP. Even though GDP grew from almost $3 to $5 trillion, government debt grew from 26.1% of GDP to 41%. What actually happened was that federal debt almost doubled, not revenue. The moral of this story: A thriving economy plus tax cuts equals less revenue and increased debt.

On the other hand, Clinton raised taxes on the top 2% of the population. In 1992, individual tax revenues were 7.6% of GDP and grew to 10.2% by 2000. For corporations, it was 1.6% and 2.1% respectively. Total revenues grew from 17.5% of GDP to 20.6%. GDP grew from $6 to almost $10 trillion but total government debt dropped from 48.1% of GDP to 34.7%. Taxes went up, revenue went up, and national debt went down. A thriving economy plus tax increases equals more revenue and less debt.

Revenue is one side of the coin, spending is the other. So how do these Presidents stack up on the spending side of the equation? The charge was made that spending tripled under Reagan because of the Democrats. At first blush, you must wonder if they held a gun to Reagan’s head to force him to sign all of that spending legislation. But what do the facts tell us? Did spending increases cancel the effect of Reagan’s tax cuts? Well, discretionary spending dropped from 10.1% of GDP to 9.3% under Reagan and from 8.6% to 6.3% under Clinton. Mandatory spending dropped from 10.7% of GDP to 10.1% under Reagan and from 11.5% to 10.5% under Clinton. Total spending dropped from 21.7% of GDP to 21.3% under Reagan and from 22.1% to 18.2% under Clinton. In other words, total spending dropped under both Presidents but only under Clinton did tax increases on the top 2% produce enough revenue to reduce the national debt — significantly.
Under both Presidents there was a thriving economy as measured by GDP growth. Both Presidents reduced both discretionary and mandatory spending. One cut taxes and one raised them. One President almost doubled the national debt and one actually reduced it. One President proved that tax cuts along with spending cuts do not reduce the debt. Conservatives can continue to spout the tax cut equals increased revenue manta all they want but they lack an understanding of economic reality. They can continue to beat the drum that tax cuts coupled with reduced spending will reduce the debt but economic history is not on their side.

Jim Fitzgerald

One readers comment:

You, my friend, are being logical and that is your mistake.
(Excuse my use of the second person, but you’ll see it’s use as a rhetorical device that’s central to conservative thought.)
You are assuming that the costs and benefits being referred to apply to the same entities. In conservative land that’s never the case. When conservatives look at what the country owes, their perspective is entirely self-centered and the question they ask is “does what you (the country) owe benefit me?” Thus, the country’s debt is good when the interest on it is paid to “me and my cronies,” as a guaranteed tax-exempt unearned income, and it’s bad when the interest on it is paid into the Social Security Trust Fund as unearned income for people who paid in less than they get out. In conservative accounting, any time you get a benefit, it’s a cost to “me” simply because I didn’t get it. Moreover, in the conservative world view, not having one’s expectations satisfied registers as deprivation. That’s because one person benefitting from another’s cost is the norm.
It’s a matter of perspective. Liberals get confused because the conservative habit of framing a discussion as “objective” is a pretense which involves the substitution of the object of their envy for themselves. The real purpose of their nattering is to get benefits for themselves that they haven’t earned — i.e. at your cost. But, of course, they’re not going to admit that.

Interesting.