Trump’s Misguided Embrace of Tax Cuts

By BRUCE BARTLETT AUG. 12, 2016

In a speech in Detroit on Monday, Donald J. Trump put forward a huge tax cut as the centerpiece of his economic program. He compared his plan to Ronald Reagan’s 1981 tax cut, saying his proposal would be “the biggest tax revolution since the Reagan tax reform, which unleashed years of continued economic growth and job creation.”

I know something about the Reagan tax cut. In 1977, while working for Representative Jack Kemp, Republican of New York, I drafted the Kemp-Roth tax bill, which Reagan sent to Congress in early 1981. The law cut statutory tax rates by about 25 percent across the board.

It is G.O.P. dogma that the Reagan tax cut set off an economic boom. Every Republican presidential nominee since the 1980s has promised big tax cuts and another economic surge. Tax increases, Republicans believe, are the kiss of death for the economy.

While Mr. Trump has been unafraid to differ with Republican doctrine on many issues, such as Iraq and trade, he is embracing party orthodoxy on taxes. But the Reagan tax cut is not the medicine the economy needs.

Tax rates were very high when Reagan proposed cutting them — much higher than today. The high tax rates from the World War II era had been only partly cut by John F. Kennedy, and the top income-tax rate was 70 percent. Inflation was pushing workers into higher tax brackets when they received cost-of-living pay raises.

According to the Tax Policy Center, the average federal income-tax rate on a family of four with the median income rose from 9.1 percent in 1972 to 11.8 percent in 1981. The marginal tax rate — the tax on the last dollar earned — rose from 19 percent to 24 percent in the same period.

By contrast, the average tax rate on the median family in 2014 was just 5.3 percent, and the marginal rate was 15 percent. Inflation is nonexistent, and no one is being pushed into higher tax brackets by it.

In short, taxes were too high in 1981 and needed to be cut — including for the rich. The tax rates above 50 percent were not bringing in much revenue because wealthy people were likely to invest in tax shelters.

But the Reagan tax cut played only a secondary role in the 1980s boom, which wasn’t really much of a boom . Real G.D.P. grew 37.9 percent in the 1970s, compared with 36.1 percent in the 1980s. The economy felt better because inflation came down extraordinarily quickly, far more quickly than economists in 1980 thought was possible. But this was primarily a result of the Federal Reserve’s tight money policy, not taxes.

The tax cut deserves credit for softening the blow from the reduction in inflation, which brought on a sharp recession in 1981-82. But what we think of as the Reagan boom was the typical rebound from a sharp recession, just as we had seen after all previous postwar recessions. Much credit for growth in the Reagan years must go to the sharp increase in government purchases for his defense buildup.

What many Republicans also forget is that Reagan cared about deficits and supported 11 different tax increases from 1982 to 1988 that collectively took back half of the 1981 tax cut. Although many conservative economists predicted doom from the 1982 tax increase, which equaled 1 percent of G.D.P., the beginning of the boom coincided with its enactment.

These economists also predicted catastrophe from the 1993 tax increase enacted under President Bill Clinton and from the expiration of many of President George W. Bush’s tax cuts in 2013. But in each case financial markets and the economy grew sharply afterward. By contrast, the economy tanked during the Bush years despite numerous large tax cuts.

The final proof that tax cuts are not the be-all and end-all of growth policy is the Tax Reform Act of 1986, which dropped the top income-tax rate to 28 percent. Conservative doctrine predicted an economic boom, but I don’t remember one, nor can I find one in the data.

Those economists who claim to be following Reagan’s policies by supporting Mr. Trump’s large tax-cut proposal are guilty of one-size-fits-all economics. There is far more evidence from the last 35 years showing that tax increases do more to stimulate growth than tax cuts.

I wouldn’t suggest that tax increases are always the answer. Whether taxes should be raised or cut can be determined only by analysis, not by dogma.