Greetings fellow discussers. (Does dis-cuss mean to first diss and then cuss?)
Anyway, I cannot disagree with the WSJ Opinion piece, but I can offer some perspective.
The chart below is from
http://www.usgovernmentspending.com/fed ... chart.html and uses data taken from the Bureau of Economic Analysis (part of the Commerce Department). I have the numbers in a combination of book and electronic form, but the web site does a great job of automating the information.
Indeed, the U.S. federal budget deficit has run up to a little over 10% of GDP. Additionally it is true that the Reagan deficits did not exceed 6%. There are a couple of very significant differences that are missing however. When Ronald Reagan took office the top federal marginal tax rate was 70%. Lowering taxes from there was completely in agreement with Dr. Arthur Laffer’s theory on tax revenue. He has written about the “Laffer Curve” and the “laffer Point” extensively. That point is the level of federal income taxation beyond which raising taxes decreases federal revenue. If the federal government has its tax rates set too low, then it gets low a low revenue stream, which in turn tends to lead to speculative activity by the more affluent. That in turn leads to financial market collapses that will tend to cycle over ten year periods. If the federal government tax rate is too high it will lead to widespread tax avoidance and evasion and depress the economy.
The Laffer point is that level of taxation which is “just right.” Prior to Ronald Reagan’s election the highest tax rate had been as high as 90% as we paid down the federal debt following WWII. Kennedy lowered the rate to 70%. It stayed there until Reagan reduced it to 50% in the Economic Recovery Act, but capital gains were maxed out at 40% of regular rates. Later, in 1986, the maximum rate was reduced to 28%, but capital gains were raised to 28% as well, and a host of tax deductions were eliminated. The net result of the Tax Reform Act of 1986 was an increase in taxes, although it decreased taxes at the very top of the income scale. The tax increase hit the upper middle class hardest.
The max rate gradually worked its way back up to 39.6% under Bill Clinton but new tax deductions were added. George W. Bush lowered the taxes to a max rate of 25% and dropped capital gains and dividends to 15%, the lowest tax rates have been seen since the early 1930s.
Allowing tax rates to rise back to 39.6% for couples with adjusted gross income of more than $250,000 and individuals making over $200,000 was the pledge of Obama, and he still supports a return to pre-Bush tax levels for those above those numbers. For whatever it is worth, that still amounts to a lot less taxation than existed under the pre-Bush regime because it does not revert back for those making less than the cut-off numbers.
During the recession and post-recession years, President Reagan strongly supported the 50% max tax rate with capital gains effectively at 20%. I strongly suspect that if we had the Reagan tax rates today the budget deficit would be no larger than the ones seen under Reagan. Even Arthur Laffer has publically stated that the economy actually does better than it is currently with slightly higher tax rates.
I am no lover of taxes as I pay an amazingly large amount each year to the IRS, but the empirical facts are there. The federal government was taking in about 17% of GDP in the early 1980 whereas today it is taking in around 14%. If we do some really simple math and conclude that if the federal government was taking in 3% more of the GDP, as they were in the early Reagan years, then the deficit would be about 3% less of the GDP. That moves our 10% deficit down to 7%. Add in the fact that inflation was around 12% in the early 1980s compared with slight deflation now and that additional 1% is accounted for.
I know this is complex, but that is the way the real world works. Federal income tax rates are far, far lower today than in 1982. Federal spending as a percentage of GDP is actually not quite as high today as it was in 1982-83. The difference is not in spending, but in tax levels.
That is just the reality of the accounting. No opinion from me on whether or not taxes are too high or too low, just the facts.
Jeff