Wednesday, July 23, 2014
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Rand Paul's supply-side distortions

Sen. Rand Paul, R-Ky., perpetuated the supply-side myth that tax cuts produce more revenue rather than less.  (AP Photo/Manuel Balce Ceneta)
Sen. Rand Paul, R-Ky., perpetuated the supply-side myth that tax cuts produce more revenue rather than less. (AP Photo/Manuel Balce Ceneta) AP

Kentucky Sen. Rand Paul claimed that 20 million jobs were created after President Ronald Reagan’s dramatic tax cuts in the 1980s, and that this was the “last time” such job growth took place. Paul is wrong on both counts.

The fact is that the economy added just over 16.1 million jobs under the tax-cutting Reagan, but it added nearly 22.9 million under Democratic President Bill Clinton, who raised taxes.

Supply-side Myth

Paul’s misinformed recitation of economic history came during an April 12 “Freedom Summit” gathering of 2016 Republican presidential prospects in Manchester, N.H. It was a straightforward expression of the supply-side myth that tax cuts produce more revenue rather than less:

Paul, April 12: When is the last time in our country we created millions of jobs? It was under Ronald Reagan. What did Ronald Reagan do? Did he come forward and say: “Oh, let’s just cut taxes for low-income people?” No, he said forthrightly let’s cut everyone’s taxes. He did dramatically. The top rate — that’s what rich people pay — was 70 percent, he lowered it to 50 percent. Then he lowered it again to 28 percent, and 20 million jobs were created. More revenue came in in fact. When you cut rates people work harder, they make more money, more revenue comes in.

Paul was right about the size of Reagan’s dramatic cuts in the federal income tax rate. When Reagan took office in 1981, the top rate was 70 percent of income exceeding $108,300 for singles and $215,400 for couples filing jointly, and during his final year in office, the top rate was just 28 percent on income exceeding $17,850 for singles and $29,750 for couples filing together.

And it’s also true that those tax cuts were accompanied by years of prosperity. The 16.1 million jobs added during his eight years in office came despite a 16-month recession that began early in his first term, before the tax cuts enacted in 1981 began to take effect. But even ignoring the jobs lost during the early part of his time in office, the economy gained only 18.4 million jobs from the low point in December 1982 to the end of his presidency. That’s an enviable number, but it’s still well short of Paul’s “20 million” claim.

And it’s not the “last time” such gains were made, either. Clinton took office in 1993 during a weak recovery from an eight-month recession that plagued the middle of Republican George H.W. Bush’s term.

To reduce the huge federal deficits — records for the time — that he had inherited from Reagan and Bush, Clinton pushed through a tax increase (and some spending cuts) in 1993. Afterward, the deficits shrank, the recovery accelerated, and it continued until the end of his presidency, becoming what is still the longest sustained economic boom in the nation’s history.

During Clinton’s eight years, the economy added far more jobs than were added under Reagan, or even the combined total under both Reagan and the elder Bush, for that matter. Clinton’s total of 22.9 million in eight years easily exceeds the 18.8 million added in the 12 Reagan-Bush years. (For a discussion of all the factors involved, see our Dec. 7, 2007, Ask FactCheck item, “Clinton and Economic Growth in the ’90s.”)

Tax Cuts = More Revenue?

Another dubious claim by Paul is that “more revenue came in” after Reagan cut taxes. As we’ve often noted, when politicians say “more” or “less,” it’s always a good idea to ask, “compared with what?”

The plain fact is, revenue fell by $17 billion, or 2.8 percent, during fiscal year 1983, which was the first full fiscal year during which the 50 percent top federal income tax rate was in effect.

Furthermore, that drop came despite the fact that the recession of 1981-82 (when unemployment hit what is still a record 10.8 percent) was ravaging the economy during all of the previous fiscal year, and a recovery commenced two months after the start of FY 1983. (Fiscal years start Oct. 1 of the preceding calendar year.) Normally, recoveries bring increases in revenues, not declines.

Later, the government did see impressive increases in revenue — 11 percent in FY 1984 and 10.1 percent in FY 1985, for example. But would those increases have been even greater had rates not been reduced, or been cut less? It’s not possible to re-run history, so nobody can say for sure.

At the time the 1981 act was passed, however, the nonpartisan Joint Committee on Taxation projected an average revenue loss of more than $111 billion per year over the first four years the cuts were in effect — compared with what was projected under the old rates. That’s noted in a document we’ve cited before, “Revenue Effects of Major Tax Bills,” compiled by a career tax analyst in the Treasury Department.

Economists generally agree that lower taxes stimulate economic activity. But contrary to what Rand claims, they say tax cuts just don’t produce enough revenue to pay for themselves, let alone bring in increased revenue. For more on that, see our Jan. 16, 2008, item, “The Impact of Tax Cuts.”

And again, Paul is simply falsifying evidence when he claims far more job growth under Reagan than actually took place, and when he says the Reagan years were the “last time” such growth occurred.

Factcheck.org is a nonpartisan, nonprofit “consumer advocate” for voters that aims to reduce the level of deception and confusion in U.S. politics. Based in Philadelphia, Factcheck monitors the factual accuracy of what is said by major U.S. political players in the form of TV ads, debates, speeches, interviews and news releases. Its goal is to apply the best practices of both journalism and scholarship, and to increase public knowledge and understanding. Find a list of Factcheck.org funders here.

Brooks Jackson FACTCHECK.ORG
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