The argument that the near-doubling of revenues during Reagan's two terms proves the value of tax cuts is an old argument. It's also extremely flawed. At 99.6 percent, revenues did nearly double during the 80s. However, they had likewise doubled during EVERY SINGLE DECADE SINCE THE GREAT DEPRESSION! They went up 502.4% during the 40's, 134.5% during the 50's, 108.5% during the 60's, and 168.2% during the 70's. At 96.2 percent, they nearly doubled in the 90s as well. Hence, claiming that the Reagan tax cuts caused the doubling of revenues is like a rooster claiming credit for the dawn.
Furthermore, the receipts from individual income taxes (the only receipts directly affected by the tax cuts) went up a lower 91.3 percent during the 80's. Meanwhile, receipts from Social Insurance, which are directly affected by the FICA tax rate, went up 140.8 percent. This large increase was largely due to the fact that the FICA tax rate went up 25% from 6.13 to 7.65 percent of payroll. The reference to the doubling of revenues under Reagan commonly refers to TOTAL revenues. These include the above-mentioned Social Insurance revenues for which the tax rate went UP. It seems highly hypocritical to include these revenues (which were likely bolstered by the tax hike) as proof for the effectiveness of a tax cut.
Hence, what evidence there is suggests there to be a correlation between lower taxes and LOWER revenues, not HIGHER revenues as suggested by supply-siders. There may well be valid arguments in favor of tax cuts. But higher tax revenues does not appear to be one of them.
Effect of Reagan Tax Cuts on Revenues and GDP - Long Analysis
The argument that the near-doubling of revenues during Reagan's two terms proves the value of tax cuts is an old argument. It's also extremely flawed. The growth of receipts by source, outlays, and GDP over every 10-year period since 1940 is shown in the following graph:
It should be noted that the above graph shows "real" growth rates, that is, the growth rates corrected for inflation. The actual numbers and sources for the graph can be found at recgro17.html. As can be seen in the first table, total receipts increased 76.0 percent from 1981 to 1991. However, this was the slowest 10-year growth rate since a 75.4 percent growth in total receipts from 1956 to 1966. Of course, these results are likely skewed by the high inflation that occurred during the 70's. Hence, it makes more sense to look at the "real" (inflation-adjusted) rates. The second table shows that the real growth rate from 1981 to 1991 was 18.5%. The 10-year growth rate increased in the following years to a high of 37.9% from 1984 to 1994. However, the real growth rate of total receipts reached higher highs of 48.0% in 1971 to 1981 and 53.6% from 1990 to 2000.
Another serious flaw in the doubling of revenues argument is that it looks at all revenues. The FICA tax rate increased from 6.13 percent in 1980 to 7.65 percent in 1990. To include an increase in revenues gained through a tax hike in order to argue in favor of tax cuts would seem extremely hypocritical. Hence, we need to look only at revenues obtained from individual income taxes. According to the second table, the real growth in individual income tax receipts was 10.1% from 1981 to 1991 and 11.5% from 1982 to 1992. These were the lowest growth rates of any of the 58 10-year spans from 1940 to 2007. However, these record lows were surpassed by the 5 10-year spans from 1998 to 2008 through 2002 to 2012, all of which contained the financial crisis. For these spans, the growth rates were 6.4%, -19.1%, -29.8%, -13.6%, and 3.5%, respectively.
Hence, the evidence is that the Reagan tax cuts DECREASED revenues over what they would have been, at least over the short (10-year) term. The only remaining argument in favor of the Reagan tax cuts, at least from a revenue point of view, would seem to be that they permanently raised the level of the GDP, thus bringing in slightly higher revenues far into the future. According to the graph and second table, the GDP reached a high 10-year growth rate of 36.4% from 1983 to 1993. However, it reached higher highs of 37.9 from 1991 to 2001, 47.3% from 1947 to 1957, and 50.3% from 1959 to 1969. In fact, the above graph shows that the 10-year growth rate in the GDP has been relatively stable since 1965 to 1975 though it began to drop in 2008 and is projected to stay weak through 2021. Hence, these figures don't provide any strong evidence that the Reagan tax cuts permanently affected the GDP one way or the other.
Major Tax Bills Enacted under Reagan
The Office of Tax Analysis of the U.S. Treasury Department has put out a paper titled Revenue Effects of Major Tax Bills. The following estimate of the revenue effects of all major tax bills enacted under Reagan is taken from Table 2 of that document:
REVENUE EFFECTS OF MAJOR TAX BILLS ENACTED UNDER REAGAN (as percentage of GDP)
Number of
years after enactment First
-------------------------- 2-yr 4-yr
Tax bill 1 2 3 4 avg avg
------------------------------------------------ ----------------------------------------
Economic Recovery Tax Act of 1981............... -1.21 -2.60 -3.58 -4.15 -1.91 -2.89
Tax Equity and Fiscal Responsibility Act of 1982 0.53 1.07 1.08 1.23 0.80 0.98
Highway Revenue Act of 1982..................... 0.05 0.11 0.10 0.09 0.08 0.09
Social Security Amendments of 1983.............. 0.17 0.22 0.22 0.24 0.20 0.21
Interest and Dividend Tax Compliance Act of 1983 -0.07 -0.06 -0.05 -0.04 -0.07 -0.05
Deficit Reduction Act of 1984................... 0.24 0.37 0.47 0.49 0.30 0.39
Omnibus Budget Reconciliation Act of 1985....... 0.02 0.06 0.06 0.06 0.04 0.05
Tax Reform Act of 1986.......................... 0.41 0.02 -0.23 -0.16 0.22 0.01
Omnibus Budget Reconciliation Act of 1987....... 0.19 0.28 0.30 0.27 0.24 0.26
------------------------------------------------------------------------------------------
TOTAL........................................... 0.33 -0.53 -1.63 -1.97 -0.10 -0.95
Source: OTA Working Paper 81, Table 2, Office of Tax Analysis, U.S. Treasury Department,
online at https://www.treasury.gov/resource-center/tax-policy/tax-analysis/Documents/WP-81.pdf
The above table shows that Reagan's initial tax cut in 1981 was estimated to have a large negative effect on revenues. This is apparent in the graph titled "Receipts and Selected Tax Rates" at recsrc11.html which shows a sharp drop in individual income tax revenues from 1982 to 1984. This drop was arguably a major motivation for the Tax Equity and Fiscal Responsibility Act of 1982 and the Deficit Reduction Act of 1984, both of which had a positive effect on revenues and helped to stabilize them. The Tax Reform Act of 1986 (which cut the top marginal rate from 50 to 28 percent), however, appeared to have only a slight effect on revenues. How could this be? The answer lies in looking more closely at the provisions in the two tax bills. Following are the provisions listed by the Treasury document for the 1981 tax bill:
Economic Recovery Tax Act of 1981
As can be seen, all of the provisions are effectively tax cuts. On the other hand, following are the provisions listed by the document for the 1986 tax bill:
Tax Reform Act of 1986
As can be seen, a number of these provisions are effectively tax hikes, offsetting the additional cuts in the tax rates. Those provisions include items 2, 7 through 10, 12, 13, and the second half of item 1 (repeal of the capital gains exclusion). That is likely the major reason why revenues did not fall further. In any case, this shows that the top marginal rate does not always tell the whole story about the level of individual income taxes.
Effect of Kennedy Tax Cut on Revenues
The red line in the following graph shows the change in real income tax revenues after the Kennedy tax cut was enacted in 1964:
The actual numbers and sources can be found at recsrc17.html. As can be seen, real income tax revenues did go up sharply (54.0% from $301.19 billion to $463.84 billion) from 1965 to 1969. However, over 45% of this increase ($74.46 billion of $162.65 billion) occurred in 1969 after the Revenue and Expenditure Control Act of 1968 created a temporary 10% income tax surcharge through 6/30/69 (see here). Furthermore, real income tax revenues then stagnated for the next 8 years, not surpassing their 1969 level until 1977. Hence, the data seems inconclusive regarding the effect of the 1964 tax cut on revenues.
Still, it's important to note that the Kennedy tax cut reduced the top marginal rate from 91% to 70%. Reagan went on to reduce it from 70% to 50% in 1981 and from 50% to 28% in 1986. A marginal rate of 91% seems exceptionally high, at least by today's standards. Hence, it would seem possible that Kennedy's tax cut was beneficial, at least in reducing this oppressive top marginal rate but that Reagan's tax cuts took the marginal rates to a level where the negative effects far outweighed any positive effects.
Effect of Bush Tax Cuts on Revenues and GDP
There have been three major tax cuts under Bush. Briefly, the 2001 tax cut created a new 10% individual tax rate and phased in the lowering of individual tax rates. It also phased in an increase in the child tax credit, marriage penalty relief provisions, an increase of the estate tax exemption, an increase in the IRA contribution limit, and the repeal of limits on itemized deductions and personal exemptions. The 2002 tax cut was chiefly aimed at business, creating 30% expensing for certain capital asset purchases, extending the exception under Subpart F for active financing income, and increasing the carryback of net operating losses to 5 years. Finally, the 2003 tax cut lowered the top individual income tax rate on dividends and capital gains and accelerated most of the phased-in provisions of the 2001 tax cut. For a more complete description of the tax cuts, see page 14 of Revenue Effects of Major Tax Bills.
As mentioned above, the real growth in individual income tax receipts for the 5 10-year spans from 1998 to 2008 through 2002 to 2012 were 6.4%, -19.1%, -29.8%, -13.6%, and 3.5%, respectively. These are the lowest 5 growth rates of any of the 66 10-year spans from 1940 to 2015. However, the first three of these spans begin before the initial Bush tax cut in 2001 and all five extend into the financial crisis. Hence, it may be might be helpful to also look at a shorter time-span to try to judge the effects of the Bush tax cuts. A good choice might be eight years as this would cover the span from the last full year of Clinton's presidency (2000) to the year before the financial crisis began to seriously effect revenue (2008). The growth of receipts by source, outlays, and GDP over every 8-year period since 1940 is shown in the following graph:
The actual numbers and sources can be found at recgro17_8.html. As can be seen in the second table and graph, real individual income tax receipts declined 8.9% from 2000 to 2008. Even total receipts declined 0.5% over that period. Finally, real GDP grew just 16.1% from 2000 to 2008. This was the lowest real GDP growth over any 8-year span up to that time since 15.9% from 1974 to 1982. All of the 8-year periods since then have had lower growth, chiefly due to the steep decrease in GDP at the depth of the financial crisis in 2009. This is projected to recover by 2009 to 2017 but that is yet to be seen. Hence, the evidence at that point is that the Bush tax cuts decreased revenues over what they would have been, at least over the short term. This was true even in my prior analysis based on data through 2007, before the financial crisis of 2008. In any event, the revenue growth numbers grew worse through 2010 and the GDP growth numbers still have not recovered.
Effect of Trump Tax Cuts on Revenues and GDP
On December 22, 2017, former President Donald Trump signed the TCJA (Tax Cuts and Jobs Act) into law. The law took effect on January 1, 20018 and is described in this Investopedia article. That article lists the following three key takeaways:
As can be seen, receipts from corporate income taxes fell from about 1.5 percent of GDP in 2017 to about 1.0 percent of GDP in 2018. It stayed around that level until 2021 when it rose back to 1.6 percent of GDP. The reasons for this recovery is explored in an post from the Peter G. Peterson Foundation. It states that the "subsequent rebound in corporate taxes was primarily due to strong economic growth and a spike in corporate profits". It states that "the cause of that growth in corporate profits is debated among economists and policy specialists" and summarizes the conclusions of the Brookings Institution versus the Tax Foundation. It then concludes:
Even though corporate tax revenues were about the same as pre-TCJA budgetary projections, researchers from NBER found that the TCJA continued to produce negative revenue effects from 2021 to 2023. Despite increased corporate investment and wages mitigating the negative revenue effects, the rebounding revenues during that time were not enough to offset the reduction in revenues caused by the tax cuts. The researchers found that, in 2022, the federal government missed out on 38 percent of the corporate tax revenues it would have received if the TCJA had not been enacted. For the 2018 to 2027 period, they estimate that the corporate provisions of the TCJA will reduce corporate tax revenues by 40 percent.
Also, it should be noted that the estimated increase in corporate receipts shown in the graph above is likely due to budget proposals such as those on page 8 of the Budget to "build on this progress by increasing the corporate minimum tax rate to 21 percent, quadrupling the surcharge on stock buybacks, extending the IRS investment, and other important reforms, resulting in about $3 trillion of deficit reduction even after financing the Budget's investments".
The red line in the graph above shows that individual income tax receipts fell from about 8.2 percent of GDP in 2017 to about 7.6 percent of GDP in 2020. However, they then rose to 10.4 percent of GDP in 2022. According to this CEA post, this was largely due to historically high capital gains realizations due to strong market returns earlier in the recovery following the onset of COVID. In any case, the graph shows that receipts fell back to 8.1 percent of GDP in 2023. This is described in a post from the Committee for a Responsible Federal Budget (CRFB) titled "2023 Revenue Plunge Confirms 2022 Surge Was a Fluke".
It's important to note that the TCJA contained both tax reductions and tax increases. An analysis by the Joint Committee on Taxation titled JCT Analyzes TCJA Distributional Impact lists these reductions and increases and contains the following table:
About this table, it states:
Table 2 provides, for 2019, this analysis for the effect of the Conference Agreement for H.R.1. relative to 2017 prior law. The table shows that while the majority of tax filers are projected to have reductions in tax liability, some tax filers in each income category are projected to experience tax increases. The table also shows that generally as income increases, an increasing percentage of tax filers have tax decreases. However, filing units with economic income of $1 million or more have the highest percentage (13.8) with tax increases of greater than $500.
Similar to corporate tax receipts, the graph shows that tax receipts are estimated to rise as a percent of GDP after 2023. However, this is likely due largely to the fact that many of the individual tax benefits are set to expire in 2025. The United States Senate Committee on the Budget reports in this post that "[a]ccording to the latest report by the nonpartisan Congressional Budget Office (CBO), extending the Trump tax cuts for the next 10 years-as Republicans have proposed-would add $4.6 trillion to the deficit".
In summary, as with the Reagan and Bush tax cuts, the evidence is that the Trump tax cuts decreased revenues over what they would have been, at least over the short (10-year) term. As with those prior tax cuts, the only remaining argument in favor of the Trump tax cuts, at least from a revenue point of view, would seem to be that they permanently raised the level of the GDP, thus bringing in slightly higher revenues far into the future. Following is a portion of the prior graph shown for the Bush tax cuts:
As can be seen, GDP growth (from 8 years earlier) has remained at about the same level. Hence, as with the Reagan and Bush tax cuts, the figures don't provide any strong evidence that the Trump tax cuts permanently affected the GDP one way or the other. Hence, there is no strong evidence that the revenue loss in the short term will ever be compensated by some revenue gain in the long term.