After reading my recent piece on Republican fiscal policies, former Hillsdale College colleague Kirby Cundiff convinced me that one of my arguments was fairly weak. Because Reagan had cut marginal rates but “closed loopholes,” I was trying to gauge the overall effect. To this end, I compared federal tax receipts as a percentage of GDP between Carter and Reagan, and concluded that Reagan hadn’t really “cut taxes.” But as Kirby pointed out, the supply-siders had long ago argued that a president could cut marginal tax rates and yet we would see no dip in % of GDP taxed.
Consider this simple example: Suppose initially the poor are taxed at 20%, while the rich are taxed at 100%. The rich won’t work, and 20% of GDP is taxed. Now suppose the gov’t cuts tax rates on the rich to 20% as well. They start working like crazy, boosting GDP. But still, the aggregate federal tax take will be 20% of GDP. You can see this even at the individual household level. Imagine that initially the top marginal tax rate is 95%. Then maybe you choose to earn only $20,000 a year, and let’s say that you pay 10% in taxes. Now the top rate gets cut to 20%, and you choose to earn $200,000 per year. Your tax rate would actually jump from 10% to 20%, but of course there is a very real sense in which you are enjoying a “tax cut.”
I’m not sure that this insight vindicates Reagan overall, but it certainly shows that my statistical comparison is inconclusive.
