The Bush Tax Cuts: How do they compare with the Reagan cuts?
One way to gain perspective on the cost of the 2001-04 Bush tax cuts is by comparison with the 1981 Reagan tax cut, embodied in the Economic Recovery Tax Act, or ERTA. Although both tax cuts involved major and sustained reductions in tax rates and in revenue, both the details of the cuts and the circumstances in which they were enacted differed greatly, leading to quite different effects.
- The tax code was not indexed to the price level before 1985, so that even with no change in the tax code, tax collections rose over time as inflation pushed up wages and salaries, which in turn pushed individuals into higher tax brackets. This tended to erode the revenue loss from the Reagan tax cut relatively quickly; the Bush tax cuts are not subject to such erosion.
- Fiscal deficits are a greater economic threat today than they were in the 1980s and early 1990s. The retirement of the baby boomers is twenty-five years closer now than in the early 1980s, giving the budget little time to recover before the fiscal pressures begin in earnest. Private saving was significantly higher in the early 1980s than it is now, public debt was a smaller share of GDP, and the United States was an international creditor then but is a substantial international debtor today.
- The economic benefit of tax cuts was likely higher in the early 1980s, because marginal tax rates were much higher then and thus more likely to have had distortive economic effects than the more moderate rates of the 1990s.
- The Reagan administration proved willing to raise taxes when the ill effects of the 1981 tax cut became apparent-a move the Bush administration shows no interest in considering. The 1981 tax cut was followed a year later by a tax increase, in the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). The revenue costs of ERTA, minus the revenue increase in TEFRA, amounted to about 2.1 percent of GDP. On this basis, the Bush tax cuts are approximately the same size as the Reagan tax cuts.