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Reagan’s Legacy

Reagan’s Legacy

revenue slurgeMany, including AEI’s Pethokoukis, argue that economic growth during Reagan’s tenure wasn’t all that impressive, alluding to growth rates in the ’80s as being only one-tenth of one percent higher than growth rates in the previous decade. These numbers may be correct, but that’s not the correct period to look at!

Reagan’s tax cuts didn’t take full effect until Jan. 1, 1983. In fact, the tax cuts weren’t passed by Congress until August 1981 and were phased in after that. It’s amazing how tax cuts don’t work until they take effect! Specifically, here’s how the phase-in occurred:

Supposedly there was a 5% cut in income tax rates on Oct. 1, 1981; 10% on July 1, 1982; and 10% on July 1, 1983. The real tax bracket extensions weren’t quite 25% because the extensions were based on the prior year’s number.

Therefore, a 5% cut in October 1981 was on the original tax rates, whereas the 10% cut in July of 1982 was on the brackets after the 5% cut — i.e., 9.5% on the original tax brackets and the 10% cut in July 1983 was on the 1982 brackets (8.55% on the original tax bracket), or a cumulative total cut of 23.05% — not 25%.

But in addition to the tax cuts being smaller than advertised, there is also no such thing as a midyear tax cut. As every income tax filer knows, income is reported for a whole year without reference to which month that income was earned. All income, regardless of month earned, is taxed on the same tax table.

For 1981, for example, withholding was changed on Oct. 1, 1981, but instead of being a 5% cut for the final three months of 1981, the cut was prorated over the whole year of 1981 at 1.25% (3/12 x 5%). The cut included for 1982 the full 5% left over from 1981 plus half of the 10% cut scheduled for July 1, 1982, adding up to a full 10% cut for income earned in calendar 1982.

For 1983 — the full calendar year — the cut was 20%: the 5% from 1981, the 10% from 1982 and half the 10% for 1983.