The Reagan Tax Cuts Paid For Themselves

Screen Shot 2015-09-10 at 2.06.36 PMBy Dr. Arthur B. Laffer

From Investor’s Business Daily,

During the Reagan years, “federal income taxes” as a percentage of GDP went from 9.1% in 1981 to 8% in 1989. And to James Pethokoukis of the American Enterprise Institute and others, this means the “Reagan tax cuts didn’t pay for themselves.”

But wait. Income tax revenues from the top 1% of income earners rose like mad as a share of GDP. In 1981, the top 1% of income tax filers paid total income taxes equal to 1.5% of GDP. In 1989, the top 1% paid a full 2% of GDP in income taxes. From 1981 to 1989, the highest marginal income tax rate, which is the rate paid by the highest income earners, fell from 70% to 28%.

Think about it: The highest income tax rate paid by the top 1% of income earners fell by 60% (from 70% to 28%), yet the top 1% of income earners paid 33% more in income taxes as a share of GDP.

From 1981 to 1989, total employment as a share of the adult population rose by 4 percentage points, which, in human terms, is an additional 7.4 million people employed above and beyond the number of people who would have been employed if employment as a share of population had remained at the 1981 level.

These people got their jobs because employers and job creators found hiring them more attractive in part because of the tax cuts.

Additional employment, of course, raises payroll and income taxes. For payroll taxes alone, the higher employment added $14 billion in taxes annually. For income taxes, there would be an equally as large increase in tax revenues.

 

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