Democratic Underground

Reagan's Phony Tax Cut
April 06, 2001
by Ken Alford

How many times have we heard the talk radio and newspaper editorialists remind us that the Reagan tax cut brought record revenues into our Treasury? Usually their boasts are preceded by the declaration that the huge deficits of the 1980s were caused by too much spending - not a lack of revenues. Furthermore, it was the Democratic Congress that was responsible because they could not restrain spending.

Never mind that the Republicans had control of the House for two years, the Senate for six years, and the Presidency for eight years. Or that Mr. Reagan always asked for more spending than the Congress gave him.

In the most simple examination of the facts, one might conclude they are correct. However, on a closer analysis, we realize the source of the revenues in the 1980s budgets. A huge proportion of the revenues were gained from government spending of borrowed money.

It was no secret that Mr. Reagan was adamant about cutting the size of government. If we had to spend all the incoming revenues on interest and numerous military projects, there would be little left to grow the government with more social programs. In this respect , Mr. Reagan was very successful. Indeed, revenues increased in the 1980s.

Contrary to Republican claims, there were few new social programs initiated in the 1980s. Still, few programs were receiving enough revenues to pay for themselves. Social Security was one of the few programs. For example, there was not enough revenues to pay for the $300 billion defense budgets. In fact, most of the deficit spending could be directly attributed to the increases in defense spending.

After the huge taxcut, there simply was not enough revenues to pay the $100 billion per year needed for unemployment insurance. Not surprisingly, Mr. Reagan and his administration made the decision to tax unemployment insurance in order to get more revenues. Also, they decided to put a 50% surtax on Social Security income at a certain level. Of course, they accrued more revenue when they repealed the long tradition of deducting interest on credit cards.

Every avenue was investigated for possible revenues. Without a doubt, it was the working people and the middle class that suffered most from Ronald Reagan's taxcut.

Furthermore, we should understand that borrowed money by the federal government also produces tax revenue. For example, if a GI is paid with borrowed money and he buys a new car, there are tax revenues produced from this borrowed money the same as if it had come from a balanced budget. The worker that made the car would pay taxes. The salesman that got the commission from selling the car would have paid taxes into our Treasury, etc. So, we can state with some certainty that many of the revenues paid into the Treasury after the great Reagan tax cut were paid from borrowed money.

So, indeed revenues did increase during the Reagan Revolution. And if we had borrowed another trillion dollars, they would have increased even more.


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