Tax Cuts Did Not Pay For Themselves Under Reagan (and They Won't Under Pawlenty)
Congressional leaders meeting with Vice President Joe Biden are inching closer to an elusive budget deal that could combine effective tax increases (via lower rates and fewer exemptions) with cuts across domestic spending and health care programs. The AARP's tacit acknowledgement that Social Security cuts are inevitable is the latest indication that the Biden rounds could produce what the Gang of Six, Gang of Five, Deficit Commission and twenty-odd other deficit deals could not. A vote.
But as Congress crawls toward compromise, some presidential candidates are slouching toward partisan piffle. Former Minnesota Governor Tim Pawlenty says he can balance the budget and cut taxes by $8 trillion, because tax cuts increase revenue. Cool trick! How does it work?
In an interview with Slate's Dave Weigel on June 13, he claimed "when Ronald Reagan cut taxes in a significant way, revenues actually increased by almost 100 percent during his eight years as president. So this idea that significant, big tax cuts necessarily result in lower revenues - history does not [bear] that out."
Pawlenty's statistic is mostly wrong. His conclusion is fully wrong. First, revenue didn't double during Reagan's eight years. It increased by 65 percent, from $600 billion in 1981 to $990 billion in 1989 in nominal terms.
Second, Reagan's 1981 tax cut didn't increase tax revenue, explains Bruce Bartlett, a former economist and domestic policy adviser under Reagan. Inflation grew revenue, and population growth grew revenue, and economic expansion grew revenue, and tax increases grew revenue ("Ronald Reagan raised taxes 11 times, increasing revenues by $133 billion per year as of 1988 - about a third of the nominal revenue increase during Reagan's presidency").
It's not clear why Pawlenty would want to make this fuzzy argument anyway. If he wants to grow tax revenue and balance the budget, he should raise taxes. If he wants to shrink government, he should say "Of course tax cuts starve Washington for revenue. That's exactly what I'm trying to do." But if he wants to be the next Reagan, he should listen to Reagan's advisers: Tax cuts never pay for themselves.