How Much Do Tax Cuts Really Matter?

The economic records of former presidents hold a lesson for Donald Trump.

A mock, metallic money-printing plate with President Trump's face on it
A mock money-printing plate with President Trump's face on it (Pavel Golovkin / AP)

The annual Census Bureau report on income and poverty released last week closes the book on former President Barack Obama’s economic record. But it opens the door to questioning the claim from President Trump and congressional Republicans that cutting taxes and federal regulations is the key to accelerating economic growth.

With the Census measures from 2016 now public, it’s possible to compare the economic records of the past four two-term presidents. Over their respective eight years, Bill Clinton and Obama each raised taxes on the affluent and generally increased federal regulation of business (though Obama did so more aggressively than his fellow Democrat). By contrast, Republicans Ronald Reagan and George W. Bush each cut taxes, particularly on top earners, and slashed regulation, exactly as the GOP is promising to do now.

As the Republicans intensify their push for a major tax reduction, these economic records directly refute the idea that their plan is a surefire recipe for growth—or that its opposite is certain to depress it.

Notwithstanding Clinton’s tax increase and relatively pro-regulatory posture, the economy during his two terms produced by far the best record on both raising incomes and reducing poverty. Reagan generated the second-best record on raising incomes, but he trailed well behind Obama in reducing poverty. Despite two big tax cuts, Bush generated, by far, the worst record on both fronts.

Consider first the Census’s broadest measure of economic well-being, the median household income—the level half of families rank above and the other half below. Over Clinton’s eight years, the median income posted a nearly 15 percent gain. Reagan followed with a roughly 10 percent increase. After significant progress in his final two years, Obama placed a solid third, registering a 6 percent rise. Under Bush, the median income fell by 2 percent.

The income gains radiated more broadly during the two Democratic presidencies. Under both Obama and Clinton, the median income grew faster for Hispanics and African Americans than it did for whites. Under Bush, it declined even more for Hispanics and African Americans than it did for whites. Under Reagan, African Americans achieved about the same gains as whites, while Hispanics lagged far behind both.

The economy also generated better results on poverty under the two Democrats. The number of Americans living in poverty fell by nearly 20 percent under Clinton and by almost 7 percent under Obama. Despite Reagan’s solid overall growth record, the number of poor people remained essentially unchanged during his presidency, declining by less than 1 percent. During Bush’s two terms, the number of poor people rose by 21 percent.

As with income, when it came to escaping poverty minority groups experienced better results during the two Democratic presidencies. Over Clinton’s terms, the number of African Americans in poverty fell the fastest, at almost 27 percent. Obama’s terms were next, with a 7 percent reduction. Reagan saw little change (a 2 percent reduction), and the number increased by 15 percent under Bush. Obama recorded the largest reduction in Hispanics in poverty (at nearly 10 percent), followed by Clinton (almost 5 percent). The number of poor Hispanics increased substantially under both Reagan and Bush. (The number of whites in poverty also declined the most under Clinton, followed by Reagan and Obama; it increased under Bush.)

One clear message from these records is that whatever the Republican recipe of tax cuts for top earners and deregulation has meant for the overall economy, it has historically produced little benefit for those at the economy’s margins. Clinton and Obama had more success at lifting those boats.

More broadly, the checkerboard pattern of income gains since 1980—with the two-term Democrats ranking first and third, and the Republicans second and last—suggests that other dynamics matter more than federal tax and regulatory policy in determining how fast Americans climb the economic ladder.

Those who defend Bush’s record or diminish Clinton’s correctly point out that many factors other than their economic choices shaped their presidencies’ outcomes—from the headwind of the September 11 attacks that Bush confronted to the tailwind Clinton received from the 1990s revolution in computing and communications. Others note that presidents who mostly cut taxes on occasion raised them (as Reagan did) or vice versa (like Clinton).

But those complications are precisely the most important lesson from this history. It offers no evidence that federal tax and regulatory policies are the decisive factors driving growth compared with trends in productivity, the labor market, and the business cycle. That’s especially true for growth that’s broadly shared. “If you tried to map a president’s tax regime against how well the middle class did, you wouldn’t find anything, and that’s because the forces that drive middle-class income gains are really quite different than the ones [affected] by tax changes,” said Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities and the former chief economic adviser to Vice President Joe Biden.

That means plans to cut taxes and regulations cannot reasonably be justified as guaranteed ways to invigorate the economy. The better way to assess these ideas is on their intrinsic merits: whether tax levels will enable Washington to meet its spending obligations (particularly as the nation adds about 40 million seniors through 2050) or whether regulations are needed to protect consumers, workers, and the environment at reasonable cost to business. Those who claim lower taxes and less regulation are the key to prosperity must answer why presidents who pursued the opposite strategy, Obama and Clinton, each generated better results on income and poverty than the two-term Republican presidents that preceded them.