WHAT CAUSED THE DEFICIT: SPENDING OR TAX CUTS?

As the GDP chart shows, the percentage of taxes collected in the Reagan-Bush era was exactly the same as the period for 1972-81, while spending increased 2.0 percent. In the long run, it would appear that runaway spending created our deficits. However, if you compare the 80s with Carter's last budget, you find that Reagan and Bush cut taxes 1.6 percent, but increased spending only 0.3 percent. So, depending on how you measure it, you can blame either tax cuts or runaway spending for the deficit.

Carter's 20.2 percent in tax collections for 1981 was unusually high for the 70s, the exception rather than the rule. One could argue that it's better to take the long-term view, and regard spending as the chief cause of the deficit.

On the other hand, if you take an even longer-term view, you would find that general tax collections have been slowly climbing over this century, probably in response to the demands of an increasingly interdependent economy. Carter's increase of a few points could be viewed as normal within this trend, with Reagan's tax cuts being the exception.

Ultimately, this is spin-doctor heaven, and loses sight of the real issue. The supply-siders (David Stockman, Paul Craig Roberts and Martin Anderson) had boasted that the 81 tax cuts would result in 5 percent economic growth in 1982, which would simply outgrow the deficit.¹ In fact, 1982 turned out to be the worst year in postwar history, with negative growth of 2.2 percent.

Return to Overview
___________________
¹ Hedrick Smith, The Power Game: How Washington Works (New York: Ballantine Books, 1988), p. 382.