The following article by Nicole Lewis was posted on the Washington Post website November 8, 2017:
White House press secretary Sarah Huckabee Sanders argued that Democrats have often historically stood in the way of big changes in the tax code. (Reuters)
“While arguing over President Reagan’s 1981 tax cuts, Democrats claimed it would only benefit the rich. The Democrat speaker of the House at the time, Tip O’Neill, called them royal tax cuts, because he claimed they favored the wealthiest Americans. What really happened was more than 14 million new jobs were created over five years; incomes grew by over 22 percent for the next seven years; and the economy grew by over 3.5 percent, on average, for the rest of the decade.”
— White House press secretary Sarah Huckabee Sanders, during a press briefing, Oct. 31
On Nov. 3, House Republicans unveiled a tax plan that aims to cut taxes on corporations and individuals. During a press briefing on Oct. 31, White House press secretary Sarah Huckabee Sanders preempted Democrats’ criticism of the plan as a giveaway to the rich, claiming that Democrats also criticized the first round of Reagan-era tax cuts back in 1981 on the same ground. Yet ultimately, according to Sanders, the cuts were a boon for the economy, creating millions of jobs and boosting incomes.
The idea that Reagan-era tax cuts led to economic growth is still hotly debated by economists. Yet it’s a well-tread talking point for the GOP who are eager to reduce American’s tax burden. In Sanders’s retelling of the tax mythos, she cites specific numbers to support her claim. We set a high bar for fact-checking statements by White House press secretaries and were tempted to let Sanders slide. But then a reader emailed and asked us to look into her figures.
Whether or not Sanders’s numbers add up, there’s good reason to be leery of her cause-and-effect analysis. Let’s take a look.
The facts
On Aug. 13, 1981, Ronald Reagan signed the Economy Recovery Tax Act of 1981 into law. A key feature of the law was a phased-in 23-percent cut in individual tax rates over three years, which brought the highest marginal tax rate down from 70 to 50 percent.
Sanders said in the years following the United States gained 14 million jobs, incomes grew by over 22 percent, and gross domestic product, the broadest measure of the economy, grew by more than 3.5 percent on average. Her numbers are derived from personal income and GDP data from the Bureau of Economic Analysis and jobs data from the Bureau of Labor Statistics.
According to BLS, in January 1982, the first year the tax cuts were in effect, there were roughly 90.5 million jobs, and by the same time five years later in 1987, that number had grown to 101 million. The gain in jobs is roughly 10.5 million, nearly 3.5 million short of Sanders’s 14 million figure.
Moving the parameters, however, changes the figures a bit. The year 1983 started off with nearly 89 million jobs and five years later in 1988 that number had grown to almost 104 million, which constitutes an increase of nearly 15 million new jobs.
But the shift is little more than a sleight of hand. When Reagan took office in January 1981, the country was experiencing a mild economic recession, which continued into 1982. By the end of 1982 the unemployment rate reached an all-time high of 10.8 percent, with nearly 2.9 million jobs lost since the onset of the recession. Some of the gains Sanders cites are due to the bounce back after the decline.
With respect to GDP, 1984 is a significant year. According to data from the BEA, real GDP increased 3.6 percent on average between 1982 and 1989. But notice in the chart below in 1984 the GDP topped 7 percent, boosting the overall average. That figure, again, reflects recovery from a recession.
Sanders also cites gains in incomes over the remainder of the decade as proof the tax cuts improved the economy, and once again 1984 is a significant number. Between 1982 and the close of the decade, personal incomes grew 28 percent. From 1983 to 1984 personal incomes spiked, increasing 7.3 percent in just one year.
The numbers Sanders stated are a bit fuzzy, albeit generally in the ballpark. What is clear, though, is that 1983 and 1984 are skewing the data. What’s going on?
The United States was recovering from an economic recession. Sanders’s tax claim doesn’t acknowledge this important fact. Yet it’s a critical piece of the puzzle.
The Federal Reserve, led by chairman Paul Volcker, jacked up federal funds rate to 20 percent in 1980 and 1981 to curb inflation. Note that the timing is rather close to passage of the tax cut — it was set at 20 percent in May 1981 — though to some extent the tight-money policy of the Fed and the expansive fiscal policy of the Fed were at odds with each other.
In 1981 federal interest rates soared to 19 percent, making it expensive to borrow money and tipping the country into a recession. By the end of 1982 the interest rate dropped to 9 percent. Low interest rates make it cheaper to borrow money, and economists generally tend to agree low rates have a stimulating effect on the economy as people are more likely to make investments to expand their business.
Can all of the growth in the ’80s be attributed to lowering interest rates? No, but it is a factor.
Additionally, Reagan receives a lot of praise for lowering taxes, but his tax increases are often overlooked. Even before the 1981 tax cut took full effect, under pressure from Congress, Reagan boosted taxes several times: in 1982 with the Tax Equity and Fiscal Responsibility Act, again in 1983 with the Social Security Amendments, and in 1984 with the Deficit Reduction Act. Many of these tax increases aimed to increase federal tax revenue, after it declined following initial cuts.
The Pinocchio Test
Sanders suggests criticism that the GOP tax plan only benefits the rich are unfounded because when Reagan reduced taxes in 1981, the economy soared. But there are numerous problems with her cause-and-effect relationship. For one, it is impossible to pin economic gains to a single event. But more importantly, Sanders’s analysis is incredibly myopic.
Many of the gains Sanders cites can be attributed to economic recovery following the recession from 1981-1982 and Volcker’s monetary policy. Additionally, over the course of his presidency, Reagan increased taxes several times.
It would be more reasonable to consider the tax cuts in conjunction with a series of monetary policy interventions enacted during and before Reagan’s administration. Yet Sanders gives Reagan all the credit. We wavered between Two and Three Pinocchios for Sanders, as the data points are mostly correct, but they are used in a misleading way. Ultimately, for citing numbers out of context, we award Sanders Two Pinocchios.
Two Pinocchios
