The Myth of the "Feeding Frenzy"

BARTLETT, BRUCE

The Myth of the "Feeding Frenzy" The deficits of the 1980s can't be blamed on business tax cuts in 1981. BY BRUCE BARTLETT ONE OF THE MOST ENDURING of Washington myths is that a "feeding frenzy"...

...It is difficult to say to what extent these subsequent tax increases offset the 1981 tax cut...
...In its February 18, 1981, document "A Program for Economic Recovery," the Reagan administration put forward its tax plan...
...The following table compares the Reagan estimates of the revenue loss from its tax plan in February with those calculated by Congress's Joint Committee on Taxation after passage of the tax bill...
...For example, Congress restricted the use of tax straddles, raising revenues by $1.7 billion over 5 years...
...As Wall Street Journal reporters Jacob Schlesinger and John McKinnon put it, "The big fear among economists and fiscal disciplinarians is that, just as the 1981 tax act helped usher in an era of budget deficits, an ever-swelling 2001 cut could wipe out current surpluses...
...Both featured corporate lobbyists who say that the business community is looking for big tax cuts in the upcoming tax bill...
...By contrast, increases in spending are extremely difficult to undo once enacted...
...There is, in short, no reason at all to blame ensuing deficits on out of control tax cutting in 1981...
...The tax cut that was enacted in August 1981 closely resembled the tax cut put forward by Ronald Reagan during the campaign...
...And these estimates don't even take into account that billions of dollars in taxes were raised by increases included in the 1981 tax bill...
...It comes from a December 1981 committee report entitled "General Explanation of the Economic Recovery Tax Act of 1981...
...This legislation was one of the largest tax increases in American history, almost all of it levied on business...
...This fact is further underscored by a comparison of JCT and Reagan administration estimates just for the business provisions of the tax bill...
...The false history of the 1981 tax cut is just a smoke screen for liberal opposition to any and all tax cuts...
...Very little was added that had any substantial effect on revenues...
...However, the Treasury Department used to publish a table in the budget each year that attempted to keep track of the cumulative effect of tax changes...
...The feeding frenzy argument appeared most prominently in lead articles in the Wall Street Journal and the National Journal in early February...
...According to the "Changes in Receipts" table in the 1989 federal budget, the 1981 tax cut caused federal revenues to be $242 billion lower than they would have been in the absence of the tax cut, and without accounting for any expansionary effects the tax cut had on the economy...
...It shows that there were no huge revenue-losing provisions added to the Reagan plan after its introduction, as the feeding frenzy mythologists assume...
...Let us look at the record...
...a voracious business lobby will supposedly get its way in Congress...
...In other words, two-thirds of the 1981 tax cut had been taken back through tax increases by 1987, leaving total revenues just $79 billion lower than they would have been had the 1981 tax cut never been enacted...
...They go on to state, "By 1987, the business tax cuts passed in 1981 were costing the federal government more revenue than the personal income tax cuts, and together, the drain on the budget reached 5.5 percent of the entire U.S...
...Not only were the business tax cuts in the final legislation almost exactly the same as those proposed by Ronald Reagan during the 1980 campaign, but even those cuts were largely reversed by subsequent legislation...
...The recession raised unemployment and reduced corporate profits, while collapsing inflation reduced nominal GDP far below any economist's projections...
...According to a March 1981 CBO document entitled "Economic Policy and the Outlook for the Economy," federal revenues under the Reagan tax cut were expected to rise (by CBO's estimate) from $599 billion in 1981 to $769 billion in 1984...
...These effects reduced revenues far more than the tax cut...
...It is irrelevant to this Bruce Bartlett is senior fellow with the National Center for Policy Analysis and a nationally syndicated columnist...
...Obviously, no gimmicks were used to fool anyone about the revenue impact of the Reagan tax cut...
...In short, there is no evidence that a feeding frenzy by business interests on Capitol Hill in 1981 caused the deficits of the 1980s...
...This committee was also under Democratic control, chaired by Dan Rostenkowski of Illinois...
...All these statements are wrong...
...gross domestic product...
...It is also easy to demonstrate that there was no feeding frenzy in Congress that loaded up the Reagan plan with additional cuts...
...Proponents of the feeding frenzy argument usually ignore this fact...
...This figure amounts to 5.1 percentónot 5.5 percentóof GDE However, the impact of subsequent tax increases raised federal revenues by $163 billion in 1987...
...Considering that the tax committee had a year of additional economic data upon which to base its estimate, it is remarkable how close its calculation of revenues was to the original Reagan forecast...
...Leaving aside the differences in their economic effects, it is abundantly clear that the political system is far more willing to undo a tax cut than it is to undo a spending increase...
...argument that George W. Bush offered no such cuts in his proposal...
...Similarly, reporters John Maggs and Peter Stone of the National Journal say that Reagan's business depreciation proposal in 1981 "opened the floodgates for a torrent of other demands that became the bidding war...
...However, any honest analysis of the reasons will put the blame on the 1981-82 recession, one of the deepest in the postwar era, and the collapse of inflation from 12.4 percent in 1980 to just 1.1 percent by 1986...
...And much of what business got in the 1981 tax bill was taken back in the 1982 tax bill and subsequent tax increases...
...As one can see, the final law actually reduced taxes for businesses less than the Reagan administration originally estimated...
...BY BRUCE BARTLETT ONE OF THE MOST ENDURING of Washington myths is that a "feeding frenzy" of tax cuts for business in 1981 was responsible for the deficits of the 1980s...
...The Reagan administration estimates cited in the same document showed revenues rising from $600 billion in 1981 to $771 billion in 1984...
...The truth is that there was no feeding frenzy...
...It is true that budget deficits did increase subsequent to passage of the 1981 tax cut...
...This raises an important point about tax cuts that liberals conveniently forget: They can be rescinded relatively easily...
...According to the committee's figures, TEFRA alone took back about 40 percent of the business tax cuts in the 1981 legislation...
...Nevertheless, Congress believed that it had gone too far in 1981, especially in cutting taxes for businesses, and reversed course in 1982, passing the Tax Equity and Fiscal Responsibility Act (TEFRA...
...Since reporters Maggs and Stone identify 1987 as a key year, let us look at the budget table for that year...
...This mythology is now being revived by those eager to derail, or at least shrink, a major tax cut this year...
...In fact, the Reagan administration's revenue estimates were almost identical to those of the Congressional Budget Office, then under Democratic control with Alice Rivlin as its director...
...The following table from the Joint Committee on Taxation's December 1982 report on the 1982 tax bill shows how much of the 1981 business tax cut was rescinded...
...According to legend, its budget estimates were based on a "rosy scenario...
...And there were major business tax increases to follow in the Deficit Reduction Act of 1984, the Consolidated Omnibus Budget Reconciliation Act of 1985, the Tax Reform Act of 1986, and several more budget reconciliation acts in 1987, 1989, 1990, and 1993...

Vol. 6 • February 2001 • No. 22


 
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