My regular readers will know that I am pretty interested in tax policy, so for me, the most interesting moment last night may have been the exchange over historic examples of tax cuts leading to growth. It demonstrated how conservatives like Ryan stretch the facts when talking supply-side history, and it symbolized to me something Obama absolutely must address next week.
It went as follows:
REP. RYAN: You can cut tax rates by 20 percent and still preserve these important preferences for middle-class taxpayers —
VICE PRESIDENT BIDEN: Not mathematically possible.
REP. RYAN: It is mathematically possible. It's been done before. It's precisely what we're proposing.
VICE PRESIDENT BIDEN: (Chuckles.) It has never been done before.
REP. RYAN: It's been done a couple of times, actually.
VICE PRESIDENT BIDEN: It has never been done before.
REP. RYAN: Jack Kennedy lowered tax rates, increased growth. Ronald Reagan —
VICE PRESIDENT BIDEN: Oh, now you're Jack Kennedy.
REP. RYAN: Ronald Reagan — (laughter) — (chuckles) — Republicans and Democrats —
VICE PRESIDENT BIDEN: This is amazing.
So, what are the facts? Well, first of all, Kennedy did not technically pass a tax cut. He proposed it, but he was killed before it passed. Nevertheless it was Kennedy’s economic team that put it together, and Kennedy who decided to proceed with it. Johnson made passing it his first order of business.
It did cut rates, and it did spur growth (although there was a credit crunch in 1966 and a mini-recession later). But the key point is this: It was not a supply-side cut. It was a demand-side cut. The historian David Greenberg explained the difference well and thoroughly in a 2004 Slate article:
A demand-side cut rests on the Keynesian theory that public consumption spurs economic activity. Government puts money in people's hands, as a temporary measure, so that they'll spend it. A supply-side cut sees business investment as the key to growth. Government gives money to businesses and wealthy individuals to invest, ultimately benefiting all Americans. Back in the early 1960s, tax cutting was as contentious as it is today, but it was liberal demand-siders who were calling for the cuts and generating the controversy.
You should read Greenberg’s piece. I think he’s a little too generous to supply-siders of our time, is my only quibble. I don’t think they have any business at all invoking JFK. He reduced the top marginal rate, all right, but as Greenberg notes, only from 91 to 77 percent. I don’t think that would impress Grover Norquist. And Kennedy was intent on passing a spending stimulus as well, which he wanted to put through after passing the tax cut (doing the latter first only as political necessity).
Bottom line: What Kennedy was doing was demand-side stimulus—putting money into the middle class’ hands to drive consumption, not (chiefly) into the wealthy’s hands or businesses’ hands.
Now we move forward to Reagan. He of course cut tax cuts massively in 1986—from 16 rates to five, with the top marginal rate dropping from 50 percent to 38.5 percent (although the dollars-earned threshold for paying the top rate was lowered considerably; see here).But the story is more complicated—for example, and this is very interesting, effective corporate tax rates actually spiked under Reagan. And, of course, he increased payroll taxes by 40 percent in the 1983 Social Security deal (from 4.2 percent of salary to 6.2 percent).
Generally speaking in Reagan’s second term, yes, there was healthy growth. But something else grew: deficits. Massively. And while revenues went up, well, revenues to the federal government have gone up in every decade since the Depression. They actually went up less in the 80s than most other decades. Certainly far less than in the 1990s, when Bill Clinton raised taxes. See this and this for explanations.
Obama needs to be on top of all this. He needs a good strong rebuttal on Kennedy. An answer on Reagan. And this is the context in which he needs to bring up Bush. The Bush experience is by far the freshest one for most voters, and it shows that this aggressive tax-cutting no longer works the way conservatives say it does. It failed. It...doesn’t...work. It helped bring on our calamity. And Romney-Ryan want to do it again.
That’s the key point. Biden, as effective as he was in some ways, didn’t quite do that. Obama must, and part of doing it effectively is knowing and communicating this history.