Loughlin says Reagan's 1981 tax cuts led to exponential economic growth

John Loughlin, who is running in the Republican primary in the 1st Congressional District, is sounding a bipartisan theme in his call for cutting taxes as a solution to our economic problems. He tells viewers in his new web ad "What we need to do is what John F. Kennedy did in 1961, which is cut taxes. What we need to do is what Ronald Reagan did in 1981, and cut taxes and enjoy exponential growth."

Loughlin is echoing a popular Republican theme: If you want to grow the economy, cut taxes. The favorite example is Reagan, who was a big proponent of cutting taxes and reducing government spending. In his ad, Loughlin's unstated implication is that Reagan cut taxes and the economy grew explosively as a result.

But is it really that simple?

First, Reagan alone didn't cut taxes. He did it in conjunction with Congress. Having said that, let's look at the Reagan era of taxation.

There's no debate that Reagan dramatically reduced taxes in 1981, his first year in office. That $38-billion cut would equal $90 billion in today's dollars. At the time, it represented 1.91 percent of the gross domestic product, which is the total value of goods and services produced in the United States during a given year.

But the following year, Reagan raised taxes dramatically and other increases followed.

The 1982 hike alone, which applied to corporations and individuals, increased taxes by about $17 billion, according to a 2006 U.S. Treasury report. The increase represented 0.8 percent of the GDP. That's why it is sometimes billed as the largest peacetime tax increase in American history. That same year he also raised the gasoline tax.

In 1983, Reagan hiked taxes again. This time it was the passage of the Social Security Reform Act of 1983, which increased payroll taxes to provide long-term funding for Medicare and Social Security. According to liberal economist Paul Krugman, in a June 8, 2004, commentary in The New York Times, "this tax increase more than undid any gains from Mr. Reagan's income tax cuts" for many middle- and low-income families.

Reagan also significantly increased taxes through the Deficit Reduction Act of 1984, the Tax Reform of 1986 and the Omnibus Budget Reconciliation Act of 1987.

We asked Loughlin why he mentioned only Reagan's tax cut and not the subsequent increases. He said Reagan's 1984 increase, for example, "was to combat a budget deficit and it was also because of a fear of inflation in 1984."

"When I make the statement it was not to provide an economics lesson, but it was to illustrate that when tax rates are cut, specifically marginal tax rates and business tax rates, historically the economy experiences growth," he said. "If you argue that that's what we need to do right now, grow the economy, then certainly that's a lesson from the past that has some relevance today."

Wendy Schiller, a professor of political science and public policy at Brown University, said Reagan's tax policies and their impacts were complicated.

"He definitely raised taxes. He had to. But they were far more targeted taxes" after the big 1981 cut, she said. "When they talk about taxes, they also talk about the Medicare premium. They talk about the Social Security contribution and the income limit for Social Security contributions. All of those things would be considered taxes."

Even when Reagan lowered the tax rate again in 1986, it didn't help the middle class, she said.

"In '81 they kept deductions for things like credit card interest and student loan interest, so if your parents paid your student loan they could take the deduction. In '86 they got rid of all that," said Schiller. "So their overall tax load went up. He didn't yank up the tax rates by a third. He just took away a lot of the really good deductions for them, which ended up really raising the taxes [for] a lot of people who had benefited from the [1981] cuts."

The other question is, did the original tax cut spark "exponential growth," as Loughlin contended.

Taken literally, "exponential" refers to growth at an ever-increasing rate, as when something doubles, then triples, then quadruples. The economy during the Reagan years did no such thing.

When we talked to Loughlin about that part of his statement, he said: "We experienced additional growth after Ronald Reagan cut taxes and that might be a bit of hyperbole to say 'exponentially.'"

In fact, immediately after the 1981 cuts, the country went into a recession. The GDP dropped by nearly 2 percent. The unemployment rate jumped more than two full percentage points, spiking to 9.7 percent.

Then things got better. The GDP rose 4.5 percent in 1983 and 7.2 percent in 1984. Those are substantial jumps. The increases returned to a fairly typical 3 percent and 4 percent during the rest of his tenure. Unemployment barely declined in 1983, but then began a steady fall to 5.3 percent in 1989, when Reagan left office.

In the end, it all boils down to a question of timing.

Conservatives argue that the economic downturn after Reagan's 1981 tax cut wasn't his fault. For example, the Heritage Foundation said the steep recession was caused by tightening the money supply and attempting to rein in the inflation.

Liberals argue that reversing the tax cuts restored confidence in the economy and spurred economic growth. Loughlin, like other conservatives, argue that the cuts themselves sparked the growth, and it simply took time for the benefits to appear.

We asked Edinaldo Tebaldi, an assistant professor of economics at Bryant University, about the timing. He said it takes one to three years "to fully see the benefits of tax cuts."

He said candidates may proclaim that if you cut taxes it will spark economic growth, but "it's not that simple. The facts would not support that claim. Lower taxes are a good thing, but you need a good environment for business." That can mean better regulations that work without being onerous. In addition, "we need to cut how much the government spends on a regular basis."

(Reagan had little success in his avowed quest to cut federal spending. Although Republicans controlled the Senate for the first six of his eight years, the Democrats held the House of Representatives.)

Schiller made similar points: "Lots of things helped the economy. Fiscal policy, lowering interest rates, certainly the tax cuts, the rhetoric of fiscal restraint, and investing in defense spending will help the economy," she said. "So there's a lot of things that went up and went down under Reagan."

We'll let the economists and the partisan pundits wrangle over the impact and timing of tax changes and cycles of economic growth.

In the end, Loughlin is correct that Reagan cut taxes in 1981.

Yet he omits the important fact that the 40th president subsequently approved substantial increases, an omission we consider significant.

As for exponential growth after the Reagan tax cut, the candidate acknowledges that that's an exaggeration, although he shares the conviction of many others that the 1981 cut played a key role in economic growth in the 1980s.

In an economy as complex as ours, cause and effect statements like Loughlin's are great for a campaign ad, but they make the Truth-O-Meter shudder.

So we'll give the candidate a Barely True.

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