Monday, January 18, 2010

Paul Krugman Lies About Reagan & Taxes

In his usual pattern, Krugman distorts the record about the Reagan tax cuts. First of all, he shows in his chart when tax changes were passed and not when they were implemented. While future tax changes can affect current behavior, surely the main effect comes when they are implemented.

And secondly, and more importantly, while it is true that in 1981 a tax bill was enacted that reduced taxes and that in 1982 one (or actually two) tax bill was enacted that raised taxes, the 1981 tax bill reduced tax revenues gradually over several years, meaning that it caused tax rates to fall not just in 1982 but also further reduced them in 1983, 1984 and 1985. And the net effect of the 1981 tax cut bill was a further 1.39% of GDP tax cuts in 1983 and a further 0.98% of GDP tax cuts in 1984. This compares with the 0.58% tax increasing effect of the 1982 bills in 1983 and the additional 0.6% tax increasing effect in 1984. Meaning that the net tax cuts in the boom years of 1983 and 1984 was 0.81% in 1983 and 0.38% in 1984.

(See here for a summary of the size of the tax cuts in different years)

The one thing true in Krugman's post is his admission that monetary policy played a very important role both in the 1982 slump and the very vigorous 1983-84 recovery. However, it is very misleading to suggest that the 1983-84 recovery happened in the context of tax increases, since the implemented tax cuts were much bigger than the implemented tax increases.