In recent decades, the United States has implemented three significant tax cut initiatives: the Reagan tax cuts in the 1980s, the Bush tax cuts in the early 2000s, and the Trump tax cuts in 2017. All of these tax cuts were intended to jumpstart the economy and bring in more government revenue thanks to increased economic activity. History proves that these kinds of tax cuts often resulted in huge new budget deficits. They failed to produce the promised fiscal gains.
The Reagan administration’s tax cuts, introduced in 1981, reduced the top marginal income tax rate from 70 percent to 50 percent, followed by a further reduction to 28 percent in 1986. Under President George W. Bush, Congress passed two large pieces of tax legislation in 2001 and 2003. In effect, these laws were designed to reduce income taxes, capital gains taxes, dividend taxes and estate taxes. During his time in office, one law President Trump did sign was a big tax cut. This legislation dramatically collapsed the corporate income tax rate from 35 percent to 21 percent and amended individual income taxes for millions of taxpayers.
The Reagan Tax Cuts: Analyzing Their Legacy
In 1981, President Ronald Reagan’s administration rolled out massive tax cuts, claiming that they would kickstart the economy. To pay for it, they reduced the top marginal income rate in half. Unfortunately, this strategy backfired and did not produce the intended fiscal outcomes. The budget deficit was $79 billion when Reagan took office but soared to $153 billion by 1989. That explosive expansion proved the opposite — that lowering the tax rate does not always mean an increase in federal revenue.
As a percentage of GDP, the federal deficit went from 2.5 percent to 2.8 percent under Reagan. This upsurge happened even as advocates assured us the tax cuts would generate dynamic economic growth so powerful it would make up for the revenue lost. Federal revenue as a percent of GDP is at its lowest level since 1984. It never returned to the level before these cuts in Reagan’s first term. Assurances of increased macroeconomic activity didn’t translate into strong government revenue.
Critics contend that these tax cuts produced temporary, flash-in-the-pan economic growth. Unfortunately, these boosts weren’t enough to do more than halt the freefalling drop in federal revenue. Ultimately, Reagan’s tax policies highlight a pattern seen in subsequent administrations: significant reductions in tax rates can lead to deeper budget deficits when not accompanied by corresponding spending cuts.
The Bush Tax Cuts: Continuation of a Trend
As much as turned the tide, President George W. Bush followed up with his own, sweeping tax reductions in 2001 and 2003. These measures were intended to boost job creating and economic growth in the wake of the dot-com bubble and during economic uncertainty in the wake of September 11, 2001. These cuts had featured both personal and corporate income tax cuts, along with a slashing of capital gains and dividend taxes.
Yet under the presidency of Bush, the debt-to-GDP ratio rose from 34 percent in 2000 to 39 percent in 2008. This increase in spending happened at the same time that deficits shot up—deficits fueled by two unfunded wars and the outpacing of entitlement spending. Initiatives to create more economic activity and jobs through tax cuts started. The effect on federal revenues looked a lot like what we experienced under Reagan’s administration.
Similar to the last two tax cuts, the result was a big drop in federal revenue as a share of GDP under Bush’s presidency. Critics pointed out that there was more positive economic growth. This growth was not enough to reverse the lost revenue, showing that large tax cuts often lead to larger deficits unless spending is cut accordingly.
The Trump Tax Cuts: A Modern Perspective
In December 2017, President Trump enacted a major overhaul of the U.S. tax code that featured notable reductions in corporate tax rates and changes to individual tax brackets. Supporters promised that these reforms would spur innovation, economic development, and create new sources of revenue for the state.
Despite these rosy projections, data revealed some pretty scary trends. Even before the onset of the COVID-19 pandemic, the Trump administration was on track for a $1 trillion budget deficit. This reality prompted a serious debate about whether the tax cuts even accomplished the intended purpose of leading to fiscal responsibility. The unfortunate reversion back to the trend of prior administrations. They were paid for only in theory—federal revenue tanked, failing to meet the wildly optimistic projections set before undertaking these cuts.
In 2018-2019, tax receipts were undermined by $430 billion. That’s with GDP getting a short term increase due to lower taxes. However, even as the pandemic entered the scene, budget deficits were already widening. That means there’s still a rearguard effort to reconcile expansionary fiscal policy with large, unfunded tax cuts.