Donald Trump, Ronald Reagan, tax cuts and growth: What history says will happen next

Source: Getty Images
Source: Getty Images

President-elect Donald Trump has frequently been compared to former President Ronald Reagan: Both men were celebrities before their election, proponents of deregulation and enjoyed popularity among the white working class — as well as come-from-behind victories. 

Most notably, Trump has proposed huge tax cuts — the largest since Reagan's, in fact — as a means of boosting the economy.

Back in August, Trump invoked Reagan directly, promising "across-the-board income tax reduction," which would amount to the "biggest tax revolution since the Reagan Tax Reform."

Now, Trump has arguably tried to have his cake and eat it too, framing his proposed tax cuts as populist, benefiting the "working" and middle class — and he has outright said that he actually favors raising taxes on the rich.

In a town hall sponsored by the Today Show, also in August, Trump was asked whether he believed in raising taxes on the wealthy, to which he replied, "I do. I do, including myself. I do."

On taxes, Trump has sometimes contradicted himself, making predictions difficult.
Source: 
Giphy /Mic

There's reason to believe this confusing rhetoric worked: One pre-election survey from RAND Corporation, a think tank, found that some 51% of Trump voters support higher taxes on wealthier Americans.

In reality, Trump's plan does the opposite, decreasing taxes on the rich: Individuals earning $416,000 would drop from the 40% tax bracket to the 33% bracket, for example, and those earning $100,000 would drop from the 28% bracket to the 25% bracket.

That's a dramatic cut, if not quite as dramatic as Reagan-era policies, which lowered the top marginal income tax rate from 70% to 28% during his tenure. Yet Trump's campaign has welcomed the Reagan comparisons: Vice President-elect Mike Pence has said, "Reagan principles still work."

With Trump's win and a GOP-led Congress, big tax cuts are now a distinct possibility — potentially the most "sweeping tax-code changes since 1986," as a report by the Wall Street Journal put it.

Proponents of the plan say that, just as they did during Reagan's presidency, tax cuts will usher in a period of economic growth under Trump.

Is that likely? Or even an accurate reading of the events of the 1980s?

Here's what history tells us.

Could Trump grow the U.S. economy like Reagan did? 

Ronald Reagan is generally beloved: His approval ratings actually increased after he left office, and he is second only to John F. Kennedy in terms of retrospective approval ratings, according to Gallup.

But Reagan's record is a bit more complicated than widespread conservative reverence might suggest.

First, the facts: Reagan did, in fact, preside over two terms of historically high economic growth. Household income, employment and gross domestic product were all significantly higher when he left office than when he entered.

These measures are what Reaganomics proponents typically point to when they say Reagan's policies spurred growth in the United States, crediting tax cuts and smaller government — and increased incentives to work.

What people might not realize about Reagan is that his policies actually did more to expand the size of government than shrink it, and his tax cuts were expensive, spiking the federal budget deficit in his first term.

To make up for some of the shortfall, Reagan was forced to actually increase taxes 11 times, including a hike to the payroll tax to help support Social Security and Medicare, as well as corporate and gas tax bumps.

And under Reagan, the national debt nearly tripled.

For these and other reasons, the idea that President-elect Trump could simply repeat the Reagan years by slashing taxes would be a fallacy, experts say.

For Reagan, at the very least, lucky timing played a part.

"We had incredible turnaround during the Reagan era, but we were also at the bottom of a terrible recession," James Pethokoukis of right-leaning think tank American Enterprise Institute told Mic. "So to think we're going to get 7% growth because that's what happened under the Reagan administration is just not correct."

Indeed, other data suggests growth in the 1980s occurred under different conditions than what the United States faces today.

The 1982 recession, for example, left asset prices low, meaning there was simply more ground to gain.

As Nir Kaissar pointed out in Bloomberg, the "cyclically adjusted price to earnings ratio" — a way of measuring how expensive stock prices are relative to history — is nearly three times higher now than it was when Reagan first took office. 

President-elect Trump won't have the wind at his back in quite the same way. 

Reagan also helped the economy grow by expanding the military budget: At one point during his administration, military spending was $34 million an hour. 

Trump and his surrogates have talked about increasing military spending, too, but that would likely not be enough to make the economy grow as rapidly. Half the growth since World War II, Pethokoukis said, has come from growing labor force participation, with the other half coming from increased productivity. 

Our president-elect would have a hard time creating growth in the labor force with baby boomers retiring in droves — and particularly if Trump were to deliver on his promised immigration crackdown. 

Yet another reason why Trump might not have an easy time replicating the growth of the Reagan years?

Some argue that the era's tax cuts didn't even move the needle, and that it was actually the Federal Reserve's decision to lower interest rates that got the economy going, an assertion backed up by some of Reagan's own budget advisers. 

Trump certainly wouldn't have that tool at his disposal.

As Paul Krugman pointed out to MSNBC, "Right now, the interest rate is zero. The Fed can't rescue us this time, and that's why we can't do the things we did in the '80s."

What are upsides and downsides to large tax cuts? 

Advocates for cutting taxes on businesses and high earners, including former Reagan administration official Larry Kudlow, argue that cuts produce higher growth, and that "a rising tide will lift all boats" over the long term.

In a review of 26 studies from the right-leaning Tax Foundation, 23 supported the idea that big taxes on corporations and high earners hurt economic growth by lowering incentives for job creation.

Conversely, the conservative argument goes, tax cuts can increase innovation and investment by freeing up rich people's and businesses' cash to pour into the economy.

But there is actually little consensus on the idea that flatter taxes are needed for job and economic growth: The fastest growth of the post-War era, for example, occurred in the mid-1950s, when top tax rates were more than 90%.

"People spend and save pretty much independently of the tax rates," economist Dean Baker, founder of the left-leaning think tank Center for Economic and Policy Research, told Mic.

Research published by the National Bureau of Economic Research actually suggests that tax cuts are most effective at increasing employment if they help poorer people rather than richer people.

A paper published by the International Monetary Fund had similar conclusions, finding that when the poorest 20% of people in a country get a 1-percentage point increase in their share of income, it's correlated with a 0.38-percentage point higher GDP growth in the next five years — but giving a similar boost to the richest 20% is actually associated with lower growth.

That's one reason it's important to note that Trump's current tax plan includes meager cuts for middle-class folks — and is demonstrably regressive.

In fact, Trump's policies could mean a person earning more than $1,700,000 would get a tax break of more than $88,000 — while many parents and lower-income Americans could actually pay more tax because of an increase in the bottom tax bracket from 10% to 12%, as well as the elimination of personal exemptions and the head of household filing status.

There are also serious long-term consequences when you cut taxes without also cutting spending. Even Reagan conceded that his tax cuts may have gone too far, agreeing to a moderate tax hike on businesses toward the end of his first term. 

That's because tax cuts can make the deficit and debt larger.

Trump's plan, by some estimates, would explode the debt by more than $5 trillion over the next decade. 

When the debt gets bigger, the U.S. is on the line for more and sometimes higher interest payments, which can stunt the economy. Lynn Reaser, chief economist at Point Loma Nazarene University's Fermanian Business & Economic Institute, told US News"You could see a slower growth in the standard of living or even a decline."

Put simply, if you keep borrowing more and more money, lenders are going to start charging you more to borrow it, and that can become unsustainable; while that might not be a problem in the short-term, it's not smart to ignore.

"It's a long-term issue," Oren Cass, a senior fellow at the conservative-leaning Manhattan Institute and a former policy director for Mitt Romney's 2012 presidential campaign, told Mic. "The trajectory is very important. If you keep kicking the can down the road, it gets harder to self-correct."

How might Trump really compare to Reagan? 

Let's set aside, for a moment, questions of character and the fact that Reagan supported free trade and immigration, unlike Trump.

In some ways, the comparisons between the men hold up.

Trump's plan purports to kickstart growth from two sides — both supply and demand — through heavy tax cuts and an infrastructure program to put people to work. That's not unlike what Reagan did, which was to cut taxes while ratcheting up military spending. 

In the short term, that would probably have the consequence of boosting growth. 

On the flip side, if Trump's plan does end up exploding the deficit, then any benefits in growth would be only short-term, cancelled out by higher interest rates and inflation — unless, perhaps, Trump undertakes deep spending cuts to social programs: "The math doesn't work," Pethokoukis said. 

The Manhattan Institute's Cass agreed. 

"We're at the intersection of campaigning and governing here," Cass said. "Where the campaigning just promised nice things but now the government needs to be more responsible than that."

The next few months, Cass said, will be crucial for determining where Trump's priorities actually lie and whether he will focus on growth or some of the other promises he's made on the trail — like tamping down on free trade.

"He's probably got a lot of economists telling him right now that if he wants to deliver growth," Cass said, "then something like smart tax reform would be a much more intelligent place to go than some of the other, more populist areas he's focused."

While experts on the left concede that some of the more dire predictions about Trump's presidency may have been too extreme — for instance the widespread prediction that his policies would launch the country into a recession — there is concern about how Trump's policies might set the U.S. back on issues like climate change, which has economic consequences

"The idea that they're about to throw us into a recession doesn't really make sense," Baker said. "[But] rolling back everything Obama tried to do in terms of climate, we will pay a really big price for that." 

At the end of the day, the problem for Trump may not be whether or not he can deliver growth — it's whether or not he can deliver growth while also making good on all of his other "populist promises" his supporters might expect, like building an expensive wall between the U.S. and Mexico.

Tax cuts, improvements to education and health care, job growth, security — that would be a lot for any president to deliver on.

After all, even if Trump is as successful as Reagan in terms of spurring growth, it's important to remember that the policies of the 1980s had consequences: Reagan's tax cuts increased income inequality faster than during any other presidency, while his budget cuts had social costs. 

Reagan slashed programs benefiting the poor, and in his first year alone, he cut the public housing budget in half, eventually trying to eliminate federal housing subsidies altogether. 

Homelessness skyrocketed to 1.2 million people by the late 1980s, more than twice what it is now.

Next time Trump compares himself to Reagan, it behooves us to keep history in mind.

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James Dennin

James is a staff writer covering money and millennials. Send your tips and your money problems to jdennin@mic.com.

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