Reagan’s Budget Legacy

The debate over Ronald Reagan’s budget legacy has been revived by the former president’s passing. Did Reagan cut taxes or spending? Is he responsible for large budget deficits?

Figure 1 (below) shows total federal tax revenues and spending during the Reagan years. Coming into office in January 1981, he was responsible for the 1982 through 1989 fiscal year budgets. The gap between the lines is the deficit.

The first thing to note is that Reagan inherited a $79 billion deficit from Jimmy Carter in his last budget for 1981. Indeed, the government had run deficits every year since 1961 with the sole exception of 1969. Reagan did not invent deficit spending.

Reagan’s 1981 tax cut is often blamed for deficits in the 1980s. But as the figure shows, the effect of the tax cut appears modest, essentially freezing revenue for just two years. As the economy began to boom in the mid-1980s, revenues rose rapidly. By 1989, revenues were up 65 percent from 1981. Part of the increase was due to tax laws in 1982, 1984, and 1987 that increased revenues, partly reversing the 1981 cuts.

Reagan’s failure was that he did not control federal spending growth. By 1989, federal spending was up 69 percent from 1981. The deficit widened, then narrowed again by the end of the decade.

imageWhen the budget is looked at as a share of the economy, Reagan’s legacy looks a bit better from a small government perspective. Federal revenues as a share of gross domestic product fell from 19.6 percent in 1981 to 18.3 percent by 1989. Spending fell from 22.2 percent to 21.2 percent. Thus, Ronald Reagan shrank the federal government by about 5 percent — a less radical change than supporters or detractors often claim.

To Reagan’s credit, he had numerous fiscal policy successes, such as cutting the top individual tax rate from 70 percent to 28 percent and the corporate rate from 46 percent to 34 percent. On spending, Reagan’s original February 1981 plan proposed enough cuts to bring outlays down to 19.3 percent of GDP by 1984 and balance the budget. With a Congress unwilling to make serious cuts, the deficit remained high and spending was stuck at over 22 percent until the late 1980s.

With federal spending rising more rapidly than it has in decades, Ronald Reagan’s small government vision is sorely missed in Washington today.

Chris Edwards is director of tax policy at the Cato Institute.