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To reach what a White House spokesman called "the heartland of America," President Donald Trump wrote an opinion article for the Milwaukee Journal Sentinel that called on Congress to pass his tax reform bill.
In the Sept. 3, 2017 op-ed, Trump invoked a Republican famous for tax cutting to argue that his own proposed cuts would spur economic growth.
In 1986, President Ronald Reagan led the effort to make America the most competitive nation in the world by cutting our business tax rate to 34 percent, well below the average rate of other developed nations at the time. It worked. Our economy boomed, the middle class thrived and median family income increased.
As we’ll see, some economists say Reagan’s reduction in the corporate tax rate helped boost the economy.
But seven experts we spoke to were unanimous in saying that a single tax cut can’t be credited for making dramatic gains in an economy that is affected by a whole host of taxes, as well as many factors not related to taxes, such as demographics and trade policies.
"Mathematically, he’s on firm ground" in terms of economic growth and increases in median income in the years after the corporate rate cut, Manhattan Institute senior fellow Brian Riedl said of Trump’s claim.
But attributing those gains to one cut is something else.
"It’s always very hard to specify which policies led the economy to perform the way it did," Riedl said.
Said University of Wisconsin-Madison professor emeritus of applied economics Andrew Reschovsky, who worked in the Office of Tax Analysis at the U.S. Treasury: "The problem is, economies are complex things. It is really impossible to attribute any change" in the economy to a single tax cut.
To back Trump’s claim about the effects of the 1986 corporate tax rate cut, the White House cited several statistics indicating the economy improved during the next several years.
Among them: A 4.2 percent increase in gross domestic product in 1988, according to the World Bank; and an increase of nearly $2,000 -- from $51,388 to $53,367 -- in the real median household income, from 1986 to 1989.
But there are two important points to consider here, the economists told us.
1. The corporate tax rate cut -- from 46 percent to 34 percent -- was only one of a host of cuts made in the Tax Reform Act of 1986.
As Americans for Tax Reform recalled in celebrating the Reagan bill, the legislation also reduced the top marginal individual income tax rate from 50 percent to 28 percent and slashed the total number of income brackets from 14 to two, among many other tax changes. As the Washington Post reported, "tax shelters for the wealthy, which proliferated before the bill became law, were struck a mortal blow," the "once-all-powerful oil-and-gas lobby also had a few of its tax benefits clipped" and "millions of low-income Americans were taken off the income tax rolls entirely."
A corporate rate tax cut can help grow the economy and raise wages, said American Enterprise Institute economics policy resident scholar Aparna Mathur, whose specialties include tax policy and corporate taxation. But "it’s really hard to pin down" cause and effect, or to determine how much improvement they yield, she said.
Bruce Bartlett, a domestic policy adviser in the Reagan White House, was more critical of Trump’s claim. "The economy did not boom. It grew at about the same rate as before the tax reform and by 1990 was tanking," he told us.
University of California, Berkeley economist Alan Auerbach, the author of an American Economic Association journal article on the economic effects of the 1986 tax reform law, gave a more positive view.
"The economy did OK after 1986 until the 1990-91 recession, but there was no significant change in the economy's overall trajectory immediately after the 1986 act," he said. "The economy did boom in the mid- to late-1990s, and the middle class did relatively well during that period, but it's hard to attribute that to the 1986 act."
And much more difficult to attribute, as Trump did, any economic gains to only the corporate tax rate cut among the broader package of 1986 tax reforms.
2. Many factors aside from taxes help determine the performance of the economy.
Mathur said factors such as immigration and trade also affect the economy.
While the economy improved after the various 1986 Reagan tax changes, "you had a lot of winds behind the sails," said Tax Policy Center former co-director Eugene Steuerle, who was deputy assistant secretary of the U.S. Department of the Treasury for Tax Analysis under Reagan.
He cited baby boomers reaching their peak earning years and more women entering the workforce.
Said Cato Institute senior fellow Daniel Mitchell, whose specialties include fiscal policy and tax reform:
"One could certainly make an argument the (corporate tax rate cut) was good for growth, it was good for the middle class -- but lots of other things are, too."
To claim major economic gains were fueled only by the corporate cut, he said, "is puffery."
In a Journal Sentinel op-ed, Trump said: "In 1986, President Ronald Reagan" cut the business tax rate to 34 percent and "it worked -- our economy boomed, the middle class thrived and median family income increased."
Some economists say the corporate rate reduction, from 46 percent, did help lead to economic growth and higher income. But it wasn’t necessarily any more important than a cut -- from 50 percent to 28 percent -- in the top individual income tax rate that was part of the same 1986 package that included other tax changes, as well.
More importantly, many other factors beyond tax cuts -- demographics, immigration, trade policy and more -- bear on the economy.
Trump’s statement contains only an element of truth -- our definition of Mostly False.
Milwaukee Journal Sentinel, "Trump: We must fix our self-destructive tax code," Sept. 3, 2017
Milwaukee Journal Sentinel, "In op-ed for Milwaukee Journal Sentinel, President Trump touts his tax reform agenda," Sept. 3, 2017
Email, special assistant to the president and assistant communications director Steven Cheung, Sept. 5, 2017
World Bank, "GDP growth," 1961 to 2016
Federal Reserve Bank of St. Louis, "Real Median Household Income in the United States," 1984 to 2015
Interview, American Enterprise Institute economics policy resident scholar Aparna Mathur, whose specialties include tax policy and corporate taxation, Sept. 5, 2017
Interview, Urban-Brookings Tax Policy Center former co-director Eugene Steuerle, who was deputy assistant secretary of the U.S. Department of the Treasury for Tax Analysis (1987–89), Sept. 5, 2017
Interview, University of Wisconsin-Madison professor emeritus of public affairs and applied economics Andrew Reschovsky, who worked in the Office of Tax Analysis at the U.S. Treasury, Sept. 6, 2017
Email, Bruce Bartlett, a domestic policy adviser in the Reagan White House, Sept. 5, 2017
Interview, Manhattan Institute senior fellow Brian Riedl, who formerly served as the Heritage Foundation’s lead research fellow on federal budget and spending policy, Sept. 5, 2017
PolitiFact National, "Fact-checking Trump’s tax speech in Missouri," Aug. 30, 2017
Interview, Cato Institute senior fellow Daniel Mitchell, whose specialties include fiscal policy and tax reform, Sept. 5, 2017
Email, University of California, Berkeley, director of the Burch Center for Tax Policy and Public Finance Alan Auerbach, author of an American Economic Association journal article on the economic effects of the 1986 tax reform law, Sept. 5, 2017
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