How did the Reagan tax cuts and Bush tax cuts affect unemployment?

Consider this article by the Cato Institute, a libertarian think tank, which discusses how the Reagan tax cuts affected the unemployment rate.


In 1980, President Carter and his supporters in the Congress and news media asked, “how can we afford” presidential candidate Ronald Reagan’s proposed tax cuts?

Mr. Reagan’s critics claimed the tax cuts would lead to more inflation and higher interest rates, while Mr. Reagan said tax cuts would lead to more economic growth and higher living standards. What happened? Inflation fell from 12.5 percent in 1980 to 3.9 percent in 1984, interest rates fell, and economic growth went from minus 0.2 percent in 1980 to plus 7.3 percent in 1984, and Mr. Reagan was re-elected in a landslide.

[…]Despite the fact that federal revenues have varied little (as a percentage of GDP) over the last 40 years, there has been an enormous variation in top tax rates. When Ronald Reagan took office, the top individual tax rate was 70 percent and by 1986 it was down to only 28 percent. All Americans received at least a 30 percent tax rate cut; yet federal tax revenues as a percent of GDP were almost unchanged during the Reagan presidency (from 18.9 percent in 1980 to 18.1 percent in 1988).

What did change, however, was the rate of economic growth, which was more than 50 percent higher for the seven years after the Reagan tax cuts compared with the previous seven years. This increase in economic growth, plus some reductions in tax credits and deductions, almost entirely offset the effect of the rate reductions. Rapid economic growth, unlike government spending programs, proved to be the most effective way to reduce unemployment and poverty, and create opportunity for the disadvantaged.

The conservative Heritage Foundation describes the effects of the Bush tax cuts. (H/T The Lonely Conservative)


President Bush signed the first wave of tax cuts in 2001, cutting rates and providing tax relief for families by, for example, doubling of the child tax credit to $1,000.

At Congress’ insistence, the tax relief was initially phased in over many years, so the economy continued to lose jobs. In 2003, realizing its error, Congress made the earlier tax relief effective immediately. Congress also lowered tax rates on capital gains and dividends to encourage business investment, which had been lagging.

It was the then that the economy turned around. Within months of enactment, job growth shot up, eventually creating 8.1 million jobs through 2007. Tax revenues also increased after the Bush tax cuts, due to economic growth.

In 2003, capital gains tax rates were reduced. Rather than expand by 36% as the Congressional Budget Office projected before the tax cut, capital gains revenues more than doubled to $103 billion.

The CBO incorrectly calculated that the post-March 2003 tax cuts would lower 2006 revenues by $75 billion. Revenues for 2006 came in $47 billion above the pre-tax cut baseline.

Here’s what else happened after the 2003 tax cuts lowered the rates on income, capital gains and dividend taxes:

  • GDP grew at an annual rate of just 1.7% in the six quarters before the 2003 tax cuts. In the six quarters following the tax cuts, the growth rate was 4.1%.
  • The S&P 500 dropped 18% in the six quarters before the 2003 tax cuts but increased by 32% over the next six quarters.
  • The economy lost 267,000 jobs in the six quarters before the 2003 tax cuts. In the next six quarters, it added 307,000 jobs, followed by 5 million jobs in the next seven quarters.

The timing of the lower tax rates coincides almost exactly with the stark acceleration in the economy. Nor was this experience unique. The famous Clinton economic boom began when Congress passed legislation cutting spending and cutting the capital gains tax rate.

Those are the facts. That’s not what you hear in the media, but they are the facts.

14 thoughts on “How did the Reagan tax cuts and Bush tax cuts affect unemployment?”

  1. The left will always dismiss these facts with “facts” of their own, but the story is simply that these results occur whenever these or similar policies are enacted. It happened for Kennedy, too. The same for Harding.


  2. You’re forgetting that Reagan had one of the largest tax increases at that point in American history in 1982. On top of that he created jobs by quadrupling the defense budget – he was the father of borrow and spend, a policy we’re just starting to see the devastating affects (think 14 trillion on debt). So to claim that Reagan’s lowering of taxes caused the progress is to completely ignore all the stimulus he did (stimulus being the trillions in unfettered defense spending).

    As for the Bush tax cuts – we’re still losing jobs and those tax cuts have been extended, so they’re not working as advertised. Small businesses haven’t been, nor do they plan to, hire. Additionally, cutting taxes doesn’t address the underlying issues that are keeping the economy down and job creation low. Corporate profits are up yet their job creation levels remain depressed, so pushing the same ideas that have thus far been non-productive seems a bit odd to me


    1. Reagan added 1.7 trillion to the debt in 8 years. About as much as Obama will add to the deficit this year ALONE.

      The facts I presented speak louder than your assertions without facts. I’ve got the numbers.


      1. All of my “assertions” are fact based on the info you just pointed out. If we just use your number, Reagan over-spent 1.7 trillion in stimulus that was completely borrowed and to be paid back by someone else. Had he generated the results without having to force someone else to pay for it, then he can claim he was responsible. If I tried to claim I was a trillionaire by borrowing 1.7 trillion dollars I would be laughed out of the room. But if Reagan creates jobs by borrowing 1.7 trillion that his administration was able to push off to the future, he’s a miracle worker? I say you have to back that claim up.

        As for Obama, I didn’t know he was part of the conversation…do you want me to address him or should we limit it to the post?


        1. So by your logic, since Reagan “creates jobs” by borrowing 1.7 trillion… we should have jobs coming out of our ears with all the “stimulus” of the last few years. Oh, I know it’s probably just because taxes haven’t been raised enough on corporations and the rich, and the government hasn’t spent enough, huh… So let me ask you a couple questions Jerry: How are jobs created? What can the government to to encourage jobs?


          1. There has been very little stimulus the past few years. The majority of the 800 billion wasn’t used on job creation or for industry development – it was used to bail out irresponsible corporations. The wars have consumed upwards of 3 trillion dollars and will continue to eat huge amounts of money for veteran benefits and replacing depleted/worn military machinary/supplies. Add on top of that, we have to spend huge amounts of money on interest payments for our debt and on public/private entitlements. Our society subsidizes so many things it’s sickening. So to claim that we should have jobs coming out of our ears is to ignore everything you see around you.

            As for my opinions on creating jobs, I have plenty, but this is wintery’s blog – if he OK’s it, I will give some


    2. thats b/c of two policies that dont allow companies to have certainty – 1) dodd-frank & 2) sarbanes oxley. companies will hire when there is certainty in the market.
      there is your issue. in addition the #1 principle in economic policy is to spread your taxes out across your population – broad base, low rate.
      and what is the problem with a citizen or a company making money?? as long as your doing it honestly why should you be penalized. isnt that the point of why people came to this country in the first place. to say, “you make too much; give us some” promotes a culture of dependency, laziness, breads welfare, depresses entrepreneurship and is quite frankly unamerican.
      companies who lie cheat and steal ought to suffer the consequences of that but overregulation like the two federal policies above are not the fix-all and you’re seeing that today.


      1. dodd-frank in no way affects any companies ability to have “certainty” (what-ever that is) about the future – it’s aim was to prevent some of the practices that caused the 2008 market crash and it was neutered so it definitely doesn’t achieve this. Trying to bring transparency to market, as no one still knows who owns all of the credit default swaps, should not be considered a bad thing unless you believe secrecy is a great policy.

        Sarbanes-Oxley – it had the same intent as dodd-frank. Time after time, the biggest corporations have proven they will cheat and lie as much as possible to give a bigger CEO bonus while screwing everyone else invested in the company. I won’t argue with anyone that says the bill is too big and far too encompassing in it’s data retention and record retention requirements, but dubya was on an executive power grab and this really let the government claw it’s way in to the private sector instead of just fixing some obvious flaws. You can thank the GOP for this one.

        As for what you claim to be the #1 economics principle, that’s news to me (and I would bet any economist, which I’m not). economics #1 priority is never concerned with how to spread taxes.

        I believe most people fail to understand the full arguments being made about taxing the rich. I admit that I often fail to properly vocalizae it, so I’ll try to be a little clearer. I, and I hope most, aren’t out to tax or penalize anyone, especially job creators which tends to be the small business owners and the middle/upper class – from this group I exclude the upper .5% of the population. Those that control great amounts of wealth and whose main means of making money is simply moving money around. Moving money and creating complex instruments like CDO’s, etc do not create jobs but instead create instability (what dodd-frank and SOX attempted to make more transparent, but where thwarted by those who can afford to buy their politicians ear). I agreed when clinton limited welfare benefits to 5 years and I agreed even more so when the governor of michigan just recently cut his state to 4 years.

        But as Warren Buffet said, he knows of no one who will pass up an investment opportunity just because they’re afraid they will have to pay more in taxes – it’s just not going to happen when you simply move some money around, make a billion and 15% (10% depending if you had your investments for more than a year).


        1. Jerry, read this and see if you might change your mind:

          But the Republicans are trying to roll the worst parts of it back.

          When you want to know why businesses aren’t hiring, the best thing to do is to ask businesses “why aren’t you hiring?”. And when you ask them, they will tell you – taxes, regulations, environmentalism and Obamacare.


          1. I asked the company I worked for why they’re not hiring and they said they had enough bodies to do the workload they have. I asked my director if SOX or frank-dodd played a role in it and I got a funny look – I took that to mean no.

            You’ll be happy to know I just talked to two small business owners today whey they weren’t hiring and their responses were they did have enough work to justify more people. I will ask them tomorrow of SOX or frank-dodd affects them, but I think we both know the answer to that.

            I read the first link and no, it doesn’t change my minds. If banks were lending now, and they’re not, and they would point to provisions in that law that would force them to rethink the volume, type, size, etc of loans (they’re not currently making), then I would have been convinced. But to say, we’re not making loans now and a new law will might change how we lend in some indeterminate ways is hardly convincing.

            As for the second link – I didn’t read it, but to claim buyers remorse doesn’t all of a sudden make you the good guys. If they would repeal most of the patriot act and put an end to the federal power grab, I would congratulate them.


          2. Well, I asked the legal guys in the company I work for and they told me that Sarbanes-Oxley was a major pain in the ass to comply with and they were wasting tons of time on it. I haven’t asked them about Dodd-Frank, but I’m sure it’s as bad or worse.


          3. I’m not saying it isn’t a pain in the butt (I had to implement some changes to comply with it) or that I agree with the majority of it but I understand why they did it – I would have taken a different approach if it were me but when corporations keep destroying the markets you have to expect some backlash.


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