A Morning Edition segment on the Republican tax cut plan made comparisons to the Reagan tax cuts and referred to the “boom” that occurred following the tax cuts. While the economy did grow rapidly in the years from 1983 to 1986, the main reason was the severity of the 1981–82 recession. Economies tend to bounce back quickly following a severe recession.
We saw the same story in the 1970s. The economy grew at a 5.7 percent annual rate in the thirteen quarters from the fourth quarter of 1982 to first quarter of 1986. This is not hugely different than the 5.3 percent annual growth rate from the first quarter of 1975 to the third quarter of 1977. The key to the more rapid growth in the Reagan recovery was the somewhat greater severity of the 1981–82 recession, which pushed unemployment almost to 11.0 percent.
It is also worth mentioning the poor performance of investment following the reduction in the corporate income tax in 1986. The tax reform act passed in that year lowered the corporate rate from 46 percent to 35 percent, roughly the same size reduction as is included in the current bill. Rather than leading to a boom, investment actually fell as a share of GDP over the next three years.
This post first appeared at the Center for Economic and Policy Research.