The Truth About the Reagan Deficits

The ability to recover from the 1980s deficits was the result of three historical "flukes" that happened at the same time: a huge demographic bulge, an extremely strong dollar and a sudden peace dividend.

The contrast with the upcoming 20 years is stark. By 2020 the over-65 percentage of the population will have grown to more than 16 percent while the working-age population will have declined. The fastest growth is among the very elderly (those over 85). Social Security, Medicare and other entitlement programs (such as veterans' benefits) already account for more than half of federal spending. On top of this, the Bush administration has added a hugely expensive prescription drug benefit for the elderly. If no changes are made to eligibility for the programs, they will, by 2020, gobble up virtually all federal tax revenue.

With short-term interest rates lower than they have been in a half-century, the dollar is weak and getting weaker. At the same time the Treasury will have to find buyers for an ever-increasing supply of bonds to fund the deficit.

Conventional calculations of the budget deficit include the money being paid into Social Security today. Because there are currently more working-age contributors than claimants, the Social Security account is in "surplus." Strip that out and the true underlying deficit is more like $720 billion than the $521 billion quoted in this week's speeches.

el - She doesn't mention the Reagan tax increases that followed his first huge cut. Recognizing that the 1981 tax cut was excessive, the Reagan administration scaled back the cuts through tax increases, primarily the Tax Equity and Fiscal Responsibility Act of 1982. Most people don't recognize this because he did reduce the income tax rate, being very generous to the high brackets, twice. In 1981 the top personal rate was cut from 70% to 50%. Again tax rates were cut in 1986 to a 28% top rate. All of Reagan tax cuts benefitted the top 1% of taxpayers hugely. The Bush tax cuts have similar benefit ratios.

More on trickle down economics and tax cuts.

Today the over 50% of the national income goes to the wealthiest 20% of Americans. In 1980 the top 1% of tax filers received 8.45% of American AGI (Adjusted Gross Income) and in 2000 that figure had risen to 20.81% of the national AGI. Likewise in 1980 the average rate of federal income taxes that was actually paid by filers in the top 1% was 34.47% of income and by 2000 that figure had dropped to 27.45% of income. This is the first time since 1935 that such a large portion of the national income has gone to such a small portion of the population. In 1967 the wealthiest 20% only accounted for 43% of the nation?s income. The trend began in 1982. Between 1967 and 1982 middle-income households were gaining a larger share of the economy. What this means is that between 1982 and 2001 the bottom 80% of Americans have lost share in the nation?s economy. This was the inevitable result of Reaganomics. It was an intended result. Political control and economic control go hand in hand.