Federal Tax Revenues During the 1980’s

Paul Krugman takes on another aspect with respect to the latest intellectual garbage from Stephen Moore by commenting on Moore’s claim that Federal tax revenues soared from 1980 to 1989:

I have a suspicion that the Post forced him to include the inflation-adjusted number, rather than let him get away with the gee-whiz nominal number, which is, um, inflated by the relatively high rate of inflation that prevailed even in the later Reagan years. In any case, however, Moore offers no context, leaving the impression that this was an extraordinary achievement. So I looked at real federal receipts over a longer period, shown above using a log scale so that the slope of the line represents the rate of growth. If you take the period Reagan was in the White House, 1981:1 to 1989:1, I get an increase of 14.3 percent; I’m not sure why Moore’s number is bigger, but never mind.

Paul is debunking a claim that has been made and debunked many times. The usual line is that Federal tax revenues almost doubled from $517.1 billion in 1980 to $1032.0 in 1990. The inflation-adjusted part comes from the fact that the GDP deflator rose by 50.3% over this period so in real terms revenues rose by 32.8% over the entire decade. But there is another serious problem with this that anyone who followed the various tax policy changes during the Reagan years should know. Yes income tax rates were cut in 1981 but there were various tax rate increases that followed including a significant increase in payroll tax rates in 1983. Table B.21 of the Economic Report of the President provides the details on Federal tax revenues. Payroll taxes rose from $157.8 billion in 1980 to $380 billion in 1990. Yes, a 140.8% nominal increase and a 60.3% increase in real terms when this tax rate was increased. All other Federal taxes therefore rose by only 20.8% in real terms over the decade. Since I’m not the first to point this out one would have to believe that Stephen Moore would have seen this often made point before. And yet he can’t be bothered to tell his readers the whole story? Update: When Moore wrote:

close to a 75 percent change (25 percent after inflation)

Paul wondered:

I get an increase of 14.3 percent; I’m not sure why Moore’s number is bigger, but never mind.

I noted prices rose by 50% during the 1980’s. Moore apparently took the difference between the nominal growth rate and the increase in the price level to get the real increase but this is only an approximation. For large changes one would need to take this difference and divide it by the new price level (1.5). Suppose a worker made $10 an hour in 1980 and enjoyed a $17.50 wage rate in 1990. Since his cost of living rose from $1 per unit of goods to $1.50 per unit of goods, his real wage in 1980$ was $11.67 an hour not $12.50 an hour. But Stephen Moore has always been very bad at basic arithmetic.