Says Ronald Reagan 'reversed his world's 'largest tax cut' and raised taxes when revenues did not match the expectations.
Stephen Colbert has interviewed a slew of presidential candidates in the first weeks of his new job hosting CBS' The Late Show, including Jeb Bush, Donald Trump, Vermont Sen. Bernie Sanders and Texas Sen. Ted Cruz. His time with Cruz on Sept. 21 stood out for a fact-filled back and forth about a major Republican role model, President Ronald Reagan. Colbert asked Cruz if he could agree with Reagan's support of amnesty for undocumented immigrants and record of raising taxes amid budget shortfalls. Cruz said 'of course not' before pivoting to Reagan's most conservative accomplishments, one being that he 'signed the largest tax cut in history' and spurred economic growth. 'You know, when Reagan came in, from 1978 to 1982, economic growth averaged less than 1 percent a year. There's only one other four-year period where that's true. That's true from 2008 to 2012,' Cruz said. Colbert jumped in, saying 'But when conditions changed in the country, he reversed his world's 'largest tax cut' and raised taxes when revenues did not match the expectations. So it's a matter of compromising.' PolitiFact explored Cruz's point about economic growth in another fact-check. We wondered if Colbert's retort was on the money or overstated. (It's our first fact-check of Colbert in his new role - and the first one in five years, period.) Did Reagan really shift course on tax cuts when the growth stopped? A CBS press contact did not return an email for comment. Reagan's tax cut As Cruz said, the Gipper really did cut taxes - with the help of Congress - in his first year as president. The 'largest tax cut in history' that Cruz mentioned is in reference to the Economic Recovery Tax Act of 1981, a $38 billion phased-in cut ($99 billion in 2015 dollars). Put in the way that economists prefer to discuss tax cuts, it represented 1.91 percent of the country's gross domestic product. This law included across-the-board cuts of about 30 percent to statutory income tax rates. As Colbert said, Reagan raised taxes, too. Two laws, one in 1982 and another in 1984, were especially dramatic. These laws generally raised taxes by removing tax loopholes, not by raising the tax rate, said Dean Baker, a liberal economist and co-founder of the Center for Economic and Policy Research. Still, Baker said, 'the loopholes were big ones.' Reagan's tax increases 1982: The most significant tax increase Reagan signed was also the first. The Tax Equity and Fiscal Responsibility Act of 1982 (yes, another law with a very sexy name) increased taxes by almost 1 percent of GDP. The 1982 tax increase was 'probably the largest peacetime tax increase in American history,' said economist Bruce Bartlett, who advised Reagan on domestic policy and then worked as Treasury deputy assistant secretary for economic policy in the George H.W. Bush administration. (An analysis by Jerry Tempalski, an analyst in the Office of Tax Analysis with the U.S. Department of the Treasury, agrees.) This law was driven by pressure to attack the federal budget deficit, as well as the impression that Reagan's tax-cutting was partially responsible for lower-than-expected tax revenues. Bartlett, who reviewed Reagan's tax record for Tax Notes in 2011, cited a Treasury estimate that the 1982 law raised taxes by almost 1 percent of GDP, or about $150 billion in modern dollars. Specifically, it rolled back some but not all of the 1981 tax cut for writing off equipment, and it repealed 1981 'safe harbor' leasing provisions, said Stephen J. Entin, senior fellow at the Tax Foundation and former deputy assistant secretary for economic policy in the Reagan administration. 1983: A law Reagan signed in 1983 aimed to keep Social Security afloat by increasing payroll taxes and taxing Social Security benefits for some high-earners. This cost $24.6 billion, or almost $50 billion in 2015 dollars, through 1988, according to an administration estimate. 1984: The Deficit Reduction Act that Reagan signed rolled back part of the 1981 cut on buildings, Entin said, with the idea that Congress would enact spending cuts. 'But many of those cuts were either never enacted or were later restored,' Entin said. This led to $25 billion in tax receipts. Reagan also signed tax increases in 1985, 1986, 1987 and 1988 (as well as a couple other laws with revenue reductions). So where does that leave Reagan's tax record on the whole? It's mixed. On one hand, revenues were lower as a share of GDP in his last year in office (17.6 percent of GDP in 1988) compared to the year before he took office (18.5 percent of GDP in 1980), according to the White House Office of Management and Budget. However, the thrust of the 1981 tax cut that Cruz touted on Colbert's show didn't prove to have lasting effects on the whole. A 2006 Treasury Department analysis offers another view of the plunge after the 1981 law and the subsequent changes that wound it back. Reagan's staff tallied up the effect of major legislation on tax receipts over his tenure for his final budget proposal (page 4-4). The 1981 tax cuts comprised most of the total $275 billion in tax relief, but the other side of the ledger listed $133 billion in cumulative tax increases. 'Thus, Reagan took back about half the 1981 tax cut with subsequent tax increases,' Bartlett wrote.
Our ruling Responding to Cruz's assertion that Reagan 'signed the largest tax cut in history,' Colbert said he 'reversed' it and 'raised taxes when revenues did not match the expectations.' Legislation that Reagan signed over his time in office and raised taxes did not completely reverse the 1981 Economic Recovery Tax Act. But the broader point Colbert makes is on point. Reagan agreed to raise taxes to deal with budget deficits, even if he wasn't enthusiastic about it. We rate the claim Mostly True.