The Growth Experiment: How the New Tax Policy Is Transforming the U.S. Economy

By Lawrence Lindsey | Go to book overview

Chapter 6

Who Made the Deficit?

"I think it would not be a favor to the people to send them a tax refund written in red ink that's going to add to their interest rates and add to inflation."

—SENATOR LAWTON CHILES, in the Democratic response to
a Reagan television address 1

"All in all, I believe it is feasible to attain President Reagan's original goal of (budget) balance in fiscal 1983, and relatively easy to do so by fiscal 1984."

—PROFESSOR MILTON FRIEDMAN 2

From the time the Reagan tax cuts were proposed, they have been linked to the problem of the federal deficit. Critics like Senator Chiles argued the tax cuts would substantially increase the deficit and add to inflation. Proponents such as Nobel Laureate Milton Friedman, no fan of deficits, maintained that the deficit could be reduced and inflation avoided by the rest of President Reagan's programs: spending cuts and monetary restraint. Now the facts are in. The deficit did increase dramatically in the wake of the tax cut. Yet, as with the revenue effects of the tax cut, what seem to be the bare facts don't tell the story very well. By reasonable standards of measurement the tax cut contributed only minimally to the deficit.

Before addressing the various did-the-tax-cuts-cause-the‐ deficit questions, we have to answer a semantic question. There is a big difference between contributing to a problem and causing it, and a big difference between being a minor and a major contributor. To the question Was the deficit larger with the tax changes than it would have been without them? there is only

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