FACT CHECK: Scott Walker oversells effects of Reagan tax reform

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In several appearances across Iowa this month, presidential candidate Scott Walker has called for federal tax reforms that would lower marginal income tax rates while eliminating deductions and other targeted tax breaks.

Such an approach was proven effective, he argues, by the Tax Reform Act of 1986. That was the bipartisan legislation signed into law by Republican President Ronald Reagan that marked the most significant update to federal tax policy in decades.

WE RATE WALKER'S CONTENTION THAT THE 1986 TAX LAW "WORKED" IMPRECISE, because of the near impossibility of attributing shifts in broad economic measures to a single change in policy.

CONTEXT

Walker is essentially arguing for new tax reforms that would roll back marginal tax rates and get rid of the targeted tax breaks and incentives that have accumulated since 1986. Such a reform wouldn't necessarily have an impact on government revenues (the '86 law was designed to be revenue-neutral) but it would simplify the tax code, lower rates for income tax average payers and eliminate special treatment for certain entities or activities.

Here's what Walker said at the Family Leadership Summit in Ames on July 18:

"I think a good start would be to look at what President Reagan did back in 1986. … Back in the '80s it worked under Ronald Reagan. Lowering marginal tax rates, reforming the code worked back then. I think to move forward, we need to look back to something like that."

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That's a slight variation on his stump speech. Here's what he told a crowd in Davenport on July 17:

"The government could charge higher rates to the few who can afford it, or we can lower the rates, broaden the base and increase the volume of people who participate in the economy. Years ago a plan like that worked pretty well under a guy by the name of President Ronald Reagan."

The fact to be checked, then, is how well the tax reform actually "worked." Did it have a demonstrable, positive effect on Americans' economic well-being?

To back up Walker's claim, his campaign noted a 2012 op-ed published in the Hill newspaper crediting the '86 law with boosting the stock market and lowering unemployment in the two years following its passage, as well as factoids from the conservative Heritage Foundation think tank and National Review magazine noting strong economic growth throughout Reagan's presidency.

ANALYSIS

To evaluate whether the Tax Reform Act of 1986 "worked," as Walker claims, we'll evaluate it based on six factors:

Gross domestic product, which is the most straightforward measure of economic growth available.

Wage growth, unemployment rates and workforce participation, which address Walker's claim that the reform increased participation in the economy.

The Dow Jones Industrial Index, which measures the stock market performance referenced in that op-ed from "The Hill."

Federal government revenue growth.

We'll evaluate each of these in the two- and four-year increments following the enactment of the tax act on Oct. 22, 1986.

Economic growth: The tax bill became law in late 1986. In 1987, annual gross domestic product grew 3.5 percent and in 1988 it grew 4.2 percent. GDP growth slipped slightly in 1989 to 3.7 percent and then substantially in 1990, to 1.9 percent, as the U.S. economy fell into a recession that lasted into early 1991.

Those growth rates are similar to or lower than rates seen in the years immediately prior to passage of the tax reform: The economy grew by 4.6 percent in 1983, surged by 7.3 percent in 1984, and then increased by 4.2 and 3.5 percent, respectively, in 1985 and 1986.

Given the similarities in growth before and after the law was enacted, it's difficult to evaluate the reform's impact on the GDP.

Average annual GDP growth across Reagan's eight years in office, if you're wondering, was 3.5 percent. Since 1946, average annual growth has been 2.95 percent.

Workforce participation: Walker said that a 1986-style tax reform could "increase the volume of people who participate in the economy." One obvious way to measure that is through workforce participation — that is, the percentage of people ages 16 or older with a job.

But it turns out that figure did not change a whole lot with the enactment of the tax reform. The participation rate was 65.4 percent in October 1986. It was 65.7 percent a year later and 66 percent a year after that. By October 1990, it was 66.4 percent.

The increase seen throughout the period following enactment of the law, moreover, followed an upward trend that began years earlier, after labor participation bottomed out at 63.5 percent amid a recession in late 1981.

Unemployment rates: Another measure of economic participation is the unemployment rate. When the reform act was signed into law in October 1986, the U.S. unemployment rate was 7 percent. It fell steadily over the next two years, hitting 6 percent in October 1987 and 5.4 percent in October 1988. It dropped all the way to 5 percent in March 1989, but then began to rise again, hitting 5.9 percent in October 1990, four years after the bill's enactment.

Prior to the bill's passage, the rate had been stuck in the low 7-percent range for about two years. In general, unemployment rates can vary widely, and move closely with the overall business cycle.

Wage growth: Average earnings rose modestly in the years after the tax bill was enacted, but failed to keep pace with inflation. When adjusted for inflation, real average wages actually declined steadily throughout the 1980s and into 1990s, with no change following passage of the tax act.

In current dollars, average hourly earnings for production and nonsupervisory employees rose from $8.96 in October 1986 to $10.30 four years later. That sounds like an increase, but actually represents an erosion in buying power when adjusted to account for inflation.

An $8.96 hourly wage in 1986 equates to $19.51 per hour in 2015 dollars, but $10.30 in 1990 equates to $18.81 in 2015 dollars.

Stock market: In the two-year period following Reagan's bill signing, the Dow Jones Industrial Average rose 18.86 percent. In the four-year period following the signing, it rose 37.22 percent.

That growth was not a steady, straight line increase, however. Both the two-year and four-year periods were marked by substantial market volatility, including the Oct. 19, 1987, "Black Monday" crash in which the Dow lost 22.6 percent of its value in a single day, and a 15 percent drop over a period of weeks in the summer of 1990.

Federal government revenues: The tax reform was designed to be revenue-neutral, and did not have a major effect on how much money the government brought in. After two years, the changes increased federal revenue as a percentage of GDP by an average of 0.22 percent; after four years, the increase averaged out to just 0.01 percent per year.

An avowed fiscal conservative, Walker has talked about cutting the size of government. The Tax Reform Act of 1986 did very little to increase government tax revenues, but it did not decrease them either.

To sum up: Several, but not all, measures show the American economy improving in the period following enactment of the 1986 tax reform. But those improvements follow a pattern that began with the recovery from the recession of 1981, and were undermined by the onset of recession in the early 1990s.

That makes it difficult to say with confidence exactly what effect the tax reform had on the economy, or how much credit the law deserves. Extending the time frame of the analysis only complicates things further, since tax increases were enacted in 1990 and 1993.

"Something as major as the '86 reform act is obviously going to have some effect on the economy. There is no doubt about that," Iowa State University economist Joydeep Bhattacharya said in an interview. "But the broader ramifications are much harder to say."