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Figure 4.3: The Top Marginal Personal Income Tax Rate, 1913–2009

Source: Data from Tax Policy Center (Urban Institute and Brookings Institution).

With the New Deal, the top marginal tax rate rose to 63 percent, and then it rose further during World War II, to reach 94 percent by 1945. It remained near this stratospheric level until the 1960s, when tax cuts during the Johnson administration reduced it to 70 percent in 1965. It remained around that level until the Reagan Revolution. A series of tax cuts at the center of the Reagan agenda reduced it in steps to 28 percent by 1988. It is a mark of the lasting legacy of Reagan that the top marginal tax rate has not again reached even 40 percent since then. Obama entered office with the top rate at 35 percent.

Reagan argued for tax cuts on three major grounds: that lower marginal tax rates would improve the incentives for innovation and entrepreneurship; that the increased growth following the tax cuts would mean higher rather than lower government revenues; and that lower tax rates would lead the way to a smaller government overall, on both the tax and spending sides. The message was contradictory. Would tax revenues go up or down? Would spending, even on popular programs, have to be cut? Reagan’s team had it both ways: that tax cuts would be self-financing through faster growth and that they would be the leading edge into politically difficult spending cuts. We’ll continue to return to the implications of the tax cuts in later chapters. Suffice it here to state that the tax cuts were not self-financing. They led to large budget deficits and to pressures to cut government spending on domestic discretionary programs, all the more because spending on the military rose.

Cutting Civilian Outlays

It was also an overt goal of Reagan and his supporters, almost as important as the tax cuts, to cut the size of civilian government outlays while simultaneously boosting military spending. Civilian programs were viewed as wasteful, unnecessary, and lavish transfers to the undeserving poor. One of Reagan’s lasting images was the “welfare queen,” a larger-than-life individual, always imagined as an African American woman, who bilked the federal welfare programs by registering for benefits under multiple aliases. Whether such a figure truly existed was much debated, but the wildly popular idea that welfare fraud was rampant led to a surge of public support for cutting or eliminating many income support programs. The War on Poverty thus became a war on the poor.

The broadest indicator of the post-1980 change is the share of national income devoted to the provision of public goods and services in several categories. Figure 4.1 showed the overall civilian budget of the federal government relative to GDP. We can see that the Reagan Revolution achieved one of the first things it set out to accomplish: an end to the rising trend of civilian outlays as a share of GDP. The civilian budget rose from around 5 percent in 1955 to a peak of 14.9 percent of GDP in 1981. Then the increases stopped. Total civilian spending remained in the range of 13 to 15 percent of GDP thereafter, settling at 13.9 percent of GDP in 2007, the year before the financial crash and the rise in stimulus spending.

Spending on “physical resources,” mainly infrastructure, was sharply curtailed, falling by half, from around 2 percent of GDP to around 1 percent of GDP.16 The accumulated backlog of unmet infrastructure needs has soared as a result, to more than $2 trillion (roughly 15 percent of GDP), according to the American Society of Civil Engineers, which keeps track of America’s infrastructure performance and needs.

Another area that was sharply cut was education, job training, and employment programs, all vital areas of investment in human capital, especially in the context of globalization. Most education spending is at the state level, but the federal role is extremely important to preschool, higher education, and job training and placement. The federal education programs were curtailed in the 1980s, and overall