Reaganomics - Explained
Have you wondered whatever happened to Reaganomics? This was Ronald Reagan’s big idea, to achieve broad-based prosperity through supply-side tax cuts. How did that all work out? Let’s take a look at the evidence.
The notion, that lower tax rates will bring in more tax revenue, does not seem to make sense. It’s based on the Laffer curve, which shows the relationship between government revenue and the tax rate. At a 0% tax rate, there would obviously be no tax revenue. As the tax rate increased, so would revenue, until it maxed out at a sweet spot. Beyond that point, the burden of the high tax rate would depress the economy so much that tax revenue would actually decrease until it zeroed out.
Arthur Laffer was an economist on Reagan’s advisory board who argued that the top tax rate at the time - of 70% - was choking the economy - putting us to the right of the sweet spot. By reducing this tax rate, we would unleash a boom in corporate profits and personal incomes so that government tax revenues would actually increase bringing us back to the sweet spot.
The Laffer curve was an appealing notion to the wealthy because it provided a justification for cutting their taxes. This would be a win-win-win: lower taxes, a stronger economy, and a shrinking budget deficit. As the money flowed downstream, the rising tide would lift all boats. It was almost too good to be true. And, to be honest, not everyone agreed. Some even called it a Ponzi scheme. Let’s turn to the history books to see who was actually correct.
The first visible impact of the tax cuts was, disappointingly, a huge loss of government revenue, and an immediate spike in the federal deficit, which skyrocketed, quickly topped out at nearly $200 billion and remained unacceptably high throughout Reagan’s term, only to swell even more under his Republican successor, George Bush, Senior. As a solution to Carter’s $80 billion budget deficit, [boxing in the bars here] Reaganomics was a miserable failure.
As for the Laffer curve, most available evidence now suggests that the sweet spot happens at a top tax rate of 70% the very spot we started at before the first Reagan tax cut. The Laffer principle, then, that cutting tax rates increases tax revenue, the anchoring principle of supply side economics turns out to be a laugher.
Hi. I’m Nate Link and I bet you are as concerned about tax policy as I am. To get the complete story on Reaganomics, check out the full video essay on my website at www.SnickerSnack.com.
7 авг 2024
