Posts Tagged ‘Reaganomics’

Taxes, welfare and Alan Greenspan

January 17, 2014


Alan Greenspan, the former chair of the Federal Reserve Board, believed that the key to increasing a nation’s wealth is investment.  Every dollar that was collected in taxes on rich people and corporations and spent on unemployment compensation, food stamps and free health care was, in his view, one less dollar available for investment.  So he favored lower taxes on the rich and less spending on the poor.  We now know how this worked out.

American corporations are stuffed with cash, and the Federal Reserve System has pumped trillions more in cash into the big banks through its “quantitative easing” program.  But the U.S. economy, and to some extent the world economy is stalled, because of the lack of buying power of the American middle class.  That buying power was sustained in earlier eras by rising earnings, and then by rising participation in the work force and rising debt.  But all of these have run their course.  No rational business will increase production unless there is a good market for the product.

Click on Alan Greenspan’s ‘The Map and the Territory’ review by Robert Solow for a more in-depth discussion of this issue.


Reaganomics and the Democrats

February 17, 2011

Bruce Bartlett, a former senior policy analyst in the Reagan White House, posted this chart on his web log in order to make the point that Ronald Reagan as President was a pragmatist who was able to compromise without losing sight of his main goal.

He is right about that, but I want to use the chart as a point of departure to make two further points.

(1)  Under the Reagan administration, the tax burden was shifted downward.  The average blue-collar worker may have paid more in taxes in 1989 than in 1981.

(2)  Ronald Reagan did not govern the country all by himself.  The so-called Reaganomics program could not have been enacted without the cooperation of the Democrats in Congress.

Take the Economic Recovery Tax Act of 1981.  This included not only President Reagan’s proposal to lower the top tax rate from 70 to 50 percent, but a Christmas tree of tax breaks and loopholes, mainly for the benefit of big corporations, that were added by the Democratic majority in Congress.  President Reagan signed the whole mess into law rather than renounce his original plan.

Under the Tax Reform Act of 1986, most of those tax breaks and loopholes were rescinded.  The top tax rate was further reduced from 50 to 28 percent, while the tax rate for the lowest bracket was increased from 11 to 15 percent.  The net result was a further small reduction in taxes overall, but that net figure masks the downward shift in the tax burden.

Then there were the Social Security Amendments of 1983.  These amendments raised Social Security payroll taxes in gradual annual increments and gradually raised the age for full Social Security benefits from age 65 to 67.  A majority of both Republicans and Democrats, in both houses of Congress, supported these amendments.

The amendments achieved their purpose.  They kept the Social Security Trust Fund solvent to this day and for decades into the future.  But they also increased the tax burden on blue collar workers.  Congress didn’t have to do that.  If instead a bill had been passed raising the amount of income subject to Social Security taxes, the same goal could have been achieved by shifting the tax burden upward instead of downward.


The flawed logic of supply-side economics

February 15, 2011

From about 1945 to about 1975, U.S. economic policy was influenced by the ideas of the British economist John Maynard Keynes.  He said the key to economic prosperity was consumer demand for goods and services.  As long as people are willing and able to buy things, it was thought, business owners and managers supposedly would find a way to provide them.  In recessions, the job of government was to keep things on an even keel by providing unemployment compensation, engaging in public works, easing interest rates and whatever else it took to keep money in circulation.

President Reagan

The Reagan administration based its policy on a new and opposing theory which was a radical departure from Keynesianism.  The new theory was that savings and investment, not demand, were the key to prosperity.  The new theory was that it is the “supply side,” not the “demand side,” that matters.  And the key to the demand side is to lower the marginal tax rate – the additional tax you will pay if you increase your income another dollar.

Suppose you are someone who is in the 95 percent tax bracket during the 1950s.  Would you want to risk investing your money, knowing that all you would get back is 5 cents on the dollar?  Would you strive to earn extra income, knowing all you could keep is 5 cents on the dollar?  Or would you just want to sit back, enjoy yourself and spend your money on luxurious living?

Along comes the Kennedy administration, and cuts the top bracket to 70 percent.  The government loses very little in revenue, but it increases your return on investment, or on extra work, sixfold. So you, as a rich person, have six times more incentive to work and invest than you did before.

In 1978, during the Carter administration, the top capital gains tax rate was cut from 70 percent to 28 percent.  In 1981 and 1986, during the Reagan administration, the top personal income tax rate was cut in two steps from 7o percent to 28 percent.  The upper-bracket earner got to keep 72 cents on the extra dollar rather than just 30 cents.  This meant that the person could invest in something only half as profitable or twice as risky as before and still come out ahead.  The logic of the theory said this should result in a surge in investment, and prosperity for all.

This seemed plausible to a lot of people at the time.  I myself thought it was worth a try.  But in fact U.S. economic performance was no better when the top tax rate ranged from 28 to 39 percent than when it ranged from 70 to 95 percent.  But when you stop and think about it, this should not have been surprising.