dited to Arthur B. Laffer of the University of Southern California (Diller 251-252). Note the following diagram:“Laffer posited that government revenues rise as tax rates rise until they reach a point at which the increases in revenue brought by higher rates are less than the loss of revenue caused by the public’s reduced incentive to work. He argued that… the tax rates in force under the Carter administration were above optimal level. Therefore, they believed, tax revenues could be increased not by raising rates, which would intensify the disincentives Morris 5to produce, but by lowering the rates so they would be closer to the optimal rate of taxation”(Diller 252-253).Reagan’s theory went into effect in August 1981. Named the Economic Recovery Tax Act of 1981, it reduced tax rates 25%, 5% less than Reagan’s initial plan, for 33 months. The bill indexed the tax system to block inflation from pushing taxpayers into higher tax brackets as their incomes increased. Reagan also cut 35 billion dollars in public programs while raising defense spending 26 billion dollars. This intense militaristic attitude was because of the continuing and heightening fear the Cold War was producing, or so the administration stated. Most democrats viewed it as mere pork-barrel spending by a frivolous president (Diller 253).Government spending also played a large factor in Reagan’s economic policy. Termed the “leading edge” of the economic program, its ultimate goal was to reduce the size of the government (Meyer 68). The combination of a tighter fiscal policy with a looser monetary policy would result in a declining real interest rate but produce an increasing potential output. According to supply-side economists, the theory – tax cuts offset by lowered government spending – would undoubtedly heighten economic growth. Whether or not the Reagan administration followed suit will be disc...
