Data Bases • Custom Term Papers • Free Term Papers • Free Research Papers • Free Essays • Free Book Reports • Plagiarism? Links • Top 100 Term Paper Sites • Top 25 Essay Sites • Top 50 Essay Sites • Search 97,000 Papers @ DirectEssays.com • Search 101,000 Papers @ ExampleEssays.com • Search 90,000 Papers @ MegaEssays.com Free Essays • Term Paper Sites • Chuck III's Free Essays • Free College Essays • TermPaperSites.com • My Term Papers • Get Free Essays • Essay World • Planet Papers	Search Lots of Essays Back to Subjects - Political Science ronald reagan tax policy ronald reagan tax policy The year is 1980. The height of the Cold War was at its peak. The race for superior nuclear armament and a society trying to identify what direction their future was headed in were engulfing the nation. Yet, everyday President Ronald Reagan was seen smiling and seemingly in control. Perhaps he was. Despite social conflicts, the economy, which tends to control whether life is good or bad, was booming with a low unemployment rate, a small trade surplus, and a modest budget deficit. However, interest rates were in double digits as well as inflation and the national debt increased more than it had in 200 years. So what was going on? Was Ronald Reagan an economic mastermind or the man who ruined an economy still feeling the aftermath twenty years after the fact? The answer is both. The economy can be manipulated for success or a failure by a President and Reagan did both, but the economy is also on its own timeline and relatively independent of the executive office, leaving the scrutiny of President Reagan’s administration in flux. The father’s of the Constitution clearly intended for Congress to control the economy more than the President, with this being apparent in the very beginning of the national document. In Article 1, Section 8, the constitution states… “Congress holds authority to… lay and collect taxes, duties, imposts and excises, to pay the debts, provide for the common defense and general welfare of the United States…; regulate commerce with foreign nations, and among the several states…; and coin money, regulate the value thereof, and of foreign coin…”(Diller 239). In contrast, the Constitution leaves no specific economic power to the President, creating a loophole for the President to influence the economy. The 20th century has seen a change in the ability of a President to control parts of the economy through Congressional statutes. Through State of The Union addresses, commercial relations with foreign nations, veto power, and the ability to persuade public opinion via the media, Presidents now have the ability to make Congress write policy in the President’s best interest. Though the President still cannot write economic policy, the American people hold him accountable for the failures and successes of the economy. A President’s term partially rests on how the economy was during his term, with prosperity or recession playing a part in deciding the fate of the candidate’s next four years (Diller 239). Political Scientist Clinton Rossiter: “The people of this country are no longer content to let disaster fall upon them unopposed. They now expect their government, under the direct leadership of the President, to prevent a depression or panic and not simply wait until one has developed before putting it out. Thus the President has a new function which is still taking shape, that of Manager of Prosperity”(Diller 239). Ronald Wilson Reagan was born on February 6th, 1911, to Jack and Nelle Reagan of Northern Illinois. Reagan took an obscure route to the White House. He went into broadcasting after graduating college in 1932. He entered into an acting career in 1940 and married actress Jane Wyman in 1941. In 1947 he entered the “political” arena, serving as President of the Screen Actors Guild labor union. In 1948 he divorced Wyman and married Nancy Davis, another actress and his current wife. They starred in their last movie together and then Reagan went on to work for General Electric to host a weekly television program. It was during this time Reagan did what no other President has done before. After growing up in a staunch democratic household, he began to listen attentively to his conservative father-in-law and formally switched his party affiliation from Democrat to Republican in 1964. He quickly became revered by Republicans nationwide and won the Governorship of California in 1966. It was there he mastered the art of maintaining positive public perception. He made it apparent that he wanted limited government when in fact he was going along with an assertive state legislature that was working to expand public programs. Reagan made an unsuccessful bid for the Republican Presidential nomination in 1976 but made himself the frontrunner for the 1980 primaries. He successfully ousted CIA director George Bush, Senators Robert Dole, Howard Baker, and Representative John Anderson. He beat incumbent President Jimmy Carter by creating the image that Carter’s policies were dangerous. With the help of the hostage crisis in Iran, a weak economy burdened with high inflation and high unemployment, Carter’s lack of popularity, and Reagan’s own ability to look and sound fantastic in front of the camera, Ronald Reagan won the 1980 Presidential election by a ten-point margin (Lammers 99-101). Ronald Reagan’s 8-year reign on 1600 Pennsylvania Avenue holds two very different public interpretations. Before analyzing what some call the best or worst president ever, an analysis of his economic policies must first be understood. Reagan’s economic policy was based on a theory called supply-side economics. The theory is that the economy will grow and unemployment will fall by promoting productivity and investment. Supply-side economists believe that tax rates directly affect how people use their money. If the taxes are lowered people will spend more in the economy and have the incentive to save. Similarly if a business is not penalized by high taxes, they are more likely to invest the rollover money into their company, build new plants or factories, thus increasing their productivity and making new jobs. Supply-side economists felt this would generate enough revenue nationwide to decrease deficits even though taxes were still low. This theory is credited 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 to 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 discussed later in the report (Sahu 8). Manipulating the nation’s labor supply was another objective of the administration ‘s economic structure. Two major policies were designed to increase work effort in the country. The first policy reduced marginal and personal income tax rates, the second involved reformation of public-assistance programs (Sahu 8). The goal of the two policies was to spur entrepreneurship and increase the incentives of those who were dependent on some sort of public assistance, i.e. food stamps and welfare. The underlying goal was to cut federal spending on the programs that the less fortunate were overusing and replace it with higher per capita incomes. Regulatory reform and market efficiency were also a large factor in Reagan’s economic policy. Author Ronald L. Tracy: “Supply-side economists believe that government regulation of industry increases the cost of doing business and imposes impediments on the free market. Deregulation will reduce costs and will consequently shift the aggregate supply curve to the right, increasing the real output. Accordingly, Reagan supply-side policies emphasized regulatory reform to strengthen the forces of the free market.” Ronald Reagan’s free market ideology was the cornerstone of his policies. He felt that any hindering of the market by the government or its laws ruined the chances of the United States being the best in the world in any market. Only by reviewing the outcome of his efforts will one be able to decide whether he was right. The securities market was a large part of Reagan’s free market and deregulation idea. The Stock Market crash of 1987 and the corporate takeovers during his administration redirected regulatory reform from Washington to Wall Street. The administration had a history of leniency enforcing regulations and now the problems were surfacing. One Reagan supporter notes that… the Administration’s laissez-faire policies reflect sound economic thinking and appreciation of the academic literature on corporate takeovers and the microstructure of securities markets” (Davis 133). Reagan eventually responded to the questions, establishing a Presidential Task Force on Market Mechanisms, or the Brady Commission. The administrations final analysis… “resisted demands for sweeping changes in market mechanisms, and instead opted for a minimal regulatory response’ (Sahu 11). Now that there is an explanation and understanding of Ronal Reagan’s supply-side economic policy, one can begin to view the outcome of each subdivision of the policy and the positives and negatives that accompany each section. The following opinions will produce a breakdown of the preceding agenda, manufacturing a final analysis of whether or not each policy was successful. Supply-Side Economics and the Laffer Curve Ideology President Reagan and his supply-side economic theory was based on cuts in marginal tax rates in production that concurrently raised a net return and thus caused an increase in production supply. This theory was not as extreme as Laffer’s theory. Reagan felt that, by Laffer’s model, such an increase in production would render the ability to cut income taxes significantly (25%). The cut in income taxes would raise activity in the market, jumpstart supply, raise the average American’s taxable income, and subsequently heighten overall tax revenue. Unfortunately for Reagan, output had no chance to compensate for such a large cut. The enormous budget deficits incurred by the Reagan Era confirms this notion and leaves little if any debate. In President Reagan’s defense, logistically his supply-side economy never followed through long enough to see if it would have worked. Besides his Economic Recovery Tax Act of 1981, the majority of his policies for the next seven years raised the cost of capital instead of reducing the cost. Final analysis of hi eight-year reign concludes that, on net, the cost of productivity was raised through tax policy (Murphy 40-49). “Thus Reagan was not much of a supply-sider, all pretenses in that direction aside, with regard to capital during the course of his Presidency”(Murphy 41). The question that remains is – would supply-side policies to spur capital work if followed through? Based on an intense analysis by economists Charles Bischoff, Ed Kokkelenberg, and Ralph Terragrossar, the answer is maybe. Traditional investment models and … “the neoclassical investment models fail to account for the fact that investment determinants are endogenous. …They … overestimate the efficacy of a dose of supply-side fiscal policy on investment behavior” (Murphy 41). The three economists did use rational expectations through constant variables. The result confirmed that Reagan’s theory would have worked, yet with too small of a gain to have made a significant impact (Murphy 42). Limited Government (Spending) and the Militaristic Regime The $125 billion dollar budget deficit the country swallowed in the 1980s was not what President Reagan intended. The following excerpt from Reagan’s Council of Economic Advisors (CEA) states their objectives for limited government and spending: “From a high 23 percent of the gross national product (GNP) in fiscal 1981, Federal outlays are now scheduled to decline to 21.8% in fiscal 1982 and to reach approximately 19% beginning in 1984. From deficit $59.6 billion in 1980, … Federal expenditures are now estimated to exceed revenues by $45.0 billion in fiscal 1982 and $23.0 billion in 1983. By fiscal 1984… the Federal budget should be in balance” (Meyer 69). This outline for a balanced budget via reduced government spending and supply-side tax cuts was, well, not followed. The rate of government spending actually increased two percentage points instead of declining four percent as stated in the agenda. This six percent swing accounts for a large portion of the deficit. The reasons for this fluctuation in spending are due to lack of spending restraint and a sharp increase in military spending (Meyer 69). Office of Management and Budget David Brockman continually harped on Reagan to cut defense spending to make up the difference, but the President stated that military spending was not going to be a part of the balanced budget and was “off limits” (Lammers 104). The problems in El Salvador and the Iran Contra Scandal were Presidential initiatives President Reagan chose to follow during the peak of the Cold War. Large chunks of money went into the Central American “Hot War”, for President Reagan felt it was a must. “El Salvador became per square mile one of the most heavily armed nations in the world” (Armstrong 33). This spending was legitimate, for shortly after the scandal in Central America the fall of the Soviet Union became real. Thus two conclusions can be made. President Reagan’s inability to eliminate the … “waste, fraud and abuse” (Lammers 128) in government spending eliminated the chance for a balanced budget. Yet, the timing of Cold War complications resulted in higher military spending that, if left tranquil, might have produced a negative outcome. Therefore Reagan was guilty of lack of domestic restraint but no one can attest to a strong and formidable fight against standing up to the Soviet Union at the end of a forty-year war. The Manipulation of the Labor Supply Another primary goal of the supply-side theory, labor supply, was set in place to create entrepreneurship, higher work effort, and a strong American capitalistic mindset. The two initiatives Reagan placed were indeed successful. His first policy, to reduce marginal and personal income tax rates, was enacted in 1981 and phased in to work for the next four years. He fervently pushed through another tax reform into legislation in 1986 to reduce marginal tax rates even more. Reagan’s second initiative, targeted to help low income families who depended on federal aid, failed initially but did come about by his second term. By turning over most programs to the state governments, he was successful in reforming food stamp legislation, housing assistance, and the Aid to Families with Dependent Children (AFDC) program (Burtless 43). But what was the outcome of all this new legislation? For starters, the Tax Reform Act of 1986 was the most important change in the income tax system in over forty-five years. The act cut ten tax brackets, from fourteen to four, out of the system and reduced marginal tax rates across the board at an average of 25%. It also reduced the marriage penalty and construed the tax rate to be more regressive. The manipulation worked. The labor supply grew substantially, with men working over 4% more annually and women over 3.5% annually (Burtless 57). The unemployment rate during the administration rose 1.9% from the previous decade, barely offsetting the effects of the income tax policy and the public assistance transfer policies. The result of all the policies and programs did produce a modest increase in the labor supply, though not nearly as high as President Reagan had intended (Burtless 62). (De) Regulatory Reform and a Free Market Ideology Ronal Reagan passionately stated that government involvement in the free market should be absent, making sure the market remained “free” from restraint. He started in the right direction. Early in 1981 Vice President George H. Bush led a task force on regulatory relief. Sixty days of suspended regulations followed so the task force could review policies throughout the country. The price controls on oil were eliminated, a deregulation that consists to this day. Reagan also combined and centralized the regulatory office to provide a more efficient base to tackle the system. Led by James Miller, head of the Office of Information and Regulatory Affairs (OIPA), and Murray Weidenbaum, the head of the Council of Economic Advisors (CEA), the combination was set in place to destroy regulation legislation and the President’s free market ideology (Boettke 120). Some feel Reagan and his administration can only claim success in slowing regulatory laws, nowhere near the goal of wiping them out. Political Economist William Niskanen: “The Reagan program of regulatory relief promised more than it delivered. The failure to achieve substantial reduction in or reform of federal regulations, building on the considerable momentum of the Carter administration was the major missed opportunity of the initial Reagan program.” (Boettke 120) Peter Boetkke states that Reagan relied on reform by changing the names of those in charge instead of structural reform. This resulted in Reagan’s essential failure in pushing his deregulation agenda through (121). Economist Kenneth Boyer disagrees. He states that deregulation did occur where it had to – in the public utilities market. The markets Reagan succeeded in deregulating were public transportation, natural gas and oil markets, and most importantly, the American Telephone and Telegraph Company (AT&T). The only reasoning in Boetkke’s theory of a slowing deregulation policy was because, besides AT&T, there were no natural monopolies. Most industries were deregulated in the Carter Administration, leaving little for Reagan to deregulate (125-126). The failure or success of Reagan’s free market ideology was left up to public opinion. The failure of the savings and loans suit was given widespread publicity as a deregulation failure. With the exception of that, one must assume that President Reagan and his administration did succeed at his goal of deregulation of the market. He just finished where Carter left off. The foregoing interpretations and President Ronald Reagan’s effort to manipulate the economy drew many different conclusions on his success and or failure from many politicians, economists, and the general public. Political economist Roger Kormendi makes a serious defense of Reagan “heaven”. He analyzed that … “high real interest rates, large current account deficits, and even large budget deficits are not necessarily fundamental problems hanging over our economy, a legacy of chaos from the Reagan era. Rather, when viewed as a whole, they are natural consequences of expectations of an improved future” (256-257). High interest rates were only a reflection of rebirth in the American economy. Foreign investment, specifically from Japan, revealed that the international community was showing confidence in the U.S. economy. Kormendi also posits that the budget deficit is not a problem in a rapidly growing economy if government spending is restrained. This is where “hell” theorists have a fight. Reagan did overspend by running large foreign account deficits while waiting for his supply-side theory to come around, which it did not (Kormendi 251). Reagan supporters claim success in reducing the rate of spending, but this decline is measured from the GNP peak in Reagan’s administration in 1983, whereas it should be measured from when Reagan assumed office, which generated a growth in spending. Deregulation was successful in part, but even a member of Reagan’s Council of Economic Advisors, Thomas Moore, was disappointed that financial markets were not deregulated more. He felt Reagan promised more than he was able to provide. Reagan’s management of the labor supply was widely successful, despite the minimal rise in the unemployment rate (Moore 107-108). Moore contests that the myth that the new 20 million jobs were … “dead end, McDonald’s-type hamburger-flipping jobs …just (wasn’t) true” (108). Eighty-five percent of the new jobs were professional or technical jobs, paying salaries over $20,000 dollars a year in 1980s rates (Moore 108). The most successful of Reagan’s economic policies was his marginal and personal income tax rates reconstruction. Many predicted this program to fail, but instead it recorded one of the most impressive economic performances in recorded history: eighty-six straight months of continuous economic expansion. This pushed the U.S. way past a European economy that was stagnant (Sahu 9). “Reagan’s vision of the ‘unlimited potential of the human mind’”(Kormendi 251)… unleashed personal initiative for success that, despite the recession in the early 1990s, spurred growth and the nation-wide boom contributed to President Clinton’s term. As all economists know, the economy at the time of the current president is not necessarily due to his policies, but a combination of past policies and current tinkering by the Federal Reserve. Ronald Wilson Reagan was, without a doubt, a controversial American President that made a serious impact on the economy of the United States during his reign in Washington in the 1980s. He was not a mastermind like many contested he was, nor was he a complete failure in economic policy. He also proved that Presidents could impact the economy in many ways. Reagan promised much more than he was able to supply and he did not restrain his spending as much as he should have. However, his confidence in entrepreneurs and the unlimited belief in the American economy’s ability to boom independently from government interference proved to be the keystone in the success of the U.S. markets of the 1990s. Politics and Government Four Hundred Twelve Economic Legacy of the Reagan Years: Euphoria or Chaos? New York: Praeger Press, 1991. Bibliography: “Works Cited” Armstrong, Robert and Janet Shenk. El Salvador, The Face of Revolution: South End Press: Boston, MA. 1982. Boettke, Peter J. “The Reagan Regulatory Regime: Reality Vs. Rhetoric.” The Economic Legacy of the Reagan Years: Euphoria or Chaos? Ed. Anandi P. Sahu, and Ronald L. Tracy. New York: Praeger Press, 1991. 117-123. Boyer, Kenneth D. “Comment:” The Economic Legacy of the Reagan Years: Euphoria or Chaos? Ed. Anandi P. Sahu, and Ronald L. Tracy. New York: Praeger Press, 1991. 124-128 Burtless, Gary. “The Supply-Side Legacy of the Reagan Years: Effects on Labor Supply.” The Economic Legacy of the Reagan Years: Euphoria or Chaos? Ed. Anandi P. Sahu, and Ronald L. Tracy. New York: Praeger Press, 1991. 43-63. Davis, Jeffry and Kenneth Lehn. “Securities Regulation during the Reagan Administration: Corporate Takeovers and the 1987 Stock Market Crash.” The Economic Legacy of the Reagan Years: Euphoria or Chaos? Ed. Anandi P. Sahu, and Ronald L. Tracy. New York: Praeger Press, 1991. 129-146. Diller, Daniel C. and Dean J. Patterson. “Chief Economist.” Powers of the Presidency 2nd Edition. Washington, DC: Library of Congress, 1997. 239-280. Kormendi, Roger C. “The Reagan Legacy: Unwarranted Optimism or Unfolding Opportunities?” The Economic Legacy of the Reagan Years: Euphoria or Chaos? Ed. Anandi P. Sahu, and Ronald L. Tracy. New York: Praeger Press, 1991. 251-258. Morris 16 Lammers, William W. and Michael A. Genovese. The and Domestic Policy: Comparing Leadership Styles, FDR to Clinton: Washington, DC: CQ Press, 2000. Meyer, Lawrence H., Joel L. Prakken, and Chris P. Varvares. “Two Revolutions in Economic Policy: Growth-Oriented Macro Policy in the Kennedy and Reagan Administrations.” The Economic Legacy of the Reagan Years: Euphoria or Chaos? Ed. Anandi P. Sahu, and Ronald L. Tracy. New York: Praeger Press, 1991. 67-86. Moore, Thomas Gale. “The Reagan Economic Performance.” The Economic Legacy of the Reagan Years: Euphoria or Chaos? Ed. Anandi P. Sahu, and Ronald L. Tracy. New York: Praeger Press, 1991. 107-116. Murphy, Kevin J. “Comment:” The Economic Legacy of the Reagan Years: Euphoria or Chaos? Ed. Anandi P. Sahu, and Ronald L. Tracy. New York: Praeger Press, 1991. 40-42. Sahu, Anandi P., and Ronald L. Tracy, Eds. The Word Count: 3668
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