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VI. Analyzing the effectiveness of Supply-Side Economics as applied by
Ronald Reagan
A. Contractionary effects
of tight money came earlier than the expansionary effects
of a tax cut and the result was two recessions from 1980-83.
B. Short-term results were
good.
1.
Inflation dropped dramatically although much of the credit must
go to the Federal
Reserve which
began tightening
in 1979.
2.
Unemployment eventually came down.
3.
The longest peacetime expansion in history resulted although critics point out
that
the large increase
in military
spending during
the early Reagan years made for high
peacetime defense budgets.
C. Supply-side effects may have
been negligible.
1. Aggregate supply moved little as
productivity increases were small.
2. Saving went down (though much of the
drop in saving had demographic causes
as baby boomers
borrowed
to furnish homes, many of which were investment
type
multifamily dwellings.
D. Some results seemed bad,
especially at the time.
1. Large federal deficit resulted
(in part because inflation came down much faster
than
expected lowering tax revenues).
Many felt these
deficits
would compete with (crowd out) private investment for
many
years.
2. The trade deficit increased.
a. The problem began when an increase in borrowing by businesses, individuals,
and
the federal government caused high interest rates.
b. High interest rates combined with a drop in inflation and an economic
recovery
making U.S. investments attractive.
c. The resulting high foreign
demand for the dollar pushed its value up making
imports cheaper and exports
more expensive.
E. Opinions differ as to the overall
result.
1. Some think the recovery was a
typical Keynesian demand-side phenomenon
(i.e., deficit
spending)
2. Supply-side economists point to
a number of improved conditions.
a. The
increase in manufacturing productivity indicates supply-side
economics
worked.
b. Comparing saving rates for countries is
difficult as
different accounting
procedures are used to measure saving.
c.
When Reagan left office, the average United States
citizen earned about 25%
more than the average citizen of Germany and Japan.
1. Data based upon purchasing power parity and not the
international exchange
rate of the dollar.
2. Critics point to a widening income
gap between rich and poor.
3. Other things happened that
affected economic activity.
a.
Industry was deregulated.
b. Intellectual
Property rules were rewritten.
c.
Pressure was put on the Soviet Union by enhancing the military buildup started
by
President Carter.
d.
Striking air traffic controllers were fired.
e.
Social Security funding was enhanced with benefit cuts and tax increases.
f. The
government increased dramatically funding semiconductor and network
research.
g.
These thoughts are from page H2 of the article by David Warsh in the
February 4,
2001 Boston Globe.
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VII. Recent tax reforms
1. Economic
Recovery Tax Act of 1981
a.
Cut personal tax rates by 25% over three years
b.
Reduced capital gains tax rate below that paid on ordinary income
c.
Allowed for a more rapid write-off of capital (accelerated
depreciation)
2. Tax Reform
Act of 1986
a.
Lowered top rates from 50% to 28%
b.
Increased the tax base by doing away with many tax loopholes
3. Budget Accord of
1990
a.
Increased the top tax rate to 31%.
b.
Increased regressive excise taxes.
4. Tax Increases of 1990 and 1993
a. Taxes were
increased to lower the deficit.
b. Hope was a lower
deficit would lower interest rates.
c. Interest rates came down,
other things happened to foster a
strong economy, and the deficit (ignoring the
long-term
social security liability) disappeared.
5.
Economic
Growth and Tax Relief Reconciliation Act of
2001
and the 2003
a.
highest income tax rates: the 28, 31, and 36 percent rates
fall by 3 percentage
points, while the 39.6 percent rate falls
to 35 percent.
b. A
new 10 percent tax bracket is carved out of the 15 percent
bracket.
c.
Although the cuts in the highest income tax rates phase in
slowly, the 0
percent bracket is available immediately.
d. The
tax act also expands the child credit and the Earned
Income Tax Credit (EITC)
e.
reduces marriage penalties
f.
increases subsides for education and retirement saving
g.
repeals the limitations on itemized deductions and phase
outs of
personal
exemptions
h.
provides temporary, limited relief from the alternative
minimum tax (AMT), a
complex law that was designed
to prevent aggressive tax sheltering but primarily affects
large families or
residents of states with high income taxes.
i. The
tax act reduces the estate tax and generation-skipping
tax between 2001 and 2009
and repeals them in 2010.
j.
Different views of the act
1)
2001 Tax Cut
takes an in depth look.
2)
CTJ May 26 Analysis of Final Bush Tax Plan
3)
The 2001 Tax Cut Did Make a Difference
is what most
conservatives feel 5
years later.
4)
Comparing the Kennedy,
Reagan and Bush Tax Cuts
4) A Comprehensive Assessment of the Bush Administration
...
6. Jobs and Growth
Tax Relief Reconciliation
Act of 2003
a.
Lowered long term (over one year) capital gains
taxes from
20% to 5% for those in the lowest two brackets (Under $65,100
for
married filing jointly in 2008) and 15% in higher brackets.
b.
Most rate reductions would expire if not extended
by 2010.
c.
Primary residence is excluded to $250,000 ($500,000
married
filing jointly) if held two of the five years prior to the sale.
VIII. The future = Savings + Investment + Risk Taking = Productivity
IX. Historic
Review of government action to stop recessions from the NYT
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