Originally Published: 6/15/2009
By The Issue Wonk
You still hear the calls from Republican spokespeople for the great fiscal policies of Ronald Reagan. Of course you do. These people are rich. And Reagan’s policies made the rich very rich. But they made the average worker poorer. Reagan’s policies were continued during the presidency of Bill Clinton, but were enhanced by George W. Bush. So, who wants to continue Reaganomics?
Reaganomics refers to the economy policies of President Ronald Reagan. There were 4 pillars to Reagan’s policies:1
1. Reduce the growth of government spending
2. Reduce marginal tax rates on income from both labor and capital
3. Reduce government regulation
4. Control the money supply to reduce inflation
If you remember, at the time that Reagan took office it was a period of high unemployment and runaway inflation, called “stagflation,” and, thus, you see pillar #4 appearing in his policies. However, the other 3 pillars are, and have been for a very long time, policies of the Republican party. In fact, Reagan ran for office primarily on 2 promises: to lower taxes and create a smaller federal government. He achieved one; he failed to achieve the other.
Reagan decreased income taxes but continued government spending by increasing deficit spending, relative to the Gross Domestic Product, to the highest seen since World War II. (See The Issue Wonk table.) His philosophy was that regulation was a problem; that the free market was the savior that would raise everyone’s economic status; and that free trade produced economic strength to all people. The policies he instituted have in large part led to the economic problems we’re experiencing today.
One of Reagan’s problems was that he failed to recognize that the so-called free market doesn’t really exist. It never did. It never will. It’s a theoretical construct developed by economists to define the best of all worlds. It’s like saying, “In the perfect world . . .” or “If I were king . . .” It’s not reality. And deregulation couldn’t make it real.
Throughout Reagan’s presidency, and George H.W. Bush’s, and Bill Clinton’s, deregulation marched forward like Napoleon’s army, leaving death and destruction in its wake and culminating in the coup de grâce -- the repeal of the Glass-Steagall Act in 1999. This opened the door for banks to get into the investment market, without regulation, which helped create the subprime mortgage mess.
Corporate Tax Cuts
Reagan promoted tax cuts for corporations.2 His argument was that if corporations had larger profits they would create more jobs. This is still the Republican mantra. It’s nonsense. No business ever created a job. Jobs are created when there is a demand for the products and services produced by the business. This implies 2 things: (a) The business must be providing a product or service that people want; and (b) people must have the disposal income in order to purchase the product or service. This means that the average worker must have an adequate and stable income (stable so that they can plan on future income not being eroded by inflation) in order to purchase what the business is producing. Do you really think that if a corporation has an additional $20 billion dollars it will hire more people to make more widgets if no one is buying their product? You don’t need to be an economist to understand this. It’s common sense. Cutting corporate taxes does not create jobs, but it does make investors and CEOs very rich.
Personal and Employment Taxes
While Reagan also lowered the personal tax rates on the wealthiest citizens from 70% to 28%,3 his biggest gift to the wealthy was his cuts to capital gains taxes, which has continued to this day.4 However, with less revenue and increased spending, he had to get the money from somewhere. So, he raided the Social Security Trust Fund, endangering Social Security benefits. This led to the largest tax increase in history.5 In 1981 Social Security contributions were 6.65% each for employers and employees. If you were self-employed, you got a break. Self-employed people didn’t have to pay 6.65% for the employer contribution plus 6.65% for the employee contribution. They paid only 9.3%. By the time Reagan left office the payment for each was 7.51% and the rate for the self-employed was 15.02%, the full amount for both the employer and employee contribution.5 Also, in 1981, Social Security taxes, also known as employment taxes, was only paid on the first $29,700 in income. As Reagan left office that amount had been raised to $45,000.6 So, while the wealthy got incredible tax cuts, the lower classes got tax increases. And remember, that the increase in employment taxes was only on the lower wage earners, not the high income wage earners.
Reagan also went after capital gains taxes. While there was a problem with homeowners having to pay capital gains taxes on their homes when they sold them, that problem has been remedied. The Taxpayer Relief Act of 1997 changed federal law to allow homeowners to sell their private residences with little or no capital gains. “Private residence” has been defined as one in which a person has lived for 2 of the prior 5 years. For a single homeowner, a profit of $250,000 may be realized without a capital gains tax. For a couple, the profit allowance doubles, to $500,000.7
But Reagan’s objective was to cut capital gains taxes on the wealthiest Americans – the investors. Most “investment” is in the form of corporate investing, primarily through the stock market. When your investment pays you money, it’s called “capital gains.” Here’s a real-world scenario. A person who makes $100,000 a year off of investments will pay 15% in taxes, while a worker who makes $100,000 a year by working 40+ hours a week pays 28%. Will the investor make more investments? Maybe. But the investment probably would be more stock purchases, more money to the corporations. And what do the corporations do with the investments? They give money back to the investors in dividends and pay the CEOs more money. What does this do for the economy? For creating jobs? For the average worker? Nothing. Now, figure this in: to get more investments the corporations must produce ever bigger dividends. There’s only 2 ways to do this: raise the cost of the product or service and/or cut the cost of doing business. Thus you see jobs moving overseas to cut costs and you also see higher costs of the products and services even though it costs less to produce them. Who benefits from this? The wealthy. What we have done with our tax structure is to turn it from an “income tax” to a “wage tax.” If you work for a living, you’ll pay more taxes than someone who makes a living by “investing” millions of dollars.
National Debt and Deficit Spending
Reagan’s policies were known as “trickle-down economics” – meaning if businesses and wealthy people have lots of money, it’ll trickle down to the rest of us. With the massive tax cuts and significant increases in military spending and an increase in the trade deficit,8 Reagan had huge annual deficits which led to massive borrowing and a national debt that went from $700 billion when he took office to almost $3.5 trillion when he left. (See The Issue Wonk table.) In 1985 the U.S., for the first time since 1914, “owed more money to foreigners than it was owed.”9 He moved the United States from being the world’s largest international creditor to the world’s largest debtor nation.10 And this is good for whom?
1 Niskanen, William A. Reaganomics. Library of Economics and Liberty, 1988.
2 Ronald Reagan on Tax Reform. On the Issues.
3 Excerpt from The Reagan Restoration. Wall Street Journal, June 7, 2004, cited by Miller, John. Ronald Reagan’s Legacy. Dollars & Sense, June 2004.
4 Mitchell, Daniel J. The Historical Lessons of Lower Tax Rates. The Heritage Foundation, July 19, 1996.
5 Social Security and Medicare Tax Rates. Social Security Trust Fund Data.
6 Contribution and Benefit Base. Social Security Administration.
7 Bell, Kay. Capital Gains Home-Sale Tax Break a Boon for Owners. Bankrate.com.
8 Etebari, Mehrun. Trickle Down Economics: Four Reasons Why it Just Doesn’t Work. United For a Fair Economy, July 17, 2003.
9 History Central, 1984-1985.
10 Shaw, Jonathan. Debtor Nation: The Rising Risks of the American Dream, On a Borrowed Dime. Harvard Magazine, July-August, 2007.
© The Issue Wonk, 2009