Stone on Obama and Reagonomics

Obama on Republican Economic Policy: "It Doesn't Work"
Geoffrey R. Stone
The Huffington Post
December 15, 2011

In his speech in Osawatomie, Kansas, last week, President Obama proclaimed that Republican economic policy -- trickle-down, supply-side, tax-cutting economics -- "doesn't work." It has been tried, he said, and it "has never worked." Is he right? Or is this just more political blather? To see, we need to go back to basics, back to Reaganomics.

Ronald Reagan swept into Washington touting the theory of "trickle-down" economics. The idea was simple: by reducing federal tax rates, government would leave more money in the market, which would bolster the economy, which would generate jobs and goods, which would increase total income, which would ultimately produce enough tax revenue to make up for the initial reduction in taxes. In a speech in February 1981, Reagan declared that his plan, labeled "voodoo economics" a year earlier by his eventual running mate, George H. W. Bush, would eliminate the nation's budget deficit and produce a surplus by 1984.

The Economic Recovery Tax Act of 1981 (known as the Kemp-Roth Act) cut $750 billion in federal tax revenue over five years. Individual income taxes were reduced across the board by 5% the first year and 10% the following two years. The top tax rate was lowered from 70% to 50%. The government also cut taxes on capital gains and inheritance. Five years later, Reagan's Tax Reform Act of 1986 reduced rates even further, lowering the maximum tax on the highest-earning individuals to only 28%, the lowest in more than half-a-century.

Faculty: 
Geoffrey R. Stone